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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-14012
EMERITUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
WASHINGTON 91-1605464
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3131 ELLIOTT AVENUE, SUITE 500 SEATTLE, WA 98121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(206) 298-2909
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $.0001 par value American Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), (2) and has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark that there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
Aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 2002, was $25,783,947.
As of February 28, 2002, 10,196,030 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of Form 10-K (items 10-13) is
incorporated herein by reference to the Registrant's definitive Proxy Statement
to be filed on or before April 30, 2002.
PAGE NO.
---------
. PART I
ITEM 1.. DESCRIPTION OF BUSINESS 1
ITEM 2.. DESCRIPTION OF PROPERTY 9
ITEM 3.. LEGAL PROCEEDINGS 15
ITEM 4.. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
. EXECUTIVE OFFICERS OF EMERITUS 16
. PART II
ITEM 5.. MARKET FOR REGISTRANTCOMMON EQUITY AND RELATED
. STOCKHOLDER MATTERS 18
ITEM 6.. SELECTED CONSOLIDATED FINANCIAL DATA 19
ITEM 7.. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
. AND RESULTS OF OPERATIONS 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38
ITEM 8.. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
ITEM 9.. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
. ACCOUNTING AND FINANCIAL DISCLOSURE 39
. PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 39
ITEM 11. EXECUTIVE COMPENSATION 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
. MANAGEMENT 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 39
. PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
. FORM 8-K 40
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Emeritus is one of the largest and most experienced national operators of
assisted living residential communities. Assisted living communities provide a
residential housing alternative for senior citizens who need help with the
activities of daily living, with an emphasis on assisted living and personal
care services.
At December 31, 2001, we held an interest in 133 assisted living communities,
consisting of approximately 12,200 units with a capacity for 14,000 residents,
located in 29 states and Japan. Of these, we operate 132 communities, including
16 communities that we own, 42 communities that we lease, and 74 communities
that we manage, including four in which we hold joint venture interests. Under
three management agreements covering 46 of our 74 managed communities, we have
options to purchase 38 communities and rights of first refusal on three
communities that expire June 30, 2003, and options to purchase five communities
that expire December 31, 2003.
We strive to provide a wide variety of assisted living services in a
professionally managed environment that allows our residents to maintain dignity
and independence. Our residents are typically unable to live alone, but do not
require the intensive care provided in skilled nursing facilities. Under our
approach, seniors reside in a private or semi-private residential unit for a
monthly fee based on each resident's individual service needs. We believe our
residential assisted living communities allow seniors to maintain a more
independent lifestyle than is possible in the institutional environment of
skilled nursing facilities. In addition, we believe that our services, including
assisting residents with activities of daily living, such as medication
management, bathing, dressing, personal hygiene and grooming, are attractive to
seniors who are inadequately served by independent living facilities.
The Assisted Living Industry
We believe that the assisted living industry is the preferred residential
alternative for seniors who cannot live independently due to physical or
cognitive frailties but who do not require the more intensive medical attention
provided by a skilled nursing facility.
Generally, assisted living provides housing and 24-hour personal support
services designed to assist seniors with the activities of daily living, which
include bathing, eating, personal hygiene, grooming, medication reminders,
ambulating and dressing. Certain assisted living facilities may offer higher
levels of personal assistance for residents with Alzheimer's disease or other
forms of dementia.
We believe that a number of factors will allow assisted living companies to
continue as one of the fastest growing choices for senior care:
* Consumer Preference. We believe that assisted living is preferred by
prospective residents as well as their families, who are often the decision
makers for seniors. Assisted living is a cost-effective alternative to other
types of care, offering seniors greater independence while enabling them to
reside longer in a more residential environment.
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* Cost-Effectiveness. The average annual cost to care for a Medicare or
Medicaid patient in a skilled nursing home can exceed $40,000. The average cost
to care for a private pay patient in a skilled nursing home can exceed $60,000
per year in certain markets. In contrast, assisting living services generally
cost 30% to 50% less than skilled nursing facilities located in the same region.
We also believe that the cost of assisted living services compares favorably
with home healthcare, particularly when costs associated with housing, meals and
personal care assistance are taken into account.
* Demographics. The target market for our services is generally persons 75
years and older who represent the fastest growing segments of the U.S.
population. According to the U.S. Census Bureau, the portion of the U.S.
population age 75 and older is expected to increase by 11.5% from approximately
16.6 million in 2000 to approximately 18.6 million by the year 2010. The number
of persons age 85 and older, as a segment of the U.S. population, is expected to
increase by 33.2% from approximately 4.3 million in 2000 to over 5.7 million by
the year 2010. Furthermore, the number of persons afflicted with Alzheimer's
disease is also expected to grow in the coming years. According to data
published by the Alzheimer's Association, this population will increase 127%
from the current 4.4 million to 10.0 million people by the year 2010. Because
Alzheimer's disease and other forms of dementia are more likely to occur as a
person ages, we expect the increasing life expectancy of seniors to result in a
greater number of persons afflicted with Alzheimer's disease and other forms of
dementia in future years, absent breakthroughs in medical research.
* Changing Family Dynamics. According to the U.S. Census Bureau, the median
income of the elderly population is increasing. Currently, more that 60 percent
of the population over the age of 75 have incomes over $15,000 per year and
slightly more than 35 percent have annual incomes of at least $25,000.
Accordingly, we believe that the number of seniors and their families who are
able to afford high-quality senior residential services, such as those we offer,
has also increased. In addition, the number of two-income households has
increased over the last decade and the geographical separation of senior family
members from their adult children has risen with the geographic mobility of the
U.S. population. As a result, many families that traditionally would have
provided the type of care and services we offer to senior family members are
less able to do so.
* Supply/Demand Imbalance. While the senior population is growing significantly,
the supply of skilled nursing beds per thousand is declining. We attribute this
imbalance to a number of factors in addition to the aging of the population.
Many states, in an effort to maintain control of Medicaid expenditures on
long-term care, have implemented more restrictive Certificate of Need
regulations or similar legislation that restricts the supply of licensed skilled
nursing facility beds. Additionally, acuity-based reimbursement systems have
encouraged skilled nursing facilities to focus on higher acuity patients. We
also believe that high construction costs and limits on government reimbursement
for construction and start-up expenses also have constrained the growth and
supply of traditional skilled nursing beds. We believe that these factors, taken
in combination, result in relatively fewer skilled nursing beds available for
the increasing number of seniors who require assistance with the activities of
daily living but do not require 24-hour medical attention.
