SCHEDULE 14A INFORMATION
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EMERITUS CORPORATION
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EMERITUS CORPORATION
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Notice of Annual Meeting of Shareholders
To Be Held September 27, 2001
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To the Shareholders of Emeritus Corporation:
The annual meeting of shareholders of Emeritus Corporation will be held at
the Columbia Winery, 14030 N.E. 145th Street, Woodinville, Washington 98072 on
Thursday, September 27, 2001, at 10:00 a.m., local time, and any adjournments
thereof, to consider and act upon the following matters:
1. To elect two directors into Class II of the Board of Directors.
2. To approve an amendment to increase the number of shares available for
issuance under the Emeritus Corporation Amended 1998 Employee Stock
Purchase Plan.
3. To ratify the appointment of KPMG LLP as our independent public
accountants for fiscal year 2001.
4. To transact such other business as may properly come before the
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on August 15, 2001, as
the record date for the determination of shareholders entitled to notice of,
and to vote at, the annual meeting and any adjournments or postponements
thereof. Shareholders are cordially invited to attend the annual meeting in
person.
By Order of the Board of Directors
/s/ Daniel R. Baty
Daniel R. Baty
Chairman and Chief Executive Officer
Seattle, Washington
August 17, 2001
EMERITUS CORPORATION
3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
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PROXY STATEMENT
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This proxy statement, which was first mailed to our shareholders on or about
August 30, 2001, is furnished to shareholders in connection with the
solicitation of proxies by the Board of Directors for the annual meeting of
shareholders to be held September 27, 2001, and any adjournments or
postponements of the annual meeting. You may revoke your proxy in writing at
any time before it is exercised by filing with our Secretary a written
revocation or a duly executed proxy bearing a later date. You may also revoke
your proxy by attending the annual meeting and voting in person. If the
enclosed form of proxy is properly executed and returned, it will be voted in
accordance with the instructions given, unless revoked.
As of August 15, 2001, the record date for the annual meeting, there were
10,180,626 shares of common stock, 25,000 shares of Series A Convertible
Redeemable Exchangeable Preferred Stock (the "Series A Stock"), and 30,609
shares of Series B Convertible Preferred Stock (the "Series B Stock")
outstanding. Holders of common stock are entitled to one vote for each share.
Holders of Series A Stock are entitled to 27.5 votes for each share, or an
aggregate of 687,500 votes. Holders of Series B Stock are entitled to
138.5 votes per share, or an aggregate of 4,239,474 votes. Therefore the total
number of votes entitled to be cast at the annual meeting is 15,107,600 votes.
Holders of common stock, Series A Stock and Series B Stock representing a
majority of total votes entitled to be cast, present in person or represented
by proxy, will constitute a quorum.
Directors will be elected by a plurality of the votes present by proxy or in
person at the annual meeting. Shareholders are not entitled to cumulate votes
in the election of directors. Abstentions from voting on the election of
directors will have no impact on the outcome of the election since no vote will
have been cast in favor of a nominee. The proposal to amend the employee stock
purchase plan and the proposal to ratify the appointment of the accountants
will be approved if the votes cast in favor of each proposal exceed the votes
cast against each proposal. Abstentions from voting and broker nonvotes on
these two proposals will have no impact on the outcome since no vote will have
been cast for or against the proposals. There can be no broker nonvotes on the
election of the directors or the approval of the proposals to amend the
employee stock purchase plan and to ratify the appointment of the accountants
since brokers who hold shares for the accounts of their clients have
discretionary authority to vote such shares with respect to these matters.
We will bear the cost of soliciting proxies. Certain of our directors,
officers, and regular employees, without additional compensation, will solicit
proxies personally or by telephone or telefax. In addition, we may reimburse
brokerage firms and other persons representing beneficial owners of shares of
common stock for their expenses in forwarding solicitation materials to such
beneficial owners.
As of the date hereof, we are not aware of any matters to be voted upon at
the annual meeting other than as stated in the accompanying Notice of Annual
Meeting of Shareholders. The accompanying proxy gives discretionary authority
to the persons named therein to vote the shares in their best judgment if any
other matters are properly brought before the annual meeting.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. One class is elected
each year by the shareholders. At the annual meeting, two directors will be
elected to serve for a term of three years, expiring on the date of the annual
meeting of shareholders in 2004. All of the nominees are currently directors.
If elected, the nominees will continue in office until a successor has been
elected or until resignation or removal in the manner provided
by our Bylaws. The names of directors nominated for the terms, as well as the
directors whose terms will continue after the annual meeting, are listed below.
Pursuant to a shareholders' agreement dated as of October 24, 1997, Emeritus
and Daniel R. Baty have agreed to take all necessary action to elect a number
of directors selected by NorthStar Capital Partners LLC that would constitute
at least one-seventh of the entire Board. Mr. Hamamoto was nominated under the
arrangement. Pursuant to another shareholders' agreement dated as of December
10, 1999, Emeritus and Mr. Baty have agreed to take all necessary action to
elect a number of directors selected by Saratoga Partners IV, L.P. that would
constitute not less than the percentage of the entire Board that would equal
Saratoga's percentage ownership of voting securities of Emeritus. Saratoga is
entitled to select at least two directors. Messrs. Niemiec and Durkin were
nominated under this arrangement.
Nominees for Election
Class II Directors (terms to expire in 2004)
Raymond R. Brandstrom (age 48), one of Emeritus's founders, has served as a
director since its inception in 1993 and as Vice Chairman of the Board since
March 1999. From 1993 to March 1999, Mr. Brandstrom also served as Emeritus's
President and Chief Operating Officer. In March 2000, Mr. Brandstrom was
elected Vice President of Finance, Chief Financial Officer and Secretary of
Emeritus. From May 1992 to October 1996, Mr. Brandstrom served as President of
Columbia Pacific Group, Inc. and Columbia Pacific Management, Inc., both of
which companies are wholly owned by Mr. Baty and are engaged in developing
independent living facilities and providing consulting services for that
market. From May 1992 to May 1997, Mr. Brandstrom served as Vice President and
Treasurer of Columbia Winery, a company affiliated with Mr. Baty that is
engaged in the production and sale of table wines.
David T. Hamamoto (age 41) 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.
Continuing Directors
Class I Directors (terms to expire in 2003)
Patrick Carter (age 54) has served as a director of Emeritus since November
1995. From November 1985 until April 1999, Mr. Carter was Chief Executive
Officer and Managing Director of Westminster Health Care Holdings, Plc., a
publicly held operator of skilled-nursing facilities in the United Kingdom.
Motoharu Iue (age 65) has served as a director of Emeritus since April 1995.
Mr. Iue served as Chairman of the Board of Sanyo North America Corporation
("Sanyo NA"), a consumer electronics company, and President of Three Oceans,
Inc. ("Three Oceans") from October 1996 until March 1999. Mr. Iue served as
President of Sanyo NA and as Chairman of the Board of Three Oceans from 1992
until March 1999, and also served as Chief Executive Officer of both of these
companies. He has been a director of Sanyo NA since 1977 and currently serves
on the board of both Sanyo Electric Co., Ltd. and Three Oceans. Three Oceans,
Inc. is a 3.8% shareholder of Emeritus. Mr. Iue also serves on the board of
All-American Sportpark, Inc., a public company.
David W. Niemiec (age 51) 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. beginning in 1974
and served as Vice
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Chairman from 1991 through September 1997, when the firm was acquired by Swiss
Bank Corporation. From September 1997 to February 1998, he was Managing
Director of the successor firm, SBC Warburg Dillon Read, Inc.
Class III Directors (terms to expire 2002)
Daniel R. Baty (age 57), one of Emeritus's founders, has served as its Chief
Executive Officer and as a director since its inception in 1993 and became
Chairman of the Board in April 1995. Mr. Baty also has served as the Chairman
of the Board of Holiday Retirement Corporation since 1987 and served as its
Chief Executive Officer from 1991 through September 1997. Since 1984, Mr. Baty
has also served as Chairman of the Board of Columbia Pacific Group, Inc. and,
since 1986, as Chairman of the Board of Columbia Pacific Management, Inc.
Charles P. Durkin, Jr. (age 63) has served as a director of Emeritus since
December 30, 1999. Mr. Durkin is one of the founders of Saratoga Partners, a
private equity investment firm. Since Saratoga's formation as an independent
entity in September 1998, he has been a Managing Director of Saratoga
Management Company LLC, the manager of the Saratoga Partners funds. Prior to
that, from September 1997, he was a Managing Director of SBC Warburg Dillon
Read, Inc., the successor entity to Dillon, Read & Co., where Mr. Durkin
started his investment banking career in 1966 and became a Managing Director in
1974.
Information on Committees of the Board of Directors and Meetings
The Board of Directors has established a compensation committee and an audit
committee. We have no nominating committee and the full Board selects nominees
for the election of directors.
Our compensation committee establishes salaries, incentives, and other forms
of compensation for directors, officers, and our other key employees,
administers the 1995 Stock Incentive Compensation Plan, and recommends policies
relating to benefit plans. Our compensation committee currently consists of
Messrs. Carter (Chairman), Niemiec and Brandstrom and it held two meetings
during 2000.
Our audit committee reviews our accounting practices, internal accounting
controls, and financial results and oversees the engagement of our independent
auditors. Our audit committee currently consists of Messrs. Carter, Niemiec and
Hamamoto (Chairman), and it held one meeting during 2000.
During 2000, there were five meetings of the Board of Directors. All board
members attended at least 75% of the meetings of the Board of Directors and
each committee on which he was a member, except Mr. Iue, who attended one
meeting of the Board of Directors.
Audit Committee Report
Audit Committee members Messrs. Hamamoto and Carter are independent as that
term is defined in Section 121(A) of the American Stock Exchange's listing
standards. Mr. Niemiec may not be considered independent under Section 121(A)
because Saratoga Management Company LLC, of which Mr. Niemiec is a principal
and is the beneficial owner of approximately 34% of our voting securities.
However, the Board believes that this circumstance does not impair Mr.
Niemiec's independence and that his presence on the Audit Committee is in the
best interests of the shareholders. On May 30, 2000, the Board of Directors
adopted a written Audit Committee Charter, a copy of which is provided herewith
as Appendix A. The Audit Committee has reviewed and discussed the audited
financial statements for fiscal 2000 with our management. Additionally, the
Audit Committee has discussed with the independent accountants the matters
required to be discussed by Statement on Auditing Standards No. 61. The Audit
Committee has received the written disclosures and the letter from the
independent accountants required by Independence Standards Board Standard No. 1
and has discussed with the independent accountants the independent accountants'
independence. Based on the discussions and reviews noted above, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in our Annual Report on Form 10-K for fiscal year 2000.
Audit Committee
David T. Hamamoto (Chairman)
Patrick Carter
David W. Niemiec
3
Director Compensation
We currently pay our nonemployee directors $500 for each board meeting or
committee meeting they attend and reimburse them for all reasonable expenses
incurred in connection with their attendance. In September 1995, we established
the Stock Option Plan for Nonemployee Directors. Under the plan, nonemployee
directors receive options to purchase 2,500 shares of our common stock at the
time of their initial election or appointment. In addition, each nonemployee
director automatically receives an option to purchase 2,000 shares of our
common stock immediately following each year's annual meeting of shareholders.
