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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT 1934
For the fiscal year ended December 31, 1999.
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-14012
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EMERITUS CORPORATION
(Exact name of registrant as specified in its charter)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Washington 91-1605464
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3131 Elliott Avenue, Suite 500, Seattle, WA 98121
(Address of principal executive offices)
(206) 298-2909
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.0001 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), (2) and has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark that there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 27, 2000 was $24,945,353.
As of March 27, 2000, 10,066,550 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of Form 10-K (items 10-13) is
incorporated herein by reference to the Registrant's definitive Proxy
Statement relating to its 2000 Annual Meeting of Stockholders to be held on
May 24, 2000.
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EMERITUS CORPORATION
INDEX
Page No.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS................................... 1
ITEM 2. DESCRIPTION OF PROPERTY................................... 20
ITEM 3. LEGAL PROCEEDINGS......................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 25
EXECUTIVE OFFICERS OF THE REGISTRANT...................... 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 27
ITEM 6. SELECTED FINANCIAL DATA................................... 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK..................................................... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 36
ITEM 11. EXECUTIVE COMPENSATION.................................... 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K................................................. 36
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Emeritus is one of the largest and most experienced national operators of
assisted living residential communities. Assisted living communities provide a
residential housing alternative for senior citizens who need help with the
activities of daily living, with an emphasis on assisted living and personal
care services.
We currently operate 132 assisted living communities, consisting of
approximately 12,600 units with a capacity for 13,700 residents, located in 29
states and Japan. Of these operating communities, we own 17 communities, lease
41 communities, manage 69 communities and hold joint venture interests in five
communities. Under three management agreements covering 46 of our 69 managed
communities, we have options to purchase 43 of the communities, which must be
exercised by July 3, 2001, and a right of first refusal to purchase the
remaining three communities at any time up to December 31, 2001.
We strive to provide a wide variety of assisted living services in a
professionally managed environment that allows our residents to maintain
dignity and independence. Our residents are typically unable to live alone,
but do not require the intensive care provided in skilled nursing facilities.
Under our approach, seniors reside in a private or semi-private residential
unit for a monthly fee based on each resident's individual service needs. We
believe our residential assisted living communities allow seniors to maintain
a more independent lifestyle than is possible in the institutional environment
of skilled nursing facilities. In addition, we believe that our services,
including assisting residents with activities of daily living such as
medication management, bathing, dressing, personal hygiene and grooming, are
attractive to seniors who are inadequately served by independent living
facilities.
The Assisted Living Industry
We believe that the assisted living industry is becoming the preferred
residential alternative for seniors who cannot live independently due to
physical or cognitive frailties but who do not require the more intensive
medical attention provided by a skilled nursing facility. Industry estimates
show that assisted and independent living industries generated approximately
$11.2 billion in revenues in 1996 and will generate $18.2 billion in revenues
in 2000.
Generally, assisted living provides housing and 24-hour-per-day personal
support services designed to assist seniors with the activities of daily
living, which include bathing, eating, personal hygiene, grooming, medication
reminders, ambulating and dressing. Certain assisted living facilities may
offer higher levels of personal assistance for residents with Alzheimer's
disease or other forms of dementia.
We believe that a number of factors will allow assisted living companies to
continue as one of the fastest growing choices for senior care:
. Consumer Preference. We believe that assisted living is preferred by
prospective residents as well as their families, who are often the
decision makers for seniors. Assisted living is a cost-effective
alternative to other types of care, offering seniors greater
independence and enabling them to age in a residential environment.
. Cost-Effectiveness. The average annual cost for a patient in a skilled
nursing home can exceed $40,000. The average cost for a private pay
patient in a skilled nursing home can exceed $75,000 per year in certain
markets. In contrast, assisting living services generally cost 30% to
50% less than skilled nursing facilities located in the same region. We
also believe that the cost of assisted living services compares
favorably with home healthcare, particularly when costs associated with
housing, meals and personal care assistance are taken into account.
1
. Demographics. The target market for our services is persons generally 75
years and older, one of the fastest growing segments of the U.S.
population. According to the U.S. Census Bureau, the portion of the U.S.
population age 75 and older is expected to increase by 28.7% from
approximately 13.0 million in 1990 to approximately 16.8 million by the
year 2000. The number of persons age 85 and older, as a segment of the
U.S. population, is expected to increase by 46% from approximately 3.9
million in 1998 to over 5.7 million by the year 2010. Furthermore, the
number of persons afflicted with Alzheimer's disease is also expected to
grow in the coming years. According to data published by the Alzheimer's
Association, this group will grow from the current 4.4 million people to
10.0 million or an increase of 127% by the year 2010. Because
Alzheimer's disease and other forms of dementia are more likely to occur
as a person ages, we expect the increasing life expectancy of seniors to
result in a greater number of persons afflicted with Alzheimer's disease
and other forms of dementia in future years, absent breakthroughs in
medical research.
. Changing Family Dynamics. According to the U.S. Census Bureau, the
median income of the elderly population has been increasing.
Accordingly, we believe that the number of seniors, and their families,
who are able to afford high-quality senior residential services, such as
those we offer, has also increased. In addition, the number of two-
income households has increased over the last decade and the
geographical separation of senior family members from their adult
children has risen with the geographic mobility of the U.S. population.
As a result, many families that traditionally would have provided the
type of care and services we offer to senior family members are less
able to do so.
. Supply/Demand Imbalance. While the senior population is growing
significantly, the supply of skilled nursing beds per thousand is
declining. We attribute this imbalance to a number of factors in
addition to the aging of the population. Many states, in an effort to
maintain control of Medicaid expenditures on long-term care, have
implemented more restrictive Certificate of Need regulations or similar
legislation that restricts the supply of licensed skilled nursing
facility beds. Additionally, acuity-based reimbursement systems have
encouraged skilled nursing facilities to focus on higher acuity
patients. We also believe that high construction costs and limits on
government reimbursement for construction and start-up expenses also
will constrain the growth and supply of traditional skilled nursing
beds. We believe that these factors, taken in combination, result in
relatively fewer skilled nursing beds available for the increasing
number of seniors who require assistance with the activities of daily
living but do not require 24-hour medical attention.
Competitive Strengths
We compete with other assisted living communities located in the areas where
we operate. These communities are operated by individuals, local and regional
businesses and larger operators of regional and national groups of
communities, including public companies similar to us. We believe that we have
the following competitive strengths:
. State-of-the-Art Communities. Of our 132 operating communities, 62
communities have been built and opened since January 1, 1996 and reflect
state-of-the-art design and equipment. In addition, we have
significantly upgraded 27 of our older communities to improve their
appearance and operating efficiency. These upgrades included the
finished appearance of the communities, as well as various improvements
to kitchens, nurse call systems and electronic systems, including those
for data transmission, data sharing and e-mail.
. Large Operating Scale. We believe that our size gives us significant
advantages over smaller operators. Given the scale of our operations, we
have the opportunity to select the best operating systems and service
alternatives and to develop a set of best practices for implementation
on a national scale. We also believe that, because of our size, we are
able to purchase such items as food, equipment, insurance and employee
benefits at lower costs, and to negotiate for more favorable financing
arrangements.
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. Lower Cost of Communities. As of December 31, 1999, the average cost per
unit of our communities was approximately $64,500. We believe that these
costs are less than the current replacement costs of these communities
and below the average costs incurred by many other public companies
operating in the industry. We also believe that these lower capital
costs give us opportunities to enhance margins and greater flexibility
in designing our rate structure and responding to varying regional
economic and regulatory changes.
. Geographic Diversification and Regional Focus. We operate our
communities in 29 states in all regions of the United States. We believe
that because of this geographic diversification we are less vulnerable
to adverse economic developments and industry factors, such as
overbuilding and regulatory changes, that are limited to a particular
region. We believe that this also moderates the effects of regional
employment and competitive conditions. Within each region, we have
focused on establishing a critical mass of communities in secondary
markets, which enables us to maximize operating efficiencies.
. Experienced Management with Industry Relationships. Daniel R. Baty, our
Chief Executive Officer, has more than 30 years of experience in the
long-term-care industry, ranging from independent living to skilled
nursing care. We believe that this long experience and the relationships
that he has developed with owners, operators and sources of capital have
helped us and will continue to help us in acquiring communities,
developing operating, investment and joint venture relationships, as
well as finding sources of debt and equity capital. Mr. Baty also has a
significant financial and management interest in Holiday, an operator of
independent living facilities, which we believe provides us with an
informal but important relationship with a complementary business. In
addition, our senior operating vice presidents have an average of 22
years of experience with major companies in the long-term-care industry.
We believe that this strong senior leadership, with proven management
skills, will allow us to take advantage of the opportunities present in
the assisted living industry.
Business Strategy
We believe that there is a significant demand for alternative long-term-care
services that are well-positioned between the limited services offered by
independent living facilities and the higher-level medical and institutional
care offered by skilled nursing facilities. Our goal is to become the national
leader in the assisted living segment of the long-term care industry through
the following strategy:
. Focus on Operations and Maintain High Levels of Occupancy. In 1998, we
increased our focus on enhancing operations and on achieving higher
levels of occupancy at our communities. As a result of our aggressive
acquisition and development program in prior years, the overall
occupancy rate at our communities had been a secondary focus. Our
acquired communities typically have a period of six to 18 months
following acquisition where adjustment and repositioning affect
occupancy. Our developed communities typically require 12 to 24 months
for occupancy to rise to stabilized levels. In addition, much of our
management effort was directed toward our acquisition and development
program and the financing that it required. Since our shift in emphasis
in 1998, we have experienced significant increases in occupancy. Because
of the relatively high fixed costs of our business that result from
investment in physical plant and minimum staffing requirements, we
believe that adding residents at current occupancy rates will generate
greater incremental operating margins than our current system-wide
operating margins. As a result, we expect that further increases in
occupancy will improve our communities' operating results. We intend to
continue this emphasis on enhancing our operations and on increasing and
sustaining occupancy.
. Capitalize on Opportunities to Own Communities. In the past we have
leased many of our communities, often through sale/leaseback financing
arrangements with real estate investment trusts, or REITs, in order to
grow rapidly with limited equity capital. Our recent Meditrust
transactions are giving us the ability to acquire 46 communities before
December 31, 2001. We are also evaluating our current leasing
arrangements with REITs to capitalize on acquisition opportunities as
they arise.
3
Although ownership will tend to increase our need for equity capital, we
believe that owning, rather than leasing, our operating communities will
be more attractive for the following reasons:
. reacquisition of facilities generally results in the termination of
leases with adverse financial terms, such as rent increase
provisions,
. ownership of communities will allow us, rather than the lessor, to
benefit from any future appreciation in the value of these
communities, although we will also be subject to the risk of declines
in value, and
. ownership will give us greater control over these critical assets and
will allow us greater flexibility and control in financing and
refinancing our communities, in expanding and making capital
improvements to our existing communities and in other transactions
involving the transfer and use of these communities.
. Acquire Communities Selectively. We have acquired a significant portion
of our operating communities and will continue to consider future
acquisitions as attractive opportunities become available. In 1998, we
reduced our acquisition activity in part to concentrate on the need to
improve operations and to raise occupancy. As we achieve these
objectives, we expect to be more receptive to acquisition opportunities
that meet designated criteria. We particularly expect to favor the
acquisition of communities that provide more complete coverage of our
existing markets. In addition, we intend to focus on acquisitions of
communities that have been designed and built originally as assisted
living facilities and that will have positive cash flow upon
acquisition, but will also allow for future cash flow opportunities
through facility expansion or added services. By contrast, in our
earlier period of aggressive expansion, our business strategy included
acquiring facilities that were incurring losses at the time of
acquisition and often required conversion and repositioning to meet our
standards of service and operation. The process of modifying operations
and upgrading facilities caused periods of operating losses and low
occupancy that extended longer than we had anticipated. We intend to be
more selective and measured in our acquisition strategy in the future.
. Appeal to the Middle Market. We target the segment of the senior
population that we believe is the most attractive, residents in
secondary markets, including suburban locations, with populations of
50,000 to 150,000 persons who have middle to upper-middle incomes. We
believe that this "value" sensitive segment of the senior community is
the largest, broadest and most stable and that we are one of the few
national operators focusing on this group. We believe that these markets
are receptive to the development of new assisted living communities and
the expansion of existing communities.
4
Resident Services
Our assisted living communities offer residents a full range of services
based on individual resident needs in a supportive "home-like" environment. By
offering a full range of services, we can accommodate residents with a broad
range of service needs and therefore enable residents to "age in place." The
services that we provide to our residents are designed to respond to their
individual needs and to improve their quality of life.
Service Level Type of Description of Care Provided
Resident
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Basic All residents-- We provide these basic services to our
services independent, residents:
assisted living
and memory . three meals per day,
disorder
residents . social and recreational activities,
. weekly housekeeping and linen
service,
. building maintenance and grounds
keeping,
. 24-hour emergency response and
security,
. licensed nurses on staff to monitor
and coordinate care needs, and
. transportation to appointments, etc.
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Assisted Assisted living We cater our assisted living services to
living residents and each resident based on his/her individual
services some memory requirements for more frequent or intensive
disorder assistance or increased care or supervision.
residents We achieve this individualized care, through
consultation with the resident, the
resident's physician and the resident's
family.
We determine an individual resident's
level of care by the degree of assistance
he/she requires in each of several
categories. Our categories of care include,
but are not limited to:
. medication management and
supervision,
. reminders for dining and recreational
activities,
. assistance with bathing, dressing and
grooming,
. incontinence,
. behavior management,
. dietary assistance, and
. miscellaneous (which consists of
diabetic management, prescription
medication, transfer, simple
treatment, oxygen set up/maintenance
and prosthesis).
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Memory Memory disorder We have designed our memory disorder
disorder residents program to meet the specialized medical,
(Alzheimer's) psychological and social needs of our
services residents afflicted by this condition. In a
manner consistent with our assisted living
services, we help structure a service plan
for each resident based on his/her
individual needs. Some of the key service
areas that we focus on to provide the best
care for our memory disorder residents
center around:
. separate dining program,
. enhanced behavior management,
. structured activity planning, and
. counseling for residents and their
families.
5
Service Revenue Sources
We rely primarily on our residents' ability to pay our charges for services
from their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe generally that
only seniors with income or assets meeting or exceeding the regional median
can afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business.
As third party reimbursement programs and other forms of payment continue to
grow, we intend to pursue these alternative forms of payment, depending on the
level of reimbursement provided in relation to the level of care provided. We
also believe that private long-term care insurance will increasingly become a
revenue source in the future, although it is currently small. All sources of
revenue other than residents' private resources constitute less than 10% of
our total revenues.
Management Activities
At December 31, 1999, we managed and provided administrative services to 68
assisted living communities under management agreements that typically provide
for management fees ranging from 4% to 7% of gross revenues. Management fees
were approximately $4.9 million in 1999. These management agreements have
terms ranging from two to five years, and may be renewed at the expiration of
the term. We have various categories of management agreements, including:
. management agreements covering 46 communities in connection with the
Meditrust transactions that are described under "Meditrust
Transactions." We receive a management fee of 5% of gross revenues, but
may receive up to 7% depending on cash flow performance of the
communities managed.
. management agreements covering 10 communities owned by Columbia House, a
limited partnership controlled by Mr. Baty. We provide management
services and administrative services in connection with acquisition,
development and financing activities and generally receive fees ranging
from 4% to 6% of the gross revenues generated by the communities.
. management agreements covering five communities owned by joint ventures
in which we have a financial interest. We receive management fees
ranging from 4% to 7% of gross revenues.
. management agreements covering seven communities owned by independent
third parties. We receive management fees ranging from 4% to 7% of gross
revenues. Three of these arrangements will automatically convert to
lease arrangements at the end of the second year of the term or at the
time the community produces positive cash flow, whichever occurs first.
Prior to 1999, we did not have material revenue from management
arrangements. If we exercise our options to purchase the Meditrust communities
prior to July 3, 2001 or if the management agreements expire on that date and
are not renewed, our revenue from management fees will diminish substantially.
Marketing and Referral Relationships
Our operating strategy is designed to integrate our assisted living
communities into the continuum of healthcare providers in the geographic
markets in which we operate. One objective of this strategy is to enable
residents who require additional healthcare services to benefit from our
relationships with local hospitals, home healthcare agencies, and skilled
nursing facilities in order to obtain the most appropriate level of care.
Thus, we seek to establish relationships with local hospitals, through joint
marketing efforts where appropriate, and home healthcare agencies, alliances
with visiting nurses associations and, on a more limited basis, priority
transfer agreements with local, high-quality skilled nursing facilities. In
addition to benefiting residents, the implementation of this operating
strategy has strengthened and expanded our network of referral sources.
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In 1998, we developed a brand concept for our communities by adopting the
"Loyalton" name for our newly developed communities as well as selected
existing communities. We believe that this branding will encourage loyalty
among our residents, shareholders and employees and develop recognition of the
Emeritus and Loyalton name throughout our markets.
Administration
We employ an integrated structure of management, financial systems and
controls to maximize operating efficiency and contain costs. In addition, we
have developed the internal procedures, policies and standards we believe are
necessary for effective operation and management of our assisted living
communities. We have recruited experienced key employees from several
established operators in the long-term-care services field and believe we have
assembled the administrative, operational and financial personnel who will
enable us to continue to manage our operating strategies effectively.
We have established Central, Eastern and Western Operational Divisions. Each
division is headed by a division vice president. Each division consists of
several operating regions headed by a regional vice president who provides
management support services for each of the communities in his/her respective
region. Day-to-day community operations are supervised by an on-site community
director who, in certain jurisdictions, must satisfy certain licensing
requirements. We provide management support services to each of our
residential communities, including establishing operating standards,
recruiting, training, and financial and accounting services.
We have centralized finance and other operational functions at our
headquarters in Seattle, Washington in order to allow community-based
personnel to focus on resident care. The Seattle office establishes company-
wide policies and procedures, oversees our financial and marketing functions,
manages our acquisition and development activities and provides our overall
strategic direction.
We use a blend of centralized and decentralized accounting and computer
systems that link each community with our headquarters. Through these systems,
we are able to closely monitor operating costs and quickly distribute
financial and operating information to appropriate levels of management in a
cost efficient manner. We believe that our current data systems are adequate
for current operations and provide the flexibility to meet the continued
growth of our operations without disruption or significant modification to
existing systems beyond 2000. We use high quality hardware and operating
systems from current and proven technologies to support our current technology
infrastructure.
Competition
The number of assisted living communities in the United States is increasing
rapidly. As the assisted living industry continues to grow, fewer attractive
development sites may be available. This market saturation could have an
adverse effect on our newly developed communities and their ability to reach
stabilized occupancy levels. Moreover, the senior housing services industry
has been subject to pressures that have resulted in the consolidation of many
small local operations into larger regional and national multi-facility
operations. While there are several national and regional companies that
provide senior living alternatives, we anticipate that our primary source of
competition will come from local and regional assisted living companies that
operate, manage and develop residences within the geographic area in which we
operate, as well as retirement facilities and communities, home healthcare
agencies, not-for-profit or charitable operators and, to a lesser extent,
skilled nursing facilities and convalescent centers. We believe that quality
of service, reputation, a facility's location, physical appearance and price
will be significant competitive factors. Some of our competitors have
significantly greater resources, experience and recognition within the
healthcare community than we do.
Employees
At December 31, 1999, we had 6,311 employees, including 4,424 full-time
employees, of which 144 were employed at our headquarters. None of our
employees are currently represented by a labor union, and we are not
7
aware of any union-organizing activity among our employees. We believe that
our relationship with our employees is good.
Although we believe that we are able to employ sufficiently skilled
personnel to staff the communities we operate or manage, a shortage of skilled
personnel in any of the geographic areas in which we operate could adversely
affect our ability to recruit and retain qualified employees and control our
operating expenses.
Significant Transactions
Meditrust Transactions
In two separate transactions in the fall of 1998 and the spring of 1999, we
arranged for two investor groups to purchase an aggregate of 41 of our
operating communities and five communities under development for a total
purchase price of approximately $275.0 million. Of the 46 communities
involved, 43 had been, or were proposed to be, leased to us by Meditrust
Company LLC under sale/leaseback financing arrangements, and three had been
owned by us. The first purchase, consisting of 25 communities, which we will
call the December communities, was completed in December 1998 and the second
purchase, consisting of 21 communities, which we will call the March
communities, was completed in March 1999.
The investor groups who purchased the communities included parties
affiliated with us. Of the $168.0 million purchase price for the December
investment, $138.0 million was financed through a three-year first mortgage
loan with an independent third party and $30.0 million was financed through
subordinated debt and equity investments from the investor group, which
includes one of our principal shareholders and a member of our board of
directors.
Of the $124.2 million purchase price for the March investment, approximately
$99.6 million was financed through three-year first mortgage loans with
independent third parties and $24.6 million was financed through subordinated
debt and equity investments from the investor group, which includes one of our
principal shareholders and a member of our board of directors.
The investor groups have retained us to manage all of the communities
through December 31, 2001. If we do not exercise the option or right of first
refusal to purchase the communities, as described below, the investor group
may require us to manage the communities for up to twelve additional months.
Under the arrangement, we receive management fees equal to 5% of the gross
revenues generated by the facilities on the properties. We also are entitled
to additional management fees of 2% of the gross revenues, which will be
accrued and paid out of cash flow, provided that the communities have positive
cash flow for three consecutive months. Thereafter, if the cash flow is not
positive for two consecutive months, the 2% management fee will again be
deferred until the three-month standard is again met. The cash flow
requirements are determined as a group for the December communities, as a
group for March operating communities and individually for the March
communities under development. We have agreed to reimburse the December
investment group for all losses greater than $4.5 million sustained on the
December communities prior to December 31, 2001. At December 31, 1999, we are
obligated under this funding requirement for a total of $1.4 million. We have
a similar reimbursement arrangement relating to the five development
communities acquired in the March investment; under this arrangement, we are
generally required to reimburse the investor group for any losses greater than
$500,000 at any of the five development communities with no obligation
outstanding at December 31, 1999. We do not have any such arrangements for the
16 operating communities acquired in the March investment. During 1999, we
received $1.4 million in management fees for the December communities and $1.4
million in management fees for the March communities, including under
development communities. As of December 31, 1999, the December communities had
incurred $12.0 million in losses and the March communities under development
had incurred $2.3 million in losses.
We have certain rights to acquire the communities purchased in the December
and March transactions. We have an option to purchase 22 of the December
communities as a group and we have an option to purchase all 21 of the March
communities as a group, both of which must be exercised by July 3, 2001. In
addition, if either
8
of the investor groups requires Mr. Baty to purchase certain of the
communities, upon the conditions described below, we must exercise our option
within 60 days of receiving notice of this action. We also have a right of
first refusal through December 31, 2001 to re-purchase the three December
communities that we previously owned.
