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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1)
(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
------------------- -----------------------------------------
Common Stock, $.0001 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
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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, 1999 was $24,945,353.
As of March 27, 1999, 10,066,550 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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EMERITUS CORPORATION
INDEX
Page No.
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PART III
ITEM 10. DIRECTORS OF THE REGISTRANT............................... 2
ITEM 11. EXECUTIVE COMPENSATION.................................... 3
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................... 8
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 9
1
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
Patrick Carter (age 53) has served as a director of Emeritus since November
1995. From November 1985 until April 1999, Mr. Carter was Chief Executive
Officer and Managing Director of Westminster Health Care Holdings, Plc., a
publicly held operator of skilled-nursing facilities in the United Kingdom. He
currently serves on the Board of Directors of CBI Ltd., a private investment
company, and Monument Insurance Group Ltd., another private company where he is
also Chairman.
Motoharu Iue (age 63) has served as a director of Emeritus since April 1995.
Mr. Iue served as Chairman of the Board of Sanyo and President of Three Oceans
from October 1996 until March 1999. Mr. Iue served as President of Sanyo and as
Chairman of the Board of Three Oceans from 1992 until March 1999, and also
served as Chief Executive Officer of both of these companies. He has been a
director of Sanyo since 1977 and currently serves on the board of both Sanyo
and Three Oceans. Three Oceans Inc. is a 3.8% shareholder of Emeritus.
David W. Niemiec (age 50) has served as a director of Emeritus since December
30, 1999. Since September 1998, Mr. Niemiec has been a Managing Director of
Saratoga Management Company LLC, the manager of a group of private equity
investment funds operated under the name of Saratoga Partners. Prior to that he
worked at the investment banking firm of Dillon, Read & Co. Inc. beginning in
1974 and served as Vice Chairman from 1991 through September 1997, when the
firm was acquired by Swiss Bank Corporation. From September 1997 to February
1998, he was Managing Director of the successor firm, SBC Warburg Dillon Read
Inc.
Charles P. Durkin, Jr. (age 61) has served as a director of Emeritus since
December 30, 1999. Mr. Durkin is one of the founders of Saratoga Partners, a
private equity investment firm. Since Saratoga's formation as an independent
entity in September 1998, he has been a Managing Director of Saratoga
Management Company LLC, the manager of the Saratoga Partners funds. Prior to
that from September 1997, he was a Managing Director of SBC Warburg Dillon Read
Inc., the successor entity to Dillon, Read & Co. Inc., where Mr. Durkin started
his investment banking career in 1966 and became a Managing Director in 1974.
Mr. Durkin is a director of Koppers Industries, Inc. and of Scovill Fasteners,
Inc.
Raymond R. Brandstrom (age 47), one of Emeritus's founders, has served as a
director since its inception in 1993 and as vice-chairman of the Board since
March 1999. From 1993 to March 1999, Mr. Brandstrom also served as Emeritus's
President and Chief Operating Officer. Since the resignation of Kelly Price in
March 2000, Mr. Brandstrom has served as Acting CFO. From May 1992 to October
1996, Mr. Brandstrom served as president of Columbia Pacific Group, Inc. and
Columbia Management, Inc., both of which companies are wholly owned by Mr. Baty
and are engaged in developing independent living facilities and providing
consulting services for that market. From May 1992 to May 1997, Mr. Brandstrom
served as Vice President and Treasurer of Columbia Winery, a company affiliated
with Mr. Baty that is engaged in the production and sale of table wines.
David T. Hamamoto (age 40) has served as a director of Emeritus since
November 1997. Mr. Hamamoto is a member of NorthStar Capital Partners LLC, a
real estate fund that he founded in July 1997. Between 1983 and July 1997, Mr.
Hamamoto was employed by Goldman Sachs, most recently as co-founder and co-head
of the Real Estate Principal Investment Area of the Whitehall Funds. Mr.
Hamamoto is also Co-Chairman, Co-Chief Executive Officer and Co-President of
NorthStar Capital Investment Corporation, a private investment firm.
Daniel R. Baty (age 56), one of Emeritus's founders, has served as its Chief
Executive Officer and as a director since its inception in 1993 and became
Chairman of the Board in April 1995. Mr. Baty also has served as the Chairman
of the Board of Holiday Retirement Corp. since 1987 and served as its Chief
Executive Officer from 1991 through September 1997. Since 1984, Mr. Baty has
also served as Chairman of the Board of Columbia Pacific Group, Inc. and, since
1986, as Chairman of the Board of Columbia Management, Inc.
William E. Colson (age 58) has served as a director of Emeritus since 1995.