All options granted under the plan fully vest on the date of the annual
shareholders' meeting that follows the date of grant, and expire 10 years after
the date of grant. The exercise price for these options is the fair market
value of our common stock on the grant date.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents certain information with respect to compensation
we paid in the fiscal years ended December 31, 1998, 1999, and 2000, to our
Chief Executive Officer and to our other four most highly compensated officers
as of December 31, 2000:
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
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Securities All Other
Name and Principal Other Annual Underlying Compensation
Position Year Salary($) Bonus($)(1) Compensation($)(2) Options(#)(3)(4) ($)(5)
------------------ ---- --------- ----------- ------------------ ---------------- ------------
Daniel R. Baty(6)....... 2000 -- -- -- -- --
Chairman and Chief 1999 -- -- 1,560 40,000 --
Executive Officer 1998 -- -- 264 204,000 --
Sarah J. Curtis(7)...... 2000 165,000 10,000 4,250 -- 10,000
Vice President, Sales 1999 158,885 10,000 1,560 20,000 --
and Eastern Division 1998 141,656 22,500 1,696 52,000 --
Suzette McCanless(8).... 2000 165,816 10,000 6,000 -- --
Vice President, 1999 134,929 10,000 6,000 20,000 --
Operations 1998 115,145 25,000 6,000 43,500 --
--Eastern Division
Gary S. Becker(8)....... 2000 164,664 15,000 6,000 -- --
Senior Vice President, 1999 134,846 15,000 5,750 20,000 --
Operations 1998 115,812 18,000 6,000 43,500 --
Russell G. Kubik(9)..... 2000 152,432 10,000 6,000 -- --
Vice President, 1999 122,619 15,000 -- 20,000 --
Operations 1998 104,500 -- -- 34,000 --
--Central 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 second quarter of
the following year.
(2) Consists of amounts paid for parking fees and health club memberships.
(3) No options were granted in 2000.
(4) Subsequent to December 31, 2000, Messrs. Baty, Becker and Kubik and Ms.
McCanless accepted the Company's offer to exchange their outstanding stock
options for options to be granted on or about December 10, 2001, to
purchase an equivalent number of shares at an exercise price equal to the
higher of the fair market value of the Company's stock on the date of grant
or $1.50. As a result of this exchange, the options listed above (except
those held by Ms. Curtis, who resigned on December 31, 2000) were
cancelled. The new options will vest and become exercisable 2 1/2 years
from the date of grant under the following schedule: 1/3 will vest six
months after the date of grant, 1/3 will vest 18 months after the date of
grant and 1/3 will vest 30 months after the date of grant. (See
"COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION--Stock Options.")
(5) All Other Compensation represents reimbursement for health-related leave
expenses.
(6) 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 canceled.
(7) 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 canceled. Ms.
Curtis resigned on December 31, 2000.
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(8) 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 canceled.
(9) Of the 34,000 options granted in 1998, 19,000 were granted in an exchange
program pursuant to which 19,000 options granted in 1997 were canceled.
Option Grants in Last Fiscal Year
The Compensation Committee did not grant options to the executive officers
during the fiscal year ended December 31, 2000.
Fiscal Year-End Option Values
None of the following executive officers exercised options during the fiscal
year ended December 31, 2000. The following table presents certain information
regarding options held as of December 31, 2000, 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, 2000(#)(1) December 31, 2000($)(2)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Daniel R. Baty.............. 168,400 75,600 -- --
Suzette McCanless........... 33,767 29,733 -- --
Sarah J. Curtis............. 39,200 32,800 -- --
Gary S. Becker.............. 33,767 29,733 -- --
Russell G. Kubik............ 28,067 25,933 -- --
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(1) Subsequent to December 31, 2000, Messrs. Baty, Becker and Kubik and Ms.
McCanless accepted the Company's offer to exchange their outstanding stock
options for options to be granted on or about December 10, 2001, to
purchase an equivalent number of shares at an exercise price equal to the
higher of the fair market value of the Company's stock on the date of grant
or $1.50. As a result of this exchange, the options listed above (except
those held by Ms. Curtis, who resigned on December 31, 2000) were
cancelled. The new options will vest and become exercisable 2 1/2 years
from the date of grant under the following schedule: 1/3 will vest six
months after the date of grant, 1/3 will vest 18 months after the date of
grant and 1/3 will vest 30 months after the date of grant. (See
"COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION--Stock Options.")
(2) None of the options to purchase an aggregate of 497,000 shares held on a
combined basis by the executive officers named above were in-the-money at
the fiscal year-end based on the $1.44 closing price of the common stock on
the American Stock Exchange on December 29, 2000, the last day of active
trading for the year 2000.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee of the Board consists of two nonemployee directors
and our Vice President of Finance. The committee is responsible for
establishing and administering our executive compensation programs. Our
objective is to pay competitively in order to attract 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 upon the recommendations of the
Chief Executive Officer in matters related to the individual performance of the
other executive officers because the committee believes that the Chief
Executive Officer is the most qualified to make this assessment. Base salaries
for executive officers generally are designed to be less than those paid by
competitors in the assisted living industry. These lower base salaries are
combined with stock option grants so that a significant portion of the
executives' pay is tied to performance of our stock.
Base Salaries. In 2000, 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 2000, we granted stock options to a total of two employees in
recognition of their dedication, commitment, and hard work. After thorough
consideration, the committee concluded that no options would be granted to the
executive officers during 2000.
In May 2001, Emeritus offered an exchange of employee stock options under the
Emeritus Amended and Restated 1995 Stock Incentive Plan (the "Stock Incentive
Plan"). Employees were given the opportunity to tender either all or none of
their options in exchange for the same number of new options to be granted
under the Stock Incentive Plan. Approximately 99% of the shares underlying the
eligible options were tendered and accepted for exchange, including all the
options held by executive officers. The new options will be granted on or about
December 10, 2001, the first business day that is six months and one day after
the date Emeritus accepted the tendered options for exchange. The new options
will have an exercise price equal to the higher of the fair market value of
Emeritus common stock on the date of grant or $1.50 and will vest 2 1/2 years
from the date the new options are granted according to the following schedule:
33 1/3 percent will vest six months after the date of grant; 33 1/3 percent
will vest 18 months after the date of grant; and 33 1/3 percent will vest 30
months after the date of grant. In all other respects, the terms of the new
options will be identical to the terms of the tendered options.
The Committee approved the exchange offer because it believes that providing
employees, including executive officers, with the benefit of owning options
that increase in value over time fosters employee loyalty and creates
performance incentives that, in turn, maximize shareholder value. Because the
outstanding options under the Stock Incentive Plan had exercise prices
significantly higher than the current market price of Emeritus common stock,
the Committee found that an exchange offer was an appropriate mechanism to
retain employees and advance the Committee's goal of increasing shareholder
value.
Annual Incentives. To date, the committee has not established a regular
annual incentive or bonus plan for executive officers. Four of our named
executives were awarded cash bonuses in April 2001 based on the committee's
assessment of their individual performances in 2000.
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Our Chief Executive Officer, Mr. Baty, a founder of Emeritus, has a
significant equity position. As of August 15, 2001, Mr. Baty owned shares
(directly and indirectly) and exercisable options representing approximately
39% of our common stock. Because of his significant equity stake in Emeritus,
Mr. Baty receives no base salary or bonus. This compensation pattern was
established prior to our initial public offering and the committee has
continued it, recognizing that the principal compensation of Mr. Baty will be
the inherent value of his equity stake.
Section 162(m) of the Internal Revenue Code includes potential limitations on
the deductibility for federal income tax purposes of compensation in excess of
$1 million paid or accrued with respect to any of the executive officers whose
compensation is required to be reported in our proxy statement. Certain
performance-based compensation that has been approved by shareholders is not
subject to the deduction limit. Our stock option plans are structured to
qualify options as performance-based compensation under Section 162(m). For
2001, the committee does not expect that there will be any nondeductible
compensation.
Compensation Committee
Patrick Carter (Chairman)
David W. Niemiec
Raymond R. Brandstrom
8
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return on shares of our
common stock with the cumulative total return of the AMEX Market Value Index
and a peer group selected by us for the period beginning on December 31, 1995,
the end of the fiscal year following our first day of trading for our common
stock, and ending on December 31, 2000, the end of our last fiscal year.
COMPARISON OF 6 YEAR CUMULATIVE TOTAL RETURN* AMONG
EMERITUS CORPORATION, THE AMEX MARKET VALUE INDEX AND A PEER GROUP
[STOCK PERFORMANCE GRAPH]
* $100 INVESTED ON 12/31/95 IN STOCK OR INDEX--INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.
Emeritus New Peer AMEX Old Peer
Corporation Group Market Group
----------- -------- ------ --------
December 31, 1995..................... 100.00 100.00 100.00 100.00
December 31, 1996..................... 116.13 104.03 105.52 104.03
December 31, 1997..................... 109.68 183.28 126.97 183.28
December 31, 1998..................... 90.86 184.94 125.25 181.93
December 31, 1999..................... 55.91 65.58 156.15 56.64
December 31, 2000..................... 12.37 53.17 154.23 38.68
Assumes $100 invested in each share of the common stock, the AMEX Market
Value Index and the peer group, with all dividends reinvested. Stock price
performance shown above for the common stock is historical and not necessarily
indicative of future price performance.
Given the relative volatility of the assisted living industry, we revise our
peer group from time to time to include companies that have entered the
assisted living market. As the industry begins to mature and consolidate, we
remove certain companies previously included in our peer group as they are
acquired or as their focus of services shifts away from the assisted living
residences.
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The new peer group consists of the following six companies: Alterra
Healthcare Corporation, formerly denoted as Alternative Living Services, Inc.;
American Retirement Corporation; ARV Assisted Living, Inc.; Assisted Living
Concepts, Inc.; Capital Senior Living; and Sunrise Assisted Living, Inc.
The old peer group consisted of the following eight companies primarily
involved in the provision of assisted living services: Alterra Healthcare
Corporation; American Retirement Corporation; ARV Assisted Living, Inc.;
Assisted Living Concepts, Inc.; Brookdale Living Communities; Capital Senior
Living; CareMatrix Corporation; and Sunrise Assisted Living, Inc. We changed
our peer group from December 31, 1999, to December 31, 2000, as follows: we
eliminated Brookdale Living and CareMatrix Corp. due to changes in the status
of their public holdings such that they are no longer comparable to Emeritus.
CHANGE OF CONTROL ARRANGEMENTS
Option Plan. In the event of (a) the merger or consolidation of Emeritus in
which it is not the surviving corporation or pursuant to which shares of common
stock are converted into cash, securities, or other property (other than a
merger in which holders of common stock immediately before the merger have the
same proportionate ownership of the capital stock of the surviving corporation
immediately after the merger); (b) the sale, lease, exchange, or other transfer
of all, or substantially all, of our assets (other than a transfer to a
majority-owned subsidiary); or (c) the approval by the holders of common stock
of any plan or proposal for our liquidation or dissolution, each outstanding
option under our stock option plan will automatically accelerate so that it
will become 100% vested and exercisable immediately before such transaction,
except to the extent that options are assumed by the successor corporation. The
vesting of such assumed options accelerates at the time an optionee's
employment is terminated by us for reasons other than "cause" or by the
optionee for "good reason" following a change of control.
CERTAIN TRANSACTIONS
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 $292.2 million. Of the 46 communities involved,
43 had been, or were proposed to be, leased to us by Meditrust Company LLC
under sale/leaseback financing arrangements and we had owned three. The first
purchase, consisting of 25 communities, which we will call the December
communities, was completed in December 1998. The second purchase, consisting of
21 communities, which we will call the March communities, was completed in
March 1999.
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 December investor group. A group led by
Holiday Retirement Corporation, of which Mr. Baty is the Chairman and a
principal shareholder, provided approximately $5.1 million of the equity. This
group included Holiday as to a 40% interest, Columbia Pacific Master Fund '98
as to a 32% interest, and a former board member 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 March 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.
10
as to a 32% interest, and a former board member 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 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 groups 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 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 the March operating
communities and individually for the March communities under development. We
have agreed to reimburse the December investor 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 16 operating communities acquired in
the March investment. In 1999, the December communities incurred $6.4 million
of operating cash losses, which included $1.9 million of management fees that
we earned. Our funding obligation was $1.9 million, net of the $4.5 million of
operating cash losses funded by the December investor group. In 2000, the
December communities incurred $4.9 million in cash operating losses, which
represented our funding obligation and included $2.1 million in management
fees that we earned. In 1999, the March communities did not generate cash
operating losses in excess of the amounts funded by the March investor group,
therefore no funding was required by us for the March development communities,
and we earned $1.5 million in combined management fees. In 2000, the March
development communities incurred aggregate cash operating losses of $1.6
million, including $360,000 in management fees that we earned. The other March
communities are not subject to a deficit-funding obligation and for those we
earned $1.9 million in management fees.