The option purchase prices for the December communities and the March
communities are determined under similar formulas which provide for the
repayment or payment of:
. the mortgage loans of $138.0 million and $99.6 million on such
communities;
. the investor groups' original debt and equity investments;
. an amount intended to provide the investor groups with an 18% rate of
return, compounded annually, on their original debt and equity
investments, less any cash distributions received;
. a fee generally equal to 2% of the investor groups' original debt and
equity investments, which for the March communities may be adjusted for
appreciation in our common stock; and
. the reasonable costs of the investor groups' dissolution and
liquidation.
As a condition to making the December and March investments, the investor
groups entered into agreements with Mr. Baty under which the investor groups
may require Mr. Baty to purchase certain of the December and March
communities. Under these agreements, the investor groups may require Mr. Baty
to purchase between six and twelve of the December communities and between
four and ten of the March communities, upon the occurrence of one of the
following events:
. we do not provide notice of our intent to exercise our options to
purchase the December or March communities by July 3, 2001;
. we exercise an option to purchase the communities, but do not close the
transaction;
. we or one of our managers causes a default under the agreements which
govern the management of the December and March communities;
. Mr. Baty's net worth falls below a certain threshold or Mr. Baty fails
to provide certain reports relating to his net worth to the investor
groups;
. there is a change of control in our Board or ownership; or
. Mr. Baty ceases to be our chief executive officer.
If either of the investor groups requires Mr. Baty to purchase some of the
communities, Mr. Baty will also have the option to purchase all of the
communities owned by that investor group on the same terms under which we may
purchase the communities.
Saratoga Relationship
On December 10, 1999, we entered into an agreement to sell 40,000 shares of
our Series B Stock to Saratoga Partners IV, L.P. ("Saratoga") and certain
investors related to Saratoga for a purchase price of $1,000 per share. On
December 30, 1999, we completed the sale of 30,000 shares of Series B Stock
and we expect to complete the sale of the remaining 10,000 shares during the
first half of 2000. Each share of Series B Stock is convertible into the
number of shares of common stock equal to the stated value of $1,000 divided
by an initial conversion price of $7.22. The conversion price is subject to
adjustment as described below. The entire issue of 40,000 shares of Series B
Stock is initially convertible into 5,540,166 shares of Common Stock based on
the current conversion price.
The net proceeds from the sale of the Series B Stock to be received by us
will be approximately $38.6 million, after we pay fees and expenses of the
transaction estimated at $1.4 million. We are required to
9
use a substantial portion of the proceeds to purchase the March communities
referred to under the "Meditrust Transactions" above, three assisted living
communities that are currently being leased by us and one assisted living
community from a third party by June 27, 2000. The balance of $11.6 million
will be added to working capital and used for general corporate purposes. If
we do not use at least $23 million in the identified purchases of communities,
then the use of approximately $35 million of the proceeds (less amounts paid
for such communities) is subject to Saratoga's approval.
The terms of the Series B Stock and related agreements were more favorable
to us than the terms of other preferred stock financings which were
potentially available to us at the time the Series B Stock transaction was
being negotiated. In addition, throughout 1999 we had reviewed, with the
assistance of our investment banker, a variety of private and public financing
possibilities. We believe that the sale of Series B Stock to Saratoga
represents the best financing currently available and that the acquisition of
assets with the proceeds of the financing will be in the best interests of the
shareholders.
The terms of the financing arrangements with Saratoga are set forth in the
Designation and related agreements, including the shareholders agreement. The
Series B Stock is subject to the prior rights and preferences of the Series A
Stock.
Dividends
The holders of the Series B Stock are entitled to receive quarterly
dividends payable in a combination of cash and additional shares of Series B
Stock. From issuance to January 1, 2004, the dividend rate will be 6% of the
stated value of $1,000, of which 2% is payable in cash and 4% is payable in
Series B Stock at the rate of one share of Series B Stock for every $1,000 of
dividend. After January 1, 2004, the dividend rate will be 7%, of which 3% is
payable in cash and 4% is payable in Series B Stock. Dividends accumulate,
whether or not declared or paid. Prior to January 1, 2007, however, if the
cash portion of the dividend is not paid, the dividend rate will increase to
7%, payable entirely in cash, until the unpaid cash dividends have been fully
paid or until January 1, 2007, whichever first occurs. The dividends must be
paid or declared and set aside for payment prior to any payment or declaration
of dividends on, or purchase or redemption of, any common stock or any other
class of preferred stock junior to the Series B Stock.
If shareholders fail to approve the issuance of the common stock on
conversion of the Series B Stock on or before June 27, 2000 under the rules of
the American Stock Exchange, the dividend rate on the Series B Stock would be
increased to 12% per annum until January 1, 2007 and 14% per annum thereafter
and would be payable entirely in cash.
The rights of the holders of Series B Stock to receive dividends are subject
to the prior rights of the holders of Series A Stock.
Conversion
The holders of the Series B Stock have the right at any time to convert each
share of Series B Stock into a number of shares of common stock equal to the
stated value of $1,000 divided by the conversion price.
The conversion price is currently $7.22 per share. If, however, we declare
any dividend or distribution on our common stock, or split, combine or
reclassify our common stock, the conversion price will be proportionately
adjusted so that each holder of Series B Stock will be entitled to receive the
same number of shares of common stock upon conversion as if such conversion
occurred prior to the event requiring the adjustment. Similarly, if we merge
with another entity or sell substantially all of our assets, the holders of
the Series B Stock will be entitled to convert each share of Series B Stock
into the consideration, whether it consists of stock, other securities or
property, which that holder would have been entitled to receive had that
holder converted its holdings of Series B Stock to common stock immediately
prior to the merger or asset sale.
The conversion price will also be adjusted pursuant to a weighted average
formula if we issue additional shares of common stock, or securities
convertible into or exercisable for common stock, at a price less than the
10
then current conversion price. According to the formula, the conversion price
would be adjusted to an amount equal to the quotient obtained by dividing (a)
the number of shares of common stock outstanding on a fully diluted basis
immediately prior to the issuance of additional common stock multiplied by the
then effective conversion price, plus the aggregate consideration received for
the new issuance, by (b) the number of shares of common stock outstanding on a
fully diluted basis immediately following the new issuance. There are limited
exceptions to this adjustment for stock options and warrants in certain
situations.
As a result of the formula, the Series B Stock could convert to common stock
at a rate that is below the current conversion price of $7.22 per share. The
Series B Stock could also convert at a rate that is also below $6.0625 per
share, which was the closing price of the common stock on the American Stock
Exchange on December 10, 1999, the date that we entered into the agreement
with Saratoga.
Redemption
After January 10, 2003, we can redeem all, but not less than all, of the
Series B Stock at $1,000 per share, plus unpaid dividends, if the closing
price of the common stock on the American Stock Exchange is at least 175% of
the then conversion price for 30 consecutive trading days ending not more than
10 days prior to the date we notify the holders of the redemption.
If there is a change in control of Emeritus, each holder of Series B Stock
has the right to require us to purchase all or a portion of the Series B Stock
owned by such holder for the stated value of $1,000 per share. The holder may
exercise this right during 45 days after notification of the change in
control. A change in control means (a) a person or group acquiring securities
that would entitle such person or group to elect a majority of the Board of
Directors, (b) persons who are currently directors, or who are selected by
those directors, ceasing to constitute a majority of the Board of Directors,
or (c) the sale of all or substantially all of our assets.
If shareholders fail to approve the issuance of the common stock on
conversion of the Series B Stock on or before June 27, 2000 under the rules of
the American Stock Exchange, each holder of Series B Stock will have the right
to require us to purchase all or a portion of the Series B Stock owned by such
holder for the stated value of $1,000 per share, plus accrued and unpaid
dividends. Each holder can exercise this right unless we obtain the
shareholder approval required by the American Stock Exchange, at which time
the right would terminate as to any then outstanding shares of Series B Stock.
It is unlikely that we would have sufficient cash to redeem the Series B Stock
if required to do so. In light of the foregoing, the failure to obtain the
shareholder approval could deplete all of our available cash and thus
materially impair our ability to continue to operate our business.
Liquidation Rights
If we dissolve, liquidate or wind-up our affairs, the holders of Series B
Stock are entitled to receive, before any payment or distribution is made to
the holders of common stock or any other class of preferred stock ranking
junior to the Series B Stock, out of our assets available for distribution,
the stated value of $1,000 per share and all accrued and unpaid dividends to
and including the date of payment to the holder. In the event our assets
available for distribution to the holders of Series B Stock are insufficient
to permit payment in full of all amounts owing to the holders, then all of
such assets shall be distributed proportionately among the holders of the
Series B Stock to the exclusion of the holders of common stock or any other
class of junior preferred stock.
The liquidation rights of the holders of Series B Stock are subject to the
prior rights of the holders of Series A Stock.
Voting and Board of Directors
Each share of Series B Stock is entitled to a number of votes equal to the
number of shares of common stock into which it is convertible. Except as
required by law or as described below, the Series B Stock votes with the
common stock and Series A Stock as a single voting group.
11
We may not amend or alter the rights and preferences of the Series B Stock
so as to adversely affect the Series B Stock without the consent of the
holders of a majority of the outstanding shares of Series B Stock. In
addition, we may not increase the number of authorized shares of preferred
stock or create another series of preferred stock ranking prior to or pari
passu with the Series B Stock without the consent of the holders of at least
75% of the outstanding Series B Stock.
Under the shareholders agreement, Saratoga is entitled to board
representation at a percentage of the entire Board of Directors, rounded up to
the nearest whole director, that is represented by the voting power of the
Series B Stock owned by Saratoga and its related investors. The shareholders
agreement also provides for a minimum of two Saratoga directors. Saratoga is
currently entitled to designate three of eight members of the Board, although
it has advised us that it will designate only two at this time. Saratoga's
right to designate directors terminates if Saratoga has sold more than 50% of
its initial investment and its remaining shares represent less than 5% of
outstanding shares of common stock on a fully diluted basis or it is unable to
exercise independent control over its shares.
Under the Designation, 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.
Other Terms
The shareholders agreement provides that neither Saratoga nor Mr. Baty is
permitted to purchase voting securities in excess of a defined limit. That
limit for Saratoga and its affiliates is 110% of the number of shares of
common stock (assuming conversion of the Series B Stock) owned by Saratoga and
its related investors immediately after the completion of the financing, plus
the Series B Stock (or underlying common stock) issuable as dividends on the
Series B Stock. That limit for Baty is the greater of 110% of the shares of
common stock owned by Baty as of December 10, 1999 or 100% of the Saratoga
ownership described in the preceding sentence. These restrictions will
terminate 18 months after the date on which Saratoga and its related investors
cease to hold securities representing 5% of the shares of common stock on a
fully diluted basis.
The shareholders agreement provides that if Mr. Baty contemplates selling
30% or more of the Common Stock he owns, Saratoga and its related investors
would have the right to participate in the sale on a proportionate basis.
Pursuant to a registration rights agreement, Saratoga and its related
investors have the right to two demand registrations, one of which may be a
shelf registration effective for one year, and unlimited piggyback
registrations, subject to marketing restrictions imposed by underwriters.
Pursuant to an investment agreement, commencing January 1, 2007, (a) the
holders of the Series B Stock have the right to elect a number of directors
(together with other directors selected pursuant to the Designation and 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.
Factors Affecting Future Results and Regarding Forward-Looking Statements
Our business, results of operations and financial condition are subject to
many risks, including, but not limited to, those set forth below. The
following important factors, among others, could cause actual operating
results to differ materially from those expressed in forward-looking
statements included in this report and presented elsewhere by our management
from time to time. Do not place undue reliance on these forward-looking
statements, which speak only as of the date of this report. A number of the
matters and subject
12
areas discussed in this report refer to potential future circumstances,
operations and prospects, and therefore, are not historical or current facts.
The discussion of such matters and subject areas is qualified by the inherent
risks and uncertainties surrounding future expectations, and also may
materially differ from our actual future experience involving any one or more
of such matters and subject areas relating to demand, pricing, competition,
construction, licensing, construction delays on new developments contractual
and licensure, and other delays on the disposition of assisted living
communities in our portfolio, and ability to continue managing costs while
maintaining high occupancy rates and market rate assisted living charges in
our communities. We have attempted to identify, in context, certain of the
factors that may cause actual future experience and results to differ from our
current expectations regarding the relevant matter or subject area. We
undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
We have incurred losses since we began doing business and expect to continue
to incur losses for the foreseeable future. We organized and began operations
in July 1993 and have operated at a loss since we began doing business. For
1998 and 1999, we recorded net losses of $31.0 million and $21.0 million. We
believe that the historically aggressive growth of our portfolio through
acquisitions and developments and related financing activities was among the
principal causes of these losses. The majority of the operating communities
that we acquired operated at a loss following acquisition, typically for
periods ranging from 12 to 18 months after we acquired them. Communities that
we have developed typically incurred start-up losses for at least 12 months
after beginning operations. While we have slowed our acquisition and
development activities, we expect to continue to acquire and develop new
assisted living communities at a moderate pace, and we expect these loss
trends to continue for future acquisitions or development projects. We expect
to continue to incur losses at least through the end of 2000. Our operations
may not become profitable in line with our current expectations or may not
become profitable at all.
If we cannot generate sufficient cash flow to cover required interest,
principal and lease payments, we risk defaults on our debt agreements and
operating leases. At December 31, 1999, we had mortgage debt of
$131.3 million, with minimum principal payments of about $8.6 million due in
2000. At December 31, 1999, we were obligated under long-term operating leases
requiring minimum annual lease payments of about $22.1 million in 2000. In
addition, we will have approximately $76.1 million and $2.5 million in
principal amount of debt repayment obligations that become due in 2001 and
2002, respectively. We intend to continue to finance our communities through a
combination of mortgage financing and operating leases, including leases
arising through sale/leaseback transactions.
Because we are highly leveraged, we may not be able to respond to changing
business and economic conditions or continue our development and acquisition
program. Further, a substantial portion of our cash flow will be devoted to
debt service and lease payments. In the past we have been unable to generate
sufficient cash flow from operations to cover required interest, principal and
lease payments and we may be unable to do so in the future. If we cannot meet
these payments when due, we may need to renegotiate payments or obtain
additional equity or debt financing. We may not be successful or timely in
doing so, and the terms of any financing or refinancing may not be favorable.
If we failure to acquire alternative financing, a lender could foreclose on
our facilities secured by the respective indebtedness or, in the case of an
operating lease, could terminate our lease, resulting in loss of income and
asset value. In some cases, our indebtedness is secured by a particular
community and a pledge of our interests in a subsidiary entity that owns that
community. In the event of a default, a lender could avoid judicial procedures
required to foreclose on real property by foreclosing on our pledge instead,
thus accelerating its acquisition of that community. Furthermore, because of
cross-default and cross-collateralization provisions in certain of our
mortgage and sale/leaseback agreements, if we default on one of our payment
obligations we could adversely affect a significant number of our communities.
We may be unable to increase or stabilize our occupancy rates or control
costs. In previous years we had difficulty increasing our occupancy levels and
keeping our variable costs in line with occupancy. Our historical
13
losses have resulted, in part, from lower than expected occupancy levels at
our newly developed and acquired communities, and higher than expected
marketing, staffing and other infrastructure costs associated with our efforts
to improve our occupancy levels. We cannot guarantee that our occupancy levels
will continue to increase at the rate we currently expect, or at all, or that
cost levels will remain in line with our occupancy levels. If we fail to do
so, the value of our common stock may decline.
We may be unable to obtain the additional capital we will need to finance
our operations. We have experienced negative cash flow from operating
activities since we began doing business. Our newly developed assisted living
communities historically have not generated positive cash flow until at least
9 to 12 months after they open for business. In addition, communities that we
have acquired for repositioning as assisted living communities have taken at
least 12 to 18 months after acquisition to begin to generate positive cash
flows. We expect these negative cash flow trends to continue for facilities
that we develop or acquire for repositioning in the future.
Our future success depends in part on finding sources to finance our
development and acquisition of assisted living communities. We expect to meet
this need largely through arranging sale/leaseback arrangements or mortgage
refinancing. However, our newly developed or repositioned communities may not
achieve a stabilized occupancy rate and resident mix that meets our
expectations, or generate positive cash flow or operating results sufficient
to allow us to refinance outstanding indebtedness secured by the community
through sale/leaseback transactions.
We will occasionally seek additional funding through public or private
financing, including equity financing. We may not find adequate equity, debt
or sale/leaseback financing when we need it or on terms acceptable to us. This
could require us to delay, scale back or eliminate all or some of our
development and acquisition projects. In addition, if we raise additional
funds by issuing equity securities, our shareholders may experience dilution
of their investment.
We may be unable to obtain the additional capital we will need to retain
important segments of our operating communities. We manage 46 of our operating
communities under short-term management agreements expiring December 31, 2001.
In addition, we expect to manage communities that are currently under
development. We also have options to purchase 43 communities, and a right of
first refusal to purchase three of these communities prior to December 31,
2001. Based on formulas in the options, the purchase prices of the communities
could be substantially greater than the original purchase prices paid by the
investor groups that currently own them, depending on when the purchase
occurs. If we are unable to obtain the capital and related mortgage financing
necessary to complete these purchases, we could lose control of these
communities and the right to operate them, which represents about 35 % of our
total operating capacity. The loss of these operating communities would have a
material adverse effect on our revenues and results of operations.
If we fail to comply with financial covenants contained in our debt
instruments, our lenders may accelerate the related debt. From time to time,
we have not complied with certain covenants in our financing agreements. In
the future we may not be able to comply with these covenants, which generally
relate to matters such as net worth, cash flow and debt coverage ratios. If we
fail to comply with any of these requirements, our lenders could accelerate
the related indebtedness so that it becomes due and payable prior to its
stated due date. We may be unable to pay or refinance this debt if it becomes
due.
We face risks associated with acquisitions. We intend to continue to seek
acquisition opportunities. However, we may not succeed in identifying any
future acquisition opportunities or completing any identified acquisitions.
The acquisition of communities presents a number of risks. Existing residences
available for acquisition may frequently serve or target different market
segments than those we presently serve. It may be necessary in these cases to
reposition and renovate acquired residences or turn over the existing resident
population to achieve a resident care level and income profile that is
consistent with our objectives. In the past, these obstacles have delayed the
achievement of acceptable occupancy levels and increased operating and capital
expenditures. As a consequence, we currently plan to target assisted living
communities with established
14
operations, which could reduce the number of acquisitions we can complete and
increase the expected cost. Even in these acquisitions, however, we may need
to make staff and operating management personnel changes to successfully
integrate acquired communities into our existing operations. We may not
succeed in repositioning acquired communities or in effecting any necessary
operational or structural changes and improvements on a timely basis. We also
may face unforeseen liabilities attributable to the prior operator of the
acquired communities, against whom we may have little or no recourse.
We expect competition in our industry to increase, which could cause our
occupancy rates and resident fees to decline. The long-term care industry is
highly competitive, and given the relatively low barriers to entry and
continuing health care cost containment pressures, we expect that our industry
will become increasingly competitive in the future. We compete with other
companies providing assisted living services as well as numerous other
companies providing similar service and care alternatives, such as home
healthcare agencies, independent living facilities, retirement communities and
skilled nursing facilities. We expect that competition will increase from new
market entrants, as assisted living residences receive increased market
awareness and more states decide to include assisted living services in their
Medicaid programs. Many of these competitors may have substantially greater
financial resources than we do. Increased competition may limit our ability to
attract or retain residents or maintain our existing rate structures. This
could lead to lower occupancy rates or lower rate structures in our newly
constructed and developed communities.
We also cannot predict the effect of the healthcare industry trend toward
managed care on the assisted living marketplace. Managed care, an arrangement
whereby service and care providers agree to sell specifically defined services
to public or private payors in an effort to achieve more efficiency with
respect to utilization and cost, is not currently a significant factor in the
assisted living marketplace. However, managed care plans sponsored by
insurance companies or HMOs may in the future affect pricing and the range of
services provided in the assisted living marketplace.
If development of new assisted living facilities outpaces demand, we may
experience decreased occupancy, depressed margins and diminished operating
results. We believe that some assisted living markets have become or are on
the verge of becoming overbuilt. The barriers to entry in the assisted living
industry are not substantial. Consequently, the development of new assisted
living facilities could outpace demand. Overbuilding in the markets in which
we operate could thus cause us to experience decreased occupancy and depressed
margins and could otherwise adversely affect our operating results.
Market forces could undermine our efforts to attract seniors with sufficient
resources to pay to our communities. We rely on our residents' abilities to
pay our fees from their own or familial financial resources. Generally only
seniors with income or assets meeting or exceeding the comparable median in
the region where our assisted living communities are located can afford our
fees. Inflation or other circumstances may undermine the ability of seniors to
pay for our services. If we encounter difficulty in attracting seniors with
adequate resources to pay for our services, our occupancy rates may decline
and we may suffer losses that could cause the value of your investment in our
stock to decline.
Interest rate increases could adversely affect our earnings due to our
floating rate debt. As of December 31, 1999, about $78.5 million of our debt
bore interest at fluctuating rates. We may incur additional debt in the future
that bears interest at floating rates. Accordingly, increases in prevailing
interest rates would increase our interest payment obligations, which would
negatively affect our earnings. For example, a two percent increase in
interest rates would increase our annual interest expense by about $1.6
million based on our floating rate debt as of December 31, 1999.
Our labor costs may increase and may not be matched by corresponding
increases in rates we charge to our residents. We compete with other providers
of assisted living services and long-term care in attracting and retaining
qualified and skilled personnel. We depend on our ability to attract and
retain management personnel responsible for the day-to-day operations of each
of our residences. If we are unable to attract or retain qualified residence
management personnel, our results of operations may suffer. In addition,
possible shortages of nurses
15
or trained personnel may require us to enhance our wage and benefits packages
to compete in the hiring and retention of personnel. We also depend on the
available labor pool of semi-skilled and unskilled employees in each of the
markets in which we operate. As a result of these and other factors, our labor
costs may increase and may not be matched by corresponding increases in rates
we charge to our residents.
We face possible environmental liabilities at each of our properties. Under
various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances, including asbestos-containing materials, that could be
located on, in or under its property. These laws and regulations often impose
liability whether or not the owner or operator knew of, or was responsible
for, the presence of the hazardous or toxic substances. We could face
substantial costs of any required remediation or removal of these substances,
and our liability typically is not limited under applicable laws and
regulations. Our liability could exceed our properties' value or the value of
our assets. We may be unable to sell or rent our properties, or borrow using
our properties as collateral, if any of these substances is present or if we
fail to remediate them properly. Under these laws and regulations, if we
arrange for the disposal of hazardous or toxic substances such as asbestos-
containing materials at a disposal site we also may be liable for the costs of
remediation or removal of the hazardous or toxic substances at the disposal
site. In addition to liability for these costs, we could be liable for
governmental fines and injuries to persons or properties.