Mr. Colson is a founder of Holiday Retirement Corp. and has been its President
and Chief Operating Officer since 1987, and in September 1997, became its Chief
Executive Officer.
2
Section 16(a) Beneficial Ownership Reporting Compliance
Officers and directors of the Company and persons who own more than ten
percent of the Company's stock are required to report to the Securities and
Exchange Commission (SEC) their ownership and changes in ownership of the
Company's stock. Regulations of the SEC require us to disclose to our
shareholders any filings that were not made on time. Based solely on our
review of copies of the reports received by us, or written representations
received from reporting persons that no such forms were required, we believe
that, during fiscal year 1999, our officers and directors complied with all
applicable filing requirements, with the exception of three Form 3 Initial
Statements of Beneficial Ownership that were inadvertently filed late by three
of our executives.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents certain information with respect to
compensation we paid in the fiscal years ended December 31, 1997, 1998 and
1999 to our Chief Executive Officer and to our other four most highly
compensated officers as of December 31, 1999:
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
----------------------------- ------------
Other Annual Securities All Other
Name and Principal Bonus Compensation Underlying Compensation
Position Year Salary($) ($)(1) ($)(2) Options(#) ($)(3)
------------------ ---- --------- ------ ------------ ------------ ------------
Daniel R. Baty(4)....... 1999 -- -- 1,560 40,000 --
Chairman and Chief 1998 -- -- 264 204,000 --
Executive Officer 1997 -- -- 1,363 64,000 --
Kelly J. Price(5)....... 1999 164,532 40,000 1,560 20,000 --
Vice President, Finance 1998 150,629 22,500 1,696 75,250 --
and Chief Financial 1997 99,357 -- 1,363 44,000 --
Officer
Sarah J. Curtis(6)...... 1999 158,885 10,000 1,560 20,000 --
Vice President, Sales 1998 141,656 22,500 1,696 52,000 --
and Marketing 1997 87,708 -- 1,334 32,000 10,000
Gary S. Becker(7)....... 1999 134,846 15,000 5,750 20,000 --
Senior Vice President, 1998 115,812 18,000 6,000 43,500 --
Operations 1997 104,045 -- -- 28,500 --
Suzette McCanless(7).... 1999 134,929 10,000 6,000 20,000 --
Vice President, 1998 115,145 25,000 6,000 43,500 --
Operations-- 1997 89,761 -- -- 28,500 --
Eastern Division
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(1) Represents amounts earned for the respective calendar year under the
Company's corporate incentive plan which are paid in the first quarter of
the following year.
(2) Consists of amounts paid for parking fees and health club memberships.
(3) Consists of a $10,000 housing allowance in 1997 for Ms. Curtis.
(4) Mr. Baty is not a full time employee of Emeritus and is not currently
paid a salary by us. Of the 204,000 options granted in 1998, 164,000 were
granted in an exchange program pursuant to which 50,000 options granted
in each of 1995 and 1996 and 64,000 options granted in 1997 were
cancelled.
(5) Of the 75,250 options granted in 1998, 55,250 were granted in an exchange
program pursuant to which 1,250 options granted in 1995, 10,000 options
granted in 1996, and 44,000 options granted in 1997 were cancelled. Mr.
Price resigned as an officer of the Company effective March 31, 2000.
3
(6) Of the 52,000 options granted in 1998, 32,000 were granted in an exchange
program pursuant to which 32,000 options granted in 1997 were cancelled.
(7) Of the 43,500 options granted in 1998, 28,500 were granted in an exchange
program pursuant to which 28,500 options granted in 1997 were cancelled.
Option Grants in Last Fiscal Year
The following table presents certain information regarding options granted
during the fiscal year ended December 31, 1999 to the following executive
officers:
Option Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------------
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Option Term ($)(4)
Options Employees in Exercise Price Expiration -----------------------
Name Granted (#)(1) Fiscal Year (2) ($/Share)(3) Date 5% 10%
---- -------------- --------------- -------------- ---------- ----------- -----------
Daniel R. Baty.......... 40,000 8.7% 7.25 11/17/09 182,379 462,185
Kelly J. Price.......... 20,000 4.4% 7.25 11/17/09 91,190 231,093
Sarah J. Curtis......... 20,000 4.4% 7.25 11/17/09 91,190 231,093
Gary S. Becker.......... 20,000 4.4% 7.25 11/17/09 91,190 231,093
Suzette McCanless....... 20,000 4.4% 7.25 11/17/09 91,190 231,093
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(1) The options have terms of 10 years and generally vest between 20% to 33%
per year beginning one year from the date of grant. The exercisability of
the options may accelerate if certain corporate transactions occur.