2
Competitive Strengths
We compete with other assisted living communities located in the areas where we
operate. These communities are operated by individuals, local and regional
businesses and larger operators of regional and national groups of communities,
including public companies similar to us. We believe that we have the following
competitive strengths:
* State-of-the-Art Communities. Of our 132 operating communities, 65
communities have been built and opened since January 1, 1996 and reflect
state-of-the-art design and equipment. In addition, we have significantly
upgraded 48 of our older communities to improve their appearance and operating
efficiency. These upgrades include the finished appearance of the communities,
as well as various improvements to kitchens, nurse call systems and electronic
systems, including those for data transmission, data sharing and e-mail.
* Large Operating Scale. We believe that our size gives us significant
advantages over smaller operators. Given the scale of our operations, we have
the opportunity to select the best operating systems and service alternatives
and to develop a set of best practices for implementation on a national scale.
We also believe that, because of our size, we are able to purchase such items as
food, equipment, insurance and employee benefits at lower costs, and to
negotiate more favorable financing arrangements.
* Lower Cost of Communities. As of December 31, 2001, the average cost per
unit of our communities was approximately $64,700. We believe that these costs
are less than the current replacement costs of these communities and below the
average costs incurred by many other public companies operating in the industry.
We also believe that these lower capital costs give us opportunities to enhance
margins and greater flexibility in designing our rate structure and responding
to varying regional economic and regulatory changes.
* Geographic Diversification and Regional Focus. We operate our communities
in 29 states in all regions of the United States. We believe that because of
this geographic diversification we are less vulnerable to adverse economic
developments and industry factors, such as overbuilding and regulatory changes,
that are limited to a particular region. We believe that this also moderates the
effects of regional employment and competitive conditions. Within each region,
we have focused on establishing a critical mass of communities in secondary
markets, which enables us to maximize operating efficiencies.
* Experienced Management with Industry Relationships. Daniel R. Baty, our Chief
Executive Officer, has more than 30 years of experience in the long-term care
industry, ranging from independent living to skilled nursing care. We believe
that his experience and the relationships that he has developed with owners,
operators and sources of capital have helped us and will continue to help us
develop operating efficiencies, investment and joint venture relationships, as
well as obtain sources of debt and equity capital. Mr. Baty also has a
significant financial and management interest in Holiday Retirement Corporation,
an operator of independent living facilities, which we believe provides us with
an informal but important relationship with a complementary business. In
addition, our senior operating vice presidents have an average of 19 years of
experience with major companies in the long-term care industry. We believe that
this strong senior leadership, with proven
3
management skills, will allow us to take advantage of the opportunities present
in the assisted living industry.
Business Strategy
We believe that there is a significant demand for alternative long-term care
services that are well positioned between the limited services offered by
independent living facilities and the higher-level medical and institutional
care offered by skilled nursing facilities. Our goal is to become the national
leader in the assisted living segment of the long-term care industry through the
following strategy:
* Focus on Operations and Occupancy. Through 1998, we focused on rapidly
expanding our operations in order to assemble a portfolio of assisted living
communities with a critical mass of capacity. We pursued an aggressive
acquisition and development strategy during that time. Having achieved our
growth objective, in 1999 and continuing through 2001, we have substantially
reduced our pace of acquisition and development activities to concentrate on
improving community performance through both increased occupancy and revenue per
occupied unit. Initially, we focused most of our efforts on increasing occupancy
across our portfolio. Having achieved a portion of our total goal by late 1999,
we then shifted our efforts toward enhancing our rates, particularly in
facilities that were substantially below industry averages. This rate strategy
has led to increased rates across most of our portfolio. We believe that
continued focus on both rates and occupancy will continue to generate the
incremental growth in margins we are striving to achieve.
* Expand Business through Third Party Management Agreements. With the
current changes in the capital markets, we may be presented with, or look for,
opportunities for revenue growth through the use of third party management
agreements. We will take advantage of these opportunities if the managed
communities fit into our existing areas of operational strength and appropriate
geological proximity to the communities that we currently own or manage, and,
therefore require minimal incremental cost. We intend to manage these new
communities for a fee based on a percentage of their gross revenue.
* Acquire Communities Selectively. In 1998, we reduced our acquisition
activity in part to concentrate on the need to improve operations through
occupancy and rate enhancement. As we achieve these objectives, we expect to be
more receptive to acquisition opportunities that meet designated criteria. We
particularly expect to favor the acquisition of communities that provide more
complete coverage of our existing markets and intend to focus on acquisitions of
communities that have been originally designed as assisted living facilities and
that will have positive cash flow opportunities. We intend to be more selective
and measured in our acquisition strategy in the future.
* Appeal to the Middle Market. The market segment most attractive to us is
middle to upper-middle income seniors in smaller cities and suburbs with
populations of 50,000 to 150,000 persons. We believe that this "value-sensitive"
segment of the senior community is the largest, broadest and most stable. We
think that these markets are receptive to the development of new assisted living
communities and the expansion of existing communities.
4
Resident Services
Our assisted living communities offer residents a full range of services based
on individual resident needs in a supportive "home-like" environment. By
offering a full range of services, we can accommodate residents with a broad
range of service needs. The services that we provide to our residents are
designed to respond to their individual needs and to improve their quality of
life.
SERVICE LEVEL TYPE OF RESIDENT DESCRIPTION OF CARE PROVIDED
- ------------- ------------------------------- --------------------------------------------------------------
Basic Services. . All residents--independent, We offer these basic services to our residents:
. . . . assisted living and those with * three meals per day,
. . . . Alzheimer's and related * social and recreational activities,
. . . . dementia * weekly housekeeping and linen service,
. . . . * building maintenance and grounds keeping,
. . . . * 24-hour emergency response and security,
. . . . * licensed nurses on staff to monitor and coordinate care
. . . . needs, and
. . . . * transportation to appointments, etc.
- ----------------------------------------------------------------------------------------------------------------------
Assisted living . Assisted living residents We cater our assisted living services to each resident based on
services. . . . . his/her individual requirements for more frequent or intensive
. . . . assistance or increased care or supervision. We achieve this
. . . . individualized care, through consultation with the resident, the
. . . . resident's physician and the resident's family.