Some of our facilities generate infectious medical waste due to the illness
or physical condition of the residents, including, for example, blood-soaked
bandages, swabs and other medical waste products and incontinence products of
those residents diagnosed with an infectious disease. The management of
infectious medical waste, including handling, storage, transportation,
treatment and disposal, is subject to regulation under various laws, including
federal and state environmental laws. These environmental laws set forth the
management requirements, as well as permit, record-keeping, notice and
reporting obligations. Each of our facilities has an agreement with a waste
management company for the proper disposal of all infectious medical waste.
Any finding that we are not in compliance with these environmental laws could
adversely affect our business and financial condition. Because these
environmental laws are amended from time to time, we cannot predict when and
to what extent liability may arise. In addition, because these environmental
laws vary from state to state, expansion of our operations to states where we
do not currently operate may subject us to additional restrictions on the
manner in which we operate our facilities.
Our chief executive officer and one of our directors have interests that may
conflict with ours due to their interests in Holiday Retirement Corp. Mr.
Baty, our Chief Executive Officer, and Mr. Colson, one of our directors, are
the principal shareholders, directors and senior executive officers of Holiday
Retirement Corp. Substantially all the independent living facilities operated
by Holiday are owned by partnerships controlled by Messrs. Baty and Colson and
in which they have varying financial interests. Messrs. Baty's and Colson's
responsibilities to Holiday and its affiliates include:
. overseeing the management of independent living facilities,
. the acquisition, financing and refinancing of existing facilities, and
. the development and construction of, and capital-raising activities to
finance, new facilities.
The financial interests and management and financing responsibilities of
Messrs. Baty and Colson with respect to Holiday and its affiliated
partnerships could present conflicts of interest with us, including:
. conflicts relating to the selection of future development or acquisition
sites,
. competition for potential residents in markets where both companies
operate, and
. competing demands for the time and efforts of Mr. Baty.
Because Mr. Baty is both our Chief Executive Officer and a principal
executive officer of Holiday, circumstances could arise that would distract
him from our operations. Our interests and Holiday's interests may
16
on some occasions be incompatible. We have entered into a noncompetition
agreement with Mr. Baty, but this noncompetition agreement does not limit Mr.
Baty's current role with Holiday or its related partnerships, so long as
assisted living is only an incidental component of Holiday's operation or
management of independent living facilities.
We have entered into agreements with several companies that are owned or
controlled by our affiliates, whose interests with respect to these companies
occasionally may conflict with ours. We have entered into agreements with
several companies that are owned or controlled by certain of our officers and
directors. Under these agreements, we provide management and other services to
senior housing communities owned by those companies and we have material
agreements relating to the purchase, sale and financing of a number of our
operating communities. There is a risk that our dealings with these companies
under these and any future arrangements will not be negotiated at arms length
and may be regarded as less advantageous to us than terms that would be
negotiated with unrelated third parties. Because of our affiliates' interests
and responsibilities with respect to these other companies, these affiliates
may occasionally have interests that are not compatible with ours.
We may be unable to attract and retain key management personnel. We depend,
and will continue to depend, on the services of Mr. Baty, our Chief Executive
Officer. The loss of Mr. Baty's services, in part or in whole, could adversely
affect our business and our results of operations. Mr. Baty has financial
interests in and management responsibilities with respect to Holiday and its
related partnerships. As a result, he does not devote his full time and
efforts to Emeritus. We have a key employee insurance policy covering the life
of Mr. Baty in the amount of $10.0 million. We may be unable to attract and
retain other qualified executive personnel critical to the success of our
business.
Our costs of compliance with government regulations may significantly
increase in the future. Federal, state and local authorities heavily regulate
the healthcare industry. Regulations change frequently, and sometimes require
us to make expensive changes in our operations. A number of legislative and
regulatory initiatives relating to long-term care are proposed or under study
at both the federal and state levels that, if enacted or adopted, could
adversely affect our business and operating results. We cannot predict to what
extent legislative or regulatory initiatives will be enacted or adopted or
what effect any initiative would have on our business and operating results.
Changes in applicable laws and new interpretations of existing laws can
significantly affect our operations, as well as our revenues, particularly
those from governmental sources, and our expenses. Our residential communities
are subject to varying degrees of regulation and licensing by local and state
health and social service agencies and other regulatory authorities. While
these regulations and licensing requirements often vary significantly from
state to state, they typically address:
. fire safety,
. sanitation,
. staff training,
. staffing levels,
. living accommodations such as room size, number of bathrooms and
ventilation, and
. our health-related services.
We may be unable to satisfy all regulations and requirements or to acquire
and maintain any required licenses on a cost-effective basis.
In addition, with respect to our residents who receive financial assistance
from governmental sources for their assisted living services, we are subject
to federal and state regulations that prohibit certain business practices and
relationships. Failure to comply with these regulations could prevent
reimbursement for our healthcare services under Medicaid or similar state
reimbursement programs. Our failure to comply with such regulations
17
also could result in fines and the suspension or inability to renew our
operating licenses. Federal, state and local governments occasionally conduct
unannounced investigations, audits and reviews to determine whether violations
of applicable rules and regulations exist. Devoting management and staff time
and legal resources to such investigations, as well as any material violation
by us that is discovered in any such investigation, audit or review, could
strain our resources and affect our profitability. In addition, regulatory
oversight of construction efforts associated with repositionings could cause
us to lose residents and disrupt community operations.
Our liability insurance may be insufficient to cover the liabilities we
face. In recent years, participants in the long-term-care industry have faced
an increasing number of lawsuits alleging malpractice or related legal
theories. Many of these suits involve large claims and significant legal
costs. We expect that we occasionally will face such suits because of the
nature of our business. We currently maintain insurance policies in amounts
and with coverage and deductibles we deem appropriate based on the nature and
risks of our business, historical experience and industry standards. We could
incur liability in excess of our insurance coverage or claims not covered by
our insurance. Claims against us, regardless of their merit or eventual
outcome, may also undermine our ability to attract residents or expand our
business and would require management to devote time to matters unrelated to
the operation of our business. Our liability insurance policies must be
renewed annually, and we may not be able to obtain liability insurance
coverage in the future or, if available, on acceptable terms.
Our stock price has been highly volatile, and a number of factors may cause
our common stock price to decline. The market price of our common stock has
fluctuated and could fluctuate significantly in the future in response to
various factors and events, including, but not limited to:
. the liquidity of the market for our common stock,
. variations in our operating results,
. variations from analysts' expectations, and
. new statutes or regulations, or changes in the interpretation of
existing statutes or regulations, affecting the healthcare industry
generally or the assisted living residence business in particular.
In addition, the stock market in recent years has experienced broad price
and volume fluctuations that often have been unrelated to the operating
performance of particular companies. These market fluctuations also may cause
the market price of our common stock to decline.
We may experience development and construction delays and cost
overruns. Although we have significantly reduced our development of new
communities, our growth strategy continues to depend, in part, on our ability
to develop and construct additional communities. In our development and
construction projects, we face a number of contingencies over which we will
have little or no control and which might increase project costs and
completion time. These contingencies include:
. obtaining and reacting to changes in zoning, land use, building,
occupancy, licensing and other required permits,
. budget and schedule overruns,
. the inability of the general contractor or subcontractors to perform
under their contracts,
. shortages of labor or materials,
. adverse weather conditions, or
. changes in applicable laws or regulations or in the method of applying
such laws and regulations.
As a result of these factors, we may experience cost overruns, construction
delays and higher-than-anticipated start-up losses. We cannot guarantee that
we will succeed in developing and constructing currently planned or additional
communities or that any developed community will be economically successful.
18
Our share ownership and certain other factors may impede a proposed takeover
of our business. As of March 27, 2000, Mr. Baty, our Chief Executive Officer,
controls about 33% of our outstanding common stock. Together, our directors
and executive officers own over 63% of our outstanding common and preferred
stock. Accordingly, Mr. Baty and the other members of our board and management
would have significant influence over the outcome of matters submitted to our
shareholders for a vote, including matters that would involve a change of
control of Emeritus. Further, our Articles of Incorporation require a two-
thirds supermajority vote to approve a business combination of Emeritus with
another company that is not approved by the board of directors. Accordingly,
the current management group and board of directors could prevent approval of
such a business combination. We currently have a staggered board in which only
one-third of the board stands for election each year. Thus, absent removals
and resignations, a complete change in board membership could not be
accomplished in fewer than approximately two calendar years.
19
ITEM 2. DESCRIPTION OF PROPERTY
Communities
Our assisted living communities generally consist of one- to three-story
buildings and include common dining and social areas. Twenty-two of our
operating communities offer some independent living services and four are
operated as skilled nursing facilities. The table below summarizes current
information regarding our currently operating communities.
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------ ----------------- ---------- ----- ---- --------------------
Arizona
Arbor at Olive Grove * Phoenix Jun. 1994 98 111 Lease
La Villita * (2) Phoenix Jun. 1994 87 87 First Refusal/Manage
Loyalton of Flagstaff
(3) Flagstaff Jun. 1999 61 67 Option/Manage
Loyalton of Phoenix
(3) Phoenix Jan. 1999 101 111 Option/Manage
Scottsdale Royale ++ Scottsdale Aug. 1994 63 63 Own
Villa Ocotillo Scottsdale Sep. 1994 102 106 Own
California
Creston Village ++ Paso Robles Mar. 1998 97 107 Joint Venture
Emerald Hills Auburn Jun. 1998 89 98 Lease
Fulton Villa Stockton Apr. 1995 81 81 Own
Laurel Place * ++ (2) San Bernadino Apr. 1996 70 71 Option/Manage
Northbay Retirement ++ Fairfield Apr. 1998 172 189 Joint Venture
Rosewood Court Fullerton Mar. 1996 71 78 Lease
The Terrace ++ (2) Grand Terrace Jan. 1996 87 87 Option/Manage
Villa Del Rey * Escondido Mar. 1997 84 84 Own
Connecticut
Cold Spring Commons * Rocky Hill May 1997 80 88 Lease
Delaware
Gardens at White
Chapel (2) Newark Sep. 1998 99 109 Option/Manage
Green Meadows at Dover Dover Oct. 1995 49 60 Lease
Florida
The Allegro St. Augustine Sep. 1999 111 122 Manage
Barrington Place (2) LeCanto May 1996 80 120 Option/Manage
Beneva Park Club (2) Sarasota Jul. 1995 96 102 Option/Manage
Central Park Village *
++ (2) Orlando Jul. 1995 179 193 Option/Manage
College Park Club *
(2) Bradenton Jul. 1995 87 93 Option/Manage
Colonial Park Club (3) Sarasota Aug. 1996 90 90 Option/Manage
Heritage Oaks Tallahassee Jan. 2000 120 132 Manage
La Casa Grande New Port Richey May 1997 195 232 Own
The Lodge at Mainlands
(2) Pinellas Park Aug. 1996 154 162 Option/Manage
Madison Glen (2) Clearwater May 1996 130 154 First Refusal/Manage
Park Club of Brandon
(3) Brandon Jul. 1995 90 88 Option/Manage
Park Club of Ft. Myers
(3) Ft. Myers Jul. 1995 79 82 Option/Manage
Park Club of Oakbridge
(3) Lakeland Jul. 1995 89 88 Option/Manage
River Oaks Englewood May 1997 153 200 Own
Springtree (2) Sunrise May 1996 180 246 Option/Manage
Stanford Centre Altamonte Springs May 1997 118 181 Own
20
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------- ------------- ---------- ----- ---- -------------
Idaho
Bestland Retirement ++ Coeur d'Alene Nov. 1996 82 85 Manage
Highland Hills (3) Pocatello Oct. 1996 49 55 Option/Manage
Juniper Meadows Lewiston Dec. 1997 80 88 Own
Loyalton of Coeur d'Alene
++ (3) Coeur d'Alene Mar. 1996 104 114 Option/Manage
Ridge Wind (3) Chubbuck Aug. 1996 80 106 Option/Manage
Summer Wind Boise Sep. 1995 49 53 Lease
Illinois
Canterbury Ridge (4) Urbana Nov. 1998 101 111 Manage
Iowa
Silver Pines Cedar Rapids Jan. 1995 80 80 Own
Kansas
Elm Grove Estates (2) Hutchinson Jun. 1997 116 128 Option/Manage
Kentucky
Stonecreek Lodge * Louisville May 1997 80 88 Lease
Maryland
Emerald Estates Baltimore Nov. 1999 120 134 Manage
Loyalton of Hagerstown (3) Hagerstown Sep. 1999 100 110 Option/Manage
Martin's Glen Essex Feb. 1999 97 107 Manage
Massachusetts
The Lodge at Eddy Pond Auburn Jan. 2000 108 110 Lease
Meadow Lodge at Drum Hill * Chelmsford Oct. 1997 80 88 Own
The Pines at Tewksbury *
(3) Tewksbury Jan. 1996 49 65 Option/Manage
Woods at Eddy Pond * Auburn Jun. 1997 80 88 Lease
Mississippi
Loyalton of Biloxi (4) Biloxi Feb. 1999 83 91 Manage
Loyalton of Hattiesburg Hattiesburg Aug. 1999 83 91 Manage
Ridgeland Court * Ridgeland Aug. 1997 79 87 Joint Venture
Silverleaf Manor Meridian Aug. 1998 101 111 Manage
Trace Point Clinton Nov. 1999 100 110 Manage
Missouri
Autumn Ridge ++ Herculaneum Jun. 1997 94 94 Manage
Montana
Springmeadows Residence Bozeman May 1997 74 81 Own
Nevada
Concorde * Las Vegas Nov. 1996 113 125 Own
New Jersey
Laurel Lake Estates Voorhees Jul. 1995 113 115 Lease
New York
Bassett Manor (1) Williamsville Nov. 1996 104 106 Lease
Bassett Park Manor (1) Williamsville Nov. 1996 78 80 Lease
Bellevue Manor (1) Syracuse Nov. 1996 90 90 Lease
Colonie Manor (1) Latham Nov. 1996 94 94 Lease
21
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------ ------------------ ---------- ----- ---- -------------
East Side Manor (1) Fayetteville Nov. 1996 79 87 Lease
Green Meadows at
Painted Post (1) Painted Post Oct. 1995 73 96 Lease
The Landing at
Brockport Brockport Jul. 1999 84 92 Manage
The Landing at
Queensbury Queenbury Dec. 1999 84 92 Manage
Loyalton of Lakewood
(3) Lakewood Sep. 1999 83 91 Option/Manage
Perinton Park Manor
(1) Fairport Nov. 1996 78 86 Lease
West Side Manor--
Rochester (1) Rochester Nov. 1996 72 72 Lease
West Side Manor--
Syracuse (1) Syracuse Nov. 1996 77 79 Lease
Woodland Manor (1) Vestal Nov. 1996 60 116 Lease
North Carolina
Heritage Health Center
# Hendersonville Feb. 1996 67 135 Lease
Heritage Hills
Retirement Community
++ Hendersonville Feb. 1996 99 99 Own
Heritage Lodge
Assisted living Hendersonville Feb. 1996 20 24 Lease
Pine Park Retirement
Community ++ Hendersonville Feb. 1996 110 110 Lease
Pines of Goldsboro Goldsboro Nov. 1998 101 111 Manage
Ohio
Brookside Estates (2) Middleburg Heights Oct. 1998 99 101 Option/Manage
Park Lane ++ Toledo Jan. 1998 92 101 Manage
Oregon
Meadowbrook (3) Ontario Jun. 1995 53 55 Option/Manage
Pennsylvania
Green Meadows at
Allentown Allentown Oct. 1995 76 97 Lease
Green Meadows at
Latrobe Latrobe Oct. 1995 84 125 Lease
South Carolina
Anderson Place--The
Summer House ++ (3) Anderson Oct. 1996 30 40 Option/Manage
Anderson Place--The
Village (3) Anderson Oct. 1996 75 75 Option/Manage
Anderson Place--The
Health Center # (3) Anderson Oct. 1996 22 44 Option/Manage
Bellaire Place * (2) Greenville Jul. 1997 81 89 Option/Manage
Countryside Park Easley Feb. 1996 48 66 Lease
Countryside Village
Assisted living Easley Feb. 1996 47 77 Lease
Countryside Village
Health Care Center # Easley Feb. 1996 24 44 Lease
Countryside Village
Retirement Center ++ Easley Feb. 1996 75 78 Lease
Skylyn Health Center # Spartanburg Feb. 1996 26 48 Lease
Skylyn Personal Care
Center Spartanburg Feb. 1996 80 119 Lease
Skylyn Retirement
Community ++ Spartanburg Feb. 1996 155 155 Lease
York Care York Apr. 1997 50 100 Manage
Tennessee
Walking Horse Meadows
++ * (2) Clarksville Jun. 1997 50 55 Option/Manage
22
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ------------------------ -------------- ---------- ------ ------ --------------------
Texas
Amber Oaks * ++ San Antonio Apr. 1997 155 267 Lease
Cambria * El Paso Oct. 1996 79 87 Lease
Dowlen Oaks (2) Beaumont Mar. 1997 79 87 Option/Manage
Eastman Estates (2) Longview Jul. 1997 70 77 Option/Manage
Elmbrook Estates (3) Lubbock Feb. 1997 79 87 Option/Manage
Lakeridge Place (2) Wichita Falls Jul. 1997 80 88 Option/Manage
Meadowlands Terrace *
(2) Waco Jul. 1997 71 78 First Refusal/Manage
Myrtlewood Estates (2) San Angelo Aug. 1997 79 87 Option/Manage
The Palisades * ++ El Paso Apr. 1997 158 215 Lease
Redwood Springs ++ San Marcos Apr. 1997 90 90 Lease
Saddleridge Lodge (2) Midland Mar. 1997 79 87 Option/Manage
Seville Estates * (2) Amarillo Mar. 1997 50 55 Option/Manage
Sherwood Place * Odessa Oct. 1996 79 87 Lease
Vickery Towers at
Belmont ++ Dallas Apr. 1995 301 331 Manage
Utah
Emeritus Estates (2) Ogden Apr. 1998 83 91 Option/Manage
Virginia
Carriage Hill
Retirement Bedford Sep. 1994 88 134 Lease
Cobblestones at
Fairmont * Manassas Sep. 1996 75 82 Own
Loyalton of Staunton
(3) Staunton Aug. 1999 101 111 Option/Manage
Wilburn Gardens Fredericksburg Jan. 1999 101 111 Manage
Washington
Arbor Place at Silver
Lake Everett Jul. 1999 101 111 Manage
Charlton Place Tacoma Jul. 1998 95 104 Manage
Cooper George * ++ Spokane Jun. 1996 141 159 Partnership
Courtyard at the
Willows * Puyallup Oct. 1997 100 110 Own
Evergreen Lodge (3) Federal Way Apr. 1996 98 124 Option/Manage
Fairhaven Estates *
(3) Bellingham Oct. 1996 50 55 Option/Manage
Garrison Creek Lodge * Walla Walla Jun. 1996 80 88 Lease
Harbour Pointe Shores
(2) Ocean Shores Mar. 1997 50 55 Option/Manage
The Hearthstone (3) Moses Lake Nov. 1996 84 92 Option/Manage
The Hearthside Issaquah Feb. 2000 98 98 Own
Kirkland Lodge Kirkland Feb. 1996 75 85 Own
Renton Villa * Renton Sep. 1993 79 97 Lease
Richland Gardens Richland Jul. 1998 100 110 Manage
Seabrook * Everett Jun. 1994 60 62 Lease
Van Vista/Columbia
House Vancouver Oct. 1997 100 100 Admin Services
Wyoming
Park Place ++ (2) Casper Feb. 1996 60 60 Option/Manage
Sierra Hills (4) Cheyenne Jun. 1998 83 91 Manage
Japan
San Oaks Kurashiki Dec. 1999 116 116 Joint Venture
------ ------
Total Operating
Communities 11,824 13,495
====== ======
23
- --------
* Near an existing or proposed Holiday facility.
++ Currently offers independent living services.
# Currently operates as a skilled nursing facility.
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(b) "Beds" reflects the actual number of beds, which in no event is greater
than the maximum number of licensed beds allowed under the community's
license.
(1) We provide administrative services to the community that is operated by
Painted Post Partners through a lease agreement with an independent third
party.
(2) On December 31, 1998, an investor group acquired these communities from
Meditrust. We hold an option or a right of first refusal to purchase the
communities, expiring on July 3, 2001, at a formula price based on a
specified return to the investor group. We manage the communities during
the option term.
(3) On March 31, 1999, an investor group acquired these communities from
Meditrust. We hold an option to purchase the communities, expiring on
July 3, 2001, at a formula price based on a specified return to the
investor group. We manage the communities during the option term.
(4) These communities are managed for two years or until they meet specified
cash flow targets, whichever occurs first, at which time we lease them
pursuant to pre-established terms.
Development Communities
The following table summarizes certain current information regarding
communities under construction, which are communities where construction
activities, such as groundbreaking activities, exterior construction or
interior build-out, have commenced.
Scheduled Units Beds
Community Location Opening (a) (b) Site Interest
- ------------------------ -------------- ------------ ----- ---- -------------
Anticipated 2000 and 2001 Openings:
California
Village at Granite Bay Granite Bay 2nd Qtr 2001 100 110 Joint Venture
Florida
The Allegro at Fleming
Island Fleming Island 3rd Qtr 2000 100 110 Manage
Illinois
Rockford Rockford 2nd Qtr 2000 100 110 Manage
Ohio
The Landing at Canton Canton 4th Qtr 2000 84 92 Manage
New Jersey
Loyalton of Cape May Cape May 2nd Qtr 2001 100 110 Manage
--- ---
Total 2000 and 2001
Openings 484 532
=== ===
- --------
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(b) "Beds" reflects the actual number of beds, which in no event is greater
than the maximum number of licensed beds allowed under the community's
license.
Our executive offices are located in Seattle, Washington, where we lease
approximately 26,500 square feet of space. Our lease agreement includes a term
of 10 years, expiring July 2006, with two five-year renewal options.
24
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Emeritus did not submit any matter to a vote of its security holders during
the fourth quarter of its fiscal year ended December 31, 1999.
Executive Officers of the Registrant
The following table presents certain information about our executive
officers. There are no family relationships between any of the directors or
executive officers.
Name Age Position
---- --- --------
Daniel R. Baty..... 56 Chairman of the Board and Chief Executive Officer
Kelly J. Price..... 31 Vice President, Finance, Chief Financial Officer,
Principal Accounting Officer and Secretary
Sarah J. Curtis.... 38 Vice President, Sales and Marketing
Martin D. Roffe.... 52 Vice President, Financial Planning
Suzette McCanless.. 51 Vice President, Operations--Eastern Division
Russell G. Kubik... 46 Vice President, Operations--Central Division
Gary S. Becker..... 52 Senior Vice President of Operations
Daniel R. Baty, 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 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 and, since 1986, as chairman of the
board of Columbia Management, 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.