(2) We granted 459,750 stock options to employees in 1999.
(3) The option exercise price is equal to the closing price of our common
stock on the American Stock Exchange on the date of grant.
(4) Represents value of current-year grants assuming appreciation rates of 5%
and 10% per year over the 10-year option period. The actual value realized
may be greater or less than the potential realizable values set forth in
the table. The assumed rates of growth are prescribed by the SEC for
illustrative purposes only and are not intended to predict or forecast
future stock prices.
Fiscal Year-End Option Values
None of the following executive officers exercised options during the fiscal
year ended December 31, 1999. The following table presents certain information
regarding options held as of December 31, 1999 by each of the following
executive officers:
Fiscal Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999 (#) December 31, 1999 ($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Daniel R. Baty.............. 108,933 135,067 -- --
Kelly J. Price.............. 22,467 72,783 -- --
Sarah J. Curtis............. 19,467 52,533 -- --
Gary S. Becker.............. 16,400 47,100 -- --
Suzette McCanless........... 16,400 47,100 -- --
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(1) None of the options to purchase an aggregate of 538,250 shares held on a
combined basis by the executive officers named above were in-the-money at
the fiscal year end based on the $6.50 closing price of the common stock
on the American Stock Exchange on December 31, 1999.
4
Compensation Committee Report On Executive Compensation
The compensation committee of the Board consists of three non-employee
directors. The committee is responsible for establishing and administering our
executive compensation programs. Our objective is to pay competitively in order
to attract qualified executive personnel who best meet our needs; retain and
motivate these executives to achieve superior performances; link individual
compensation to individual and company performance; and align executives'
financial interests with those of our shareholders.
Executive compensation generally consists of three components: base salary,
cash bonuses and long-term incentive awards. The committee has established each
executive's compensation package by considering (a) the salaries of executive
officers in similar positions in companies in the same industry as Emeritus and
in related industries, (b) the experience and contribution levels of the
individual executive officer, and (c) our financial performance. Companies used
as a reference for considering compensation levels include some, but not all,
of the companies constituting the peer group in the stock performance graph.
The committee also relies on the recommendations of the Chief Executive Officer
in matters related to the individual performance of the other executive
officers, because the committee believes that the Chief Executive Officer is
the most qualified to make this assessment. Base salaries for executive
officers generally are designed to be less than those paid by competitors in
the assisted-living industry. These lower base salaries are combined with stock
option grants so that a significant portion of the executives' pay is tied to
performance of our stock.
Base Salaries. In 1999, base salaries were established as described above.
Stock Options. We grant stock options to provide a long-term incentive
opportunity that is directly linked to shareholder value. They are granted with
an exercise price equal to the market value of the common stock on the date of
grant, and become exercisable in 33 1/3% annual increments beginning one year
after the date of grant. To encourage stock retention, all options are granted
as incentive stock options to the maximum extent possible under the Internal
Revenue Code. In 1999, we granted stock options to a total of 191 employees in
recognition of their dedication, commitment and hard work. After considering
the individual performance of each executive, the committee determined the
number of options to be granted to each executive officer.
Annual Incentives. To date, the committee has not established a regular
annual incentive or bonus plan for executive officers. Four of our named
executives were awarded cash bonuses in March 2000 based on the committee's
assessment of their individual performances in 1999.
Our Chief Executive Officer, Mr. Baty, a founder of Emeritus, has a
significant equity position. As of March 27, 2000, Mr. Baty owned shares and
exercisable options representing approximately 35% of our common stock. Because
of his significant equity stake in Emeritus, Mr. Baty receives no base salary
or bonus. This compensation pattern was established prior to our initial public
offering and the committee has continued it, recognizing that the principal
compensation of Mr. Baty will be the interest value of his equity stake.
Section 162(m) of the Internal Revenue Code includes potential limitations on
the deductibility for federal income tax purposes of compensation in excess of
$1 million paid or accrued with respect to any of the executive officers whose
compensation is required to be reported in our proxy statement. Certain
performance-based compensation that has been approved by shareholders is not
subject to the deduction limit. Our stock option plans are structured to
qualify options as performance-based compensation under Section 162(m). For
2000, the committee does not expect that there will be any nondeductible
compensation.
Compensation Committee
David Niemiec (Chairman)*
Patrick Carter
David Hamamoto
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* Mr. Niemiec has served on the committee since his election as of December
30, 1999 and did not actually participate in most of the decisions related
to 1999 executive compensation.