Although the funding obligations described above include management fees
earned by us under the management agreements, we do not recognize these
management fees as revenue in our financial statements to the extent that we
are funding the cash operating losses that include them. Correspondingly, we
recognize the funding obligations under the agreements, less the applicable
management fees, as an expense in our financial statements under the category
"Other, net."
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, for which we must give notice of our intent to
exercise by December 12, 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 to give notice of our intent
to exercise the right of first refusal by December 12, 2001, to repurchase 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 that 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
11
. 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 December 12, 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 that
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.
During 2000, the December communities failed to comply with certain debt
service coverage tests required under the related mortgage loan for $138
million. This noncompliance resulted in a restructuring of the mortgage debt
effective March 22, 2001. As a part of the restructuring, the existing
variable interest rate (LIBOR* plus 3.25%) was increased by 1.25% on $40
million of the debt, which will increase the deficit funding obligation for
which we may be responsible under our management agreement with the December
investor group. The restructuring also provided for the pledge of five of the
March communities as additional collateral to secure the mortgage debt, which
could adversely affect our ability to purchase such communities under our
management agreement with the March investor group. Other features of the
restructuring include two nine-month extensions of the mortgage loan,
exercisable by the December investor group under certain circumstances;
modification of the debt service coverage tests; modification of certain
liquidity requirements that we are required to meet; and payment of certain
restructuring and extension fees and expenses. As a part of the restructuring,
Mr. Baty agreed to fund a partial repayment of the mortgage debt of $1.25
million during the first quarter of 2001, with additional $250,000 reductions
each quarter thereafter, and agreed to pledge additional collateral to secure
his obligation to purchase communities under certain circumstances as
described above.
In connection with the restructuring, our management agreement with the
December investor group was also amended. Under the amendment, we have the
option to extend the management agreement (including the option to purchase
the December communities) for two nine-month terms, provided that the mortgage
debt is extended as contemplated in the restructuring and subject to certain
performance-based rights of the December investor group to terminate the
agreement early. Notice of our intent to exercise the option to purchase the
December communities, which originally had to be given prior to June 30, 2001,
may now be given at any time prior to December 12, 2001 (or during the first
and second extension terms, September 12, 2002, and June 1, 2003,
respectively). During the extension terms, we are entitled to a base
management fee of 3% of revenues, payable out of cash flow, and an additional
management fee of 4% of revenues, payable out of 50% of cash flow. We continue
to be obligated to fund cash operating deficits if any, during the extension
terms. Under the amended management agreement, transaction fees and expenses,
including the restructuring fee and extension
- --------
*LIBOR is the London Interbank Offering Rate.
12
fees payable to the mortgage lender, are funded by Mr. Baty, subject to
reimbursement by us as to 25% of such fees and expenses out of 50% of
management fees received with respect to the December communities. In addition,
if we exercise our options to purchase either the December communities or the
March communities, 25% of such fees and expenses are added to the option price
and used to reimburse Mr. Baty.
In connection with the restructuring, our management agreement with the March
investor group was also amended to provide that our notice to exercise the
option to purchase the March communities, which originally had to be given
prior to June 30, 2001, may now be given at any time prior to December 12,
2001. In addition, if we exercise our option to purchase the March communities
and the five March communities that serve as additional collateral for the
December communities' mortgage debt are not released, then the option price on
the remaining March communities is reduced by the amount that the value of the
five communities, determined in accordance with a formula, exceeds the option
price on such communities, if any.
Baty Transactions
Columbia House is a Washington limited partnership in which Mr. Baty
indirectly controls the general partner and holds an indirect 60% interest. It
develops, owns and leases low-income senior housing projects. We currently
manage 10 communities owned by Columbia House. The agreements have terms
ranging from two to four years, with options to renew, and provide for
management fees ranging from 4% to 6% of gross operating revenues, payable
monthly for management agreements and fixed fees payable monthly for
administrative agreements, as well as bonuses. We earned fees of $789,000 in
2000 under these agreements. Columbia House owed us $1.5 million as of December
31, 2000, representing advances made to various Columbia House communities and
outstanding management and administrative fees. These advances did not formerly
bear interest, but, commencing January 1, 2001, they bear interest at LIBOR
plus 3%. At June 30, 2001, these amounts had been paid current.
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.
In April 1998, we assigned our economic interest in a 172-unit assisted
living community located in Fairfield, California, to a limited liability
company for $2.8 million in cash. Our economic interest consisted of a 67%
interest in the profits, losses, and distributions of an operating limited
liability company that owns and operates the community, the right to receive
payments of principal and interest under a $2.4 million promissory note
evidencing a loan by us to the operating company, and the obligation to make
additional capital contributions under the agreement establishing the operating
company. The limited liability company to which we assigned our economic
interest is comprised of a third party investor as to a 25% interest and three
investor pools with interests of 14.1%, 35.9% and 25%. Mr. Baty's family
partnership is the 18.75% general partner in the first two pools and the third
pool includes Mr. Baty individually as its 18.75% general partner. We continue
to manage the operations of the community pursuant to a management agreement
and to manage the affairs of the operating limited liability company. We
receive fees for these management activities equal to 5% of gross revenues of
the community. In January 2000, we repurchased 25% of our original interest in
the community (16.7% of the operating limited liability company) for a total of
$791,000. During 2000, we received $157,000 in management fees. At December 31,
2000, the limited liability company operating the community owed us $463,000,
representing funds advanced as working capital. These advances did not formerly
bear interest, but, commencing January 1, 2001, they bear interest at LIBOR
plus 3%.
13
In June 1998, we sold a 295-unit independent and assisted living facility
located in Texas to a partnership consisting of Columbia Pacific Master Fund,
as to a 99% interest and to Mr. Baty personally, as to a 1% limited partnership
interest. The purchase price for the facility was $6.8 million plus the
assumption of a first mortgage of $14.8 million, which was guaranteed by Mr.
Baty in connection with the transaction, and a release of Emeritus from the
mortgage obligations. The purchase price was paid as follows:
. cash in the amount of $4.5 million;
. a promissory note in the amount of $1.5 million, of which $1.0 million
was repaid in 1999, bearing interest at 9% per annum and maturing in 10
years; and
. an $800,000 promissory note bearing interest at 9% per annum, due on
demand.
In addition, in 1999, we loaned the partnership $450,000 for certain repairs,
which is evidenced by a demand promissory note bearing interest at 9% per
annum. We and the partnership have entered into a management agreement for a
five-year term, with automatic two-year extensions, with management fees of 6%
of gross revenue or $10,000 per month, whichever is greater. We have the right
of first refusal in the event of the sale of the facility. For 2000, we
received $271,000 in management fees. At December 31, 2000, the partnership
owed us $1.051 million, representing advances for working capital. These
advances did not formerly bear interest, but, commencing January 1, 2001, they
bear interest at LIBOR plus 3%. As of June 30, 2001, such advances were repaid
in full. The balance of the purchase notes of $500,000 and $800,000, and the
repair note of $450,000, with accrued interest of $439,000, remained
outstanding as of December 31, 2000, and continue to remain outstanding.
In June 1998, we sold a 30% general partnership interest in Cooper George
Partners Limited Partnership, a limited partnership in which we formerly held a
50% general partnership interest, to Columbia Pacific Master Fund.
Concurrently, Columbia Pacific Master Fund purchased a 19% limited partnership
interest from an independent investor who formerly held a 50% limited
partnership interest. Our remaining 20% interest was converted to a limited
partnership interest. Cooper George Partners owns a 141-unit assisted living
community in Washington. The purchase price for the partnership interest was
$1.05 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 2000, we earned $160,000 in management fees. At
December 31, 2000, Cooper George Partners owed us $449,000, representing
advances for working capital. These advances did not formerly bear interest,
but, commencing January 1, 2001, they bear interest at LIBOR plus 3%.
During 1999, we began to provide management services to four joint ventures
that opened new assisted living communities. Our management agreements have
terms ranging from two to four years, with options to renew, and provide for
management fees ranging from 4% to 6% of gross operating revenues, payable
monthly. Entities controlled by Mr. Baty held interests in the joint ventures
ranging from 50% to 62%. During 2000, we earned management fees of $346,000
under these management agreements. At December 31, 2000, the joint ventures
owed us, collectively, $671,000, representing advances for working capital.
These advances did not formerly bear interest but, commencing January 1, 2001,
they bear interest at LIBOR plus 3%.
During 2000, we began to provide management services to four newly acquired
assisted living communities owned by Mr. Baty, and continued management
services on one other community. These management agreements have terms ranging
from two to five years, with renewal options, and provide management fees
ranging from a flat fee of $5,000 per month up to either 6% or 7% of gross
operating revenues, payable monthly, depending on the financial performance of
the communities. In 2000, we earned
14
management fees of $596,000 under these management agreements. At December 31,
2000, the communities owed us collectively $213,000, representing advances for
working capital. These advances did not formerly bear interest but, commencing
January 1, 2001, they bear interest at LIBOR plus 3%.
On March 22, 2001, we entered into an agreement with Mr. Baty, which governs
the repayment of amounts owed by the foregoing entities in which Mr. Baty has a
financial or other interest. Such amounts are to be repaid as soon as possible
except for the term notes, which are to be paid in accordance with their terms.
Mr. Baty has guaranteed the repayment and a portion of the outstanding balances
are secured by a pledge of the membership interest of a limited liability
company that owns an assisted living facility. The agreement also establishes
future operating, accounting, and payment procedures, including interest on
average outstanding balances at LIBOR plus 3%. Under the agreement, the related
entities paid $3.0 million of the outstanding balances on March 27, 2001. As of
June 30, 2001, the aggregate of such outstanding balances (excluding the notes)
was $1.7 million.
Saratoga Transactions
On December 10, 1999, we entered into an agreement to sell 40,000 shares of
our Series B Preferred Stock to Saratoga Partners IV, L.P. and its related
investors ("Saratoga") for a purchase price of $1,000 per share. On December
30, 1999, we completed the sale of 30,000 shares of Series B Stock, and we
agreed to complete the sale of the remaining 10,000 shares during the first
quarter of 2000. Messrs. Niemiec and Durkin, two of our directors, are
principals of Saratoga.
Our net proceeds from the sale of all 40,000 shares of the Series B Stock
were to be approximately $38.6 million, after fees and expenses of the
transaction estimated at $1.4 million. The purchase agreement and related
documents provided that we would use $23.0 million to $26.8 million of these
proceeds to purchase certain assisted living communities by June 30, 2000. If
we did not do so, such proceeds were to be placed in a separate bank account,
the disbursement of which would be subject to Saratoga's prior consent. Under a
modification letter agreement dated May 15, 2000, we changed our agreements
with Saratoga to (i) cancel the sale of the remaining 10,000 shares of Series B
Stock, (ii) remove all restrictions and requirements relating to the use of
proceeds received from the sale of the original 30,000 shares and (iii) on or
before August 8, 2000, issue to Saratoga a seven-year warrant to purchase one
million shares of our common stock at an exercise price of $4.30 per share
(with such shares approved for listing on the American Stock Exchange) or, in
the alternative, to make a cash payment to Saratoga. In August 2000, we issued
the warrant to Saratoga.
The holders of the Series B Stock are entitled to receive quarterly dividends
payable in a combination of cash and additional shares of Series B Stock. From
issuance to January 1, 2004, the dividend rate will be 6% of the stated value
of $1,000, of which 2% is payable in cash and 4% is payable in Series B Stock
at the rate of one share of Series B Stock for every $1,000 of dividend. After
January 1, 2004, the dividend rate will be 7%, of which 3% is payable in cash
and 4% is payable in Series B Stock. Dividends accumulate, whether or not
declared or paid. Prior to January 1, 2007, however, if the cash portion of the
dividend is not paid, the cumulating cash portion of the dividend will increase
to 7% 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. 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. For the year ended December 31, 2000, the Company paid two quarterly
dividends consisting of $305,000 of cash dividends and issued 609 shares of
Series B Stock. Additionally, there are accumulated cash dividends for two
quarters of $1.309 million, including one quarter accrued at the accelerated
default rate.