Kelly J. Price has served as Emeritus's Vice President since February 1997,
as Chief Financial Officer and Secretary since September 1995 and as Principal
Accounting Officer since February 1998. Prior to that, he was Emeritus'
Director of Finance since January 1995. From September 1991, until joining
Emeritus, Mr. Price was employed at Deloitte & Touche LLP in both the
Management Consulting and Accounting practice. In March 2000, Mr. Price
resigned his position as Chief Financial Officer, Principal Accounting
Officer, and Secretary.
Sarah J. Curtis joined Emeritus as Vice President of Sales and Marketing in
March 1997. Prior to that, she had been National Director of Sales for Beverly
Enterprises, Inc. since March 1996. From July 1991 until February 1996, Ms.
Curtis was initially an Area Manager and then Regional Director of Sales and
Marketing for the Southern Region of Hillhaven/Vencor Corporation.
Martin D. Roffe joined Emeritus as Director of Financial Planning in March
1998, and was promoted to Vice President, Financial Planning in October 1999.
Mr. Roffe has 29 years experience in the Acute Care, Long Term Care, and
Senior Housing industries. Prior to joining Emeritus, from May of 1987 until
February 1996, Mr. Roffe served as Vice President of Financial Planning for
the Hillhaven Corporation, at which he also held the previous positions of Sr.
Application Analyst and Director of Financial Planning, from January 1983 to
April 1987. Prior to 1983, Mr. Roffe served in a Budget Director capacity for
Acute Care Facilities.
Suzette McCanless joined Emeritus as Eastern Division Director of Operations
in March 1997 and was promoted to Vice President, Operations--Eastern
Division, in September 1999. Ms. McCanless has 21 years of health care
management experience. Prior to joining Emeritus, from July 1996 to February
1997, she was Group Vice President for Beverly Enterprises, Inc., at which she
also held the previous positions of Administrator and Regional Director of
Operations from June 1983 to March 1994. In the interim, Ms. McCanless worked
for Delta
25
Health Group, from April 1994 to August 1995, as Regional Director of
Operations, and at Hillhaven/Vencor Corporation as the Director of Operations
from September of 1995 to June of 1996.
Russell G. Kubik joined Emeritus as Central Division Director of Operations
in April 1997 and was promoted to Vice President, Operations--Central
Division, in September 1999. Mr. Kubik has 17 years of health care management
experience. Prior to joining Emeritus, from 1994 to 1997, Mr. Kubik served as
Regional Director of Operations for Sun Healthcare Group in the Seattle/Puget
Sound area. From May 1992 to March 1994, Mr. Kubik worked as Regional Director
of Operations for Beverly Enterprises, Inc. in Washington and Idaho.
Gary S. Becker joined Emeritus as Western Division Director in January 1997.
He was promoted to Vice President, Operations--Western Division, in September
1999 and then promoted to Senior Vice President of Operations in March 2000.
Mr. Becker has 28 years of health care management experience. From October
1993 to December 1996 he was Vice President of Operations for the Western
Division of Sunrise Healthcare Corp. From 1982 to October 1993 he was Vice
President of Operations for the Mid-West division of the Hillhaven
Corporation.
26
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the American Stock Exchange under the
symbol "ESC" since November 21, 1995, the date of our initial public offering.
The following table sets forth for the periods indicated the high and low
closing prices for our common stock as reported on AMEX.
High Low
-------- --------
1997
First Quarter......................... $13.5000 $11.1250
Second Quarter........................ $16.2500 $11.5000
Third Quarter......................... $15.5000 $13.8750
Fourth Quarter........................ $16.2500 $11.8750
1998
First Quarter......................... $13.5000 $10.6875
Second Quarter........................ $13.3750 $10.7500
Third Quarter......................... $12.4375 $ 9.1250
Fourth Quarter........................ $11.3750 $ 8.6250
1999
First Quarter......................... $15.1250 $11.3750
Second Quarter........................ $12.1250 $ 9.7500
Third Quarter......................... $10.0000 $ 7.5000
Four Quarter.......................... $ 7.8125 $ 5.1250
As of March 27, 2000, the number of record holders of our Common Stock was
151.
We have never declared or paid any dividends on our Common Stock, and expect
to retain any future earnings to finance the operation and expansion of our
business. Future dividend payments will depend on our results of operations,
financial condition, capital expenditure plans and other obligations and will
be at the sole discretion of our Board of Directors. Certain of our existing
leases and lending arrangements contain provisions that restrict our ability
to pay dividends, and it is anticipated that the terms of future leases and
debt financing arrangements may contain similar restrictions. Therefore, we do
not anticipate paying any cash dividends on our Common Stock in the
foreseeable future.
27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
related notes included elsewhere in this Form 10-K. The consolidated statement
of operations and consolidated balance sheet data set forth below, have been
derived from our consolidated financial statements, which have been audited by
KPMG LLP, independent auditors. The historical results are not necessarily
indicative of results to be expected for any future period.
Year Ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Consolidated Statements of
Operations Data:
Total operating revenues.... $ 21,277 $ 68,926 $117,772 $151,820 $122,642
Total operating expenses.... 22,149 74,053 139,323 171,405 124,821
Loss from operations........ (872) (5,127) (21,551) (19,585) (2,179)
Net interest and other
expense.................... (6,815) (3,075) (6,660) (9,194) (18,525)
Extraordinary loss on
extinguishment of debt..... (1,267) -- -- (937) (333)
Cumulative effect of change
in accounting principle.... -- -- -- (1,320) --
-------- -------- -------- -------- --------
Net loss.................... (8,954) (8,202) (28,211) (31,036) (21,037)
Preferred stock dividends... -- -- 425 2,250 2,250
-------- -------- -------- -------- --------
Net loss to common
shareholders............. $ (8,954) $ (8,202) $(28,636) $(33,286) $(23,287)
======== ======== ======== ======== ========
Loss per common share before
extraordinary item
and cumulative effect of
change in accounting
principle--basic and
diluted.................... $ (0.95) $ (0.75) $ (2.60) $ (2.96) $ (2.19)
Extraordinary loss per
common share--basic
and diluted................ $ (0.16) $ -- $ -- $ (.09) $ (.03)
Cumulative effect of change
in accounting principle
loss per common share--
basic and diluted.......... $ -- $ -- $ -- $ (.12) $ --
Net loss per common
share--basic and
diluted.................. $ (1.11) $ (0.75) $ (2.60) $ (3.17) $ (2.22)
Weighted average number of
common shares outstanding--
basic and diluted.......... 8,062 11,000 11,000 10,484 10,469
Consolidated Operating Data:
Communities operated........ 22 69 99 113 129
Number of units............. 1,857 5,807 8,624 9,972 11,726
December 31,
------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Consolidated Balance Sheet
Data:
Cash and cash equivalents... $ 9,507 $ 23,039 $ 17,537 $ 11,442 $ 12,860
Working capital (deficit)... 4,091 9,757 12,074 (977) 6,828
Total assets................ 115,635 158,038 228,573 192,870 198,370
Long-term debt, less current
portion.................... 66,814 60,260 108,117 119,674 128,319
Convertible debentures...... -- 32,000 32,000 32,000 32,000
Redeemable preferred stock.. -- -- 25,000 25,000 25,000
Shareholders' equity
(deficit).................. 34,895 26,188 1,207 (45,964) (37,290)
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Emeritus is a Washington corporation organized by Daniel R. Baty and two
other founders in 1993. In November 1995, we held our initial public offering
and began our expansion strategy.
Until 1998, we focused on rapidly expanding our operations in order to
assemble a portfolio of assisted living communities with a critical mass of
capacity. We pursued an aggressive acquisition and development strategy during
that time, acquiring 35 and developing 10 communities in 1996, acquiring 7 and
developing 20 communities in 1997, and developing 5 communities in 1998.
Having achieved our growth objective, in 1998 and continuing in 1999 we
substantially reduced our pace of acquisition and our development activities
to concentrate on enhancing operations and increasing occupancy, which had
been a secondary focus during this period of rapid expansion. Our focus on
operations and occupancy yielded a nine-percentage point increase between both
year-end 1997 and 1998, and year-end 1998 and 1999, to an ending occupancy of
90% at December 31, 1999, across our consolidated portfolio. Average occupancy
increased four percentage points between 1997 and 1998 and 10 percentage
points between 1998 and 1999 to 87% for 1999. Our total operated portfolio
experienced a similar trend for ending occupancy increasing four percentage
points to 82% at December 31, 1999 compared to 78% at December 31, 1998. We
intend to continue our growth strategy by selectively acquiring and developing
new communities with operating characteristics consistent with our current
emphasis on maintaining high occupancy and enhancing our operating model and
service offerings.
The following table presents a summary of our community interests.
As of December 31,
----------------------------------------------------------------------
1996 1997 1998 1999
---------------- ---------------- ---------------- ----------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------- ------ --------- ------ --------- ------ --------- ------
Owned (4)............... 15 1,485 19 2,099 15 1,492 16 1,572
Leased (4).............. 53 4,165 76 6,124 52 3,937 40 3,302
Managed/Admin Services.. 1 83 4 327 38 3,734 68 6,247
Joint
Venture/Partnership.... 2 162 1 140 8 809 5 605
--- ------ --- ------ --- ------ --- ------
Operated Portfolio.... 71 5,895 100 8,690 113 9,972 129 11,726
Percentage Increase
(1).................. 196% 170% 41% 47% 13% 15% 14% 18%
Pending Acquisitions.... 8 1,028 -- -- -- -- 2 206
New Developments (2).... 27 2,296 26 2,483 21 2,029 6 604
Minority Interest
(Alert) (3)............ 17 959 22 1,248 21 1,203 -- --
--- ------ --- ------ --- ------ --- ------
Total................. 123 10,178 148 12,421 155 13,204 137 12,536
Percentage Increase
(Decrease) (1)....... 95% 96% 20% 22% 5% 6% (12%) (5%)
- --------
(1) The percentage increase (decrease) indicates the change from the
preceding December 31.
(2) The six communities under development at December 31, 1999 are being
developed by third parties, but will be managed by us upon completion.
(3) In November 1999, we sold all our minority interest in Alert Care.
(4) Included in our consolidated portfolio of communities.
We rely primarily on our residents' ability to pay our charges for services
from their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe generally that
only seniors with income or assets meeting or exceeding the regional median
can afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an
29
adverse effect on our business. All sources of revenue other than residents'
private resources constitute less than 10% of our total revenues.
We have incurred net operating losses and negative cash flows from operating
activities since our inception. As of December 31, 1999 we had an accumulated
deficit of approximately $103.8 million. These losses resulted from a number
of factors, including:
. the development of 60 and acquisition of 69 assisted living communities
that incurred operating losses during the 12 to 24 month period after
acquisition or development,
. occupancy levels at our communities that were lower for longer periods
than we originally anticipated,
. financing costs that we incurred as a result of multiple financing and
refinancing transactions,
. refinancing transactions that increased the levels of our debt and our
related interest expense, and
. administrative and corporate expenses that we increased to facilitate
our growth.
During 1998, we decided to reduce acquisition and development activities and
dispose of select communities that had been operating at a loss. We believe
that slowing our acquisition and development activities has enabled us to use
our resources more efficiently and increase our focus on enhancing community
operations.
Results of Operations
The following table sets forth, for the years indicated, certain items of
the Company's Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from year to year.
Percentage of Revenues Year-to-Year Percentage
Years Ended December 31, Increase (Decrease)
-------------------------------- -----------------------------
1997 1998 1999 1997-1998 1998-1999
-------- -------- -------- ----------- ------------
Total operating
revenues............... 100 % 100 % 100 % 29 % (19)%
Expenses:
Community operations.. 70 73 64 34 (29)
General and
administrative....... 9 9 13 26 14
Depreciation and
amortization......... 6 4 5 (14) 5
Rent.................. 29 27 20 20 (39)
Other................. 4 -- -- N/A N/A
-------- -------- --------
Total operating
expenses............... 118 113 102 23 (27)
-------- -------- --------
Loss from operations.. (18) (13) (2) (9) (89)
-------- -------- --------
Other expense:
Interest expense,
net.................. 6 9 11 69 --
Impairment of
securities........... -- -- 6 -- N/A
Other, net............ (1) (3) (2) 531 (48)
Extraordinary loss on
early extinguishment of
debt................... -- 1 -- N/A (64)
Cumulative effect of
change in accounting
principle.............. -- 1 -- N/A (100)
-------- -------- --------
Net loss................ (24)% (20)% (17)% 10 % (32)%
30
Comparison of the Years Ended December 31, 1999 and 1998
Total Operating Revenues. Total operating revenues decreased $29.2 million
to $122.6 million for 1999 from $151.8 million for 1998, representing a 19%
decrease. At December 31, 1998 and at March 31, 1999, we transferred our
interests in a total of 41 owned and leased communities to others but
continued to manage them under three year management agreements with rights of
first refusal or options to acquire them in the future. As a result, we now
receive management fees from these communities rather than the revenues
arising from their operations. For 1998, these communities were responsible
for $51.3 million in operating revenue while generating $2.7 million in
management fees for the same period in 1999. This decrease in revenue was
partially offset, however, by generally increasing levels of occupancy
throughout our consolidated communities. Average occupancy of the 59
consolidated communities we own and lease for 1999 rose to 87% compared to 77%
for the 99 owned and leased communities in the equivalent 1998 period, an
increase of 10 percentage points.
Community Operations. Community operating expenses decreased $32.4 million
to $78.2 million for 1999 from $110.6 for 1998, representing a 29% decrease.
As a percentage of total operating revenues, community operations decreased to
64% for 1999 compared to 73% for 1998. This reduction is primarily the result
of the transfer of 41 of our previously leased and owned communities to
management agreements, as discussed in "Total Operating Revenues" above. These
communities were responsible for $39.8 million of community operating expenses
as owned and leased communities in 1998; because 25 and 16 were managed
communities during 1999 and the nine months ended December 31, 1999,
respectively, we were no longer responsible for their operating expenses. This
decrease was partially offset, however, by increased variable costs resulting
from the significant occupancy gains in our communities and by increased sales
and marketing costs. Our community operating margin, which we compute as
community revenues less community operating expenses, has increased to 32.6%
for 1999 compared to 25.4% for 1998. This improvement is, in part, because the
41 communities that we transferred to management agreements generally
experienced lower margins than our communities as a whole and, in part,
because of cost control measures that we instituted in 1998 that affected our
remaining owned and leased communities.
General and Administrative. General and administrative expenses increased
$1.9 million to $15.5 million for 1999 from $13.6 million for 1998,
representing a 14% increase. As a percentage of revenues, general and
administrative expenses increased to 13% for 1999 compared to 9% for 1998. The
increase of general and administrative costs as a percentage of revenues is
due, in part, to the shift from community revenues to management fees in the
transfer of the 41 communities referred to above. The overall increase of $1.9
million is attributable to greater personnel costs to support our increasing
number of communities as well as increased marketing costs to enhance
occupancy.
Depreciation and Amortization. Depreciation and amortization expense
increased $0.3 million to $6.0 million for 1999 from $5.7 million for 1998,
representing a 5% increase. As a percentage of total revenue, depreciation and
amortization expenses increased to 5% for 1999 as compared to 4% for 1998.
Rent. Rent expense decreased $16.4 million to $25.1 million for 1999 from
$41.5 million for 1998, representing a decrease of 39%. The decrease is
primarily attributable to the transfer of 38 of our previously leased
operating communities to management agreements as discussed above. These
communities accounted for $18 million in rent expense for 1998. We leased an
average of 43 communities in 1999, compared to an average of 76 in 1998. Rent
as a percentage of revenues was 27% and 20% for 1998 and 1999, respectively.
Interest Expense, Net of Interest Income. Interest expense, net of interest
income nominally changed to $13.1 million for 1999 from $13.0 million for
1998, representing an increase of less than one percent. As a percentage of
revenue, interest expense increased to 11% for 1999 as compared to 9% for
1998. This increase is primarily the result of an increase in mortgage
interest expense due to the refinancing of several properties during 1999. The
change in percentage of revenue is primarily the result of our decrease in
revenues from the transfer of 41 of our communities as discussed above. In
addition, total debt increased approximately $3 million to $170 million as of
December 31, 1999 compared to $167 million as of December 31, 1998.
31
Impairment of Investment Securities. Impairment of investment securities was
$7.4 million for 1999. In 1999, we wrote down our investment in ARV as we
concluded the decline in the fair market value of this investment was other
than temporary.
Other, Net. Other, net decreased $1.8 million to $2.0 million for 1999 from
$3.8 million for 1998, representing a decrease of 48%. As a percentage of
revenue, other, net, decreased to 2% in 1999 from 3% in 1998. The $1.8 million
decrease results from the recognition of our portion of 1999 operating losses
from two of our communities, gains realized on the sale of investment
securities, and the disposition of communities in 1998 which did not occur in
1999.
Extraordinary Item. We recognized extraordinary losses of approximately
$333,000 and $937,000 for 1999 and 1998, respectively, resulting from the
write-off of loan fees and other related costs in conjunction with the
refinancing of several of our mortgage-financed communities.
Cumulative Effect of Change in Accounting Principle. In 1998, we recognized
the cumulative effect of a change in accounting principle of $1.3 million
related to the early adoption of Statement of Position ("SOP") 98-5,
"Reporting on Costs of Start-up Activities", which requires that costs of
start-up activities and organization be expensed as incurred.
Comparison of Years Ended December 31, 1997 and 1998
Total Operating Revenues. Total operating revenues increased $34.0 million
to $151.8 million for 1998, from $117.8 million for 1997, representing an
increase of 29%. The increase was primarily due to increased occupancy
throughout our communities. Occupancy at December 31, 1998 increased 9
percentage points to 81% compared to 72% as of December 31, 1997. Furthermore,
average occupancy for 1998 was 77% compared to 73% for 1997, an increase of 4
percentage points. In addition to the increase in occupancy, we opened five
newly developed communities in 1998, which accounted for a $3.0 million
increase in revenue.
Community Operating Expenses. Community operating expenses increased $27.8
million to $110.6 million for 1998 from $82.8 million for 1997, representing
an increase 34%. As a percentage of total revenues, community operations
increased to 73% for 1998 compared to 70% for 1997. These increases were the
result of (1) increased labor costs due to the overall census increase
throughout our communities, (2) the opening of five newly developed
communities during 1998, (3) increased sales and marketing costs, and (4) the
recording of start-up and organization costs as operating expenses in
accordance with SOP 98-5, which would previously have been deferred and
amortized.
General and Administrative. General and administrative costs increased $2.8
million to $13.6 million for 1998 compared to $10.8 million for 1997,
representing an increase of 26%. As a percentage of revenues, these costs have
stayed relatively constant at 9% for 1998 and 1997. The overall increase of
$2.8 million is primarily attributable to greater personnel costs due to our
growth.
Depreciation and Amortization. Depreciation and amortization expense
decreased 14% to $5.7 million for 1998 from $6.6 million for 1997. As a
percentage of total revenue, depreciation and amortization expense decreased
to 4% for 1998 compared to 6% for 1997. The decrease is the result of
expensing previously deferred start-up and organization costs in 1998 in
accordance with SOP 98-5.
Rent. Rent expense increased $6.8 million to $41.5 million for 1998 from
$34.7 million for 1997, representing an increase of 20%. This increase is
primarily attributable to the opening of five newly developed communities in
1998 and 20 in 1997. In addition, the increase is partly the result of lease
provisions providing for additional payments based on a percentage of revenue
in 1998. As a percentage of total revenue, rent expense decreased 2 percentage
points to 27% for 1998 compared to 29% for 1997.
Other. In 1997, we incurred $4.4 million of charges related to the
termination of our tender offer for another company and changes in our
operating structure. We did not have any similar charges in 1998.
32
Interest Expense, Net. Interest expense increased $5.8 million to $14.2
million for 1998 from $8.4 million for 1997, representing an increase of 69%.
As a percentage of revenue, interest expense increased 3 percentage points to
9% for 1998 compared to 6% for 1997. This increase is primarily the result of
an increase in mortgage interest expense due to the refinancing of several
properties during 1998. In addition, total debt increased approximately $11.0
million to $132.0 million as of December 31, 1998 compared to $121.0 million
as of December 31, 1997.
Other, Net. Other, net increased $3.2 million to $3.8 million for 1998 from
approximately $600,000 for 1997, representing an increase of 531%. The
increase is a result of gains realized on the sale of investment securities
and the dispositions of communities.
Extraordinary Item. We recognized an extraordinary loss of approximately
$937,000 for 1998, representing the write-off of loan fees and other related
costs of our early extinguishment of debt when we refinanced 10 communities.
Cumulative Effect of Change in Accounting Principle. In 1998, we recognized
the cumulative effect of a change in accounting principle of $1.3 million
related to the early adoption of SOP 98-5, which requires that costs of start-
up activities and organization be expensed as incurred. During 1998, we
recorded a cumulative effect of a change in accounting principle of $1.3
million relating to the early adoption of SOP 98-5, which requires that costs
of start-up activities and organization be expensed as incurred. We did not
incur such a charge in 1997.
Same Community Comparison
We operated 56 communities on a comparable basis during both the three
months ended December 31, 1998 and 1999. The following table sets forth a
comparison of same community results of operations, excluding general and
administrative expenses, for the three months ended December 31, 1998 and
1999.
Three Months Ended December
31,
---------------------------------
Dollar Percent
1998 1999 Change Change
------- ------- ------ -------
(In thousands)
Revenue.................................. $24,942 $26,876 $1,934 8 %
Community operating expense.............. 15,897 17,613 1,716 11
------- ------- ------ ---
Community operating income............... 9,045 9,263 218 2
------- ------- ------ ---
Depreciation and amortization............ 1,029 1,270 241 23
Rent..................................... 5,715 5,581 (134) (2)
------- ------- ------ ---
Operating income......................... 2,301 2,412 111 5
------- ------- ------ ---
Interest expense, net.................... (2,338) (2,549) (211) 9
Other expense, net....................... (7) (56) (49) 700
------- ------- ------ ---
Net loss................................. $ (44) $ (193) $ (149) 339 %
======= ======= ====== ===
The same communities represented $26.9 million or 90% of our total operating
revenue for the quarter ended December 31, 1999. Same community revenues
increased $1.9 million or 8% to $26.9 million for the three months ended
December 31, 1999 compared to $24.9 million for the comparable period in 1998.
This increase in revenue is the result of increased occupancy at the same
communities and monthly rate increases due to an expanded range of services
offered at the communities. For the quarter ended December 31, 1999 occupancy
increased 5% to 91% from 86% for the quarter ended December 31, 1998. In
addition, revenue per occupied unit increased to $2,079 for the quarter ended
December 31, 1999 compared to $2,023 for the quarter ended December 31, 1998.
For the quarter ended December 31, 1999, we generated operating income of
$2.4 million compared to an operating income of $2.3 million for the
comparable period in 1998, an improvement of $0.1 million or 5%.
33
For the full years 1998 and 1999, we operated 56 communities on a comparable
basis. The following table sets forth a comparison of these same community
results of operations, excluding general and administrative expenses for these
two years.