5
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return on shares of our
common stock with the cumulative total return of the AMEX Market Value Index
and a peer group selected by us for the period beginning on November 21, 1995,
the first day of trading for our common stock, and ending on December 31, 1999,
the end of our last fiscal year:
[STOCK PERFORMANCE GRAPH REPRESENTING DATA SET FORTH BELOW]
Emeritus AMEX New Peer Old Peer
Corporation Market Group Group
----------- ------ -------- --------
November 21, 1995....................... 100 100 100 100
December 31, 1995....................... 78 105 100 106
December 31, 1996....................... 90 112 100 155
December 31, 1997....................... 85 136 182 202
December 31, 1998....................... 70 138 188 301
December 31, 1999....................... 43 179 52 268
Assumes $100 invested in each share of the common stock, the AMEX Market
Value Index and the peer group, with all dividends reinvested. Stock price
performance shown above for the common stock is historical and not necessarily
indicative of future price performance.
Given the relatively recent emergence of the assisted living industry, we
revise our peer group from time to time to include companies that have entered
the assisted living market. As the industry begins to mature and consolidate,
we remove certain companies previously included in our peer group as they are
acquired or as their focus of services shifts away from assisted-living
residences.
6
The new peer group consists of the following eight companies: Alternative
Living Service Inc.; American Retirement Corp.; ARV Assisted Living, Inc.;
Assisted Living Concepts Inc.; Brookdale Living Communities; Capital Senior
Living; Carematrix Corp.; and Sunrise Assisted Living Inc.
The old peer group consisted of the following thirteen companies involved in
the provision of assisted-living services: AFLAC; Alternative Living Service
Inc.; American Retirement Corp.; ARV Assisted Living, Inc.; Assisted Living
Concepts Inc.; Balanced Care Corp.; Brookdale Living Communities; Capital
Senior Living; Carematrix Corp.; Greenbriar Corp.; Karrington Health; Regent
Assisted Living Inc.; and Sunrise Assisted Living Inc. We changed our peer
group from December 31, 1998 to December 31, 1999 as follows: we removed AFLAC
which does not provide senior assisted-living services as its primary business;
Balance Care Corp., Karrington Health, and Regent Assisted Living had changes
in the status of their public holdings such that they are no longer comparable
to Emeritus. Greenbriar Corp. was eliminated due to their relatively small
operations in comparison to Emeritus.
Change of Control Arrangements
Employment Agreements. We have entered into a senior management employment
agreement with Ms. Curtis. The agreement provides certain benefits in the event
that we terminate her employment for any reason other than death, "disability,"
or "cause", or she terminates her employment for "good reason" following a
"change in control," as those terms are defined in the agreement. These
benefits include:
. payment of an amount equal to three times the sum of an annual base
salary specified in the agreement and target bonus for the current
fiscal year;
. any payment necessary to offset certain tax obligations incurred as a
result of such salary and bonus payments; and
. at our option, either the continuation of life insurance, disability,
medical, dental and similar employee benefits for three years following
termination or a cash payment equal to the present value of such
benefits.
Following a change in control, for so long as her employment continues, she
will be entitled to an annual base salary no less than an amount established by
the agreement, which is intended to reflect a market salary and which is higher
than the executive's current salary, plus an annual bonus equal to at least the
average of the annual bonuses paid in the two years preceding a change in
control, and continued participation in employee benefit plans. On each
anniversary, the agreement is automatically extended for another year, unless
we otherwise notify Ms. Curtis at least 60 days prior to this anniversary. Once
a change in control occurs, the agreement remains in effect for three years
from that date.
Mr. Kelly, prior to his resignation as of March 31, 2000, had been a party to
an employment agreement identical to Ms. Curtis's agreement.
Option Plan. In the event of (a) the merger or consolidation of Emeritus in
which it is not the surviving corporation or pursuant to which shares of common
stock are converted into cash, securities or other property (other than a
merger in which holders of common stock immediately before the merger have the
same proportionate ownership of the capital stock of the surviving corporation
immediately after the merger); (b) the sale, lease, exchange or other transfer
of all or substantially all of our assets (other than a transfer to a majority-
owned subsidiary); or (c) the approval by the holders of common stock of any
plan or proposal for our liquidation or dissolution, each outstanding option
under our stock option plan will automatically accelerate so that it will
become 100% vested and exercisable immediately before such transaction, except
that acceleration will not occur if, in the opinion of our accountants, it
would render unavailable "pooling-of-interests" accounting for such transaction
and except to the extent that options are assumed by the successor corporation.
The vesting of such assumed options accelerates at the time an optionee's
employment is terminated by us for reasons other than "cause" or by the
optionee for "good reason" following a change of control.