. . . .
. . . . We determine an individual resident's level of care by the
. . . . degree of assistance he/she requires in each of several categories.
. . . . Our categories of care include, but are not limited to:
. . . . * medication management and supervision,
. . . . * reminders for dining and recreational activities,
. . . . * assistance with bathing, dressing and grooming,
. . . . * incontinence,
. . . . * behavior management,
. . . . * dietary assistance, and
. . . . * miscellaneous (which consists of diabetic management,
. . . . prescription medication, transfer, simple treatment,
. . . . oxygen set up/maintenance and prosthesis).
- ----------------------------------------------------------------------------------------------------------------------
Special Care. . . Residents with Alzheimer's We have designed our Special Care program to meet the
Program . . . . . and related dementia specialized medical, psychological and social needs of our
(Alzheimer's &. . resident afflicted by this condition. In a manner consistent with
related dementia) our assisted living services, we help structure a service plan for
. . . . each resident based on his/her individual needs. Some of the key
. . . . service areas that we focus on to provide the best care for our
. . . . residents with Alzheimer's or related dementias center around:
. . . . * separate dining program,
. . . . * enhanced behavior interpretation and management,
. . . . * structured activity planning, and
. . . . * counseling for residents and their families.
- ----------------------------------------------------------------------------------------------------------------------
5
Service Revenue Sources
We rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe generally that
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business.
As third party reimbursement programs and other forms of payment continue to
grow, we intend to pursue these alternative forms of payment, depending on the
level of reimbursement provided in relation to the level of care provided. We
also believe that private long-term care insurance will increasingly become a
revenue source in the future, although it is currently small. All sources of
revenue other than residents' private resources constitute less than 10% of our
total revenues.
Management Activities
At December 31, 2001, we managed and provided administrative services to 74
assisted living communities under management agreements that typically provide
for management fees ranging from 3% to 7% of gross revenues. Management fees
were approximately $8.7 million in 2001. These management agreements have terms
ranging from two to five years, and may be renewed or renegotiated at the
expiration of the term. We have various categories of management agreements,
including:
* management agreements covering 46 communities in connection with the
Emeritrust transactions, which we will refer to extensively throughout this
document are summarized as follows:
* EMERITRUST I: 25 communities that we began managing in December 1998.
Until December 31, 2001, we received a base management fee of 5% of gross
revenues, but were entitled to receive up to 7% depending on the cash
flow performance of the communities managed. As of January 1, 2002,
however, we will receive a base management fee of 3% of gross revenues,
but may receive up to 7% depending on the cash flow performance of the
communities managed. Additionally, we are required by our management
contracts to fund cash operating deficits.
* EMERITRUST II: 21 communities that we began managing in March 1999,
consisting of:
* EMERITRUST II OPERATING: 16 communities for which we have
no obligation to fund cash operating deficits. We receive a
base management fee of 5% of gross revenues, but may
receive up to 7% depending on the cash flow performance of
the communities managed.
* EMERITRUST II DEVELOPMENT: 5 communities for which we are
required to fund cash operating deficits. We receive a base
management fee of 5% of gross revenues, but may receive up
to 7% depending on the cash flow performance of the
communities managed.
* management agreements covering 8 communities owned by Columbia House, a
limited partnership, and 10 additional communities, all owned by entities
controlled by Mr. Baty. We provide management services and administrative
services in connection with acquisition, development and financing activities
and generally receive fees ranging from 4% to 6% of the gross revenues generated
by the communities.
6
* management agreements covering four communities owned by joint ventures in
which we have a financial interest. We receive management fees ranging from 4%
to 7% of gross revenues.
* management agreements covering six communities owned by independent third
parties. We receive management fees ranging from 4% to 7% of gross revenues, or
similar arrangement based on occupied capacity.
Prior to 1999, we did not have material revenue from management agreements. If
we exercise our options to purchase the Emeritrust communities prior to June 10,
2003 (December 10, 2003, for the five Emeritrust II Development communities), or
if the management agreements expire on those dates and are not renewed, our
revenue from management fees will diminish substantially.
Marketing and Referral Relationships
Our operating strategy is designed to integrate our assisted living communities
into the continuum of healthcare providers in the geographic markets in which we
operate. One objective of this strategy is to enable residents who require
additional healthcare services to benefit from our relationships with local
hospitals, physicians, home healthcare agencies, and skilled nursing facilities
in order to obtain the most appropriate level of care. Thus, we seek to
establish relationships with local hospitals, through joint marketing efforts
where appropriate, and home healthcare agencies, alliances with visiting nurses
associations and, on a more limited basis, priority transfer agreements with
local, high-quality skilled nursing facilities. In addition to benefiting
residents, the implementation of this operating strategy has strengthened and
expanded our network of referral sources.
Administration
We employ an integrated structure of management, financial systems and controls
to maximize operating efficiency and contain costs. In addition, we have
developed the internal procedures, policies and standards we believe are
necessary for effective operation and management of our assisted living
communities. We have recruited experienced key employees from several
established operators in the long-term care services field and believe we have
assembled the administrative, operational and financial personnel who will
enable us to continue to manage our operating strategies effectively.
We have established Central, Eastern and Western Operational Divisions. A
division vice president heads each division. Each division consists of several
operating regions headed by a regional director of operations who provides
management support services for each of the communities in his/her respective
region. An on-site community director who, in certain jurisdictions, must
satisfy certain licensing requirements supervises day-to-day community
operations. We provide management support services to each of our residential
communities, including establishing operating standards, recruiting, training,
and financial and accounting services.
We have centralized finance and other operational functions at our headquarters
in Seattle, Washington, in order to allow community-based personnel to focus on
resident care. The Seattle office establishes certain policies and procedures
applicable to the entire company, oversees our financial and marketing
functions, manages our acquisition and development activities and provides our
overall strategic direction.
7
We use a blend of centralized and decentralized accounting and computer systems
that link each community with our headquarters. Through these systems, we are
able to monitor operating costs and distribute financial and operating
information to appropriate levels of management in a cost efficient manner. We
believe that our current data systems are adequate for current operating needs
and provide the flexibility to meet the requirements of our operations without
disruption or significant modification to existing systems beyond 2002. We use
high quality hardware and operating systems from current and proven technologies
to support our current technology infrastructure.