The holders of the Series B Stock have the right at any time to convert each
share of Series B Stock into a number of shares of common stock equal to the
stated value of $1,000 divided by the conversion price. The conversion price is
currently $7.22 per share, subject to adjustment in certain events, including
an adjustment pursuant to a weighted average formula if we issue additional
shares of common stock, or securities convertible
15
into or exercisable for common stock, at a price less than the then current
conversion price. The number of shares issuable on exercise of the warrant and
the related exercise price is subject to similar adjustments.
After January 10, 2003, we can redeem all, but not less than all, of the
Series B Stock at $1,000 per share, plus unpaid dividends, if the closing price
of the common stock on the American Stock Exchange is at least 175% of the then
conversion price for 30 consecutive trading days ending not more than 10 days
prior to the date we notify the holders of the redemption. If there is a change
in control of Emeritus, each holder of Series B Stock has the right to require
us to purchase all or a portion of the Series B Stock owned by such holder for
the stated value of $1,000 per share. If we dissolve, liquidate, or wind up our
affairs, the holders of Series B Stock are entitled to receive, before any
payment or distribution is made to the holders of common stock or any other
class of preferred stock ranking junior to the Series B Stock, out of our
assets available for distribution, the stated value of $1,000 per share and all
accrued and unpaid dividends to and including the date of payment to the
holder. The liquidation rights of the holders of Series B Stock are subject to
the prior rights of the holders of Series A Stock.
Each share of Series B Stock is entitled to a number of votes equal to the
number of shares of common stock into which it is convertible. Except as
required by law or as described below, the Series B Stock votes with the common
stock and Series A Stock as a single voting group.
We may not amend or alter the rights and preferences of the Series B Stock so
as to adversely affect the Series B Stock without the consent of the holders of
a majority of the outstanding shares of Series B Stock. In addition, we may not
increase the number of authorized shares of preferred stock or create another
series of preferred stock ranking prior to or pari passu with the Series B
Stock without the consent of the holders of at least 75% of the outstanding
Series B Stock.
Under a shareholders' agreement, Saratoga is entitled to board representation
at a percentage of the entire Board of Directors, rounded up to the nearest
whole director, that is represented by the voting power of the Series B Stock
owned by Saratoga and its related investors. The shareholders' agreement also
provides for a minimum of two Saratoga directors. Saratoga is currently
entitled to designate three of seven members of the Board, although it has
advised us that it will designate only two at this time. Saratoga's right to
designate directors terminates if Saratoga has sold more than 50% of its
initial investment and its remaining shares represent less than 5% of the
outstanding shares of common stock on a fully diluted basis or it is unable to
exercise independent control over its shares.
Under the Designation of Shareholder Rights, included in the shareholders'
agreement, whenever the cash dividends have not been paid for six consecutive
quarters, Saratoga may designate one director in addition to the other
directors that it is entitled to designate under the shareholders' agreement.
The shareholders' agreement provides that neither Saratoga nor Mr. Baty is
permitted to purchase voting securities in excess of a defined limit. That
limit for Saratoga and its affiliates is 110% of the number of shares of common
stock (assuming conversion of the Series B Stock) owned by Saratoga and its
related investors immediately after the completion of the financing, plus the
Series B Stock (or underlying common stock) issuable as dividends on the Series
B Stock. That limit for Baty is the greater of 110% of the shares of common
stock owned by Baty as of December 10, 1999, or 100% of the Saratoga ownership
described in the preceding sentence. These restrictions will terminate 18
months after the date on which Saratoga and its related investors cease to hold
securities representing 5% of the outstanding shares of common stock on a fully
diluted basis.
The shareholders' agreement also provides that if Mr. Baty contemplates
selling 30% or more of the common stock he owns, Saratoga and its related
investors would have the right to participate in the sale on a proportionate
basis.
16
Pursuant to a registration rights agreement, Saratoga and its related
investors have the right to two demand registrations, one of which may be a
shelf registration effective for one year, and unlimited piggyback
registrations, subject to marketing restrictions imposed by underwriters.
Pursuant to an investment agreement, commencing January 1, 2007 (a) the
holders of the Series B Stock have the right to elect a number of directors
(together with other directors selected pursuant to the Designation of
Shareholder Rights included in the shareholders' agreement) that would be one
director less than a majority of the Board and (b) we will retain Saratoga
Management Company LLC to provide management and advisory services to evaluate
our strategy relating to shareholder value, real estate and corporate
financing, and other strategic initiatives, at an annual fee of $3.2 million.
These rights and obligations will terminate at such time that the Series B
Stock is converted or redeemed.
NorthStar Transaction
In October 1997, a group of institutional investors led by NorthStar Capital
Partners LLC, of which Mr. Hamamoto is a principal, purchased 25,000 shares of
Series A Convertible Exchangeable Redeemable Preferred Stock, representing
approximately 10% ownership of Emeritus, for $25 million. The Series A Stock
is entitled to a 9% annual dividend, payable quarterly. Each share of Series A
Preferred Stock is convertible into that number of shares of common stock
equal to $1,000 (the liquidation value of a share of Series A Preferred Stock)
divided by the conversion price of $18.20 per share. Currently the Series A
Preferred Stock is convertible into an aggregate of 1,373,626 shares of our
common stock. The Series A Preferred Stock is also exchangeable into
convertible debt at our option. The conversion price is subject to adjustment
in the event of stock dividends, stock subdivisions and combinations, and
extraordinary distributions. The Series A Preferred Stock has a mandatory
redemption date of October 24, 2004.
Pursuant to a shareholders' agreement entered into in connection with this
investment, Emeritus and Mr. Baty are required to take all necessary action
to:
. elect one director selected by NorthStar;
. if NorthStar invests an additional $25 million in Emeritus, elect a
second additional director selected by NorthStar; and
. if the size of our board increases, elect additional directors so that
NorthStar's representation shall not be less than one-seventh of the
entire board.
These rights terminate in certain events relating to NorthStar's sale of
capital stock or a change in control of NorthStar. All NorthStar transfers are
subject to our right of first refusal. In addition, if Mr. Baty sells shares
of common stock representing 50% or more of his ownership position, NorthStar
is entitled to participate in that sale on a pro rata basis. NorthStar has
agreed not to purchase any additional shares of our voting securities, from
now until 18 months after it ceases to own 5% of the outstanding common stock
on a fully diluted basis.
In January 2000, we paid NorthStar $2,250,000 and in April 2000, paid an
additional $350,000, which represented all dividends in arrears from 1999. For
the year 2000, we paid two quarters' of dividends that totaled $1.1 million.
Additionally, there are accumulated dividends for two quarterly payments of
$1.4 million, accrued at the accelerated default rate of 11%.
Other Transactions
During 1995, Messrs. Baty and Brandstrom formed Painted Post Partners, a New
York general partnership, to facilitate the operation of assisted living
communities in the state of New York, a state which generally requires that
natural persons be designated as the licensed operators of assisted living
communities. We have entered into administrative services agreements with the
partnership for the term of the underlying leases. The administrative services
agreements provide for fees that would equal or exceed the profit of a
17
community operated efficiently at full occupancy and, unless reset by agreement
of the parties, will increase automatically on an annual basis in accordance
with changes in the Consumer Price Index. In addition, we have agreed to
indemnify the partners against losses and, in exchange, the partners have
agreed to assign any profits to us. As part of their general noncompetition
agreements with us, each of Messrs. Baty and Brandstrom has agreed that, in the
event he ceases to be a senior executive of Emeritus, he will transfer his
interest in the partnership for a nominal charge to his successor at Emeritus
or other person designated by us.
We have entered into noncompetition agreements with Messrs. Baty and
Brandstrom. These agreements provide that they will not compete with us,
directly or indirectly, in the ownership, operation or management of assisted
living communities anywhere in the United States and Canada during the terms of
their employment and for a period of two years following the termination of
their employment. The agreements also provide, however, that they may hold (1)
up to a 10% limited partnership interest in a partnership engaged in such
business, (2) less than 5% of the outstanding equity securities of a public
company engaged in such business, or (3) interests in the New York partnership
described above. These agreements do not limit Mr. Baty's current role with
Holiday Retirement Corporation. Mr. Baty has agreed, however, that if Holiday
operates or manages assisted living communities, other than as a limited
component of independent living communities consistent with its current
operations, he will not personally be active in the management, operation, or
financing of such facilities nor will he hold any separate ownership or other
interest therein.
In April 1998, we entered into a joint venture with Sanyo Electric Co. Ltd.,
of Osaka, Japan, with which Mr. Iue is affiliated, to provide assisted living
services in Japan. The joint venture, Sanyo Emeritus Corporation, has been
formed to provide a residential-based healthcare alternative for Japan's
growing elderly population. Sanyo Emeritus was initially capitalized with
(Yen)50 million, or $384,000 (USD), with Emeritus and Sanyo each providing half
the funds. The joint venture's first assisted living community in Japan was
opened in December 1999. During 2000, we recognized approximately $200,000 of
losses associated with our interest in Sanyo Emeritus in accordance with the
joint venture agreement.
18
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table presents as of August 15, 2001, certain information with
respect to the beneficial ownership of our common stock and preferred stock (on
an as-converted basis) by:
. each person that we know owns more than 5% of the common stock;
. each of our directors;
. each current officer named in the compensation tables; and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the SEC and
includes shares over which the indicated beneficial owner exercises voting
and/or investment power. Shares of stock subject to options, convertible
debentures or warrants currently exercisable or exercisable within 60 days are
deemed outstanding for computing the percentage ownership of the person holding
the options, but are not deemed outstanding for computing the percentage
ownership of any other person. Except as otherwise indicated, we believe the
beneficial owners of the common stock listed below, based on information
furnished by them, have sole voting and investment power with respect to the
shares listed opposite their names. Unless otherwise indicated, the following
officers, directors, and shareholders can be reached at the principal offices
of Emeritus.
The table presents the beneficial ownership of the preferred stock as
converted into common stock. NorthStar Capital Partners LLC owns 100% of the
outstanding Series A preferred stock, and Saratoga Partners IV, L.P. and its
affiliates own 100% of the outstanding Series B preferred stock.
Shares of Emeritus Common Stock
----------------------------------
Amount and Nature
of Beneficial
Name and Address Ownership Percent of Class
- ---------------- ----------------- ----------------
Daniel R. Baty(1)(2)....................... 4,109,169 39.05%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom...................... 357,575 3.51%
Gary S. Becker............................. 8,417 *
Motoharu Iue(3)(4)......................... 395,500 3.89%
Suzette McCanless.......................... 2,926 *
Patrick Carter(4).......................... 70,500 *
David Hamamoto(5)(6)....................... 1,382,126 6.40%
David W. Niemiec(7)........................ 5,243,974 33.99%
Charles P. Durkin, Jr.(7).................. 5,243,974 33.99%
Sirach Capital Management(8)............... 701,000 6.89%
3323 One Union Square
600 University Street
Seattle, WA 98101
B.F., Limited Partnership(2)............... 2,955,950 29.04%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
NorthStar Capital Partners LLC(6).......... 1,373,626 6.33%
299 Park Avenue, 33rd Floor
New York, New York 10022
Saratoga Partners IV, L.P.(9).............. 5,239,474 33.98%
535 Madison Avenue
New York, NY 10022
All directors and executive officers as a
group (11 persons)(2)(3)(6)(9)(10)........ 10,888,561 66.04%
19
- --------
* Less than 1%.
(1) Includes 2,955,950 shares held by B.F., Limited Partnership, of which
Columbia Pacific, a company wholly owned by Mr. Baty, is the general
partner and of which Mr. Baty is a limited partner. Also includes 340,908
shares issuable upon conversion of 6.25% Convertible Subordinated
Debentures due 2006 held by Columbia Select, L.P., of which B.F., Limited
Partnership is the general partner.
(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, 2000, on Schedule 13-D.
(3) Includes 385,000 shares held by Three Oceans, Inc. a U.S. affiliate of
Sanyo, a publicly traded Japanese company. Mr. Iue is a former executive
and current director of U.S. affiliates of Sanyo. Mr. Iue disclaims
beneficial ownership of shares of common stock held by Three Oceans.
(4) Includes options exercisable within 60 days for the purchase of 10,500
common shares.