7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents, as of March 27, 2000, certain information with
respect to the beneficial ownership of our common stock and preferred stock by
. each person that we know owns more than 5% of the common stock,
. each of our directors,
. each officer or former officer named in the compensation tables, and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the SEC and
includes shares over which the indicated beneficial owner exercises voting
and/or investment power. Shares of stock subject to options or warrants
currently exercisable or exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding the options, but are
not deemed outstanding for computing the percentage ownership of any other
person. Except as otherwise indicated, we believe the beneficial owners of the
common stock listed below, based on information furnished by them, have sole
voting and investment power with respect to the shares listed opposite their
names. Unless otherwise indicated, the following officers, directors and
shareholders can be reached at the principal offices of Emeritus.
Shares of Emeritus
Common Stock
-----------------------------
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
---------------- -------------------- --------
Daniel R. Baty(1)(2)............................ 3,602,566 35.4%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom(3)........................ 444,042 4.4%
Gary S. Becker(4)............................... 20,126 *
Kelly J. Price(5)............................... 90,980 *
Sarah J. Curtis(6).............................. 21,667 *
Motoharu Iue(7)(8).............................. 393,500 3.9%
Suzette McCanless(4)............................ 19,763 *
Patrick Carter(8)............................... 68,500 *
William E. Colson(8)(9)......................... 18,500 *
David Hamamoto(10)(11).......................... 1,380,126 6.4%
David W. Niemiec(12)............................ 5,583,193 35.7%
Charles P. Durkin, Jr.(12)...................... 5,583,193 35.7%
Sirach Capital Management(13)................... 701,000 6.9%
3323 One Union Square
600 University Street
Seattle, WA 98101
B.F., Limited Partnership(2).................... 2,948,450 29.3%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
NorthStar Capital Partners LLC(11).............. 1,373,626 6.4%
299 Park Avenue, 33rd Floor
New York, New York 10022
Saratoga Partners IV, L.P.(14).................. 5,580,693 35.7%
535 Madison Avenue
New York, NY 10022
All directors and executive officers as a group
(13 persons)(1)(2)(7)(9)(11)(14)(15)........... 10,973,937 65.8%
8
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* Less than 1%.
(1) Includes 2,948,450 shares held by B.F., Limited Partnership., of which
Columbia Pacific, a company wholly owned by Mr. Baty, is the general
partner and of which Mr. Baty is a limited partner. Also includes
options exercisable within 60 days for the purchase of 108,936 shares.
(2) B.F., Limited Partnership may be deemed to have voting and dispositive
power over the shares, based upon publicly available information as
reported as of December 31, 1999 on Schedule 13D.
(3) Includes options exercisable within 60 days for the purchase of 87,467
shares.
(4) Includes options exercisable within 60 days for the purchase of 19,400
shares.
(5) Includes options exercisable within 60 days for the purchase of 31,267
shares.
(6) Includes options exercisable within 60 days for the purchase of 21,467
shares.
(7) Includes 385,000 shares held by Three Oceans, Inc., an U.S. affiliate of
Sanyo, a publicly traded Japanese company. Mr. Iue is a former executive
and current director of U.S. affiliates of Sanyo. Mr. Iue disclaims
beneficial ownership of shares of Common Stock held by Three Oceans.
(8) Includes options exercisable within 60 days for the purchase of 8,500
shares.
(9) Includes 10,000 shares held by Holiday Retirement Corp., of which Mr.
Colson is the principal shareholder and Chief Executive Officer.
(10) Includes options exercisable within 60 days for the purchase of 6,500
common shares.
(11) The 1,373,626 shares are convertible Series A preferred stock held by
NorthStar Capital Partners LLC, of which Mr. Hamamoto is a principal.
(See "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--NorthStar
Transaction.") The Series A preferred stock currently votes with both
the Series B preferred stock and the common stock, and is entitled to
687,500 votes. This represents approximately 6.4% of the voting power of
currently outstanding Emeritus common and preferred stock.
(12) Includes 5,540,166 shares issuable upon conversion of Series B preferred
stock currently held or purchasable within 60 days by Saratoga Partners,
of which Messrs. Niemiec and Durkin are principals. (See Part I
"Significant Transactions--Saratoga Relationship.") Also includes 40,527
shares (as-converted) that represent accrued dividends on the Series B
preferred stock. The Series B preferred stock currently votes with both
the Series A preferred stock and the common stock on an as-converted
basis, and represents approximately 28% of the voting power of the
currently outstanding Emeritus common and preferred stock. Also includes
options exercisable within 60 days for the purchase of 2,500 shares.
(13) Sirach Capital Management may be deemed to have voting and dispositive
power over the shares, based upon publicly available information
reported as of December 31, 1998 on Schedule 13G.