Year Ended December 31,
--------------------------------------
Dollar Percentage
1998 1999 Change Change
------- -------- ------- ----------
(In thousands)
Revenue............................. $91,902 $104,796 $12,894 14 %
Community operating expense......... 60,675 66,990 6,315 10
------- -------- ------- ----
Community operating income.......... 31,227 37,806 6,579 21
------- -------- ------- ----
Depreciation and amortization....... 3,829 4,830 1,001 26
Rent................................ 22,819 22,124 (695) (3)
------- -------- ------- ----
Operating income.................... 4,579 10,852 6,273 137
------- -------- ------- ----
Interest expense, net............... (8,790) (9,750) (960) 11
Other income (expense), net......... 217 (71) (288) (133)
------- -------- ------- ----
Net loss............................ $(3,994) $ 1,031 $ 5,025 (126)%
These same communities represented $104.8 million or 85% of our total
operating revenue for 1999. Same community revenues increased $12.9 million or
14% to $104.8 million for 1999 compared to $91.9 million for 1998. This
increase in revenue is the result of increased occupancy for these same
communities and monthly rate increases due to an expanded range of services
offered at the communities. For 1999, occupancy increased 8 percentage points
to 88% from 81% for 1998. In addition, revenue per occupied unit increased to
$2,090 for 1999 compared to $2,004 for 1998. For 1999, we generated operating
income of $10.9 million and net income of $1.0 million compared to operating
income of $4.6 million and a net loss of $4.0 million for 1998, an improvement
of approximately $5.0 million and more than 100% for both figures.
Liquidity and Capital Resources
Cash Flows for the Year Ended December 31, 1999. For 1999, net cash used in
operating activities was $12.5 million resulting primarily from our net loss
of $21.0 million. We repurchased one of our previously leased facilities
during the third quarter and incurred general property and equipment capital
expenditures of $4.6 million, as well as an excess of $500,000 of construction
expenditures on leased communities over construction advances for the year.
These outflows of cash were offset by our March 31, 1999 transfer of 17 leased
communities for $3.2 million as well as by proceeds on the sale of our office
park of $500,000. In December 1999, we obtained net proceeds of $29.0 million
from a preferred stock purchase by an investor group, of which $13.5 million
is restricted for future acquisitions. As a result of this financing
transaction, we increased our cash position at December 31, 1999 by a net of
$1.4 million thereby creating working capital of $6.8 million.
In March 1999, we disposed of leasehold interests in 17 of our buildings in
the Meditrust restructuring transaction which produced net proceeds of $3.2
million as indicated above. In addition, this restructuring transaction has
reduced our operating lease payments by a yearly amount of $7.6 million.
In 1999, we purchased 163,700 shares of our common stock through public
market transactions at an aggregate cost of $1.1 million.
We have been and expect to continue to be dependent on third-party financing
for our cash needs in connection with operating losses as well as with our
acquisition and development of communities. There can be no assurance that
financing for these requirements will be available to us on acceptable terms.
Moreover, to the extent we acquire communities that do not generate positive
cash flow, we may be required to seek additional capital or borrowings for
working capital and liquidity purposes.
34
Impact of Y2K
We completed our Year 2000 remediation plans by the end of 1999, and have
not experienced any significant disruptions to our financial or operating
activities caused by failure of our computerized systems resulting from Year
2000 issues. Further, we have no information that indicates a significant
vendor or service provider has experienced any significant disruptions to
their financial or operating activities such that they would be unable to
provide us goods or services. Furthermore, we have not received any
notification from lenders or regulatory agencies indicating that a lender
considers or may consider us to be in violation of a loan agreement, or
significant regulatory action is being or may be taken against us as a result
of Year 2000 issues.
Impact of Inflation
To date, we have not been significantly affected by inflation. It could,
however, affect our future revenues and operating income due to our dependence
on our senior resident population, most of whom rely on relatively fixed
incomes to pay for our services. As a result, our ability to increase revenues
in proportion to increased operating expenses may be limited. We typically do
not rely to a significant extent on governmental reimbursement programs. In
pricing our services, we attempt to anticipate inflation levels, but there can
be no assurance that we will be able to respond to inflationary pressures in
the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates as a result of our
short- and long-term borrowings. We manage this risk by obtaining fixed-rate
borrowings when possible. At December 31, 1999, our variable rate borrowings
totaled $78.5 million. If market interest rates average 2% more in 2000 than
they did in 1999, our interest expense would increase and income before taxes
would decrease by $1.6 million. These amounts are determined by considering
the impact of hypothetical interest rates on our outstanding variable rate
borrowings as of December 31, 1999 and do not consider changes in the actual
level of borrowings that may occur subsequent to December 31, 1999. This
analysis also does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment nor does it consider
likely actions that management could take with respect to our financial
structure to mitigate the exposure to such a change.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the Independent Auditors report are listed at
Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Executive Officers of the Registrant" in
Part I of this Form 10-K and under the captions "Election of Directors
Nominees for Election" and "Compliance with Section 16(a) of the Exchange Act
of 1934" in the Company's Proxy Statement relating to its 2000 annual meeting
of shareholders (the "Proxy Statement") is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" and "Election of
Directors Director Compensation" in the Company's Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the Company's
Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) FINANCIAL STATEMENTS. The following financial statements of the
Registrant and the Report of Independent Public Accountants
therein are filed as part of this Report on Form 10-K:
Page
----
Independent Auditors' Reports....................................... F-1
Consolidated Balance Sheets......................................... F-3
Consolidated Statements of Operations............................... F-4
Consolidated Statements of Comprehensive Operations................. F-5
Consolidated Statements of Cash Flows............................... F-6
Consolidated Statements of Shareholders' Equity (Deficit)........... F-7
Notes to Consolidated Financial Statements.......................... F-8
(2) FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and
Qualifying Accounts (contained on page F-21) Other financial
statement schedules have been omitted because the information
required to be set forth therein is not applicable, is immaterial
or is shown in the consolidated financial statements or notes
thereto.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the
Registrant during the quarter ended December 31, 1999.
36
(c) EXHIBITS: The following exhibits are filed as a part of, or
incorporated by reference into, this Report on Form 10-K:
Number Description
------ -----------
3.1 Restated Articles of Incorporation of registrant (Exhibit 3.1). (2)
3.2 Amended and Restated Bylaws of the registrant (Exhibit 3.2). (1)
4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006 (2)
(Exhibit 4.1).
4.2 Indenture dated February 15, 1996 between the registrant and (2)
Fleet National Bank ("Trustee") (Exhibit 4.2).
4.3 Preferred Stock Purchase Agreement (including Designation of (12)
Rights and Preferences of Series A Convertible Exchangeable
Redeemable Preferred Stock of Emeritus Corporation Agreement,
Registration of Rights Agreement and Shareholders Agreement)
dated October 24, 1997 between the registrant ("Seller") and
Merit Partners, LLC ("Purchaser") (Exhibit 4.1).
10.1 Amended and Restated 1995 Stock Incentive Plan (Exhibit 99.1). (14)
10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2). (2)
10.3 Form of Indemnification Agreement for officers and directors of (1)
the registrant (Exhibit 10.3).
10.4 Noncompetition Agreements entered into between the registrant
and each of the following individuals:
10.4.1 Daniel R. Baty (Exhibit 10.4.1), Raymond R. Brandstrom (Exhibit (2)
10.4.2) and Frank A. Ruffo (Exhibit 10.4.3).
10.6 Form of Stock Purchase Agreement dated July 31, 1995, entered (1)
into between Daniel R. Baty and each of Michelle A. Bickford,
Jean T. Fukuda, James S. Keller, George T. Lenes and Kelly J.
Price (Exhibit 10.6).
10.8 Scottsdale Royale in Scottsdale, Arizona, and Villa Ocotillo in
Scottsdale, Arizona. The following agreements are representative
of those executed in connection with these properties:
10.8.1 Loan Agreement dated December 31, 1996 in the amount of (5)
$12,275,000 by the registrant ("Borrower") and Lender (Exhibit
10.9.1).
10.8.2 Promissory Note dated December 31, 1996 in the amount of (5)
$5,500,000 between the registrant to Bank United (the "Lender")
with respect to Scottsdale Royale and Villa Ocotillo
(Exhibit 10.9.3).
10.8.3 Deed of Trust, Security Agreement, Assignment of Leases and (5)
Rents, and Fixture Filing (Financial Statement) dated as of
December 31, 1996, by the registrant, as Trustor and debtor, to
Chicago Title Insurance Company, as Trustee, for the benefit of
the Lender, Beneficiary and secured party with respect to
Scottsdale Royale and Villa Ocotillo (Exhibit 10.9.4).
10.9 Rosewood Court in Fullerton, California, the Arbor at Olive
Grove in Phoenix, Arizona, Renton Villa in Renton, Washington,
Seabrook in Everett, Washington, Laurel Lake Estates in Vorhees,
New Jersey, Green Meadows--Allentown in Allentown, Pennsylvania,
Green Meadows--Dover in Dover, Delaware, Green Meadows--Latrobe
in Latrobe, Pennsylvania, Green Meadows--Painted Post in Painted
Post, New York, Heritage Health Center in Hendersonville, North
Carolina. The following agreements are representative of those
executed in connection with these properties:
10.9.1 Lease Agreement dated March 29, 1996 between the registrant (3)
("Lessee") and Health Care Property Investors, Inc. ("Lessor")
(Exhibit 10.10.1).
10.9.2 First Amendment Lease Agreement dated April 25, 1996 by and (3)
between the registrant ("Lessee") and Health Care Property
Investors, Inc. ("Lessor") (Exhibit 10.10.2).
10.11 Summer Wind in Boise, Idaho
37
Number Description
------ -----------
10.12 Silver Pines (formerly Willowbrook) in Cedar Rapids, Iowa
10.12.1 Purchase and Sale Agreement (including Real Estate Contract) (1)
dated January 4, 1995 between Jabo, Ltd. ("Jabo") and the
registrant (Exhibit 10.19.1).
10.12.2 Assignment and Assumption Agreement with respect to facility (1)
leases dated as of January 17, 1995 by and between Jabo, as
Assignor, and the registrant, as Assignee (Exhibit 10.19.2).
10.13 The Palisades in El Paso, Texas, Amber Oaks in San Antonio,
Texas and Redwood Springs in San Marcos, Texas. The following
agreements are representative of those executed in connection
with these properties.
10.13.1 Lease Agreement dated April 1, 1997 between ESC III, L.P. (6)
D/B/A Texas-ESC III, L.P. ("Lessee") and Texas HCP Holding ,
L.P. ("Lessor") (Exhibit 10.4.1).
10.13.2 First Amendment to Lease Agreement dated April 1, 1997 between (6)
Lessee and Texas HCP Holding , L.P. Lessor (Exhibit 10.4.2).
10.13.3 Guaranty dated April 1, 1997 by the registrant ("Guarantor") (6)
in favor of Texas HCP Holding, L.P. (Exhibit 10.4.3)
10.13.4 Assignment Agreement dated April 1, 1997 between the (6)
registrant ("Assignor") and Texas HCP Holding , L.P.
("Assignee") (Exhibit 10.4.4).
10.11.1 Lease Agreement dated as of August 31, 1995 between AHP of (1)
Washington, Inc. and the registrant (Exhibit 10.18.1).
10.11.2 First Amended Lease Agreement dated as of December 31, 1996 by (5)
and between the registrant and AHP of Washington, Inc.
(Exhibit 10.16.2).
10.14 Carriage Hill Retirement in Bedford, Virginia
10.14.1 Lease Agreement dated August 31, 1994 between the registrant, (1)
as Tenant, and Carriage Hill Retirement of Virginia, Ltd. as
Landlord (Exhibit 10.23.1).
10.14.2 Supplemental Lease Agreement dated September 2, 1994 (Exhibit (1)
10.23.2).
10.15 Green Meadows Communities
10.15.1 Consent to Assignment of and First Amendment to Asset Purchase (1)
Agreement dated September 1, 1995 among the registrant, The
Standish Care Company and Painted Post Partnership, Allentown
Personal Car General Partnership, Unity Partnership, Saulsbury
General Partnership and P. Jules Patt (collectively, the
"Partnerships"), together with Asset Purchase Agreement dated
July 27, 1995 among The Standish Care Company and the
Partnerships (Exhibit 10.24.1).
10.15.2 Agreement to Provide Administrative Services to an Adult Home (1)
dated October 23, 1995 between the registrant and P. Jules
Patt and Pamela J. Patt (Exhibit 10.24.6).
10.15.3 Assignment Agreement dated October 19, 1995 between the (1)
registrant, HCPI Trust and Health Care Property Investors,
Inc. (Exhibit 10.24.8).
10.15.4 Assignment and Assumption Agreement dated August 31, 1995 (1)
between the registrant and The Standish Care Company (Exhibit
10.24.9).
10.15.5 Guaranty dated October 19, 1995 by Daniel R. Baty in favor of (1)
Health Care Property Investors, Inc., and HCPI Trust (Exhibit
10.24.10).
10.15.6 Guaranty dated October 19, 1995 by the registrant in favor of (1)
Health Care Property Investors, Inc. (Exhibit 10.24.11).
10.15.7 Second Amendment to Agreement to provide Administrative (10)
Services to an Adult Home dated January 1, 1997 between
Painted Post Partners and the registrant (Exhibit 10.2).
10.16 Carolina Communities
38
Number Description
------ -----------
10.16.1 Lease Agreement dated January 26, 1996 between the registrant (2)
and HCPI Trust with respect to Countryside Facility (Exhibit
10.23.1).
10.16.3 Promissory Note dated as of January 26, 1996 in the amount of (2)
$3,991,190 from Heritage Hills Retirement, Inc. ("Borrower") to
Health Care Property Investors, Inc. ("Lender") (Exhibit
10.23.4).
10.16.4 Loan Agreement dated January 26, 1996 between the Borrower and (2)
the Lender (Exhibit 10.23.5).
10.16.5 Guaranty dated January 26, 1996 by the registrant in favor of (2)
the Borrower (Exhibit 10.23.6).
10.16.6 Deed of Trust with Assignment of Rents, Security Agreement and (2)
Fixture Filing dated as of January 26, 1996 by and among
Heritage Hills Retirement, Inc. ("Grantor"), Chicago Title
Insurance Company ("Trustee") and Health Care Property
Investor, Inc. ("Beneficiary") (Exhibit 10.23.7).
10.16.7 Lease Agreement dated as of January 26, 1996 between the (2)
registrant and Health Care Property Investor, Inc. with respect
to Heritage Lodge Facility (Exhibit 10.23.8).
10.16.8 Lease Agreement dated as of January 26, 1996 between the (2)
registrant and Health Care Property Investor, Inc. with respect
to Pine Park Facility (Exhibit 10.23.9).
10.16.9 Lease Agreement dated January 26, 1996 between the registrant (2)
and HCPI Trust with respect to Skylyn Facility (Exhibit
10.23.10).
10.16.10 Lease Agreement dated January 26, 1996 between the registrant (2)
and HCPI Trust with respect to Summit Place Facility (Exhibit
10.23.11).
10.16.11 Amendment to Deed of Trust dated April 25, 1996 between (5)
Heritage Hills Retirement, Inc. ("Grantor"), and Health Care
Property Investors, Inc. ("Beneficiary") (Exhibit 10.21.12).
10.17 Development Property in Fairfield, California
10.17.1 Loan Agreement in the amount of $12,800,000 dated January 10, (5)
1997, between Fairfield Retirement Center, LLC ("Borrower") and
the Finova Capital Corporation ("Lender") (Exhibit 10.31.1).
10.17.2 Promissory Note dated January 10, 1997 in the amount of (5)
$12,800,000 between Fairfield Retirement Center, LLC
("Borrower") and Finova Capital Corporation ("Lender")
(Exhibit 10.31.2).
10.17.3 Deed of Trust, Security Agreement, Assignment of Leases and (5)
Rents and Fixture Filing dated January 10, 1997 between
Fairfield Retirement Center, LLC ("Trustor"), Chicago Title
Company ("Trustee") and Finova Capital Corporation
("Beneficiary") (Exhibit 10.31.3).
10.17.4 Guaranty Agreement dated January 10, 1997 between the (5)
registrant ("Guarantor") and Finova Capital Corporation
("Lender") (Exhibit 10.31.4).
10.18 Garrison Creek Lodge in Walla Walla, Washington, Cambria in El
Paso Texas, and Sherwood Place in Odessa, Texas. The following
agreements are representative of those executed in connection
with these properties:
10.18.1 Lease Agreement dated July, August and September 1996 between (4)
the registrant ("Lessee") and American Health Properties, Inc.
("Lessor") (Exhibit 10.3.1).
10.18.2 First Amendment to Lease Agreement dated December 31, 1996 (5)
between the registrant ("Lessee") and AHP of Washington, Inc.,
("Lessor") (Exhibit 10.35.2).
10.19 Cobblestone at Fairmont in Manassas, Virginia
10.19.1 Loan Agreement effective as of October 26, 1995 between the (1)
registrant and Health Care REIT, Inc. (Exhibit 10.42.1).
39
Number Description
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10.19.2 Deed of Trust, Security Agreement, Assignment of Leases and (1)
Rents and Fixture Filing dated as of October 26, 1995 by the
registrant to Health Care REIT, Inc. (Exhibit 10.42.2).
10.19.3 Note dated October 26, 1995 from the registrant to Health Care (1)
REIT, Inc. (Exhibit 10.42.3).
10.19.4 Unconditional and Continuing Guaranty dated as of October 26, (1)
1995 by Daniel R. Baty in favor of Health Care REIT, Inc.
(Exhibit 10.42.4).
10.20 Rosewood Court in Fullerton, California, The Arbor at Olive
Grove in Phoenix, Arizona, Renton Villa in Renton, Washington,
Seabrook in Everett, Washington and Laurel Lake Estates in
Voorhees, New Jersey, Green Meadows--Allentown in Allentown,
Pennsylvania, Green Meadows--Dover in Dover, Delaware, Green
Meadows--Latrobe in Latrobe, Pennsylvania, Green Meadows--
Painted Post in Painted Post, New York. The following
agreements are representative of those executed in connection
with these properties:
10.20.1 Second Amended Lease Agreement dated as of December 30, 1996 by (5)
and between the registrant and Health Care Property Investors,
Inc. (Exhibit 10.37.1).
10.21 Cooper George Partners Limited Partnership
10.21.1 Deed of Trust, Trust Indenture, Assignment, Assignment of (15)
Rents, Security Agreement, Including Fixture Filing and
Financing Statement dated June 30, 1998 between Cooper George
Partners Limited Partnership ("Grantor"), Chicago Title
Insurance Company ("Trustee") and Deutsche Bank AG, New York
Branch ("Beneficiary") (Exhibit 10.3.1)
10.21.2 Partnership Interest Purchase Agreement dated June 4, 1998 (15)
between Emeritus Real Estate LLC IV ("Seller") and Columbia
Pacific Master Fund 98 General Partnership ("Buyer") (Exhibit
10.3.2).
10.21.3 Credit Agreement dated June 30, 1998 between Cooper George (15)
Partners Limited Partnership ("Borrower") and Deutsche Bank AG,
New York Branch ("Lender") (Exhibit 10.3.3).
10.21.4 Amended and Restated Agreement of Limited Partnership of Cooper (15)
George Partners Limited Partnership dated June 29, 1998 between
Columbia Pacific Master Fund '98 General Partnership, Emeritus
Real Estate IV, L.L.C. and Bella Torre De Pisa Limited
Partnership (Exhibit 10.3.4).
10.21.5 Guaranty and Limited Indemnity Agreement dated June 30, 1998 (15)
between Daniel R. Baty ("Guarantor") and Deutsche Bank AG, New
York Branch ("Lender") (Exhibit 10.3.6).
10.21.6 Promissory Note dated June 30, 1998 between Cooper George (15)
Limited Partnership ("Borrower") and Deutsche Bank, AG, New
York Branch ("Lender") (Exhibit 10.3.7)
10.22 Registration Rights Agreement dated February 8, 1996 with (2)
respect to the registrant's 6.25% Convertible Subordinated
Debentures due 2006 (Exhibit 10.44).
10.23 Registration Rights Agreement dated February 8, 1996 with (2)
respect to the registrant's 6.25% Convertible Subordinated
Debentures due 2006 (Exhibit 10.45).
10.24 Office Lease Agreement dated April 29, 1996 between Martin (3)
Selig ("Lessor") and the registrant ("Lessee") (Exhibit 10.8).
10.25 Colonie Manor in Latham, New York, Bassett Manor in
Williamsville, New York, West Side Manor in Liverpool, New
York, Bellevue Manor in Syracuse, New York, Perinton Park Manor
in Fairport, New York, Bassett Park Manor in Williamsville, New
York, Woodland Manor in Vestal, New York, East Side Manor in
Fayetteville, New York and West Side Manor in Rochester, New
York. The following agreement is representative of those
executed in connection with these properties:
10.25.1 Lease Agreement dated September 1, 1996 between Philip Wegman (4)
("Landlord") and Painted Post Partners ("Tenant") (Exhibit
10.4.1).
40
Number Description
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10.25.2 Agreement to Provide Administrative Services to an Adult Home (4)
dated September 2, 1996 between the registrant and Painted Post
Partners ("Operator") (Exhibit 10.4.2).
10.25.3 First Amendment to Agreement to Provide Administrative Services (10)
to an Adult Home dated January 1, 1997 between Painted Post
Partners and the registrant (Exhibit 10.1).
10.26 Columbia House Communities.
10.26.1 Management Services Agreement between the Registrant (4)
("Manager") and Columbia House, LLC ("Lessee") dated November
1, 1996 with respect to Camlu Retirement (Exhibit 10.6.1).
10.26.2 Management Services Agreement dated January 1, 19998 between (13)
the registrant ("Manager") and Columbia House LLC ("Lessee")
with respect to York Care.
10.26.3 Commercial Lease Agreement dated January 13, 1997 between (6)
Albert M. Lynch ("Landlord") and Columbia House, LLC ("Tenant")
with respect to York Care (Exhibit 10.3.2).
10.26.4 Management Services Agreement dated June 1, 1997 between the (9)
registrant ("Manager") and Columbia House LLC ("Owner") with
respect to Autumn Ridge (Exhibit 10.3.1).
10.26.5 Agreement to Provide Accounting and Administrative Services (12)
dated October 1, 1997 between Acorn Service Corporation
("Administrator") and Vancouver Housing, L.L.C., ("Manager")
with respect to Van Vista and Columbia House (Exhibit 10.6.1).
10.26.6 Assignment and First Amendment to Agreement to Provide (13)
Management Services dated September 1, 1997 between the
registrant, Columbia House, L.L.C., Acorn Service Corporation
and Camlu Coeur d'Alene, L.L.C. with respect to Camlu.