Competition
The number of assisted living communities continues to grow in the United
States. We believe that market saturation has had, and could continue to have,
an adverse effect on our communities and their ability to reach and maintain
stabilized occupancy levels. Moreover, the senior housing services industry has
been subject to pressures that have resulted in the consolidation of many small,
local operations into larger regional and national multi-facility operations. We
anticipate that our source of competition will come from local, regional and
national assisted living companies that operate, manage and develop residences
within the geographic area in which we operate, as well as retirement facilities
and communities, home healthcare agencies, not-for-profit or charitable
operators and, to a lesser extent, skilled nursing facilities and convalescent
centers. We believe that quality of service, reputation, community location,
physical appearance and price will be significant competitive factors. Some of
our competitors have significantly greater resources, experience and recognition
within the healthcare community than we do.
Employees
At December 31, 2001, we had 6,005 employees, including 4,409 full-time
employees, of which approximately 150 were employed at our headquarters. None of
our employees are currently represented by a labor union, and we are not aware
of any union-organizing activities among our employees. We believe that our
relationship with our employees is satisfactory.
Although we believe that we are able to employ sufficiently skilled personnel to
staff the communities we operate or manage, a shortage of skilled personnel in
any of the geographic areas in which we operate could adversely affect our
ability to recruit and retain qualified employees and to control our operating
expenses.
8
ITEM 2. DESCRIPTION OF PROPERTY
Communities
Our assisted living communities generally consist of one-story to three-story
buildings and include common dining and social areas. Twenty-two of our
operating communities offer some independent living services and three are
operated as skilled nursing facilities. The table below summarizes information
regarding our currently operating communities as of December 31, 2001.
EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
--------- ---------- ------- --------------------
ARIZONA
Arbor at Olive Grove * . . . . . . . . . . Phoenix Jun. 1994 98 111 Lease
La Villita * (2) . . . . . . . . . . . . . Phoenix Jun. 1994 92 92 First Refusal/Manage
Loyalton of Flagstaff (3). . . . . . . . . Flagstaff Jun. 1999 61 67 Option/Manage
Loyalton of Phoenix (3). . . . . . . . . . Phoenix Jan. 1999 101 111 Option/Manage
Scottsdale Royale~ . . . . . . . . . . . . Scottsdale Aug. 1994 63 63 Own
CALIFORNIA
Creston Village~ . . . . . . . . . . . . . Paso Robles Feb. 1998 100 110 Joint Venture
Emerald Hills. . . . . . . . . . . . . . . Auburn Jun. 1998 89 98 Lease
Fulton Villa . . . . . . . . . . . . . . . Stockton Mar. 1995 80 80 Own
Laurel Place *~ (2). . . . . . . . . . . . San Bernardino Apr. 1996 71 72 Option/Manage
Northbay Retirement~ . . . . . . . . . . . Fairfield Mar. 1998 172 189 Joint Venture
The Terrace~ (2) . . . . . . . . . . . . . Grand Terrace Mar. 1996 87 87 Option/Manage
Villa Del Rey *. . . . . . . . . . . . . . Escondido Mar. 1997 84 84 Own
CONNECTICUT
Cold Spring Commons *. . . . . . . . . . . Rocky Hill Apr. 1997 80 88 Lease
DELAWARE
Gardens at White Chapel (2). . . . . . . . Newark Jul. 1998 100 110 Option/Manage
Green Meadows at Dover . . . . . . . . . . Dover Oct. 1995 52 63 Lease
FLORIDA
The Allegro. . . . . . . . . . . . . . . . St. Augustine Aug. 1999 111 122 Manage
Barrington Place (2) . . . . . . . . . . . LeCanto May-1996 79 120 Option/Manage
Beneva Park Club (2) . . . . . . . . . . . Sarasota Jul. 1995 96 102 Option/Manage
9
EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
--------- ---------- ------- --------------------
The Pavillion at Crossing
Pointe *~ (2). . . . . . . . . . . . . . . Orlando Jul. 1995 174 190 Option/Manage
College Park Club * (2). . . . . . . . . . Bradenton Jul. 1995 85 93 Option/Manage
Colonial Park Club (3) . . . . . . . . . . Sarasota Aug. 1996 88 90 Option/Manage
Heritage Oaks. . . . . . . . . . . . . . . Tallahassee Dec. 1999 120 132 Manage
La Casa Grande . . . . . . . . . . . . . . New Port Richey May-1997 200 235 Own
The Lakes. . . . . . . . . . . . . . . . . Ft. Myers Jun-2000 154 190 Lease
The Lodge at Mainlands (2) . . . . . . . . Pinellas Park Aug. 1996 154 162 Option/Manage
Madison Glen (2) . . . . . . . . . . . . . Clearwater May-1996 135 154 First Refusal/Manage
Park Club of Brandon (3) . . . . . . . . . Brandon Jul. 1995 88 88 Option/Manage
Park Club of Ft. Myers (3) . . . . . . . . Ft. Myers Jul. 1995 77 82 Option/Manage
Park Club of Oakbridge (3) . . . . . . . . Lakeland Jul. 1995 88 88 Option/Manage
River Oaks . . . . . . . . . . . . . . . . Englewood May-1997 155 200 Own
Springtree (2) . . . . . . . . . . . . . . Sunrise May-1996 179 246 Option/Manage
Stanford Centre. . . . . . . . . . . . . . Altamonte Springs May-1997 118 180 Own