(14) Represents 4,155,124 shares that are issuable upon conversion of Series
B preferred stock, and 40,527 shares, on an as-converted basis, of
accrued dividends on such series B preferred stock. Also includes
1,385,042 shares of Series B preferred stock, on an as-converted basis,
that Saratoga Partners has the right to purchase within 60 days. The
Series B preferred stock currently votes with both the Series A
preferred stock and the common stock, on an as-converted basis.
(15) Includes options exercisable within 60 days for the purchase of 339,537
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 we had owned
three. 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.
9
The investor groups involved in both purchases 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. A group led by Holiday
provided approximately $5.1 million of the equity. This group included Holiday
as to a 40% interest, Columbia Pacific Master Fund "98 as to a 32% interest,
and Mr. Colson as to a 5% interest, with the remaining 23% interest being held
by individual third party investors. Columbia Pacific Master Fund is a limited
partnership of which Mr. Baty's family partnership is the general partner and
shares in 40% of income and gains after the limited partners of Columbia
Pacific Master Fund receive a return of their investment plus a preferred
return.
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. A group led by Holiday
provided approximately $4.9 million of the equity. This group included Holiday
as to a 40% interest, C.P. "99 Pool G.P. as to a 32% interest, and Mr. Colson
as to a 5% interest, with the remaining 23% interest being held by individual
third party investors. C.P. "99 Pool is a general partnership, which is
comprised of two 50% limited partnerships, the first of which includes Mr.
Baty's family partnership as its 40% general partner, and the other includes
Mr. Baty's family partnership as its 20% general partner.
The investor groups have retained us to manage all of the communities
through December 31, 2001. If we do not exercise the option 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. 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. We do
not have any such arrangements for the 14 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. As of December 31, 1999, the December communities had incurred
$1.4 million in losses for which we are obligated to reimburse the December
investment group. We expect that we will be obligated for further
reimbursements during 2000. At December 31, 1999, we had not incurred
reimbursement obligations to the March investment group as a result of losses
from the development communities.
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 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 or it
expires. 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;
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. 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 eight of the December communities and between four
and six 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.
Baty Transactions
Columbia House is a Washington limited partnership in which Mr. Baty
indirectly controls the general partner and holds an indirect 60% interest. It
develops, owns and leases low-income senior housing projects. We currently
manage eight communities owned by Columbia House and provide administrative
services for another Columbia House community. The agreements have terms
ranging from two to four years, with options to renew, and provide for
management fees ranging from 4% to 6% of gross operating revenues, payable
monthly for management agreements and fixed fees payable monthly for
administrative agreements, as well as bonuses. We earned fees of $48,000 in
1999 under these agreements. Columbia House owed us $1,451,000 as of December
31, 1999, representing advances made to various Columbia House communities and
outstanding management and administrative fees. These advances do not bear
interest.
Prior to our initial public offering in November 1995, Mr. Baty had
personally guaranteed much of our third party financing, including mortgage
debt and rental payments under leases. Many of those guarantees terminated
when the underlying properties met certain loan-to-value standards or debt-
service coverage ratios and others terminated when properties were refinanced.
During 1999, Mr. Baty guaranteed our $5.0 million revolving credit facility
until it was retired in November 1999. From November 1999 until January 2000,
we borrowed amounts from Mr. Baty ranging from $1.0 million to $5.0 million on
terms reflecting his borrowing arrangements from a commercial bank. We
currently do not have any outstanding borrowings from Mr. Baty. Except as
otherwise described in this section, Mr. Baty currently does not guarantee any
of our mortgage financing.
During 1995, Messrs. Baty and Brandstrom formed Painted Post Partners, a New
York general partnership, to facilitate the operation of assisted living
communities in the state of New York, which generally requires that natural
persons be designated as the licensed operators of assisted living
communities. We have entered into administrative service agreements with the
partnership for the term of the underlying leases. The administrative
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services agreements provide for fees that would equal or exceed the profit of
a community operated efficiently at full occupancy and, unless reset by
agreement of the parties, will increase automatically on an annual basis in
accordance with changes in the Consumer Price Index. In addition, we have
agreed to indemnify the partners against losses and, in exchange, the partners
have agreed to assign any profits to us. As part of their general non-
competition agreements with us, each of Messrs. Baty and Brandstrom has agreed
that, in the event he ceases to be a senior executive of Emeritus, he will
transfer his interest in the partnership for a nominal charge to his successor
at Emeritus or other person designated by us. In February 1999, Mr. Brandstrom
ceased to be an officer but has continued as a director and vice-chairman of
the Board. As a result, we have not requested a transfer of his interest in
the partnership to another officer. Following Mr. Price's resignation in March
2000, Mr. Brandstrom was appointed Acting CFO until a permanent replacement is
found.