10.26.7 Assignment and First Amendment to Agreement to Provide (13)
Management Services dated September 1, 1997 between the
registrant, Columbia House, L.L.C., Acorn Service Corporation
and Autumn Ridge Herculaneum, L.L.C. with respect to Autumn
Ridge.
10.26.8 Management Services Agreement dated January 1, 1998 between the (13)
registrant ("Manager") and Columbia House LLC ("Owner") with
respect to Park Lane.
10.27 Vickery Towers in Dallas, Texas
10.27.1 Partnership Interest Purchase and Sale Agreement dated June 4, (15)
1998 between ESC GP II, Inc. and Emeritus Properties IV, Inc.
(together "Seller") and Columbia Pacific Master Fund 98 General
Partnership and Daniel R. Baty (together "Purchaser") (Exhibit
10.4.1).
10.27.2 Amended and Restated Agreement of Limited Partnership of ESC (15)
II, LP dated June 30, 1998 between Columbia Pacific Master Fund
'98 General Partnership and Daniel R. Baty (Exhibit 10.4.2).
10.27.3 Agreement to Provide Management Services To An Independent and (15)
Assisted Living Facility dated June 30, 1998 between ESC II, LP
("Owner") and ESC III, LP ("Manager") (Exhibit 10.4.3).
10.28 Concorde in Las Vegas, Nevada
10.28.1 Purchase and Sale Agreement dated July 9, 1996 between the (5)
registrant ("Purchaser") and Sunday Estates, Inc. ("Seller")
(Exhibit 10.56.1).
10.28.2 First Amendment to Purchase and Sale Agreement dated July 11, (5)
1996 between the registrant the Seller (Exhibit 10.56.2).
10.29 Development Properties in Auburn, Massachusetts, Louisville,
Kentucky and Rocky Hill, Connecticut. The following agreements
are representative of those executed in connection with these
properties:
10.29.1 Lease Agreement dated February 1996 between the registrant (5)
("Lessee") and LM Auburn Assisted Living LLC, and LM Louisville
Assisted Living LLC, ("Landlords") with respect to the
development properties in Auburn and Louisville (Exhibit
10.58.1).
41
Number Description
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10.29.2 Amended and Restated Lease Agreement dated February 26, 1996 (5)
between the registrant ("Lessee") and LM Rocky Hill Assisted
Living Limited Partnership, ("Landlord") with respect to the
development property in Rocky Hill (Exhibit 10.58.2).
10.29.3 Lease Agreement dated October 10, 1996 between the registrant (5)
("Lessee") and LM Chelmsford Assisted Living LLC, ("Landlord")
with respect to the development property in Chelmsford (Exhibit
10.58.3).
10.29.4 Promissory Note in the amount of $1,255,000 dated December 1996 (5)
between the registrant ("Lender") and LM Auburn Assisted Living
LLC, ("Borrower") with respect to the development property in
Auburn (Exhibit 10.58.4).
10.29.5 Promissory Note in the amount of $1,450,000 dated January 1997 (5)
between the registrant ("Lender") and LM Louisville Assisted
Living LLC, ("Borrower") with respect to the development
property in Louisville (Exhibit 10.58.5).
10.29.6 Promissory Note in the amount of $1,275,000 dated January 1997 (5)
between the registrant ("Lender") and LM Rocky Hill Assisted
Living Limited Liability Partnership, ("Borrower") with respect
to the development property in Rocky Hill (Exhibit 10.58.6).
10.29.7 Promissory Note in the amount of $300,000 dated January 1997 (5)
between the registrant ("Lender") and LM Chelmsford Assisted
Living LLC, ("Borrower") with respect to the development
property in Chelmsford (Exhibit 10.58.7).
10.30 Development Properties in Cheyenne, Wyoming and Auburn,
California. The following agreements are representative of those
executed in connection with these properties.
10.30.1 Management Agreement dated May 30, 1997 between Willard (9)
Holdings, Inc., ("Owner") and the registrant ("Manager")
(Exhibit 10.5.1).
10.30.2 Lease Agreement dated May 30, 1997 between Willard Holdings, (9)
Inc., ("Lessor") and the registrant ("Lessee") (Exhibit 10.5.2).
10.31 Senior Management Employment Agreements and Amendments entered
into between the registrant and each of the following
individuals:
10.31.1 Frank A. Ruffo (Exhibit 10.6.2), Kelly J. Price (Exhibit (9)
10.6.3), Gary D. Witte (Exhibit 10.6.4), Sarah J. Curtis
(Exhibit 10.6.4) and Raymond R. Brandstrom (Exhibit 10.6.5).
10.31.2 Raymond R. Brandstrom (Exhibit 10.11.1), Gary D. Witte ( Exhibit (9)
10.11.2), Frank A. Ruffo (Exhibit 10.11.3), Sarah J. Curtis
(Exhibit 10.11.4) and Kelly J. Price (Exhibit 10.11.5)
10.32 La Casa Grande in New Port Richey, Florida, River Oaks in
Englewood, Florida, and Stanford Centre in Altamonte Springs,
Florida. The following agreements are representative of those
executed in connection with these properties.
10.32.1 Stock Purchase Agreement dated September 30, 1996 between Wayne (7)
Voegele, Jerome Lang, Ronald Carlson, Thomas Stanford, Frank
McMillan, Lonnie Carlson, and Carla Holweger ("Seller") and the
registrant ("Purchaser") with respect to La Casa Grande (Exhibit
10.1).
10.32.2 First Amendment to Stock Purchase Agreement dated January 31, (7)
1997 between the Seller and the registrant with respect to La
Case Grande (Exhibit 10.2).
10.32.3 Stock Purchase Agreement dated September 30, 1996 between the (7)
Seller and the registrant with respect to River Oaks (Exhibit
10.3).
10.32.4 First Amendment to Stock Purchase Agreement dated January 31, (7)
1997 between the Seller and the registrant with respect to River
Oaks (Exhibit 10.4).
10.32.5 Stock Purchase Agreement dated September 30, 1996 between the (7)
Seller and the registrant with respect to Stanford Centre
(Exhibit 10.5).
10.32.6 First Amendment to Stock Purchase Agreement dated January 31, (7)
1997 between the Seller and the registrant with respect to
Stanford Centre (Exhibit 10.6).
42
Number Description
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10.33 Painted Post Partnership
10.33.1 Painted Post Partners Partnership Agreement dated October 1, (1)
1995 (Exhibit 10.24.7).
10.33.2 First Amendment to Painted Post Partners Partnership Agreement (5)
dated October 22, 1996 between Daniel R. Baty and Raymond R.
Brandstrom (Exhibit 10.20.20).
10.33.3 Indemnity Agreement dated November 3, 1996 between the (10)
registrant and Painted Post Partners (Exhibit 10.3).
10.33.4 First Amendment to Indemnity Agreement dated January 1, 1997 (10)
between the registrant and Painted Post Partners (Exhibit
10.4).
10.33.5 Undertaking and Indemnity Agreement dated October 23, 1995 (10)
between the registrant, P. Jules Patt and Pamela J. Patt and
Painted Post Partnership (Exhibit 10.5).
10.33.6 First Amendment to Undertaking and Indemnity Agreement dated (10)
January 1, 1997 between Painted post Partners and the
registrant (Exhibit 10.6).
10.33.7 First Amendment to Non-Competition Agreement between the (11)
registrant and Daniel R. Baty (Exhibit 10.1.1) and Raymond R.
Brandstrom (Exhibit 10.1.2).
10.34 Ridgeland Court in Ridgeland, Mississippi
10.34.1 Master Agreement and Subordination Agreement dated September 5, (12)
1997 between the registrant, Emeritus Properties I, Inc., and
Mississippi Baptist health Systems, Inc. (Exhibit 10.1.1).
10.34.2 License Agreement dated September 5, 1997 between the (12)
registrant and its subsidiary and affiliated corporations and
Mississippi Baptist health Systems, Inc. (Exhibit 10.1.2).
10.34.3 Economic Interest Assignment Agreement and Subordination (12)
Agreement dated September 5, 1997 between the registrant,
Emeritus Properties I, Inc., and Mississippi Baptist Health
Systems, Inc. (Exhibit 10.1.3).
10.34.4 Operating Agreement for Ridgeland Assisted Living, L.L.C. dated (16)
December 23, 1998 between the registrant, Emeritust Properties
XI, L.L.C. and Mississippi Baptist Medical Enterprises, Inc.
(Exhibit 10.46.4)
10.34.5 Purchase and Sale Agreement dated December 23, 1998 between the (16)
registrant and Meditrust Company LLC. (Exhibit 10.46.5)
10.35 Development Property in Urbana, Illinois.
10.35.1 Lease Agreement dated September 10, 1997 between ALCO IV, (12)
L.L.C. ("Lessor") and the registrant ("Lessee") (Exhibit
10.2.1).
10.35.2 Management Agreement dated September 10, 1997 between the (12)
registrant ("Manager" and ALCO IV, L.L.C. ("Owner") (Exhibit
10.2.2).
10.36 Amendment to Office Lease Agreement dated September 6, 1996 (13)
between Martin Selig ("Lessor") and the registrant.
10.37 Villa Del Rey in Escondido, California
10.37.1 Purchase and Sale Agreement dated December 19, 1996 between the (6)
registrant ("Purchaser") and Northwest Retirement ("Seller")
(Exhibit 10.1.1).
10.38 Development Property in Paso Robles, California
10.38.1 Agreement of TDC/Emeritus Paso Robles Associates dated June 1, (6)
1995 between the registrant and TDC Convalescent, Inc. (Exhibit
10.2.1).
10.38.2 Loan Agreement in the amount of $6,000,000 dated February 15, (6)
1997 between Finova Capital Corporation ("Lender") and
TDC/Emeritus Paso Robles Associates ("Borrower")
(Exhibit 10.2.2).
43
Number Description
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10.38.3 Promissory Note dated February 28, 1997 in the amount of (6)
$6,000,000 between Finova Capital Corporation ("Lender") and
TDC/Emeritus Paso Robles Associates ("Borrower")
(Exhibit 10.2.3).
10.38.4 Deed of Trust, Security Agreement, Assignment of Leases and (6)
Rents and Fixture Filing dated February 18, 1997 between
TDC/Emeritus Paso Robles Associates ("Trustor"), Chicago Title
Company ("Trustee") and Finova Capital Corporation
("Beneficiary") (Exhibit 10.2.4).
10.38.5 Guaranty between TDC Convalescent, Inc. ("Guarantor") and (6)
Finova Capital Corporation (Exhibit 10.2.5).
10.38.6 Guaranty between the registrant ("Guarantor") and Finova (6)
Capital Corporation (Exhibit 10.2.6).
10.39 Development Property in Staunton, Virginia
10.39.1 Purchase and Sale Agreement dated February 5, 1997 between (13)
Greencastle Retirement Partners, L.L.C. ("Purchaser") and Gail
G. Brown ("Seller"). (Exhibit 10.72.1)
10.39.2 Assignment and Assumption of Purchase and Sale Agreement dated (13)
February 12, 1997 between Greencastle Retirement Partners,
L.L.C. and the registrant.
10.40 Development Property in Jamestown New York
10.40.1 Purchase Agreement dated December 12, 1996 between June (13)
Fagerstrom ("Seller") and Wegman Family LLC ("Buyer"). (Exhibit
10.73.1)
10.40.2 Assignment and Assumption Agreement dated December 30, 1997 (13)
between Wegman Family LLC ("Assignor") and Painted Post
Partners ("Assignee"). (Exhibit 10.73.2)
10.41 Development Property in Danville, Illinois
10.41.1 Purchase and Sale Agreement dated October 14, 1997 between (13)
South Bay Partners, Inc. ("Purchaser") and Elks Lodge No. 332,
BPOE ("Seller"). (Exhibit 10.74.1)
10.41.2 Assignment and Assumption of Purchase and Sale Agreement dated (13)
October 21, 1997 between South Bay Partners, Inc. and the
registrant. (Exhibit 10.74.2)
10.42 Development Property in Biloxi, Mississippi
10.42.1 Management Agreement dated December 18, 1997 between the (13)
registrant ("Manager") and ALCO VII, L.L.C. ("Owner"). (Exhibit
10.75.1)
10.43 Sanyo Electric Co., Ltd.
10.43.1 Agreement entered into on May 30, 1996 between the registrant (13)
and Sanyo Electric Co., Ltd. for the interest in jointly
entering the development, construction and /or operation of the
Senior Housing Business in Japan. (Exhibit 10.76.1)
10.43.2 Joint Venture Agreement entered into on July 9, 1997, between (13)
the registrant and Sanyo Electric Co., Ltd. (Exhibit 10.76.2)
10.44 Lakeridge Place in Wichita Falls, Texas, Meadowlands Terrace in
Waco, Texas, Saddleridge Lodge in Midland, Texas and Sherwood
Place in Odessa, Texas. The following agreements are
representative of those executed in connection with these
properties.
10.44.1 Management and Consulting Agreement dated February 1, 1998 (13)
between ESC I, L.P., and XL Management Company L.L.C. (Exhibit
10.78.1)
10.45 1998 Employee Stock Purchase Plan (Exhibit 99.2) (14)
10.46 River Oaks in Englewood, California, Stanford Center in
Alamonte Springs, La Casa Grande in New Port Richey, Florida,
Silver Pines in Cedar Rapids, Iowa, Villa Del Rey in Escondido,
California, Spring Meadows in Bozeman, Montana, Juniper Meadows
in Lewiston, Idaho and Fulton Villa in Stockton, California.
44
Number Description
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10.46.1 Credit Agreement dated April 29, 1998 between Emeritus (15)
Properties II, Inc., Emeritus Properties V, Inc., and Emeritus
Properties VII, Inc. ("Borrowers") and Deutsche Bank AG, New
York Branch ("Lender"). (Exhibit 10.2.1)
10.46.2 Amended and Restated Guaranty and Limited Indemnity Agreement (15)
dated June 30, 1998 between Emeritus Corporation ("Guarantor")
and Deutsche Bank AG ("Lender"). (Exhibit 10.2.2)
10.46.3 Amendment to Credit Agreement and Restatement of Article IX (15)
dated June 30, 1998 between Emeritus Properties II, Inc.,
Emeritus Properties III, Inc., Emeritus Properties V and
Emeritus Properties VII, Inc. (together "Borrowers") and
Deutsche Bank AG ("Lender"). (Exhibit 10.2.3)
10.46.4 Guaranty and Limited Indemnity Agreement dated April 29, 1998 (15)
between Emeritus Corporation ("Grantor") and Deutsche Bank AG,
New York Branch ("Lender"). (Exhibit 10.2.4)
10.46.5 Promissory Note dated June 30, 1998 between Emeritus Properties (15)
III, Inc. ("Borrower") and Deutsche Bank AG, New York Branch
("Lender"). (Exhibit 10.2.5)
10.46.6 Future Advance Promissory Note dated April 29, 1998 between (15)
Emeritus Properties V, Inc. ("Borrower") and Deutsche Bank AG,
New York Branch ("Lender"). (Exhibit 10.2.6)
10.47 Courtyard at the Willows In Puyallup, Washington
10.47.1 Deed of Trust, Trust Indenture, Assignment, Assignment of (15)
Rents, Security Agreement, Including Fixture Filing and
Financing Statement dated June 30, 1998 between Emeritus
Properties III, Inc. ("Grantor") and Chicago Title Insurance
Company ("Trustee") and Deutsche Bank AG, New York Branch
("Beneficiary"). (Exhibit 10.7.1)
10.47.2 Mortgage, Open-End Mortgage, Advance Money Mortgage, Trust (15)
Deed, Deed Of Trust, Trust Indenture, Assignment, Assignment of
Rents, Security Agreement, Including Fixture Filing and
Financing Statement dated June 30, 1998 between Emeritus
Properties III, Inc. ("Grantor, Mortgagor") and Deutsche Bank,
AG, New York Branch. (Exhibit 10.7.2)
10.48 Silver Pines in Cedar Rapids, Iowa, Spring Meadows in Bozeman,
Montana and Juniper Meadows in Lewiston, Idaho.
10.48.1 Promissory Note dated April 29, 1998 between Emeritus (15)
Properties II ("Borrower") and Deutsche Bank AG, New York
Branch. (Exhibit 10.8.1)
10.49 Richland Gardens in Richland, Washington, Charlton Place in
Tacoma Washington, The Pines of Goldsboro in Goldsboro, North
Carolina, Silverleaf Manor in Meridian, Mississippi and Wilburn
Gardens in Fredericksburg, Virginia. The following agreement is
representative of those executed in connection with these
properties.
10.49.1 Agreement To Provide Management Services To An Assisted Living (15)
Facility dated February 2, 1998 between Richland Assisted,
L.L.C. ("Owner") and Acorn Service Corporation ("Manager").
(Exhibit 10.9.1)
10.50 Richland Gardens in Richland, Washington, The Pines of
Goldsboro in Goldsboro, North Carolina, Silverleaf Manor in
Meridian, Mississippi, Wilburn Gardens in Fredericksburg,
Virginia and Park Lane in Toledo, Ohio. The following agreement
is representative of those executed in connection with these
properties.
10.50.1 Marketing Agreement dated February 2, 1998 between Acorn (15)
Service Corporation ("Acorn") and Richland Assisted, L.L.C.
("RALLC"). (Exhibit 10.10.1)
10.51 Kirkland Lodge in Kirkland, Washington
10.51.1 Purchase and Sale Agreement dated December 23, 1998 between the (16)
registrant and Meditrust Company LLC. (Exhibit 10.46.5)
45
Number Description
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10.51.2 Loan Agreement dated December 28, 1998 between Emeritus (16)
Properties X, L.L.C and Guaranty Federal Bank. (Exhibit
10.65.2)
10.51.3 Promissory Note Agreement dated December 28, 1998 between (16)
Emeritus Properties X, L.L.C and Guaranty Federal Bank.
(Exhibit 10.65.3)
10.51.4 Guaranty Agreement dated December 28, 1998 between the (16)
registrant and Guaranty Federal Bank. (Exhibit 10.65.3)
10.52 Emeritrust Communities
10.52.1 Purchase and Sale Agreement dated December 30, 1998 between the (16)
registrant, Emeritus Properties VI, Inc., ESC I, L.P. and AL
Investors LLC. (Exhibit 10.66.1)
10.52.2 Supplemental Purchase Agreement in Connection with Purchase of (16)
Facilities dated December 30, 1998 between the registrant,
Emeritus Properties I, Inc. Emeritus Properties VI, Inc., ESC
I, L.P. and AL Investors LLC. (Exhibit 10.66.2)
10.52.3 Management Agreement with Option to Purchase dated December 30, (16)
1998 between the registrant, Emeritus Management I LP, Emeritus
Properties I, Inc, ESC I, L.P., Emeritus Management LLC and AL
Investors LLC. (Exhibit 10.66.3)
10.52.4 Guaranty of Management Agreement and Shortfall Funding (16)
Agreement dated December 30, 1998 between the registrant and AL
Investors LLC. (Exhibit 10.66.4)
10.52.5 Put and Purchase Agreement dated December 30, 1998 between (16)
Daniel R. Baty and AL Investors LLC. (Exhibit 10.66.5) Second
Emeritrust
10.53 Emeritrust II Communities
10.53.1 Supplemental Purchase Agreement in Connection with Purchase of (17)
Facilities (AL II--14 Operating Facilities) dated March 26,1999
between the registrant, Emeritus Properties I, Inc. ESC G.G. I,
Inc., ESC I, L.P. and AL Investors II LLC (Exhibit 10.1.1).
10.53.2 Management Agreement with Option to Purchase (AL II--14 (17)
Operating Facilities) dated March 26, 1999 between the
registrant, Emeritus Management I LP, Emeritus Properties I,
Inc., ESC G.P. I, Inc., ESC I, L.P., Emeritus Management LLC
and AL Investors II LLC (Exhibit 10.1.2).
10.53.3 Guaranty of Management Agreement (AL II--14 Operating (17)
Facilities) dated March 26,199 between the registrant and AL
Investors II LLC (Exhibit 10.1.3).
10.53.4 Supplemental Purchase Agreement in Connection with Purchase of (17)
Facilities (AL II--5 Development Facilities) dated March 26,
1999 between the registrant, Emeritus Properties I, Inc. and AL
Investors Development LLC (Exhibit 10.1.4).
10.53.5 Management Agreement with Option to Purchase (AL II--5 (17)
Development Facilities) dated March 26, 1999 between the
registrant, Emeritus Properties I, Inc., Emeritus Management
LLC and AL Investors Development LLC (Exhibit 10.1.5).
10.53.6 Guaranty of Management Agreement and Shortfall Funding (17)
Agreement (AL II--5 Development Facilities) dated March 26,
1999 between the registrant and AL Investors Development LLC
(Exhibit 10.1.6).
10.53.7 Put and Purchase Agreement (AL II Holdings--14 Operating (17)
Facilities and 5 Development Facilities) dated March 26, 1999
between Daniel R. Baty and AL II Holdings LLC, AL Investors II
LLC and AL Investors Development LLC (Exhibit 10.1.7).
10.54 Meadow Lodge at Drum Lodge Hill in Chelmsford, Massachusetts
10.54.1 Purchase and Sales Agreement dated April 23, 1999 between LM (18)
Chelmsford Assisted Living, LLC ("Seller") and the registrant
("purchaser") (Exhibit 10.1.1).
46
Number Description
------ -----------
10.55 Meadow Lodge at Drum Hill in Chelmsford, Massachusetts,
Cobblestones at Fairmont in Manassas, Virginia, Kirkland Lodge
in Kirkland, Washington and Ridgeland Pointe in Ridgeland,
Mississippi. The following agreements are representative of
those executed in conjunction with these properties.
10.55.1 Fixed Rate Noted dated September 29, 1999 between Amresco (18)
Capital, L.P. ("Payee") and the registrant ("Maker") (Exhibit
10.2.1).
10.55.2 Mortgage and Security Agreement dated September 29, 1999 (18)
between Amresco Capital, L.P. (Mortgagee") and the registrant
("mortgagor") (Exhibit 10.2.2).
10.56 Series B Preferred Stock Purchase Agreement dated as of (19)
December 10, 1999 between Emeritus Corporation and Saratoga
Partners IV, L.P. (Exhibit 4.1)
10.57 Designation of Rights and Preferences of Series B Convertible (19)
Preferred Stock as filed with the Secretary of State of
Washington on December 29, 1999 (Exhibit 4.2)
10.58 Shareholders Agreement dated as of December 30, 1999 among (19)
Emeritus Corporation, Daniel R. Baty, B.F., Limited Partnership
and Saratoga Partners IV, L.P. (Exhibit 4.3)
10.59 Registration Rights Agreement dated as of December 30, 1999 (19)
between Emeritus Corporation and Saratoga Partners IV, L.P.