(5) Includes options exercisable within 60 days for the purchase of 8,500
common shares.
(6) The 1,373,626 shares are convertible Series A preferred stock held by
NorthStar Capital Partners LLC, of which Mr. Hamamoto is a principal. (See
"CERTAIN TRANSACTIONS--NorthStar Transaction.") NorthStar Capital Partners
LLC owns 100% of the Series A preferred stock. The Series A preferred
stock currently votes with both the Series B preferred stock and the
common stock, and is entitled to 687,500 votes. This represents
approximately 6.3% of the voting power of currently outstanding Emeritus
common and preferred stock.
(7) Includes 4,239,474 shares issuable upon conversion of Series B preferred
stock currently held by Saratoga Partners and its affiliates, of which
Messrs. Niemiec and Durkin are principals. (See "CERTAIN TRANSACTIONS--
Saratoga Transactions.") Saratoga Partners and its affiliates own 100% of
the outstanding Series B preferred stock, which includes 84,348 shares
(as-converted) that represent dividends paid on the Series B preferred
stock to date. The Series B preferred stock currently votes with both the
Series A preferred stock and the common stock on an as-converted basis,
which represents approximately 34% of the voting power of the currently
outstanding Emeritus common and preferred stock. Also includes options
exercisable within 60 days for the purchase of 4,500 common shares and
warrants currently exercisable to purchase 1,000,000 common shares.
(8) Sirach Capital Management may be deemed to have voting and dispositive
power over the shares, based upon the most recent publicly available
information reported as of December 31, 1998, on Schedule 13-G.
(9) Represents 1,000,000 common shares that are issuable upon exercise of
warrants and 4,239,474 shares that are issuable upon conversion of Series
B preferred stock. The Series B preferred stock currently votes with both
the Series A preferred stock and the common stock on an as-converted
basis.
(10) Includes options exercisable within 60 days for the purchase of 38,500
common shares and 340,908 shares issuable upon conversion of 6.25%
Convertible Subordinated Debentures due 2006.
20
PROPOSAL FOR APPROVAL OF AMENDMENT OF THE
AMENDED 1998 EMPLOYEE STOCK PURCHASE PLAN
General
In April 1998, the board of directors adopted Emeritus's 1998 Employee Stock
Purchase Plan (the "ESPP"), which was approved at the Annual Meeting of
Shareholders on May 20, 1998. The purpose of the ESPP is to provide a means by
which Emeritus employees may be given an opportunity to purchase our common
stock at a discount through accumulated payroll deductions. In May 1999, the
ESPP was amended to allow, among other things, quarterly purchase and offering
periods and purchases at 85% of the lesser of the stock's fair market value on
the first and last day of a purchase period. Currently, the maximum number of
shares of common stock that may be issued under the ESPP is 200,000, but upon
shareholder approval of the following amendment to the ESPP, the number of
shares that may be issued will increase to 400,000.
Proposed Amendment
On August 17, 2001, the board of directors adopted, subject to shareholder
approval, an amendment to the ESPP to increase the number of shares available
for issuance under the ESPP from 200,000 to 400,000 shares. As of August 17,
2001, 83,123 shares were available for issuance under the ESPP (not including
the proposed 200,000 share increase). Set forth below is a summary of certain
important features of the ESPP, as amended, which summary is qualified in its
entirety by reference to the full text of the ESPP, as amended and restated,
which is attached hereto as Appendix B.
(The board of directors recommends a vote in favor of this Proposal.)
Description of the ESPP
Purposes
The purposes of the ESPP are to assist eligible employees of the Company and
certain designated subsidiaries in acquiring a stock ownership interest in the
Company, help employees provide for their future security and encourage them to
remain in the employ of the Company and its subsidiaries.
Administration
The ESPP is administered by either the Company's Office of Compensation and
Benefits or by any other Company group or executive officer designated by the
Board of Directors or the Compensation Committee (the "Plan Administrator"),
which has the final power to construe and interpret the ESPP and the rights
granted under it. The Plan Administrator has the power, subject to the
provisions of the ESPP, to determine when and how rights to purchase our common
stock will be granted, the provisions of each offering under the ESPP (which
need not be identical), whether any parent or subsidiary of Emeritus will be
eligible to participate in such plan and to establish, amend and revoke rules
and regulations for its administration. The Plan Administrator has the power to
delegate administrative duties related to the ESPP to such of the Company's
other officers or employees as the Plan Administrators so determines.
Offerings
The ESPP is implemented by a series of offering and purchase periods, each of
which begin on July 1, October 1, January 1, and April 1 of each year and end
on the next September 30, December 31, March 31, and June 30, occurring
thereafter. Subject to the provisions of the ESPP, the Plan Administrator has
the authority to establish different terms for future offering and purchase
periods and to establish different commencing and ending dates for such
periods.
21
On the first day of each offering period, each eligible employee will be
granted an option to purchase up to the number of shares purchasable with a
percentage of the employee's earnings as determined by the board of directors
(not to exceed 15%). The right will be exercised on one or more purchase dates
during the offering period as established by the Plan Administrator at the
beginning of the offering period.
Eligibility
Any person who is customarily employed by us or a designated subsidiary at
least 20 hours per week and five months per calendar year on the first day of
an offering period is eligible to participate in that offering under the ESPP,
provided such employee has been in our continuous employ for at least six
months preceding the first day of the offering period. Subject to the terms of
the ESPP, the Plan Administrator can change the requirements for participation
in the ESPP for future offering periods. For purposes of the ESPP, "designated
subsidiary" includes all domestic subsidiaries of the Company. The Plan
Administrator, in its discretion, can designate other subsidiaries as eligible
to participate in the ESPP. As of August 17, 2001, approximately 2,500 of our
6,950 employees are eligible to participate in the ESPP.
Notwithstanding the foregoing, no employee is eligible for the grant of any
rights under the ESPP if, immediately after the grant, the employee would own,
directly or indirectly, stock possessing 5% or more of the total combined
voting power or value of all classes of our stock or of any parent or
subsidiary of Emeritus (including any stock which such employee may purchase
under all outstanding rights and options), nor will any employee be granted
rights that would permit him or her to buy more than $25,000 worth of stock
(determined at the fair market value of the shares at the time such rights are
granted) under all of our employee stock purchase plans in any calendar year.
Participation in the Plan
Eligible employees become participants in the ESPP by delivering to us, prior
to the offering date for the offering, an agreement authorizing payroll
deductions of up to 15% of their earnings during the purchase period.
Purchase Price
The purchase price per share at which shares are sold in an offering under
the ESPP is the lesser of 85% of the fair market value of a share of common
stock (a) on the first day of the offering period and (b) on the last day of
the offering period. For purposes of the ESPP, "fair market value" means the
closing price of the common stock on the American Stock Exchange on the
applicable date.
Payment of Purchase Price; Payroll Deductions
The purchase price of the shares is accumulated by payroll deductions over
the offering period. At any time during the offering period, a participant may
terminate his or her payroll deductions by withdrawing from the offering or the
ESPP. Unless provided for in the offering, a participant may not increase,
decrease or begin such payroll deductions after the beginning of any offering
period. All payroll deductions made for a participant are credited to his or
her account under the ESPP and deposited with our general funds.
Purchase of Stock
By executing an agreement to participate in the ESPP, the employee is
entitled to purchase shares under the plan. If the aggregate number of shares
to be purchased upon exercise of rights granted in the offering would exceed
the maximum aggregate number remaining in the Plan, the Plan Administrator will
make a pro rata allocation of shares available in as uniform a manner as it
deems practicable. Unless the employee's participation is discontinued, his or
her right to purchase shares is exercised automatically at the end of the
offering period at the applicable price. See "Withdrawal" below.
22
Withdrawal
While each participant in the ESPP is required to sign an agreement
authorizing payroll deductions, the participant may withdraw from a given
offering by terminating his or her payroll deductions and by delivering to us a
notice of withdrawal from the ESPP. The withdrawal may be elected at least ten
(10) days prior to the end of the applicable offering period, subject to any
specified limitations in the offering.
Upon any withdrawal from an offering by the employee, we will distribute to
the employee his or her accumulated payroll deductions without interest. The
employee is not entitled to again participate in such offering. An employee's
withdrawal from an offering will not have any effect upon such employee's
eligibility to participate in subsequent offerings under the ESPP.
Termination of Employment
Rights granted pursuant to any offering under the ESPP terminate immediately
upon cessation of an employee's employment for any reason, and we will
distribute to a terminated employee all of his or her accumulated payroll
deductions, without interest, less any accumulated deductions previously
applied to the purchase of stock for the terminated employee.
Restrictions on Transfer
Rights granted under the ESPP are not transferable other than by will or the
laws of descent and distribution and may be exercised only by the person to
whom such rights are granted.
Duration, Amendment and Termination
The ESPP terminates on May 20, 2008, except that the board of directors may
suspend or terminate the ESPP at any earlier time in its discretion. Any
amendment of the ESPP must be approved by the shareholders within 12 months of
its adoption by the board of directors or the Compensation Committee if the
amendment would (a) increase the number of shares of common stock reserved for
issuance under the ESPP, (b) modify the requirements relating to eligibility
for participation in the ESPP or (c) otherwise require shareholder approval
under any applicable law or regulation. Rights granted before amendment or
termination of the ESPP will not be altered or impaired by any amendment or
termination of such plan without consent of the person to whom such rights were
granted.
Effect of Certain Corporate Events
In the event of a merger or consolidation of the Company into another
corporation, the sale of all or substantially all the Company's assets, or the
dissolution or liquidation of the Company, the surviving corporation either
will assume the rights under the ESPP or substitute similar rights, or the
purchase date of any ongoing offering will be accelerated such that the
outstanding rights may be exercised immediately prior to the event.
Stock Subject to ESPP
If rights granted under the ESPP expire, lapse or otherwise terminate without
being exercised, the common stock not purchased under such rights again becomes
available for issuance under the plan.
Federal Income Tax Information
The Company intends that the ESPP qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"). The following discussion summarizes the material federal income tax
consequences to the Company and the participating employees in connection with
23
the ESPP under existing applicable provisions of the Code and the accompanying
regulations. The discussion is general in nature and does not address issues
relating to the income tax circumstances of any individual employee. The
discussion is based on federal income tax laws in effect on the date of this
proxy statement and is, therefore, subject to possible future changes in the
law. The discussion does not address the consequences of state, local or
foreign tax laws.
Under the Code, the Company is deemed to grant employee participants in the
ESPP an "option" on the first day of each offering period to purchase as many
shares of common stock as the employee will be able to purchase with the
payroll deductions credited to his or her account during the offering period.
On the last day of each six-month offering period, the purchase price is
determined and the employee is deemed to have exercised the "option" and
purchased the number of shares of common stock his or her accumulated payroll
deductions will purchase at the purchase price.
The required holding period for favorable tax treatment upon disposition of
common stock acquired under the ESPP is the later of (a) two years after the
deemed "option" is granted (the first day of an offering period) and (b) one
year after the deemed "option" is exercised and the common stock is purchased
(the last day of an offering period). Thus, the common stock generally must be
held for at least one year and nine months after it is purchased to gain
favorable tax treatment. When the common stock is disposed of after this
period, the employee realizes ordinary income to the extent of the lesser of
(1) the amount by which the fair market value of the common stock at the time
the deemed "option" was granted exceeds the "option price" and (2) the amount
by which the fair market value of the common stock at the time of the
disposition exceeds the "option price." "Option price" is equal to 85% of the
lesser of (a) the fair market value of the common stock on the first day of the
offering period and (b) the fair market value of the common stock on the last
day of the offering period. Thus, the maximum amount of gain taxable as
ordinary income is the amount of the 15% discount measured as of the last day
of an offering period. Any further gain is taxed at capital gain rates. If the
sale price is less than the option price, there is no ordinary income and the
employee recognizes long-term capital loss.
When an employee sells the common stock before the expiration of the required
holding period, the employee generally recognizes ordinary income to the extent
of the difference between the price actually paid for the common stock and the
fair market value of the common stock at the date the option was exercised (the
last day of an offering period), regardless of the price at which the common
stock is sold. If the sale price is less than the fair market value of the
common stock at the date of exercise, then the employee will also have a
capital loss equal to such difference.