We have entered into non-competition agreements with Messrs. Baty and
Brandstrom. These agreements provide that they will not compete with us,
directly or indirectly, in the ownership, operation or management of assisted
living communities anywhere in the United States and Canada during the terms
of their employment and for a period of two years following the termination of
their employment. The agreements also provide, however, that they may hold (1)
up to a 10% limited partnership interest in a partnership engaged in such
business, (2) less than 5% of the outstanding equity securities of a public
company engaged in such business, and (3) interests in the New York
partnership described above. These agreements do not limit Mr. Baty's current
role with Holiday. Mr. Baty has agreed, however, that if Holiday operates or
manages assisted living communities, other than as a limited component of
independent living communities consistent with its current operations, he will
not personally be active in the management, operation or financing of such
facilities nor will he hold any separate ownership or other interest therein.
Other Community Transactions
In April 1998, we assigned our economic interest in a 172-unit assisted
living community located in Fairfield, California to a limited liability
company for $2.8 million in cash. Our economic interest consisted of a 67%
interest in the profits, losses and distributions of an operating limited
liability company that owns and operates the community, the right to receive
payments of principal and interest under a $2.4 million promissory note
evidencing a loan by us to the operating company and the obligation to make
additional capital contributions under the agreement establishing the
operating company. The limited liability company to which we assigned our
economic interest is comprised of a third-party investor as to a 25% interest
and three investor pools with interests of 14.1%, 35.9% and 25%. Mr. Baty's
family partnership is the 18.75% general partner in the first two pools and
the third pool includes Mr. Baty individually as its 18.75% general partner.
We continue to manage the operation of the community pursuant to a management
agreement and to manage the affairs of the operating limited liability
company. We receive fees for these management activities equal to 5% of gross
revenues of the community. During 1999, we received $87,386 in management
fees. At the time we assigned our economic interest in this community, we
retained the right to repurchase our interest at the $2.8 million purchase
price plus a 9% per annum return. In January 2000, we repurchased 25% of our
original interest in the community for a total of $791,000.
In June 1998, we sold a 295-unit independent and assisted living facility
located in Texas to a partnership consisting of Columbia Pacific Master Fund,
as to a 99% interest, and to Mr. Baty personally, as to a 1% limited
partnership interest. The purchase price for the facility was $6.75 million
plus the assumption of a first mortgage of $14.8 million, which was guaranteed
by Mr. Baty in connection with the transaction, and a release of Emeritus from
the mortgage obligations. The purchase price was paid as follows:
. cash in the amount of $4.5 million;
. a promissory note in the amount of $1.5 million, of which $1.0 million
was repaid in 1999, bearing interest at 9% per annum and maturing in 10
years; and
. an $800,000 promissory note bearing interest at 9% per annum, due on
demand.
We and the partnership have entered into a management agreement for a five-
year term, with automatic two-year extensions, with management fees of 6% of
gross revenue or $10,000 per month, whichever is greater. We have
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the right of first refusal in the event of the sale of the facility. For 1999,
we received $177,300 in management fees; we have $185,500 in interest
receivable under the convertible notes.
In June 1998, we sold a 30% general partnership interest in Cooper George
Partners Limited Partnership, a limited partnership in which we formerly held
a 50% general partnership interest, to Columbia Pacific Master Fund.
Concurrently, Columbia Pacific Master Fund purchased a 19% limited partnership
interest from an independent investor who formerly held a 50% limited
partnership interest. Our remaining 20% interest was converted to a limited
partnership interest. Cooper George Partners owns a 141-unit assisted living
community in Washington. The purchase price for the partnership interest was
$1.05 million payable in cash. In connection with the purchase, the
partnership agreement was modified to provide that profits, losses and
distributions would be shared 80% by Columbia Pacific Master Fund and 20% by
us. Also in connection with the transaction, the facility was refinanced
through a $9.68 million first mortgage loan from Deutsche Bank, guaranteed by
Mr. Baty, and we received a distribution of $580,000 consisting of 20% of the
net proceeds of $2.9 million resulting from the refinancing. We and Cooper
George Partners have entered into a management agreement for a five-year term,
with automatic two-year extensions, with management fees of 6% of gross
revenue or $10,000 per month, whichever is greater. We have the right of first
refusal in the event of the sale of the facility. For 1999, we received
$129,000 in management fees.