(Exhibit 4.4)
10.60 Investment Agreement dated as of December 30, 1999 among (19)
Emeritus Corporation, Daniel R. Baty, B.F., Limited Partnership
and Saratoga Partners IV, L.P., Saratoga Partners IV, L.P. and
Saratoga Management Company LLC. (Exhibit 4.5)
21.1 Subsidiaries of the registrant. (20)
23.1 Consent of KPMG LLP. (20)
27.1 Financial Data Schedule. (20)
- --------
(1) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-1 (File No. 33-97508) declared
effective on November 21, 1995.
(2) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 29,
1996.
(3) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August
14, 1996.
(4) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1996.
(5) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1997.
(6) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 15,
1997.
(7) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on May 16, 1997.
(8) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K Amendment No. 1 (File No. 1-14012)
on July 14, 1997.
(9) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August
14, 1997.
(10) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 2 (File No.
333-20805) on August 14, 1997.
(11) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 3 (File No.
333-20805) on October 29, 1997.
47
(12) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1997.
(13) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 30,
1998.
(14) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-8 (File No. 333-60323) on July
31, 1998.
(15) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August
14, 1998
(16) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1999.
(17) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 10,
1999.
(18) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 15, 1999.
(19) Incorporated by reference to the indicated exhibit filed with the
Company's Form 8-K (File No. 1-14012) on January 14, 2000.
(20) Filed herewith.
48
SIGNATURES
Pursuant to the requirements of 13 of 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Emeritus Corporation
(Registrant)
Dated: March 30, 2000
Signature Title
--------- -----
/s/ Daniel R. Baty Chief Executive Officer
______________________________________ and Chairman of the Board
Daniel R. Baty
/s/ Kelly J. Price Chief Financial Officer,
______________________________________ Vice President, Finance
Kelly J. Price and Principal Accounting
Officer
/s/ Raymond R. Brandstrom Director
______________________________________
Raymond R. Brandstrom
/s/ Patrick Carter Director
______________________________________
Patrick Carter
/s/ William E. Colson Director
______________________________________
William E. Colson
/s/ David Hamamoto Director
______________________________________
David Hamamoto
/s/ Motoharu Iue Director
______________________________________
Motoharu Iue
49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Independent Auditors' Reports........................................ F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999......... F-3
Consolidated Statements of Operations for the years ended December
31, 1997, 1998 and 1999............................................. F-4
Consolidated Statements of Comprehensive Operations for the years
ended December 31, 1997, 1998 and 1999.............................. F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1998 and 1999............................................. F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1997, 1998 and 1999........................ F-7
Notes to Consolidated Financial Statements........................... F-8
Schedule II--Valuation and Qualifying Accounts....................... F-21
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Emeritus Corporation:
We have audited the accompanying consolidated balance sheets of Emeritus
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive operations, shareholders'
equity (deficit) and cash flows for each of the years in the three-year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Emeritus
Corporation and subsidiaries as of December 31, 1999 and 1998 and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1998 the
Company changed its method of accounting for start-up costs and organization
costs.
/s/ KPMG LLP
Seattle, Washington
February 23, 2000
F-1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Shareholders
Emeritus Corporation:
Under date of February 23, 2000, we reported on the consolidated balance
sheets of Emeritus Corporation and subsidiaries as of December 31, 1999 and
1998 and the related consolidated statements of operations, comprehensive
operations, shareholders' equity (deficit), and cash flows for each of the
years in the three year period ended December 31, 1999, as contained in the
1999 annual report on Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule of valuation and qualifying
accounts. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this consolidated financial statement schedule based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respect, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, in 1998 the
Company changed its method of accounting for start-up costs and organization
costs.
/s/ KPMG LLP
Seattle, Washington
February 23, 2000
F-2
EMERITUS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
1998 1999
-------- ---------
(In thousands,
except share data)
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 11,442 $ 12,860
Short-term investments................................... 4,491 1,134
Current portion of restricted deposits................... 2,160 381
Trade accounts receivable, net........................... 2,235 1,895
Other receivables........................................ 5,944 9,309
Prepaid expenses and other current assets................ 5,719 2,714
Property held for sale................................... 3,661 7,531
-------- ---------
Total current assets................................... 35,652 35,824
======== =========
Property and equipment, net.............................. 128,659 128,828
Property held for development............................ 1,855 2,204
Notes receivable from and investments in affiliates...... 10,247 2,915
Restricted cash.......................................... -- 13,500
Restricted deposits, less current portion................ 6,271 6,148
Lease acquisition costs, net............................. 6,558 5,907
Other assets, net........................................ 3,628 3,044
-------- ---------
Total assets........................................... $192,870 $ 198,370
======== =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Short-term borrowings.................................... $ 5,000 $ 1,000
Current portion of long-term debt........................ 7,591 8,601
Margin loan on short-term investments.................... 2,324 --
Trade accounts payable................................... 7,115 3,634
Accrued employee compensation and benefits............... 3,386 3,507
Accrued interest......................................... 2,320 2,797
Accrued real estate taxes................................ 2,915 2,034
Other accrued expenses................................... 4,991 6,899
Other current liabilities................................ 987 524
-------- ---------
Total current liabilities.............................. 36,629 28,996
-------- ---------
Deferred rent 4,352 1,887
Deferred gains on sales of communities................... 19,483 18,590
Deferred income.......................................... 216 153
Convertible debentures................................... 32,000 32,000
Long-term debt, less current portion..................... 119,674 128,319
Security deposits and other long-term liabilities........ 570 132
-------- ---------
Total liabilities...................................... 212,924 210,077
-------- ---------
Minority interests....................................... 910 583
Redeemable preferred stock............................... 25,000 25,000
Shareholders' deficit:
Preferred stock, $.0001 par value. Authorized 70,000
shares; issued and outstanding none and 30,000 at
December 31, 1998 and December 31, 1999, respectively... -- --
Common stock, $.0001 par value. Authorized 40,000,000
shares; issued and outstanding 10,484,050 and
10,323,950 shares at December 31, 1998 and 1999,
respectively............................................ 1 1
Additional paid-in capital............................... 38,995 66,916
Accumulated other comprehensive loss..................... (4,420) (380)
Accumulated deficit...................................... (80,540) (103,827)
-------- ---------
Total shareholders' deficit............................ (45,964) (37,290)
-------- ---------
Total liabilities and shareholders' deficit............ $192,870 $ 198,370
======== =========
See accompanying notes to consolidated financial statements.
F-3
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands, except per
share data)
Revenues:
Community revenue............................. $114,299 $148,226 $116,063
Other service fees............................ 3,370 2,796 1,683
Management fees............................... 103 798 4,896
-------- -------- --------
Total operating revenues.................... 117,772 151,820 122,642
-------- -------- --------
Expenses:
Community operations.......................... 82,783 110,569 78,193
General and administrative.................... 10,819 13,615 15,468
Depreciation and amortization................. 6,644 5,722 6,025
Rent.......................................... 34,651 41,499 25,135
Other......................................... 4,426 -- --
-------- -------- --------
Total operating expenses.................... 139,323 171,405 124,821
-------- -------- --------
Loss from operations........................ (21,551) (19,585) (2,179)
-------- -------- --------
Other income (expense):
Interest income............................... 1,157 1,151 670
Interest expense.............................. (8,427) (14,192) (13,751)
Impairment of investment securities........... -- -- (7,429)
Other, net.................................... 610 3,847 1,985
-------- -------- --------
Net other expense............................... (6,660) (9,194) (18,525)
-------- -------- --------
Loss before extraordinary item and cumulative
effect of change in accounting principle....... (28,211) (28,779) (20,704)
-------- -------- --------
Extraordinary loss on early extinguishment of
debt........................................... -- (937) (333)
Cumulative effect of change in accounting
principle...................................... -- (1,320) --
-------- -------- --------
Net loss........................................ (28,211) (31,036) (21,037)
======== ======== ========
Preferred stock dividends....................... 425 2,250 2,250
-------- -------- --------
Net loss to common shareholders................. $(28,636) $(33,286) $(23,287)
======== ======== ========
Loss per common share before extraordinary item
and cumulative effect of change in accounting
principle--basic and diluted................... $ (2.60) $ (2.96) $ (2.19)
Extraordinary loss per common share--basic and
diluted........................................ $ -- $ (.09) $ (.03)
Cumulative effect of change in accounting
principle loss per common share--basic and
diluted........................................ $ -- $ (.12) $ --
Net loss per common share--basic and diluted $ (2.60) $ (3.17) $ (2.22)
Weighted average number of common shares
outstanding--basic and diluted................. 11,000 10,484 10,469
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
Net loss.......................................... $(28,211) $(31,036) $(21,037)
Other comprehensive income (loss):
Foreign currency translation adjustments........ (4) (17) 20
Unrealized gains (losses) on investment
securities:
Unrealized holding gains (losses) arising during
the period..................................... 4,015 (7,955) (3,409)
Reclassification for (gains) losses included in
net loss....................................... -- (459) 7,429
-------- -------- --------
Total other comprehensive income (loss)....... 4,011 (8,431) 4,040
-------- -------- --------
Comprehensive loss................................ $(24,200) $(39,467) $(16,997)
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(28,211) $(31,036) $(21,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 7,759 6,407 6,845
Amortization of deferred gains and income..... (1,887) (2,345) (363)
Allowance for bad debts....................... 317 695 693
Extraordinary loss on early extinguishment of
debt......................................... -- 937 333
Cumulative effect of change in accounting
principle.................................... -- 1,320 --
Impairment of investment securities........... -- -- 7,429
Other......................................... (75) 317 (191)
Changes in operating assets and liabilities:
Trade accounts receivable..................... (699) (771) (75)
Other receivables............................. 533 (3,026) (3,679)
Prepaid expenses and other current assets..... (947) (12) 2,176
Trade accounts payable........................ (2,166) 4,992 (3,480)
Accrued employee compensation and benefits.... 853 (515) 121
Accrued interest.............................. 692 508 477
Accrued real estate taxes..................... 1,645 975 (881)
Other accrued expenses........................ (969) (1,770) (322)
Other current liabilities..................... 384 (157) (463)
Security deposits and other long-term
liabilities.................................. 293 (768) (435)
Deferred rent................................. 4,812 702 308
-------- -------- --------
Net cash used in operating activities....... (17,666) (23,547) (12,544)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........... (17,471) (28,612) (12,875)
Acquisition of property held for development.... (22,743) (1,780) (560)
Proceeds from sale of property and equipment.... 28,675 33,182 3,705
Purchase of investment securities............... (13,285) (557) (50)
Proceeds from the sale of investment
securities..................................... 3,207 5,421 --
Construction advances--leased communities....... 25,139 25,613 17,295
Construction expenditures--leased communities... (31,101) (22,586) (17,794)
Increase in restricted cash..................... -- -- (13,500)
Repayments from and investments in affiliates... (4,188) (9,529) (1,000)
Sale of investments in affiliates............... -- 4,092 8,177
-------- -------- --------
Net cash provided by (used in) investing
activities................................. (31,767) 5,244 (16,602)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in restricted deposits................. (3,014) (647) (39)
Proceeds from (repayment of) short-term
borrowings, net................................ 9,165 (1,841) (6,324)
Proceeds from long-term borrowings.............. 44,597 105,179 27,355
Repayment of long-term borrowings............... (29,023) (82,019) (17,700)
Increase in lease acquisition and deferred
financing costs................................ (2,452) (2,235) --
Proceeds from sale of redeemable preferred
stock.......................................... 25,000 -- --
Proceeds from sale of preferred stock........... -- -- 28,981
Repurchase of common stock...................... (341) (5,406) (1,100)
Other........................................... 3 (806) (629)
-------- -------- --------
Net cash provided by financing activities... 43,935 12,225 30,544
-------- -------- --------
Effect of exchange rate changes on cash.......... (4) (17) 20
Net increase (decrease) in cash and cash
equivalents..................................... (5,502) (6,095) 1,418
Cash and cash equivalents at beginning of year... 23,039 17,537 11,442
-------- -------- --------
Cash and cash equivalents at end of year......... $ 17,537 $ 11,442 $ 12,860
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......... $ 9,444 $ 12,999 $ 13,273
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of business and controlling
interest in a partnership:
Assets acquired............................... $ 37,347 $ 6,232 --
Liabilities assumed........................... 36,997 4,798 --
Transfer of property held for development to
property and equipment....................... 26,345 -- --
Transfer of property and equipment to property
held for sale................................ 8,202 1,450 6,307
Assumption of debt by buyer through
disposition of property...................... -- (14,800) --
Vehicles acquired through debt financing...... 2,375 -- --
See accompanying notes to consolidated financial statements.
F-6
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock Common stock Accumulated Total
---------------- ------------------ Additional other shareholders'
Number Number paid-in comprehensive Accumulated equity
of shares Amount of shares Amount capital income (loss) deficit (deficit)
--------- ------ ---------- ------ ---------- ------------- ----------- -------------
(In thousands, except share data)
Balances at December 31,
1996................... -- $-- 11,000,000 $ 1 $44,787 $ 18 $ (18,618) $ 26,188
Unrealized gain on
investment securities.. -- -- -- -- -- 3,997 -- 3,997
Foreign currency
translation
adjustment............. -- -- -- -- -- (4) -- (4)
Repurchase of common
stock.................. -- -- (25,600) -- (341) -- -- (341)
Stock options
exercised.............. -- -- 250 -- 3 -- -- 3
Preferred stock
dividends.............. -- -- -- -- -- -- (425) (425)
Net loss for the year
ended December 31,
1997................... -- -- -- -- -- -- (28,211) (28,211)
------ ---- ---------- ---- ------- ------- --------- --------
Balances at December 31,
1997................... -- -- 10,974,650 1 44,449 4,011 (47,254) 1,207
Unrealized loss on
investment securities.. -- -- -- -- -- (8,414) -- (8,414)
Foreign currency
translation
adjustment............. -- -- -- -- -- (17) -- (17)
Repurchase of common
stock.................. -- -- (491,600) -- (5,466) -- -- (5,466)
Stock options
exercised.............. -- -- 1,000 -- 12 -- -- --
Preferred stock
dividends.............. -- -- -- -- -- -- (2,250) (2,250)
Net loss for the year
ended December 31,
1998................... -- -- -- -- -- -- (31,036) (31,036)
------ ---- ---------- ---- ------- ------- --------- --------
Balances at December 31,
1998................... -- -- 10,484,050 1 38,995 (4,420) (80,540) (45,964)
Unrealized loss on
investment securities.. -- -- -- -- -- (3,409) -- (3,409)
Impairment of investment
securities............. -- -- -- -- -- 7,429 -- 7,429
Foreign currency
translation
adjustment............. -- -- -- -- -- 20 -- 20
Repurchase of common
stock.................. -- -- (163,700) -- (1,100) -- -- (1,100)
Proceeds from sale of
preferred stock, net... 30,000 -- -- -- 28,981 -- -- 28,981
Stock options
exercised.............. -- -- 3,600 -- 40 -- -- 40
Preferred stock
dividends.............. -- -- -- -- -- -- (2,250) (2,250)
Net loss for the year
ended December 31,
1999................... -- -- -- -- -- -- (21,037) (21,037)
------ ---- ---------- ---- ------- ------- --------- --------
Balances at December 31,
1999................... 30,000 $-- 10,323,950 $ 1 $66,916 $ (380) $(103,827) $(37,290)
====== ==== ========== ==== ======= ======= ========= ========
See accompanying notes to consolidated financial statements.
F-7
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Emeritus Corporation ("Emeritus" or the "Company") is a nationally
integrated assisted living organization focused on operating residential style
communities. These communities provide a residential housing alternative for
senior citizens that need help with the activities of daily living, with an
emphasis on assisted living and personal care services. The Company also
provides management services to third-party and related-party owners of
assisted living communities.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries. In addition, the accounts of limited
liability companies and partnerships have been consolidated where the Company
maintains effective control over such entities assets and operations, not-
withstanding a lack of technical majority ownership. All significant
intercompany balances and transactions have been eliminated in consolidation.
Revenue Recognition
Operating revenue consists of resident fee revenue and management services
revenue. Resident units are rented on a month-to-month basis and rent is
recognized in the month the unit is occupied. Service fees paid by residents
for assisted-living and other related services and management fees are
recognized in the period services are rendered. Management services revenue is
comprised of revenue from management contracts and is recognized in the month
in which it is earned in accordance with the terms of the management contract.
The Securities and Exchange Commission recently issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition", to be effective in the second
quarter of 2000. The Company does not anticipate that compliance with SAB 101
will result in a material change to current revenue recognition policies.
Cash and Cash Equivalents
All short-term investments, consisting primarily of commercial paper and
certificates of deposit, with a maturity at date of purchase of three months
or less are considered to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets as follows: buildings and improvements, 25 to 40 years; furniture,
equipment and vehicles, five to seven years; leasehold improvements, over the
lesser of the estimated useful life or the lease term.
For long-lived assets, including property and equipment, the Company
evaluates the carrying value of the assets by comparing the estimated future
cash flows generated from the use of the assets and their eventual disposition
with the assets' reported net book values. The carrying values of assets are
evaluated for impairment when events or changes in circumstances occur which
may indicate the carrying amount of the assets may not be recoverable. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
discounted future cash flows expected to be generated by such assets. Assets
to be disposed of are reported at the lower of their carrying amount or fair
market value less costs to sell.
F-8
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investments
Investment securities are classified as available-for-sale and are recorded
at fair value. Unrealized holding gains and losses, net of any related tax
effect, are excluded from results of operations and are reported as a
component of other comprehensive income (loss).
Investments in 20% to 50% owned affiliates are accounted for under the
equity method except where lack of voting power exists. Investments in less
than 20% owned entities are accounted for under the cost method unless the
Company exercises significant influence by means other than ownership.
Intangible Assets
Intangible assets, which are comprised of deferred financing costs,
(included in other assets) as well as lease acquisition costs are amortized on
the straight-line method over the term of the related debt or lease agreement.
Income Taxes
Deferred income taxes are provided based on the estimated future tax effects
of loss carryforwards and temporary differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates that are expected to apply to taxable income in the years in which those
carryforwards and temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
A valuation allowance is recorded for deferred tax assets when it is more
likely than not that such deferred tax assets will not be realized.
Deferred Rent
Deferred rent primarily represents lease incentives that are deferred and
amortized using the straight-line method over the terms of the associated
leases.
Deferred Gains on Sales of Communities
Deferred gains on sales of communities consist of deferred gains on
sale/leaseback transactions and deferred gains on sale transactions. The
deferred gains on sale/leaseback transactions are amortized using the
straight-line method over the lives of the associated leases. The Company has
no continuing involvement in communities that it has sold and leased back
outside of operating the communities. The deferred gains on sales will be
maintained at their current balance until the Company discontinues its
involvement in the ownership of the related communities.
Community Operations
Community operations represent direct costs incurred to operate the
communities and include costs such as resident activities, marketing,
housekeeping, food service, payroll and benefits, facility maintenance,
utilities, taxes and licenses.
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations in measuring compensation costs for its
stock option plans. The Company discloses pro forma net income (loss) and net
income (loss) per share as if compensation cost had been determined consistent
with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation.
F-9
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Loss Per Share
Basic net income (loss) per share is computed based on weighted average
shares outstanding and excludes any potential dilution. Diluted net income
(loss) per share is computed on the basis of the weighted average number of
shares outstanding plus dilutive potential common shares using the treasury
stock method. The capital structure of the Company includes convertible
debentures, redeemable and non-redeemable convertible preferred stock, as well
as stock options. The assumed conversion and exercise of these securities have
been excluded from the calculation of diluted net loss per share as their
effect is anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income and other gains and
losses effecting shareholder's equity, which under generally accepted
accounting principles are excluded from results of operations. For the
Company, these consist of unrealized gains and losses on investment securities
and foreign currency translation adjustments, net of related tax effect.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Foreign Currency Translation
Foreign currency amounts attributable to foreign operations have been
translated into U.S. dollars using year-end exchange rates for assets and
liabilities, historical rates for equity, and average annual rates for
revenues and expenses. Unrealized gains and losses arising from fluctuations
in the year-end exchange rates are recorded as a component of other
comprehensive income (loss).
Reclassifications
Certain reclassifications of the 1997 and 1998 amounts have been made to
conform to the 1999 presentation.
(2) Changes in Accounting Principles
In April 1997, the Accounting Standards Executive Committee issued Statement
of Position 98-5 (SOP 98-5), Reporting on the Costs of Start-Up Activities.
This statement provides guidance on financial reporting for start-up costs and
organization costs and requires such costs to be expensed as incurred. The
Company elected early adoption of this statement effective January 1, 1998 and
has reported a charge of $1,320,000 for the cumulative effect of this change
in accounting principle. The adoption of SOP 98-5 on January 1, 1998 resulted
in the Company expensing approximately $967,000 of start-up costs incurred in
1998.
(3) Restricted Deposits
Restricted deposits consist of funds required by various Real Estate
Investment Trusts ("REITs") to be placed on deposit until the Company's
communities meet certain debt coverage and/or cash flow coverage ratios, at
which time the funds will be released to the Company. As of December 31, 1998
and 1999, the Company had $8.4 million and $6.5 million in restricted
deposits, respectively.
F-10
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Property and Equipment
Property and equipment consist of the following:
December 31,
-----------------
1998 1999
-------- --------
(In thousands)
Land and improvements................................. $ 11,881 $ 11,456
Buildings and improvements............................ 108,221 112,256
Furniture and equipment............................... 11,321 12,007
Vehicles.............................................. 2,760 2,878
Leasehold improvements................................ 1,958 2,832
-------- --------
136,141 141,429
Less accumulated depreciation and amortization........ 9,499 13,789
-------- --------
126,642 127,640
Construction in progress.............................. 2,017 1,188
-------- --------
$128,659 $128,828
======== ========
(5) Property Held for Development
Property held for development is recorded at cost. Interest costs
capitalized on property held for development and construction in progress was
$2.7 million and $0.1 million for 1997 and 1998, respectively. There were no
capitalized interest costs in 1999.
At December 31, 1998, the Company was committed to entering long-term
operating leases with a REIT for communities then under development. In March
1999, the Company completed a disposition of its leasehold interests in these
development communities (note 18).
(6) Investment Securities
During 1997, the Company purchased common stock of ARV Assisted Living, Inc.
("ARV") in market transactions and initiated a tender offer that was
terminated in January 1998, for all of the remaining outstanding common stock
of ARV. The Company incurred costs of $3,418,000 associated with this activity
in 1997.
During 1998, the Company sold a portion of the ARV common stock in market
transactions realizing gains of approximately $450,000, which are included in
other income, net. In 1999, the Company wrote down its investment in ARV in
the amount of $7,428,000 as management has concluded the decline in the fair
market value of this investment is other than temporary. Details regarding the
ARV investment as of December 31, follow:
Gross Fair
Amortized Unrealized Market
Cost Losses Value
--------- ---------- ------
(In thousands)
1998....................................... $8,890 $(4,399) $4,491
====== ======= ======
1999....................................... $1,512 $ (378) $1,134
====== ======= ======
In September 1999, the Company prevailed in a claim against ARV and settled
for $5.0 million. The settlement terms provided for $1.5 million to be paid
immediately with the remaining balance of $3.5 million to be paid through
2001,with a discount provision for early payment. As of December 31, 1999, the
Company has collected $4.3 million as full settlement on this claim. The
settlement, net of all related legal costs, is included in other income.