IDAHO
Bestland Retirement. . . . . . . . . . . . Coeur d Nov. 1996 83 86 Manage
Highland Hills~ (3). . . . . . . . . . . . Pocatello Oct. 1996 49 55 Option/Manage
Juniper Meadows. . . . . . . . . . . . . . Lewiston Nov. 1997 82 90 Own
Loyalton of Coeur d'Alene~(3). . . . . . . Coeur d'Alene Mar. 1996 108 114 Option/Manage
Ridge Wind (3) . . . . . . . . . . . . . . Chubbuck Aug. 1996 80 106 Option/Manage
Summer Wind. . . . . . . . . . . . . . . . Boise Sep. 1995 49 53 Lease
ILLINOIS
Canterbury Ridge . . . . . . . . . . . . . Urbana Nov. 1998 101 111 Lease
Rockford . . . . . . . . . . . . . . . . . Rockford Jun. 2000 100 110 Manage
IOWA
Silver Pines . . . . . . . . . . . . . . . Cedar Rapids Jan. 1995 80 80 Own
KANSAS
Elm Grove Estates (2). . . . . . . . . . . Hutchinson Apr. 1997 121 133 Option/Manage
KENTUCKY
Stonecreek Lodge * . . . . . . . . . . . . Louisville Apr. 1997 80 88 Lease
10
EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
--------- ---------- ------- --------------------
MARYLAND
Emerald Estates. . . . . . . . . . . . . . Baltimore Oct. 1999 120 134 Manage
Loyalton of Hagerstown (3) . . . . . . . . Hagerstown Jul. 1999 100 110 Option/Manage
MASSACHUSETTS
Canterbury Woods . . . . . . . . . . . . . Attleboro Jun. 2000 130 130 Manage
The Lodge at Eddy Pond . . . . . . . . . . Auburn Jan. 2000 108 110 Lease
Meadow Lodge at Drum Hill *. . . . . . . . Chelmsford Aug. 1997 80 88 Own
The Pines at Tewksbury * (3) . . . . . . . Tewksbury Jan. 1996 49 65 Option/Manage
Woods at Eddy Pond * . . . . . . . . . . . Auburn Mar. 1997 80 88 Lease
MISSISSIPPI
Loyalton of Biloxi . . . . . . . . . . . . Biloxi Jan. 1999 83 91 Lease
Loyalton of Hattiesburg. . . . . . . . . . Hattiesburg Jul. 1999 79 83 Lease
Ridgeland Pointe * . . . . . . . . . . . . Ridgeland Aug. 1997 79 87 Joint Venture
Silverleaf Manor . . . . . . . . . . . . . Meridian Jul. 1998 101 111 Manage
Trace Point. . . . . . . . . . . . . . . . Clinton Oct. 1999 100 110 Manage
MISSOURI
Autumn Ridge~. . . . . . . . . . . . . . . Herculaneum Jun. 1997 94 94 Manage
MONTANA
Springmeadows Residence. . . . . . . . . . Bozeman Apr. 1997 74 81 Own
NEVADA
Concorde * . . . . . . . . . . . . . . . . Las Vegas Nov. 1996 116 128 Own
NEW JERSEY
Laurel Lake Estates. . . . . . . . . . . . Voorhees Jul. 1995 117 119 Lease
Loyalton of Cape May . . . . . . . . . . . Cape May May 2001 100 110 Manage
NEW YORK
Bassett Manor (1). . . . . . . . . . . . . Williamsville Nov. 1996 103 105 Lease
Bassett Park Manor (1) . . . . . . . . . . Williamsville Nov. 1996 78 80 Lease
Bellevue Manor (1) . . . . . . . . . . . . Syracuse Nov. 1996 90 90 Lease
Colonie Manor (1). . . . . . . . . . . . . Latham Nov. 1996 94 94 Lease
East Side Manor (1). . . . . . . . . . . . Fayetteville Nov. 1996 80 88 Lease
Green Meadows at Painted Post (1). . . . . Painted Post Oct. 1995 73 96 Lease
The Landing at Brockport . . . . . . . . . Brockport Jul. 1999 84 92 Manage
The Landing at Queensbury. . . . . . . . . Queenbury Nov. 1999 84 92 Manage
Loyalton of Lakewood (3) . . . . . . . . . Lakewood Jul. 1999 83 91 Option/Manage
Perinton Park Manor (1). . . . . . . . . . Fairport Nov. 1996 78 86 Lease
West Side Manor--Rochester(1) . .. . . . . Rochester Nov. 1996 72 72 Lease
West Side Manor--Syracuse(1) . . . . . . . Syracuse Nov. 1996 78 80 Lease
11
EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
--------- ---------- ------- --------------------
Woodland Manor (1) . . . . . . . . . . . . Vestal Nov. 1996 60 116 Lease
NORTH CAROLINA
Heritage Hills Retirement Community~ . . . Hendersonville Feb. 1996 99 99 Own
Heritage Lodge Assisted Living . . . . . . Hendersonville Feb. 1996 20 24 Lease
Pine Park Retirement Community~ . . . . . Hendersonville Feb. 1996 110 110 Lease
Pines of Goldsboro . . . . . . . . . . . . Goldsboro Sep. 1998 101 111 Manage
OHIO
Brookside Estates (2). . . . . . . . . . . Middleburg Heights Sep. 1998 99 101 Option/Manage
The Landing at Canton. . . . . . . . . . . Canton Aug. 2000 84 92 Manage
Lodge at Montgomery. . . . . . . . . . . . Cincinnati Jun. 2000 214 274 Manage
Park Lane. . . . . . . . . . . . . . . . . Toledo Jan. 1998 92 101 Manage
OREGON
Meadowbrook (3). . . . . . . . . . . . . . Ontario Jun. 1995 53 55 Option/Manage
PENNSYLVANIA
Green Meadows at Allentown . . . . . . . . Allentown Oct. 1995 76 97 Lease
Green Meadows at Latrobe . . . . . . . . . Latrobe Oct. 1995 84 125 Lease
SOUTH CAROLINA
Anderson Place--The Summer
House ~(3) . . . . . . . . . . . . . . . . Anderson Oct. 1996 30 40 Option/Manage
Anderson Place--Cottages . . . . . . . . . Anderson Oct. 1996 75 75 Option/Manage
Anderson Place--The Health
Center # (3) . . . . . . . . . . . . . . . Anderson Oct. 1996 22 44 Option/Manage
Bellaire Place * (2) . . . . . . . . . . . Greenville May-1997 81 89 Option/Manage
Countryside Park . . . . . . . . . . . . . Easley Feb. 1996 48 66 Lease
Countryside Village Assisted Living. . . . Easley Feb. 1996 48 78 Lease
Countryside Village Health Care
Center # . . . . . . . . . . . . . . . . . Easley Feb. 1996 24 44 Lease
Countryside Village Retirement Center. . . Easley Feb. 1996 72 75 Lease