Alert Care Transaction
In September 1999 Holiday loaned us $4.0 million on terms providing for
interest at 9% per annum. In consideration of the loan, we sold to Holiday
38.9% of the shares of capital stock we owned in Alert Care Corporation for
our cost. In November 1999, pursuant to an offer by a joint venture controlled
by Toronto Dominion Bank, we sold all of our remaining shares of Alert Care
and Holiday sold all of its shares of Alert Care. The terms of this offer gave
the investors in Alert Care, including us and Holiday, the option of
continuing the investment in Alert Care or accepting a fixed cash price. Both
we and Holiday elected to sell the investment for the cash price. Holiday was
a noncontrolling minority investor in the purchasing joint venture. The loan
from Holiday was repaid in November 1999. As a result of these transactions,
Holiday recognized a gain on the sale of its shares of Alert Care of
approximately $365,000 and interest on the loan of approximately $46,000.
NorthStar Transaction
In October 1997, a group of institutional investors led by NorthStar Capital
Partners LLC, of which Mr. Hamamoto is a principal, purchased 25,000 shares of
Series A Convertible Exchangeable Redeemable Preferred Stock, representing
approximately 10% ownership of Emeritus, for $25 million. The Series A Stock
is entitled to a quarterly 9% dividend. Each share of Series A Preferred Stock
is convertible into that number of shares of common stock equal to $1,000, the
liquidation value of a share of Series A Preferred Stock, divided by the
conversion price of $18.20 per share. Currently the Series A Preferred Stock
is convertible into an aggregate of 1,373,626 shares of our common stock. The
Series A Preferred Stock is also exchangeable into convertible debt at our
option. The conversion price is subject to adjustment in the event of stock
dividends, stock subdivisions and combinations, and extraordinary
distributions. The Series A Preferred Stock has a mandatory redemption date of
October 24, 2004.
Pursuant to a shareholders agreement entered into in connection with this
investment, Emeritus and Mr. Baty are required to take all necessary action
to:
. elect one director selected by NorthStar;
. if NorthStar invests an additional $25 million in Emeritus, elect a
second additional director selected by NorthStar; and
. if the size of our board increases, elect additional directors so that
Northstar's representation shall not be less than one-seventh of the
entire board.
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These rights terminate in certain events relating to Northstar's sale of
capital stock or a change in control of NorthStar. All NorthStar transfers are
subject to our right of first refusal. In addition, if Mr. Baty sells shares
of common stock representing 50% or more of his ownership position, NorthStar
is entitled to participate in that sale on a pro rata basis. NorthStar has
agreed not to purchase any additional shares of our voting securities, from
now until 18 months after it ceases to own 5% of the outstanding common stock
on a fully diluted basis.
During 1999, we did not pay currently the 9% dividend on the Series A Stock
and such dividends accumulated under the terms of the Series A Stock. In
January 2000, we paid Northstar $2,250,000 and in April 2000 paid an
additional $350,000, which represented all dividends in arrears.
Other Transactions
In February 1998, we entered into four management agreements with XL
Management Company L.L.C., an affiliate of Holiday. Under these agreements, XL
Management provides management services relating to four of our newly
developed assisted living communities in Texas. The agreements provide for
initial terms of 30 months and management fees based on 6% of gross revenues,
payable monthly. XL Management earned fees of $316,000 under these agreements
in 1999.
In April 1998, we entered into a joint venture with Sanyo Electric Co. Ltd.,
of Osaka, Japan, with which Mr. Iue is affiliated, to provide assisted-living
services in Japan. The joint venture, Sanyo Emeritus Corporation, has been
formed to provide a residential-based healthcare alternative for Japan's
growing elderly population. Sanyo Emeritus was initially capitalized with
(Yen)50 million, or $384,000 (U.S.), with Emeritus and Sanyo each providing
half the funds. The joint venture's first assisted-living community in Japan
was opened in December 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this amendment
to the report to be signed on its behalf by the undersigned thereunto duly
authorized.
Dated: May 1, 2000 Emeritus Corporation (Registrant)
/s/ Daniel R. Baty
_____________________________________
Daniel R. Baty,
Chief Executive Officer and Chairman
of the Board
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, this amendment to the report has been signed
by the following persons in the capacities indicated below on May 1, 2000.
/s/ Daniel R. Baty
_____________________________________
Chairman of the Board and Chief
Executive Officer
/s/ Raymond R. Brandstrom
_____________________________________
Raymond R. Brandstrom,
Director and Acting Chief Financial
Officer
/s/ Patrick Carter
_____________________________________
Patrick Carter,
Director
_____________________________________
William E. Colson,
Director
/s/ David Hamamoto
_____________________________________
David Hamamoto,
Director
/s/ Motoharu Iue
_____________________________________
Motoharu Iue,
Director
_____________________________________
David W. Niemiec,
Director
_____________________________________
Charles P. Durkin,
Director
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