Even though an employee who meets the required holding period must treat part
of his or her gain on a disposition of the common stock as ordinary income, the
Company may not take a business deduction for such amount. However, if an
employee disposes of common stock before the end of the required holding
period, the amount of income that the employee must report as ordinary income
qualifies as a business deduction for the Company for the year of such
disposition.
24
PROPOSAL FOR RATIFICATION OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected KPMG LLP, independent public accountants,
to continue as our independent auditors for the fiscal year ending December 31,
2001. KPMG LLP has audited our accounts since July 28, 1995. The Board of
Directors is submitting its selection of KPMG LLP to the shareholders for
ratification.
For the fiscal year ended December 31, 2000, the aggregate fees billed by
KPMG LLP for the audit of our annual financial statements for the fiscal year
2000 and reviews of our quarterly financial statements was $124,500. The
aggregate fees billed by KPMG LLP for tax and other non-audit professional
services for the fiscal year 2000 were $113,900.
A representative of KPMG LLP is expected to be present at the annual meeting
with the opportunity to make a statement, if the representative so desires, and
is expected to be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF KPMG LLP AS OUR INDEPENDENT PUBLIC ACCOUNTANTS
OTHER BUSINESS
The Board of Directors does not intend to present any business at the annual
meeting other than as set forth in the accompanying Notice of Annual Meeting of
Shareholders, and has no present knowledge that any others intend to present
business at the annual meeting. If, however, other matters requiring the vote
of the shareholders properly come before the annual meeting or any adjournment
or postponement thereof, the persons named in the accompanying form of proxy
will have discretionary authority to vote the proxies held by them in
accordance with their judgment as to such matters.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Officers and directors of the Company and persons who own more than ten
percent of the Company's stock are required to report to the Securities and
Exchange Commission their ownership and changes in ownership of the Company's
stock. Regulations of the Commission require us to disclose to our shareholders
those filings that were not made on time. Based solely on our review of copies
of the reports received by us, or written representations received from
reporting persons that no such forms were required for those persons, we
believe that, during fiscal year 2000, our officers and directors complied with
all applicable filing requirements, with the exception of one Form 3 Initial
Statement of Beneficial Ownership that was inadvertently filed late by Martin
Roffe.
SHAREHOLDER PROPOSALS
Shareholder proposals intended for inclusion in the proxy materials for the
Company's 2002 annual meeting of shareholders must be received in writing by
the Company not later than April 5, 2002.
Such proposals should be directed to the Corporate Secretary, Emeritus
Corporation, 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121.
25
ANNUAL REPORT
A copy of our 2000 Annual Report, which includes our Annual Report on Form
10-K for the fiscal year ended December 31, 2000, as amended, accompanies this
proxy statement.
By Order of the Board of Directors
/s/ Daniel R. Baty
Daniel R. Baty
Chairman of the Board and Chief
Executive Officer
Seattle, Washington
August 17, 2001
26
APPENDIX A
EMERITUS CORPORATION
AUDIT COMMITTEE CHARTER
I. General Functions, Authority, and Role
The audit committee is a committee of the board of directors. Its primary
function shall be to assist the board in fulfilling its oversight
responsibilities by reviewing the financial information to be provided to the
Company's shareholders and others, the systems of internal controls that
management and the board of directors have established, and the Company's audit
process.
The audit committee shall have the power to conduct or authorize
investigations into any matters within the committee's scope of
responsibilities. In connection with such investigations or otherwise in the
course of fulfilling its responsibilities under this charter, the audit
committee shall have the authority to retain special legal, accounting, or
other consultants to advise it, and may request any officer or employee of the
Company, its outside legal counsel or outside auditor to attend a meeting of
the audit committee or to meet with any members of, or consultants to, the
audit committee.
The Company's outside auditor shall ultimately be accountable to the board of
directors and to the audit committee, and the board of directors and audit
committee shall, as representatives of the Company's shareholders, have the
ultimate authority and responsibility to select, evaluate, and, where
appropriate, replace the outside auditor (or to nominate the outside auditor to
be proposed for shareholder approval). In the course of fulfilling its specific
responsibilities hereunder, the audit committee shall strive to maintain an
open avenue of communication between the Company's outside auditor and the
board of directors.
The responsibilities of a member of the audit committee shall be in addition
to such member's duties as a member of the board of directors.
While the audit committee shall have the responsibilities and powers set
forth in this charter, it shall not be the duty of the audit committee to plan
or conduct audits or to determine whether the Company's financial statements
are complete, accurate, or in accordance with generally accepted accounting
principles. These are the responsibilities of management and the outside
auditor. Nor shall it be the duty of the audit committee to conduct
investigations, to resolve disagreements, if any, between management and the
outside auditor, or to assure compliance with laws and regulations or the
Company's own policies or code of conduct.
II. Membership
The membership of the audit committee shall consist of at least three members
of the board of directors who shall serve at the pleasure of the board of
directors. The membership of the audit committee shall meet the independence
and financial literacy and experience requirements of The American Stock
Exchange, as the same may be modified or supplemented, or similar requirements
of such other securities exchange or quotation system as may from time to time
apply to the Company.
III. Responsibilities
The responsibilities of the audit committee shall be as follows:
A. General
1. Meet at least once per year, or more frequently if circumstances or the
obligations of the audit committee require.
2. Report audit committee actions to the board of directors with such
recommendations as the committee may deem appropriate.
A-1
3. Annually review and reassess the adequacy of this charter and submit it to
the board of directors for approval.
4. Perform such functions as may be assigned by law, the Company's articles
of incorporation or bylaws, or the board of directors.
B. Outside Auditor
1. As necessary, consider with management and the outside auditor the
rationale for employing audit firms other than the principal outside auditor.
2. Recommend to the board of directors the outside auditor to be nominated,
approve the compensation of the outside auditor, and, as necessary, review and
approve the discharge of the outside auditor.
3. Take reasonable steps to confirm the independence of the outside auditor,
which shall include (a) ensuring receipt from the outside auditor of a formal
written statement delineating all relationships between the outside auditor and
the Company, consistent with Independence Standards Board Standard No. 1,
(b) discussing with the outside auditor any disclosed relationships or services
that may affect the objectivity and independence of the outside auditor, and
(c) as necessary, taking, or recommending that the board of directors take,
appropriate action to oversee the independence of the outside auditor.
C. Audit Process and Results
1. Consider, in consultation with the outside auditor, the audit scope and
plan of the outside auditor.
2. Consider and review with the outside auditor the matters required to be
discussed by Statement on Auditing Standards No. 61, as the same may be
modified or supplemented from time to time.
3. Review and discuss with management and the outside auditor at the
completion of the annual examination:
a. The Company's audited financial statements and related footnotes;
b. The outside auditor's audit of the financial statements and their
report thereon;
c. Any significant changes required in the outside auditor's audit plan;
d. Any serious difficulties or disputes with management encountered
during the course of the audit; and
e. Other matters related to the conduct of the audit which are to be
communicated to the committee under generally accepted auditing standards.
4. Inquire of management and the outside auditor about the systems of
internal controls that management and the board of directors have established
and the effectiveness of those systems, and inquire of management and the
outside auditor about significant financial risks or exposures and the steps
management has taken to minimize such risks to the Company.
5. Meet with the outside auditor and management in separate executive
sessions, as necessary or appropriate, to discuss any matters that the
committee or any of these groups believe should be discussed privately with the
audit committee.
D. Securities and Exchange Commission Filings
1. Review with management and the outside auditor the interim financial
reports, when required to be reviewed under generally accepted auditing
standards.
2. Prepare the report required by the rules of the Securities and Exchange
Commission to be included in the Company's annual proxy statement.
A-2
APPENDIX B
EMERITUS CORPORATION
AMENDED 1998 EMPLOYEE STOCK PURCHASE PLAN
(as amended and restated on May 19, 1999 and August 17, 2001)
Section 1. Purpose
The purposes of the Emeritus Corporation 1998 Employee Stock Purchase Plan
(the "Plan") are to (a) assist qualified employees of Emeritus Corporation, a
Washington corporation (the "Company"), and its designated subsidiary
corporations in acquiring a stock ownership interest in the Company pursuant to
a plan that is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and
(b) help employees provide for their future security and encourage them to
remain in the employ of the Company and its subsidiary corporations. Stock
purchased under the Plan may be paid for by regular payroll deductions. Only
employees of the Company and its designated subsidiary corporations are
eligible to participate in the Plan, and participation is voluntary.
Section 2. Definitions
For purposes of the Plan, the following terms shall be defined as set forth
below.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the Company's Compensation Committee or another committee
appointed by the Board and given authority by the Board to administer the Plan.
"Company" means Emeritus Corporation, a Washington corporation.
"Designated Subsidiary" includes all domestic Subsidiary Corporations and
such other Subsidiary Corporations as may be designated from time to time by
the Board or the Committee as eligible to participate in the Plan.
"Eligible Compensation" means all regular cash compensation, including
overtime, cash bonuses and commissions. Regular cash compensation does not
include severance pay, hiring and relocation bonuses, pay in lieu of vacation
or sick leave, or any other special payments, or any gain from stock option
exercises.
"Eligible Employee" means any employee of the Company or any Designated
Subsidiary who is in the employ of the Company or a Designated Subsidiary on
one or more Offering Dates and who meets the following criteria:
(a) the employee does not, immediately after the Option is granted, own stock
(as defined by the Code) possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or of its Parent or
Subsidiary Corporations;
(b) the employee has been employed for at least six months; provided,
however, that the Plan Administrator, in its sole discretion, may reduce or
increase (to up to two years) this minimum requirement for future Offering
Periods;
(c) the employee's customary employment is for more than 20 hours per week;
provided, however, that the Plan Administrator, in its sole discretion, may
reduce this minimum hourly requirement for future Offering Periods; and
(d) the employee's customary employment is for more than five months in any
calendar year; provided, however, that the Plan Administrator, in its sole
discretion, may reduce this minimum requirement for future Offering Periods.
B-1
If the Company permits any employee of a Designated Subsidiary to participate
in the Plan, then all employees of that Designated Subsidiary who meet the
requirements of this paragraph shall also be considered Eligible Employees.
"Enrollment Period" has the meaning set forth in Section 6.1.
"ESPP Broker" has the meaning set forth in Section 10.
"Offering" has the meaning set forth in Section 5.1.
"Offering Date" means the first day of an Offering.
"Offering Period" has the meaning set forth in Section 5.1.
"Option" means an option granted under the Plan to an Eligible Employee to
purchase shares of Stock.
"Parent Corporation" means any corporation, other than the Company, in an
unbroken chain of corporations ending with the Company if, at the time of the
granting of the Option, each of the corporations, other than the Company, owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"Participant" means any Eligible Employee who has elected to participate in
an Offering in accordance with the procedures set forth in Section 6.1 and who
has not withdrawn from the Plan or whose participation in the Plan is not
terminated.
"Plan" means the Emeritus Corporation 1998 Employee Stock Purchase Plan, as
it may be amended from time to time.
"Plan Administrator" has the meaning set forth in Section 3.1.
"Purchase Date" means the last day of each Purchase Period.
"Purchase Period" has the meaning set forth in Section 5.2.
"Purchase Price" has the meaning set forth in Section 8.
"Stock" means the Common Stock, $.0001 par value per share, of the Company.
"Subscription" has the meaning set forth in Section 6.1.
"Subsidiary Corporation" means any corporation, other than the Company, in an
unbroken chain of corporations beginning with the Company if, at the time of
the granting of the Option, each of the corporations, other than the last
corporation in the unbroken chain, owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
Section 3. Administration
3.1 Plan Administrator
The Plan shall be administered by the Company's Office of Compensation and
Benefits or any other Company group or executive officer designated by the
Board or the Committee, except for those items expressly reserved to the Board
or the Committee under the Plan. Any decisions made by the Board, the Committee
or the Plan Administrator shall be applicable equally to all Eligible
Employees.