Skylyn Health Center # . . . . . . . . . . Spartanburg Feb. 1996 26 48 Lease
Skylyn Personal Care Center. . . . . . . . Spartanburg Feb. 1996 115 131 Lease
Skylyn Retirement Community. . . . . . . . Spartanburg Feb. 1996 120 120 Lease
York Care. . . . . . . . . . . . . . . . . York Sep. 1999 82 164 Manage
12
EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
--------- ---------- ------- --------------------
TENNESSEE
Walking Horse Meadows ~ * (2) .. . . . . . Clarksville Jun. 1997 50 55 Option/Manage
TEXAS
Amber Oaks * . . . . . . . . . . . . . . . San Antonio Apr. 1997 163 275 Lease
Cambria *. . . . . . . . . . . . . . . . . El Paso Sep. 1996 79 87 Lease
Dowlen Oaks (2). . . . . . . . . . . . . . Beaumont Dec. 1996 79 87 Option/Manage
Eastman Estates (2). . . . . . . . . . . . Longview Jun. 1997 70 77 Option/Manage
Elmbrook Estates (3) . . . . . . . . . . . Lubbock Dec. 1996 79 87 Option/Manage
Lakeridge Place (2). . . . . . . . . . . . Wichita Falls Jun. 1997 79 87 Option/Manage
Meadowlands Terrace * (2). . . . . . . . . Waco Jun. 1997 71 78 First Refusal/Manage
Myrtlewood Estates (2) . . . . . . . . . . San Angelo May-1997 79 87 Option/Manage
The Palisades *~ . . . . . . . . . . . . . El Paso Apr. 1997 158 215 Lease
Redwood Springs. . . . . . . . . . . . . . San Marcos Apr. 1997 90 90 Lease
Saddleridge Lodge (2). . . . . . . . . . . Midland Dec. 1996 79 87 Option/Manage
Seville Estates * (2). . . . . . . . . . . Amarillo Mar. 1997 50 55 Option/Manage
Sherwood Place * . . . . . . . . . . . . . Odessa Sep. 1996 79 87 Lease
Vickery Towers at Belmont~ . . . . . . . . Dallas Apr. 1995 301 331 Manage
UTAH
Emeritus Estates (2) . . . . . . . . . . . Ogden Feb. 1998 83 91 Option/Manage
VIRGINIA
Carriage Hill Retirement . . . . . . . . . Bedford Sep. 1994 91 137 Lease
Cobblestones at Fairmont * . . . . . . . . Manassas Sep. 1996 75 82 Own
Loyalton of Staunton (3) . . . . . . . . . Staunton Jul. 1999 101 111 Option/Manage
Wilburn Gardens. . . . . . . . . . . . . . Fredericksburg Jan. 1999 101 111 Manage
WASHINGTON
Arbor Place at Silver Lake . . . . . . . . Everett Jun. 1999 101 111 Manage
Charlton Place . . . . . . . . . . . . . . Tacoma Jul. 1998 96 105 Manage
Cooper George ~* . . . . . . . . . . . . . Spokane Jun. 1996 140 158 Partnership
Courtyard at the Willows * . . . . . . . . Puyallup Sep. 1997 101 111 Own
Evergreen Lodge (3). . . . . . . . . . . . Federal Way Apr. 1996 98 124 Option/Manage
Fairhaven Estates * (3). . . . . . . . . . Bellingham Oct. 1996 50 55 Option/Manage
Garrison Creek Lodge * . . . . . . . . . . Walla Walla Jun. 1996 80 88 Lease
Harbour Pointe Shores (2). . . . . . . . . Ocean Shores Feb. 1997 50 55 Option/Manage
The Hearthstone (3). . . . . . . . . . . . Moses Lake Nov. 1996 84 92 Option/Manage
The Hearthside . . . . . . . . . . . . . . Issaquah Feb. 2000 98 98 Own
Kirkland Lodge . . . . . . . . . . . . . . Kirkland Mar. 1996 74 84 Own
Renton Villa * . . . . . . . . . . . . . . Renton Sep. 1993 79 97 Lease
Richland Gardens . . . . . . . . . . . . . Richland May-1998 100 110 Manage
13
EMERITUS
OPERATIONS UNITS BEDS
COMMUNITY LOCATION COMMENCED (A) (B) INTEREST
--------- ---------- ------- --------------------
Seabrook * . . . . . . . . . . . . . . . . Everett Jun. 1994 60 62 Lease
WEST VIRGINIA
Charleston Gardens . . . . . . . . . . . . Charleston Aug. 2001 100 132 Manage
WYOMING
Park Place ~(2). . . . . . . . . . . . . . Casper Feb. 1996 60 60 Option/Manage
JAPAN
San Oaks . . . . . . . . . . . . . . . . . Kurashiki Dec. 1999 114 158 Joint Venture
------- -------
Total Operating Communities 12,248 14,026
======== =======
* Near an existing or proposed Holiday facility.
~ Currently offers independent living services.
# Currently operates as a skilled nursing facility.
(a) A unit is a single- or double-occupancy residential living space,
typically an apartment or studio.
(b) "Beds" reflects the actual number of beds, which in no event is greater
than the maximum number of licensed beds allowed under the community's
license.
(1) We provide administrative services to the community that is operated by
Painted Post Partners through a lease agreement with an independent
third party.
(2) On December 31, 1998, an investor group acquired these communities
("Emeritrust I") from Meditrust. We hold an option or a right of first
refusal to purchase the communities, expiring on June 10, 2003, at a
formula price based on a specified return to the investor group. We
manage the communities during the option term.
(3) On March 31, 1999, an investor group acquired these communities
("Emeritrust II") from Meditrust. We hold an option to purchase the
communities, expiring on June 10, 2003, or December 10, 2003, for the
five development communities, at a formula price based on a specified
return to the investor group. We manage the communities during the
option term.
14
Executive Offices
Our executive offices are located in Seattle, Washington, where we lease
approximately 26,500 square feet of space. Our lease agreement includes a term
of 10 years, expiring July 2006, with two five-year renewal options.