F-11
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Financial Instruments
The Company has financial instruments other than investment securities
consisting of cash and cash equivalents, trade accounts receivable, notes
receivable from and investments in affiliates, short-term borrowings, accounts
payable, convertible debentures, redeemable preferred stock and long-term
debt. The fair value of the Company's financial instruments based on their
short-term nature or current market indicators such as prevailing interest
rates approximates their carrying value with the exception of the convertible
debentures which had a fair value of $28.3 million versus a book value of
$32.0 million at December 31, 1999.
(8) Notes Receivable From and Investments in Affiliated Companies
In November 1996, the Company agreed to purchase up to 6,888,466 shares of
convertible preferred stock of Alert Care Corporation ("Alert"), an Ontario,
Canada-based owner and operator of assisted-living communities at prices
ranging from $0.67 to $0.74 per share (Cdn). In addition, the Company acquired
an option to purchase an additional 4,000,000 shares of convertible preferred
stock at an exercise price of $1.00 per share (Cdn), as well as an option to
purchase from Eclipse Capital Management ("Eclipse"), the majority shareholder
of Alert, and certain other shareholders of Alert, 9,050,000 currently issued
and outstanding shares of common stock of Alert and 950,000 currently issued
and outstanding shares of Class A non-voting stock of Alert both at an
exercise price of $3.25 per share (Cdn). There was no cost in acquiring the
option to purchase additional shares from Alert and the Company assigned no
value to the option.
In September 1999, the Company sold 38.9% of its holdings in Alert, or
4,235,613 shares, to an entity in which a principal shareholder and a Board
member of the Company are investors at a price per share equal to the
Company's cost basis of $0.85 per share (Cdn) or $0.59 per share (US).
Subsequently, in November 1999, Alert repurchased all of its preferred stock
for $1.10 per share (Cdn). The Company realized a gain of $760,000 on this
transaction, which is included in other income for 1999. Prior to its
disposition, the investment in Alert was accounted for under the cost method,
as the Company's equity ownership consisted of non-voting preferred stock.
Details regarding the Alert holdings as of December 31 are as follows:
Total
Shares Cost
----------- --------
(In thousands,
except share data)
1998
Preferred shares........... 10,888,466 $ 6,391
=========== =======
1999
Preferred shares........... -- $ --
=========== =======
During 1998, the Company sold its interest in a community located in Texas
to a partnership in which the principal shareholder of the Company is a
partner. Pursuant to the purchase and sale agreement, the Company advanced
funds to the partnership of $1.0 million, which was subsequently repaid in
1999, and $800,000, subject to promissory notes bearing interest at 9% and
payable in 10 years and on demand, respectively. The $1.0 million note
contains additional funding provisions whereby the Company funds 20% of the
losses generated by the community up to $500,000, of which $500,000 is
outstanding at December 31, 1999. In addition, the Company has advanced the
partnership $450,000 under a repair note bearing interest at 9% and due June
2008. At December 31, 1999, the Partnership's obligations to the Company total
$1.8 million.
In 1998, the Company entered into a $5.0 million credit agreement with
Aurora Bay Investments, L.L.C. ("Aurora Bay"), a limited liability company
that acquires, develops and operates Alzheimer's special care facilities. In
September 1998, a related party assumed the credit agreement for $4.2 million
that equaled the total advances made under the agreement.
F-12
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Convertible Debentures
The Company has $32.0 million of 6.25% convertible subordinated debentures
(the "Debentures") which are due in 2006. The Debentures are convertible into
common stock at the rate of $22 per share, which equates to an aggregate of
approximately 1,454,545 shares of the Company's common stock and bear interest
payable semiannually on January 1 and July 1 of each year. The Debentures are
unsecured and subordinated to all other indebtedness of the Company.
The Debentures are subject to redemption, as a whole or in part, at any time
or from time to time commencing after July 1, 1999 at the Company's option on
at least 30 days' and not more than 60 days' prior notice.
The redemption prices (expressed as a percentage of principal amount) are as
follows for the 12-month period beginning after July 1 of the following years:
Year Price
---- -----
2000....................................... 101%
2001 and thereafter........................ 100%
(10) Long-Term Debt
Long-term debt consists of the following:
December 31,
-----------------
1998 1999
-------- --------
(In thousands)
Notes payable, interest only at the LIBOR rate plus 2.95%
(8.0% at December 31, 1999) payable monthly, unpaid
principal and interest due April 2001...................... $ 73,235 $ 73,235
Notes payable, interest only at the LIBOR plus 2.25% (7.3%
at December 31, 1999), payable monthly, unpaid principal
and interest due on demand................................. 5,270 5,270
Note payable, interest at 7.82% payable in monthly
installments, unpaid principal and interest due July 2004.. 12,800 12,696
Note payable, interest at 8.38% payable in monthly
installments, unpaid principal and interest due February
2003....................................................... 5,965 5,913
Notes payable, interest only at 8.5% payable monthly, unpaid
principal and interest due December 2000................... 11,140 --
Notes payable, interest at 7.43%, payable in monthly
installments, unpaid principal and interest due October
2009....................................................... -- 25,851
Notes payable, interest at rates from 8.0% to 10.5%, payable
in monthly installments, due through July 2009............. 15,892 13,515
Other....................................................... 2,963 440
-------- --------
Subtotal.................................................. 127,265 136,920
Less current portion........................................ 7,591 8,601
-------- --------
Long-term debt, less current portion...................... $119,674 $128,319
======== ========
Substantially all long-term debt is secured by the Company's property and
equipment.
During 1998 and 1999, the Company consolidated approximately $60.3 and $15.9
million, respectively, of outstanding debt through refinancings and wrote off
$937,000 and $333,000, respectively, of related deferred costs as
extraordinary items.
F-13
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Certain of the Company's indebtedness includes restrictive provisions
related to cash dividends, investments and borrowings, and require maintenance
of specified operating ratios, levels of working capital and net worth. As of
December 31, 1999, the Company was in compliance with such covenants or
obtained waivers for noncompliance.
Principal maturities of long-term debt at December 31, 1999 are as follows:
(In thousands)
2000...................................................... $ 8,601
2001...................................................... 76,104
2002...................................................... 2,476
2003...................................................... 7,963
2004...................................................... 11,993
Thereafter................................................ 29,783
--------
Total................................................... $136,920
========
(11) Short-Term Borrowings
In September 1999, the Company's majority shareholder repaid the Company's
bank line of credit that totaled $5.0 million. Through December 1999, the
Company repaid $4.0 million to the majority shareholder and repaid the
remaining balance of $1.0 million in January 2000. Interest expense on the
shareholder loan totaled $41,000 for 1999.
(12) Margin Loan on Equity Securities
In 1997, the Company opened a margin account to facilitate the acquisition
of marketable securities. This account had a balance of $2,324,000 at December
31, 1998, secured by marketable equity securities with a market value of
$4,491,000. This loan was due upon the sale of the securities and bore
interest at 0.375% under broker call. Due to the impairment in value of the
securities, the Company paid the loan in full as of December 31, 1999.
F-14
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) Income Taxes
Income taxes reported by the Company differ from the amount computed by
applying the statutory rate primarily due to limitations on utilizing net
operating losses.
The tax effect of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities are comprised of
the following:
December 31,
------------------
1998 1999
-------- --------
(In thousands)
Deferred tax liabilities:
Depreciation and amortization....................... $ (1,266) $ (1,749)
-------- --------
Gross deferred tax liabilities.................... (1,266) (1,749)
Deferred tax assets:
Net operating loss carryforwards.................... 19,563 24,992
Deferred gains on sale/leaseback.................... 6,624 6,320
Unearned rental income.............................. 329 177
Vacation accrual.................................... 403 362
Health insurance accrual............................ 398 395
Other............................................... 585 850
-------- --------
Gross deferred tax assets............................. 27,902 33,096
Less valuation allowance.............................. (26,636) (31,347)
-------- --------
Deferred tax assets, net.............................. 1,266 1,749
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
The increase in the valuation allowance was $11,856,000 and $4,711,000 for
1998 and 1999, respectively. The increases were primarily due to the increase
in deferred gains on sale/leasebacks and the amount of net operating loss
carryforwards, for which management does not believe that it is more likely
than not that realization is assured.
For federal income tax purposes, the Company has net operating loss
carryforwards at December 31, 1999, available to offset future federal taxable
income, if any, of approximately $73,505,000 expiring beginning in 2012.
(14) Related-Party Management Agreements
During 1995, the Company's two most senior executive officers, its CEO and
now former President, formed a New York general partnership (the
"Partnership") to facilitate the operation of assisted-living communities in
the state of New York, which generally requires that natural persons be
designated as the licensed operators of assisted-living communities. The
Partnership operates ten leased communities in New York. The Company has
agreements with the Partnership and the partners under which all of the
Partnership's profits have been assigned to the Company and the Company has
indemnified the partners against losses. In February 1999, the President of
the Company ceased to be an officer of the Company and has agreed to transfer
his ownership in the Partnership to his successor at a nominal value. As the
Company has a unilateral and perpetual control over the Partnership's assets
and operations, the results of operations of the Partnership are consolidated
with those of the Company.
A number of limited partnerships which are partly owned indirectly by Mr.
Baty, the Company's Chairman and Chief Executive Officer, develop, own and
lease senior housing projects, some of which cater to low income
F-15
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
seniors. The Company has agreements with these partnerships to provide certain
administrative support, due diligence and financial support services with
respect to the acquisition, development and administration of these
communities. The agreements have terms ranging from two to four years, with
options to renew, and provide for management fees ranging from 4% to 7% of
gross operating revenues and fixed administrative fees. Management fee revenue
earned under these agreements was approximately $535,000 and $774,000 in 1998
and 1999, respectively.
In 1998, the Company and XL Management Company L.L.C., ("XL Management"), an
affiliate of Holiday Retirement Corp., an owner and operator of independent-
living communities, entered into four management agreements whereby XL
Management will provide management services relating to four newly developed
assisted-living communities located in Texas. The agreements have initial
terms of two years six months with management fees based on 6% of gross
revenues payable monthly. Total fees in 1999 amounted to $316,000 as compared
to $187,000 in 1998. The Company will pay a bonus fee per community to XL
Management based on occupancy; one year after managing the communities, if
occupancy is between 75% and 89%, XL Management will receive a bonus fee of
$25,000 and if occupancy is 90% or greater the bonus fee will be $50,000. The
Company's Chairman and Chief Executive Officer and another member of the
Company's board of directors are principal shareholders and officers of
Holiday.
(15) Shareholders' Deficit
In December 1997, the Company purchased 25,600 shares of its common stock at
an aggregate cost of $341,000. In January 1998 and subsequently in August
1999, the Company's board of directors authorized a stock repurchase program
to acquire up to an aggregate 1,000,000 shares of the Company's common stock.
At December 31, 1999, the Company had acquired a total of 680,900 shares of
its common stock at a cumulative cost of $6.9 million.
Preferred Stock
In December 1999, the Company entered into an agreement to sell 40,000
shares of our Series B Stock to Saratoga Partners IV, L.P. ("Saratoga") and
certain investors related to Saratoga for a purchase price of $1,000 per
share. The sale of 30,000 shares of Series B Stock was completed December
1999. The sale of the remaining 10,000 shares is expected during the first
half of 2000. Each share of Series B Stock is convertible into the number of
shares of common stock equal to the stated value of $1,000 divided by an
initial conversion price of $7.22 to be adjusted for any anti-dilutive
transactions. The conversion price is subject to adjustment to the extent that
additional shares are issued. The entire issue of 40,000 shares of Series B
Stock is initially convertible into 5,540,166 shares of Common Stock based on
the current conversion price.
Under terms of stock purchase agreement, the Company is required to spend
$23,000,000 of the total proceeds as partial consideration for the
acquisitions of the Emeritrust II facilities, as defined in note 18, and
certain other facilities within six months of receipt of the proceeds. If the
Company fails to spend at least $23,000,000 towards the acquisition of the
facilities, then the Company is required to place an amount calculated as
$35,000,000 less the actual amount of proceeds spent by the Company towards
the acquisition of the facilities into an escrow account whereby funds could
be spent only upon written consent of Saratoga. As of December 31, 1999,
$13,500,000 is recorded as restricted cash to be used towards the acquisition
of the facilities. The Company anticipates using the proceeds from the sale of
the remaining shares for the acquisition of the facilities.
The Series B Stock pays dividends quarterly in a combination of cash and
additional shares of Series B Stock. From issuance to January 1, 2004, the
dividend rate is 6% of the stated value of the $1,000 per share, of which 2%
is payable in cash and 4% is payable in Series B Stock for every $1,000 of
dividend. After January 1,
F-16
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2004, the rate increases to 7%, with 3% payable in cash and the remaining in
Series B Stock. Dividends will accumulate whether or not declared or paid.
After January 10, 2003, the Company 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.
1995 Stock Incentive Plan
The Company has a 1995 stock incentive plan ("1995 Plan") which combines the
features of an incentive and nonqualified stock option plan, stock
appreciation rights and a stock award plan (including restricted stock). The
1995 Plan is a long-term incentive compensation plan and is designed to
provide a competitive and balanced incentive and reward program for
participants.
The Company has authorized 2,000,000 shares of common stock to be reserved
for grants under the 1995 Plan of which 228,266 remained available for future
awards at December 31, 1999. Options generally vest between three-year to
five-year periods, at the discretion of the Compensation Committee of the
Board of Directors, in cumulative increments beginning one year after the date
of the grant and expire not later than ten years from the date of grant. The
options are granted at an exercise price equal to the fair market value of the
common stock on the date of the grant.
In November 1998, the Company offered, at the election of individual
employees, a repricing of options granted to date at an exercise price of
$9.8125 which was equal to the fair market value of the stock on the grant
date. A total of 1,005,666 shares were forfeited and reissued under the
repricing transaction.
Had compensation cost for the Company's stock option plan been determined
pursuant to SFAS 123, the Company's pro forma net loss and pro forma net loss
per share, including the effect of the repricing, would have been as follows:
Year ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(In thousands, except per
share data)
Net loss to common shareholders:
As reported.............................. $(28,636) $(33,286) $(23,287)
Pro forma................................ (29,236) (34,676) (25,055)
Net loss per common share--basic and
diluted:
As reported.............................. $ (2.60) $ (3.17) $ (2.22)
Pro forma................................ (2.66) (3.31) (2.39)
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1997, 1998 and 1999: dividend yield of 0.0% for all
periods; expected volatility of 49.1% for 1997, 48.9% for 1998 and 50.2% for
1999; risk-free interest rates of 5.45% to 5.50% for 1997, 4.51% to 4.70% for
1998, and 6.47% to 6.63% for 1999; and an expected option term of 5 years and
2 to 5 years for 1997 and 1998, giving effect to the option repricing,
respectively and 4 years for 1999.
F-17
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the activity in the Company's stock option plans follows:
1997 1998 1999
-------------------- --------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Shares Shares Shares Shares Shares
--------- --------- ---------- --------- --------- ---------
Outstanding at beginning
of year................ 484,900 $11.90 1,089,650 $12.86 1,443,366 $9.84
Granted................. 703,000 $13.43 1,471,666 $ 9.79 459,750 $7.45
Exercised............... (250) $15.25 (1,000) $10.50 (3,600) $9.81
Canceled................ (98,000) $12.32 (1,116,950) $12.80 (114,433) $9.75
--------- ------ ---------- ------ --------- -----
Outstanding at end of
year................... 1,089,650 $12.86 1,443,366 $ 9.84 1,785,083 $9.23
Options exercisable at
year-end............... 101,800 $12.40 308,352 $10.06 616,644 $9.97
Weighted-average fair
value of options
granted during the
year................... $ 6.65 $ 4.11 $3.44
The following is a summary of stock options outstanding at December 31,
1999:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- --------- ----------- ---------
$ 6.50 - $ 7.81 436,750 9.88 $ 7.26 -- --
$ 9.63 357,500 8.88 $ 9.63 96,893 $ 9.63
$ 9.81 937,333 7.36 $ 9.81 489,251 $ 9.81
$10.25 - $15.00 53,500 8.14 $12.50 30,500 $13.55
--------- ---- ------ ------- ------
1,785,083 8.31 $ 9.23 616,644 $ 9.97
========= ==== ====== ======= ======
Employee Stock Purchase Plan
In July 1998, the Company adopted an Employee Stock Purchase Plan (the Plan)
to provide substantially all employees who have completed six months of
service an opportunity to purchase shares of its common stock through payroll
deductions, up to 15% of eligible compensation. A total of 200,000 shares are
available for purchase under the Plan. Monthly, participant account balances
are used to purchase shares of stock on the open market at the lesser of the
fair market value of shares on the first or last day of the participation
period. Employees may not exceed $25,000 in annual purchases. The Employee
Stock Purchase Plan expires in May 2008.
(16) Redeemable Preferred Stock
The Company has authorized 5,000,000 shares of preferred stock, $0.0001 par
value. Pursuant to such authority, in October 1997, the Company sold 25,000
shares of Series A cumulative convertible, exchangeable, redeemable preferred
stock for $25,000,000. Cumulative dividends of 9% are payable quarterly. The
preferred stock has a mandatory redemption date of October 24, 2004 at a price
equal to $1,000 per share plus any accrued but unpaid dividends. Each share of
preferred stock may be converted, at the option of the holder, into 55 shares
of common stock. The preferred stock is also exchangeable in whole only, at
the option of the Company, into 9% subordinated convertible notes due October
24, 2004. The 9% subordinated notes would contain the same conversion rights,
restrictions and other terms as the preferred stock.
F-18
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company may redeem the preferred stock, in whole or in part, after
October 24, 2001 for $1,050 per share plus accrued dividends, provided that
the market price of common stock is at least 130% of the conversion price for
the preferred stock. In the event of liquidation of the Company, the holders
of outstanding preferred stock are entitled to receive a distribution of
$1,000 per share plus accrued dividends.
(17) Leases
At December 31, 1999, the Company leases office space and 37 assisted-living
communities. The office lease expires in 2006 and contains two five-year
renewal options. The community leases expire from 2004 to 2017 and contain two
to six five-year renewal options.
Minimum lease payments under noncancelable operating leases at December 31,
1999 are as follows:
(In thousands)
2000.............................. $ 22,102
2001.............................. 22,136
2002.............................. 22,508
2003.............................. 22,734
2004.............................. 22,689
Thereafter........................ 142,077
--------
$254,246
========
Rent expense under noncancelable operating leases was approximately
$34,651,000, $42,217,000 and $25,135,000 for 1997, 1998 and 1999,
respectively. A number of operating leases provide for additional lease
payments after 24 months computed at 5% of additional revenues of the
community. In 1999, additional rent under this provision was not significant.
(18) Sales and Acquisitions
In 1998, the Company entered into sale/leaseback transactions with a REIT,
pursuant to which the REIT acquired a community previously acquired by the
Company and leased the community back to the Company. The Company has no
continuing involvement outside of operating the community.
In 1998, the Company acquired two communities that it previously leased from
a REIT for an aggregate purchase price of $13.5 million. These acquisitions
were financed through borrowings.
In 1998 the Company sold interests in three assisted living communities for
an aggregate sales price of $25 million, including the assumption of a $14.8
million mortgage obligation and $1.8 million in notes receivable, to
partnerships in which the Company's principal shareholder is a partner and
realized cumulative gains of $475,000 which are included in other income, net.
The Company retains management interests in each community through management
contracts and a residual economic interest in two of the communities.
In December 1998 the Company disposed of its leasehold interest in 22 leased
communities and three owned communities (the "Emeritrust communities"). The
Emeritrust communities were sold to an entity in which a principal shareholder
and a Board member of the Company are investors. Pursuant to the transaction,
the Company manages all 25 communities pursuant to a three year management
contract and receives management fees of 5% of revenues currently payable as
well as 2% of revenues which is contingent upon the communities achieving
positive cash flows. For 1999, the Company earned management fees of
$1.4 million.
F-19
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The management agreement provides the Company an option to purchase the 22
previously leased communities at a formula price and a right of first refusal
on the three previously owned communities. The management agreement further
stipulates a cash shortfall funding requirement by the Company to the extent
the Emeritrust communities generate cash deficiencies in excess of $4.5
million. At December 31, 1999, the Company had accrued cash shortfall funding
requirements of $1.4 million. Previously deferred gains and the gain on this
transaction collectively totaling approximately $13 million have been deferred
given the continuing financial involvement of the Company stipulated in the
management agreement.
In March 1999, the Company completed a disposition of its leasehold
interests in 21 additional communities, consisting of 16 currently operational
communities and five development communities (the "Emeritrust II
communities"). The Emeritrust II communities were sold to an entity in which a
principal shareholder and a Board member of the Company are investors.
Pursuant to the transaction, the Company manages all 21 communities pursuant
to a three year management contract and receives management fees of 5% of
revenues currently payable as well as 2% of revenues which is contingent upon
the communities achieving positive cash flows. For 1999, the Company earned
management fees of $1.4 million. The management agreement provides the Company
an option to purchase the 19 previously leased communities at a formula price.
The management agreement further stipulates a cash shortfall funding
requirement by the Company to the extent the development communities generate
cash deficiencies in excess of $2.3 million. At December 31, 1999, the Company
had not incurred a cash shortfall-funding requirement.
In September 1999, the Company acquired a community that it previously
leased for a purchase price of $8.0 million. This acquisition was financed
through borrowings.
(19) Commitments and Contingencies
The Company is involved in legal proceedings, claims and litigation arising
in the ordinary course of business. In the opinion of management, the outcome
of these matters will not have a material effect on the Company's results of
operations or financial position.
The Company is self-insured for certain employee health benefits. The
Company's policy is to accrue amounts equal to the actuarial liabilities that
are based on historical information along with certain assumptions about
future events. Changes in assumptions for such matters as health care costs
and actual experience could cause these estimates to change.
F-20
EMERITUS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1998 and 1999
Column A Column B Column C Column D Column E
---------------------------- --------- ------------ -------------- --------
Balance
at Charged to Balance
Beginning Other Costs at End
Description of Year and Expenses Deductions (1) of Year
----------- --------- ------------ -------------- --------
(In thousands)
Year ended December 31,
1997:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.............. $127 $317 $ 96 $348
==== ==== ==== ====
Year ended December 31,
1998:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.............. $348 $695 $505 $538
==== ==== ==== ====
Year ended December 31,
1999:
Valuation accounts deducted
from assets:
Allowance for doubtful
receivables.............. $538 $693 $648 $583
==== ==== ==== ====
- --------
(1) Represents amounts written off
F-21