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3.2 Administration and Interpretation by the Plan Administrator
Subject to the provisions of the Plan, the Plan Administrator shall have the
authority, in its sole discretion, to determine all matters relating to Options
granted under the Plan, including all terms, conditions, restrictions and
limitations of Options; provided, however, that all Participants granted
Options pursuant to the Plan shall have the same rights and privileges within
the meaning of Code Section 423. The Plan Administrator shall also have
exclusive authority to interpret the Plan and may from time to time adopt, and
change, rules and regulations of general application for the Plan's
administration. The Plan Administrator's interpretation of the Plan and its
rules and regulations, and all actions taken and determinations made by the
Plan Administrator pursuant to the Plan, unless reserved to the Board or the
Committee, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's other officers or employees as the Plan Administrator so determines.
Section 4. Stock Subject to Plan
Subject to adjustment from time to time as provided in Section 19, a maximum
of 400,000 shares of Stock may be sold under the Plan. Shares sold under the
Plan shall be drawn from authorized and unissued shares or shall be shares
acquired by the Company. Any shares of Stock subject to an Option that cease to
be subject to the Option (other than by reason of exercise of the Option),
including, without limitation, in connection with the cancellation or
termination of the Option, shall again be available for sale in connection with
future grants of Options under the Plan.
Section 5. Offering Dates
5.1 Offering Periods
(a) The Plan shall be implemented by a series of offerings (each, an
"Offering"). Except as otherwise set forth below, Offerings shall commence on
July 1, October 1, January 1 and April 1 of each year and end on the next
September 30, December 31, March 31 and June 30, respectively, occurring
thereafter.
(b) Notwithstanding the foregoing, the Board or the Committee may establish
(i) a different term for one or more future Offerings and (ii) different
commencing and ending dates for such Offerings; provided, however, that an
Offering Period may not exceed five years; and provided, further, that if the
Purchase Price may be less than 85% of the fair market value of the Stock on
the Purchase Date, the Offering Period may not exceed 27 months.
(c) In the event the first or the last day of an Offering Period is not a
regular business day, then the first day of the Offering Period shall be deemed
to be the next regular business day and the last day of the Offering Period
shall be deemed to be the last preceding regular business day.
(d) An employee who becomes eligible to participate in the Plan after an
Offering Period has commenced shall not be eligible to participate in such
Offering but may participate in any subsequent Offering, provided that such
Eligible Employee is still an Eligible Employee as of the commencement of any
such subsequent Offering. Eligible Employees may not participate in more than
one Offering at a time.
5.2 Purchase Periods
(a) Each Offering Period shall consist of one or more consecutive purchase
periods (each, a "Purchase Period"). Except as otherwise set forth below,
Purchase Periods shall continue for three calendar months and shall be
coterminous with an Offering Period. Purchase Periods shall commence on July 1,
October 1, January 1 and April 1 of each year and end on the next September 30,
December 31, March 31 and June 30, respectively, occurring thereafter. The last
day of each Purchase Period shall be the Purchase Date for such Purchase
Period.
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(b) Notwithstanding the foregoing, the Board or the Committee may establish
for any future Offering (a) different terms for one or more Purchase Periods
within the Offering Period and (b) different commencing dates and Purchase
Dates for any such Purchase Periods.
(c) In the event the first or last day of a Purchase Period is not a regular
business day, then the first day of the Purchase Period shall be deemed to be
the next regular business day and the last day of the Purchase Period shall be
deemed to be the last preceding regular business day.
Section 6. Participation in the Plan
6.1 Initial Participation
An Eligible Employee shall become a Participant on the first Offering Date
after satisfying the eligibility requirements and delivering to the Plan
Administrator during the enrollment period established by the Plan
Administrator (the "Enrollment Period") a subscription (the "Subscription"):
(a) indicating the Eligible Employee's election to participate in the Plan;
(b) authorizing payroll deductions and stating the amount to be deducted
regularly from the Participant's pay; and
(c) authorizing the purchase of Stock for the Participant in each Purchase
Period.
An Eligible Employee who does not deliver a Subscription to the Plan
Administrator during the Enrollment Period shall not participate in the Plan
for that Offering Period or any subsequent Offering Period unless such Eligible
Employee subsequently enrolls in the Plan by delivering a Subscription to the
Plan Administrator during the Enrollment Period for such subsequent Offering
Period. The Plan Administrator may, from time to time, change the Enrollment
Period for any future Offering as deemed advisable by the Plan Administrator in
its sole discretion for the proper administration of the Plan.
6.2 Continued Participation
Unless the Plan Administrator determines otherwise for any future Offering, a
Participant shall automatically participate in the next Offering Period until
such time as the Participant withdraws from the Plan pursuant to Section 11.2
or terminates employment as provided in Section 12.
Section 7. Limitations on Right to Purchase Shares
7.1 $25,000 Limitation
On each Offering Date, a Participant shall be deemed to have been granted an
Option to purchase a maximum number of shares of the Stock of the Company equal
to an amount determined as follows: an amount equal to $25,000 divided by the
fair market value of the Stock of the Company on the applicable Offering Date;
provided, however, no Participant shall be entitled to purchase Stock under the
Plan (or any other employee stock purchase plan that is intended to meet the
requirements of Code Section 423 sponsored by the Company, any Parent
Corporation or any Subsidiary Corporation) at a rate that exceeds $25,000 in
fair market value, determined as of the Offering Date for each Offering Period
(or such other limit as may be imposed by the Code), for each calendar year in
which a Participant participates in the Plan (or any other employee stock
purchase plan described in this Section 7.1).
7.2 Pro Rata Allocation
In the event the number of shares of Stock that might be purchased by all
Participants in the Plan exceeds the number of shares of Stock available in the
Plan, the Plan Administrator shall make a pro rata allocation of
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the remaining shares of Stock in as uniform a manner as shall be practicable
and as the Plan Administrator shall determine to be equitable. Fractional
shares may be issued under the Plan unless the Board or the Committee
determines otherwise.
Section 8. Purchase Price
(a) The purchase price (the "Purchase Price") at which Stock may be acquired
in an Offering pursuant to the exercise of all or any portion of an Option
granted under the Plan shall be 85% of the lesser of (i) the fair market value
of the Stock on the Offering Date of such Offering and (ii) the fair market
value of the Stock on the Purchase Date. Notwithstanding the foregoing, the
Board or the Committee may establish a different Purchase Price for any future
Offering, which shall not be less than the Purchase Price previously stated.
(b) The fair market value of the Stock on the Offering Date or on the
Purchase Date shall be the closing price for the Stock as reported for such day
by the American Stock Exchange. If no sales of the Stock were made on the
American Stock Exchange on the transaction date, fair market value shall mean
the closing price for the Stock as reported for the next preceding day on which
sales of the Stock were made on the American Stock Exchange.
(c) Notwithstanding the foregoing, if an increase in the number of shares
authorized for issuance under the Plan is approved and all or a portion of such
additional shares are to be issued during one or more Offerings that are
underway at the time of shareholder approval of such increase (the "Additional
Shares"), then, if as of the date of such shareholder approval, the fair market
value of a share of Stock is higher than the fair market value on the Offering
Date for any such Offering, the Purchase Price for the Additional Shares shall
be 85% of the lesser of (i) the Stock's fair market value on the date of such
shareholder approval and (ii) the fair market value of the Stock on the
Purchase Date.
Section 9. Payment of Purchase Price
9.1 General Rules
Subject to Section 9.12, Stock that is acquired pursuant to the exercise of
all or any portion of an Option may be paid for only by means of payroll
deductions from the Participant's Eligible Compensation. Except as set forth in
this Section 9, the amount of compensation to be withheld from a Participant's
Eligible Compensation during each pay period shall be determined by the
Participant's Subscription.
9.2 Change Notices
(a) Except as set forth in Section 11.1 and unless the Plan Administrator
determines otherwise for an Offering, a Participant may not elect during an
Offering Period to increase or decrease the amount withheld from his or her
compensation for future pay periods within such Offering Period. Unless
otherwise determined by the Plan Administrator for a future Offering, a
Participant may elect to increase or decrease the amount to be withheld from
his or her compensation for future Offerings; provided, however, that notice of
such election must be delivered to the Plan Administrator in such form and in
accordance with such terms as the Plan Administrator may establish for an
Offering.
(b) Notwithstanding the foregoing, to the extent necessary to comply with
Code Section 423 and Section 7.1, a Participant's payroll deductions may be
decreased during any Purchase Period scheduled to end during the current
calendar year to 0% at such time that the aggregate of all payroll deductions
accumulated with respect to the Offering to which such Purchase Period applies
and any other Offering ending within the same calendar year exceed $21,250.
Payroll deductions shall re-commence at the rate provided in such Participant's
Subscription at the beginning of the first Purchase Period that is scheduled to
end in the following calendar year, unless the Participant terminates
participation in the Plan as provided in Section 11.1 or Section 11.2 below.
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9.3 Percent Withheld
The amount of payroll withholding with respect to the Plan for any
Participant during any pay period shall be at least $5, but not more than 15%,
of the Participant's Eligible Compensation for such pay period, but in no event
shall the amount of a Participant's payroll withholding exceed the limits of
Section 7.1. Amounts shall be withheld in whole dollar or percentage amounts
only.
9.4 Payroll Deductions
Payroll deductions shall commence on the first payday following the Offering
Date and shall continue through the last payday of the Offering Period unless
sooner altered or terminated as provided in the Plan.
9.5 Memorandum Accounts
Individual accounts shall be maintained for each Participant for memorandum
purposes only. All payroll deductions from a Participant's compensation shall
be credited to such account but shall be deposited with the general funds of
the Company. All payroll deductions received or held by the Company may be used
by the Company for any corporate purpose.
9.6 No Interest
No interest shall be paid on payroll deductions received or held by the
Company.
9.7 Acquisition of Stock
On each Purchase Date of an Offering Period, each Participant shall
automatically acquire, pursuant to the exercise of the Participant's Option,
the number of shares of Stock arrived at by dividing the total amount of the
Participant's accumulated payroll deductions for the Purchase Period by the
Purchase Price; provided, however, that the number of shares of Stock purchased
by the Participant shall not exceed the number of whole shares of Stock so
determined, if the Board or the Committee has determined for any future
Offering that fractional shares may not be issued under the Plan; and provided,
further, that the number of shares of Stock purchased by the Participant shall
not exceed the number of shares for which Options have been granted to the
Participant pursuant to Section 7.1.
9.8 Carryover of Account
Any cash balance remaining in the Participant's account at the termination of
each Offering shall be refunded to the Participant as soon as practical after
the Purchase Date without the payment of any interest; provided, however, that
if the Participant participates in the next Offering, any cash balance
remaining in the Participant's account shall be applied to the purchase of
Stock in the new Offering, provided such purchase complies with Section 7.1.
9.9 Withholding Obligations
At the time the Option is exercised, in whole or in part, or at the time some
or all of the Stock is disposed of, the Participant shall make adequate
provision for federal and state withholding obligations of the Company, if any,
that arise upon exercise of the Option or upon disposition of the Stock. The
Company may withhold from the Participant's compensation the amount necessary
to meet such withholding obligations.
9.10 Termination of Participation
No Stock shall be purchased on behalf of a Participant on a Purchase Date if
his or her participation in the Plan has terminated prior to such Purchase
Date.
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9.11 Procedural Matters
The Plan Administrator may, from time to time, establish (a) limitations on
the frequency and/or number of any permitted changes in the amount withheld
during an Offering, (b) an exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, (c) payroll withholding in excess of the
amount designated by a Participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, and (d)
such other limitations or procedures as deemed advisable by the Plan
Administrator, in its sole discretion, that are consistent with the Plan and in
accordance with the requirements of Code Section 423.
9.12 Leaves of Absence
During leaves of absence approved by the Company and meeting the requirements
of the applicable Treasury Regulations promulgated under the Code, a
Participant may continue participation in the Plan by delivering cash payments
to the Plan Administrator on the Participant's normal paydays equal to the
amount of his or her payroll deduction under the Plan had the Participant not
taken a leave of absence.
Section 10. Stock Purchased Under the Plan
10.1 ESPP Broker
If the Plan Administrator designates or approves a stock brokerage or other
financial services firm (the "ESPP Broker") to hold shares purchased under the
Plan for the accounts of Participants, the following procedures shall apply.