ITEM 3. LEGAL PROCEEDINGS
In August 2000, Emeritus began arbitration proceedings with Corio Inc. ("Corio")
in connection with a contract dispute. In 1999, we entered into an agreement
with Corio, pursuant to which Corio would plan, implement, and finalize our new
accounting software program. In March 2000, Emeritus canceled the implementation
of the program prior to its completion. Corio asserted a claim for breach of
contract for $1.4 million, requesting payment of the full contract value. Both
parties contacted AAA Arbitration as specified in the leasing and service
contract, and the dispute was settled in February 2001 for $500,000,
representing reimbursement for actual expenditures incurred by Corio. Payment of
$300,000 was made in 2001. The remaining payments are to be remitted over a
two-year term as follows: $150,000 in 2002 and $50,000 in 2003. This balance has
been accrued and is included in the consolidated financial statements for the
year ended December 31, 2001.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Emeritus did not submit any matter to a vote of its security holders during the
fourth quarter of its fiscal year ended December 31, 2001.
EXECUTIVE OFFICERS OF EMERITUS
The following table presents certain information about our executive officers.
There are no family relationships between any of the directors or executive
officers.
Name Age Position
- ------------------------- ------- ----------------------------------------------------
Daniel R. Baty. . . . . 58 Chairman of the Board and Chief Executive Officer
Raymond R. Brandstrom . 49 Vice President of Finance, Secretary, Chief Financial
Officer and Vice Chairman of the Board
Gary S. Becker. . . . . 54 Senior Vice President of Operations
Martin D. Roffe . . . . 54 Vice President, Financial Planning
Suzette McCanless . . . 53 Vice President, Operations--Eastern Division
Russell G. Kubik. . . . 48 Vice President, Operations--Central Division
Peter Kacy Kang . . . . 34 Vice President, Operations--Western Division
Kellie S. Murray. . . . 48 Vice President of Human Resources
Susan A. Scherr . . . . 53 Vice President of Signature Services
Daniel R. Baty, one of Emeritus' 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 Management, Inc. Both of these companies are
wholly owned by Mr. Baty and are engaged in developing independent living
facilities and providing consulting services for that market.
Raymond R. Brandstrom, one of Emeritus' 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' 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 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.
Gary S. Becker joined Emeritus as Western Division Director in January 1997, was
promoted to Vice President, Operations-Western Division in September 1999, and
then promoted to Senior Vice President of Operations in March 2000. Mr. Becker
has 28 years of health care management experience. From October 1993 to December
1996 he was Vice President of Operations for the Western Division of Sunrise
Healthcare Corp. From 1982 to October 1993 he was Vice President of Operations
for the Mid-West division of the Hillhaven Corporation.
16
Martin D. Roffe joined Emeritus as Director of Financial Planning in March 1998,
and was promoted to Vice President of Financial Planning in October 1999. Mr.
Roffe has 29 years experience in the acute care, long-term care, and senior
housing industries. Prior to joining Emeritus, from May 1987 until February
1996, Mr. Roffe served as Vice President of Financial Planning for the Hillhaven
Corporation, at which he also held the previous positions of Sr. Application
Analyst and Director of Financial Planning, from January 1983 to April 1987.
Prior to 1983, Mr. Roffe served in a Budget Director capacity for Acute Care
Facilities.
Suzette McCanless joined Emeritus as Eastern Division Director of Operations in
March 1997 and was promoted to Vice President of Operations-Eastern Division, in
September 1999. Ms. McCanless has 21 years of health care management experience.
Prior to joining Emeritus, from July 1996 to February 1997, she was Group Vice
President for Beverly Enterprises, Inc., at which she also held the previous
positions of Administrator and Regional Director of Operations from June 1983 to
March 1994. In the interim, Ms. McCanless worked for Delta Health Group, from
April 1994 to August 1995, as Regional Director of Operations, and at
Hillhaven/Vencor Corporation as the Director of Operations from September 1995
to June 1996.
Russell G. Kubik joined Emeritus as Central Division Director of Operations in
April 1997 and was promoted to Vice President, Operations - Central Division, in
September 1999. Mr. Kubik has 17 years of health care management experience.
Prior to joining Emeritus, from 1994 to 1997, Mr. Kubik served as Regional
Director of Operations for Sun Healthcare Group in the Seattle/Puget Sound area.
From May 1992 to March 1994, Mr. Kubik worked as Regional Director of Operations
for Beverly Enterprises, Inc. in Washington and Idaho.
Peter Kacy Kang joined Emeritus as Regional Director of Operations in June 1997
and was promoted to Senior Director of Operations - Western Division, in
February 2001. Mr. Kang was then promoted to Vice President of Operations -
Western Division in August 2001. Prior to joining Emeritus, Mr. Kang operated
nursing and rehabilitation facilities for Beverly Enterprises from 1991 to 1994
and Sun Health Care from 1994 through 1997. He also holds a Master of Science
degree from Columbia University in Administration.
Kellie S. Murray joined Emeritus as Director of Human Resources in September
1999. Ms. Murray was promoted to Vice President of Human Resources in April
2001. Ms. Murray has 17 years of health care and human resources management
experience. From January 1995 to September 1999 she was Vice President of Human
Resources for the Western Group of Sunrise Healthcare Corporation. From 1985 to
December 1994 she was Human Resources Manager for Virginia Mason Medical Center.
Susan A. Scherr joined Emeritus as a Regional Support Specialist in October 1999
and was promoted to Director of Signature Services and a member of the Emeritus
Senior Management team in December 1999. In April 2001 Susan became Vice
President of Signature Services, providing leadership and direction to Emeritus
through Sales and Marketing, Education and Training, Dining Services, and
Wellness and Activities Programming. Susan brings to Emeritus more than 17
years in the assisted living, acute and skilled care, and hospice/home health
industries.
17
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the American Stock Exchange under the symbol
"ESC" since November 21, 1995, the date of our initial public offering. The
following table sets forth for the periods indicated the high and low closing
prices for our common stock as reported on AMEX.
High Low
--------- --------
2001
First Quarter. $ 1.7500 $ 0.9000
Second Quarter $ 2.6000 $ 0.8000
Third Quarter. $ 2.5000 $ 1.4500
Fourth Quarter $ 2.3200 $ 1.6000
2000
First Quarter. $ 7.0000 $ 4.2500
Second Quarter $ 4.1875 $ 2.5000
Third Quarter. $ 3.5000 $ 2.1250
Fourth Quarter $ 2.0000 $ 1.1250
1999
First Quarter. $15.1250 $11.3750
Second Quarter $12.1250 $ 9.7500
Third Quarter. $10.0000 $ 7.5000
Fourth Quarter $ 7.8125 $ 5.1250
As of February 28, 2002, the number of record holders of our Common Stock was
138.