Promptly following each Purchase Date, the number of shares of Stock purchased
by each Participant shall be deposited into an account established in the
Participant's name with the ESPP Broker. A Participant shall be free to
undertake a disposition of the shares of Stock in his or her account at any
time, but, in the absence of such a disposition, the shares of Stock must
remain in the Participant's account at the ESPP Broker until the holding period
set forth in Code Section 423 has been satisfied. With respect to shares of
Stock for which the Code Section 423 holding periods have been satisfied, the
Participant may move those shares of Stock to another brokerage account of the
Participant' s choosing or request that a stock certificate be issued and
delivered to him or her. A Participant who is not subject to payment of U.S.
income taxes may move his or her shares of Stock to another brokerage account
of his or her choosing or request that a stock certificate be delivered to him
or her at any time, without regard to the Code Section 423 holding period.
10.2 Notice of Disposition
By entering the Plan, each Participant agrees to promptly give the Company
notice of any Stock disposed of within the later of one year from the Purchase
Date and two years from the Offering Date for such Stock, showing the number of
such shares disposed of and the Purchase Date and Offering Date for such Stock.
This notice shall not be required if and so long as the Company has a
designated ESPP Broker.
Section 11. Voluntary Withdrawal
11.1 Withdrawal From an Offering
A Participant may withdraw from an Offering by delivering to the Plan
Administrator a notice of withdrawal in the form required by the Plan
Administrator for such purpose. Such withdrawal must be elected at least ten
days prior to the end of the Purchase Period for which such withdrawal is to be
effective or by any other date specified by the Plan Administrator for any
future Offering. If a Participant withdraws after the Purchase Date for a
Purchase Period of an Offering, the withdrawal shall not affect Stock acquired
by the Participant in that Purchase Period and any earlier Purchase Periods.
Unless the Plan Administrator establishes a different rule for any future
Offering, withdrawal from an Offering shall not result in withdrawal from the
B-7
Plan and any succeeding Offering therein. A Participant is prohibited from
again participating in the same Offering at any time upon withdrawal from such
Offering.
11.2 Withdrawal From the Plan
A Participant may withdraw from the Plan by delivering to the Plan
Administrator a notice of withdrawal in the form required by the Plan
Administrator for such purpose. Such notice must be delivered at least ten days
prior to the end of the Purchase Period for which such withdrawal is to be
effective or by any other date specified by the Plan Administrator for any
future Offering. If a Participant withdraws after the Purchase Date for a
Purchase Period of an Offering, the withdrawal shall not affect Stock acquired
by the Participant in that Purchase Period and any earlier Purchase Periods. In
the event a Participant voluntarily elects to withdraw from the Plan, the
withdrawing Participant may not resume participation in the Plan during the
same Offering Period but may participate in any subsequent Offering under the
Plan by again satisfying the definition of a Participant.
11.3 Return of Payroll Deductions
Upon withdrawal from an Offering pursuant to Section 11.1 or withdrawal from
the Plan pursuant to Section 11.2, the withdrawing Participant's accumulated
payroll deductions that have not been applied to the purchase of Stock shall be
returned as soon as practical after the withdrawal, without the payment of any
interest to the Participant and the Participant's interest in the Offering
shall terminate. Such accumulated payroll deductions may not be applied to any
other Offering under the Plan.
Section 12. Termination of Employment
Termination of a Participant's employment with the Company for any reason,
including retirement, disability or death, or the failure of a Participant to
remain an Eligible Employee, shall immediately terminate the Participant's
participation in the Plan. The payroll deductions credited to the Participant's
account since the last Purchase Date shall, as soon as practical, be returned
to the Participant or, in the case of a Participant's death, to the
Participant's legal representative, and all the Participant's rights under the
Plan shall terminate. Interest shall not be paid on sums returned to a
Participant pursuant to this Section 12.
Section 13. Restrictions Upon Assignment
An Option granted under the Plan shall not be transferable otherwise than by
will or by the applicable laws of descent and distribution and shall be
exercisable during the Participant's lifetime only by the Participant. The Plan
Administrator will not recognize, and shall be under no duty to recognize, any
assignment or purported assignment by a Participant, other than by will or by
the applicable laws of descent and distribution, of the Participant's interest
in the Plan, of his or her Option, or of any rights under his or her Option.
Section 14. No Rights of Shareholder Until Shares Issued
With respect to shares of Stock subject to an Option, a Participant shall not
be deemed to be a shareholder of the Company, and he or she shall not have any
of the rights or privileges of a shareholder. A Participant shall have the
rights and privileges of a shareholder of the Company when, but not until, the
shares have been issued following exercise of the Participant's Option.
B-8
Section 15. Amendment of the Plan
The Board or the Committee may amend the Plan in such respects as it shall
deem advisable; provided, however, that, to the extent required for compliance
with Code Section 423 or any applicable law or regulation, shareholder approval
will be required for any amendment that will (a) increase the total number of
shares as to which Options may be granted under the Plan, (b) modify the class
of employees eligible to receive Options, or (c) otherwise require shareholder
approval under any applicable law or regulation.
Section 16. Termination of the Plan
(a) The Board may suspend or terminate the Plan at any time. Unless the Plan
shall theretofore have been terminated by the Board, the Plan shall terminate
on, and no Options shall be granted after, May 20, 2008. Except as provided in
Section 19, no such termination may affect any Options granted prior thereto.
No Options shall be granted during any period of suspension of the Plan.
(b) Notwithstanding the foregoing, the Plan or an Offering may be terminated
by the Board on a Purchase Date or by the Board's setting a new Purchase Date
with respect to an Offering and a Purchase Period then in progress if the Board
determines that termination of the Plan and/or the Offering is in the best
interests of the Company and the shareholders or if continuation of the Plan
and/or the Offering would cause the Company to incur adverse accounting charges
as a result of a change after the effective date of the Plan in the generally
accepted accounting rules applicable to the Plan.
Section 17. No Rights as an Employee
Nothing in the Plan shall be construed to give any person (including any
Eligible Employee or Participant) the right to remain in the employ of the
Company or a Subsidiary Corporation or to affect the right of the Company and a
Subsidiary Corporation to terminate the employment of any person (including any
Eligible Employee or Participant) at any time with or without cause.
Section 18. Effect Upon Other Plans
The adoption of the Plan shall not affect any other compensation or incentive
plans in effect for the Company or any Subsidiary Corporation. Nothing in the
Plan shall be construed to limit the right of the Company or any Subsidiary
Corporation to (a) establish any other forms of incentives or compensation for
employees of the Company or any Subsidiary Corporation or (b) grant or assume
options otherwise than under the Plan in connection with any proper corporate
purpose, including, but not by way of limitation, the grant or assumption of
options in connection with the acquisition, by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any
corporation, firm or association.
Section 19. Adjustments
19.1 Adjustment of Shares
In the event that, at any time or from time to time, a stock dividend, stock
split, spin-off, combination or exchange of shares, recapitalization, merger,
consolidation, distribution to shareholders other than a normal cash dividend,
or other change in the Company's corporate or capital structure results in (a)
the outstanding shares, or any securities exchanged therefor or received in
their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Stock, then (subject to any required action by the
Company's shareholders), the Board or the Committee, in its sole discretion,
shall make
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such equitable adjustments as it shall deem appropriate in the circumstances in
(i) the maximum number and kind of securities subject to the Plan as set forth
in Section 4 and (ii) the number and kind of securities that are subject to any
outstanding Option and the per share price of such securities. The
determination by the Board or the Committee as to the terms of any of the
foregoing adjustments shall be conclusive and binding.
19.2 Merger, Acquisition or Liquidation of the Company
In the event of the merger or consolidation of the Company into another
corporation, the acquisition by another corporation of all or substantially all
of the Company's assets, or the liquidation or dissolution of the Company, the
Purchase Date with respect to outstanding Options shall be the business day
immediately preceding the effective date of such merger, consolidation,
acquisition, liquidation or dissolution unless the Board or the Committee
shall, in its sole discretion, provide for the assumption or substitution of
such Options in a manner complying with Code Section 424(a).
19.3 Limitations
The grant of Options will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
Section 20.Registration
The Company shall be under no obligation to any Participant to register for
offering or resale under the Securities Act of 1933, as amended, or register or
qualify under state securities laws, any shares of Stock. The Company may issue
certificates for shares with such legends and subject to such restrictions on
transfer and stop-transfer instructions as counsel for the Company deems
necessary or desirable for compliance by the Company with federal and state
securities laws.
Section 21. Effective Date
The Plan's effective date is the date on which it is approved by the
Company's shareholders.
Plan approved by the Board on April 7, 1998 and by the shareholders on May
20, 1998. Plan amended by the Board on June 30, 1998. Plan amended and restated
by the Board on May 19, 1999 and August 17, 2001.
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PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
Date of
Adoption/ Date of
Amendment/ Shareholder
Adjustment Section Effect of Amendment Approval
---------- ------- ------------------- -----------
April 7, 1998 Board adoption of Plan May 20, 1998
June 30, 1998 7.1 Imposed $25,000 cap per offering Not required
period
May 19, 1999 5 Established quarterly offering and Not required
purchase periods
8 Established new purchase price for Not required
shares acquired under Plan
9.2 Established $21,250 per calendar Not required
year cap
9.3 Allowed $5/pay period minimum Not required
contribution
16 Allowed termination of Plan or Not required
Offering in event of adverse
accounting changes
August 17, 2001 4 Increased number of shares of September 27, 2001
stock available to be sold to
400,000
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EMERITUS CORPORATION
PROXY FOR THE 2001 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD SEPTEMBER 27, 2001
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoint(s) Daniel R. Baty, as the proxy with full
power of substitution and hereby authorizes him to represent and to vote as
designated below all the shares of Common Stock of Emeritus Corporation held of
record by the undersigned on August 15, 2001 at the 2001 Annual Meeting of
Shareholders to be held at the Columbia Winery, Milestone Room, 14030 N.E. 145th
Street, Woodinville, Washington 98072, at 10:00 a.m. on Thursday, September
27, 2001, with authority to vote upon the following matters and with
discretionary authority as to any other matters that may properly come before
the meeting or any adjournment or postponement thereof.
IMPORTANT - PLEASE DATE AND SIGN ON THE OTHER SIDE
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X FOLD AND DETACH HERE X
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Please mark X
your votes
as indicated
in this
example
FOR all nominees WITHHOLD
listed below AUTHORITY
(except as marked to vote for all nominees
to the contrary) listed below
1. ELECTION OF DIRECTORS:
Election of the following nominees to serve
as directors in the class indicated and for
the term indicated until their successors are
elected and qualified:
Class II (term expiring 2004): WITHHOLD AUTHORITY
01 Raymond R. Brandstrom to vote for the following
02 David T. Hamamoto
FOR AGAINST ABSTAIN
2. AMENDMENT OF THE EMERITUS CORPORATION AMENDED 1998
EMPLOYEE STOCK PURCHASE PLAN
3. RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL YEAR
2001.
(write the name(s) of nominee(s) in this space)
Unless otherwise directed all votes will be apportioned equally between those persons for whom authority is given to vote.
_______
|
|
I plan to attend the Annual Meeting
In their discretion, the proxies are authorized to vote upon such other business
as may properly be brought before the meeting or any adjournment or
postponement thereof. This Proxy, when properly executed will be voted in the
manner directed herein by the undersigned. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR" ALL THE OTHER ITEMS.
The undersigned acknowledges receipt from the Company prior to the execution
of this Proxy of a Notice of Annual Meeting of Shareholders and a Proxy Statement
dated August 17, 2001.
Please sign below exactly as your name appears on your stock certificate. When
shares are held jointly, each person must sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as such. An
authorized person should sign on behalf of corporations, partnerships and
associations and give his or her title.
YOUR VOTE IS IMPORTANT. PROMPT RETURN OF THIS PROXY CARD WILL
HELP SAVE THE EXPENSE OF ADDITIONAL SOLICITATION EFFORTS.
Signature(s)_______________________________________ Dated___________________, 2001
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X FOLD AND DETACH HERE X