We have never declared or paid any dividends on our Common Stock, and expect to
retain any future earnings to finance the operation and expansion of our
business. Future dividend payments will depend on our results of operations,
financial condition, capital expenditure plans and other obligations and will be
at the sole discretion of our Board of Directors. Certain of our existing leases
and lending arrangements contain provisions that restrict our ability to pay
dividends, and it is anticipated that the terms of future leases and debt
financing arrangements may contain similar restrictions. Therefore, we do not
anticipate paying any cash dividends on our Common Stock in the foreseeable
future.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Consolidated Statements of
Operations Data" and "Consolidated Balance Sheet Data" for, and as of the end
of, each of the years in the five-year period ended December 31, 2001, are
derived from the consolidated financial statements of Emeritus Corporation,
which financial statements have been audited by KPMG LLP, independent auditors.
The consolidated financial statements as of December 31, 2001 and 2000, and for
each of the years in the three-year period ended December 31, 2001, are included
elsewhere in this document.
Year Ended December 31,
-----------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Consolidated Statements of Operations Data:
Total operating revenues . . . . . . . . . . . . . . . . $140,577 $125,192 $122,642 $151,820 $117,772
Total operating expenses . . . . . . . . . . . . . . . . 133,202 125,905 125,330 173,823 140,912
--------- --------- --------- --------- ---------
Income (loss) from operations. . . . . . . . . . . . . . 7,375 (713) (2,688) (22,003) (23,140)
Other, net . . . . . . . . . . . . . . . . . . . . . . . (11,609) (21,223) (18,016) (6,776) (5,071)
Extraordinary loss on extinguishment of debt . . . . . . - - (333) (937) -
Cumulative effect of change in accounting principle. . . - - - (1,320) -
--------- --------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . (4,234) (21,936) (21,037) (31,036) (28,211)
Preferred stock dividends. . . . . . . . . . . . . . . . 6,368 5,327 2,250 2,250 425
--------- --------- --------- --------- ---------
Net loss to common shareholders . . . . . . . . . . . . $(10,602) $(27,263) $(23,287) $(33,286) $(28,636)
========= ========= ========= ========= =========
Loss per common share before extraordinary item and
cumulative effect of change in accounting principle--
basic and diluted. . . . . . . . . . . . . . . . . $ (1.04) $ (2.69) $ (2.19) $ (2.96) $ (2.60)
Extraordinary loss per common share--basic and diluted . - - (0.03) (0.09) -
Cumulative effect of change in accounting principle. . .
loss per common share -- basic and diluted. . . . . . - - - (0.12) -
--------- --------- --------- --------- ---------
Net loss per common share -- basic and diluted . . . . . $ (1.04) $ (2.69) $ (2.22) $ (3.17) $ (2.60)
========= ========= ========= ========= =========
Weighted average number of common shares outstanding--
basic and diluted . . . . . . . . . . . . . . . . . . . 10,162 10,117 10,469 10,484 11,000
========= ========= ========= ========= =========
Communities in which we have an interest . . . . . . . . 133 135 129 113 99
Number of units. . . . . . . . . . . . . . . . . . . . . 12,248 12,412 11,726 9,972 8,624
December 31,
----------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- --------
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 9,811 $ 7,496 $ 12,860 $ 11,442 $ 17,537
Working capital (deficit) . . . . . . . . . . . . . . . . (12,100) (81,167) 6,828 (977) 12,074
Total assets. . . . . . . . . . . . . . . . . . . . . . . 168,428 178,079 198,370 192,870 228,573
Long-term debt, less current portion. . . . . . . . . . . 131,070 60,499 128,319 119,674 108,117
Convertible debentures. . . . . . . . . . . . . . . . . . 32,000 32,000 32,000 32,000 32,000
Redeemable preferred stock. . . . . . . . . . . . . . . . 25,000 25,000 25,000 25,000 25,000
Shareholders' equity (deficit). . . . . . . . . . . . . . (74,141) (65,803) (37,290) (45,964) 1,207
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Emeritus is a Washington corporation organized by Daniel R. Baty and two other
founders in 1993. In November 1995, we completed our initial public offering
and began our expansion strategy.
Through 1998, we focused on rapidly expanding our operations in order to
assemble a portfolio of assisted living communities with a critical mass of
capacity. We pursued an aggressive acquisition and development strategy during
that time, acquiring 35 and developing 10 communities in 1996, acquiring 7 and
developing 20 communities in 1997, and developing 5 communities in 1998. During
1999 and continuing through 2001, we have substantially reduced our pace of
acquisition and development activities to concentrate on improving our
operations and increasing occupancy and our average revenue per unit.
In our consolidated portfolio, our rate enhancement program brought about an
increase in average monthly revenue per occupied unit to $2,405 for 2001 from
$2,213 for 2000. This represents an average revenue increase of $192 per month
per occupied unit, or 8.7%. The average occupancy rate decreased slightly to
84.1% in 2001 from 85.8% during 2000.
In our total operated portfolio, which includes managed communities, our rate
enhancement program brought about an increase in average monthly revenue per
occupied unit to $2,294 for 2001 from $2,109 for 2000. This represents an
average revenue increase of $185 per month per occupied unit, or 8.8% . The
average occupancy rate decreased slightly to 81.6% in 2001 from 81.7% during
2000.
We intend to continue a selective growth strategy through acquiring and
developing new communities with operating characteristics consistent with our
current emphasis on stabilizing occupancy and enhancing our operating model and
service offerings.
20
The following table sets forth a summary of our property interests.
As of December 31,
----------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Buildings Units Buildings Units Buildings Units
---------- ---------- ---------- ---------- ---------- ----------
Owned (1) . . . . . . . . . . . . . . . 16 1,579 16 1,579 16 1,572
Leased (1). . . . . . . . . . . . . . . 42 3,444 45 3,700 40 3,302
Managed/Admin Services. . . . . . . . . 70 6,620 69 6,528 68 6,247
Joint Venture/Partnership . . . . . . . 5 605 5 605 5 605
---------- ---------- ---------- ---------- ---------- ----------
Operated Portfolio . . . . . . . . 133 12,248 135 12,412 129 11,726
Percentage increase (decrease) (2) (1%) (1%) 5% 6% 14% 18%
Pending Acquisitions. . . . . . . . . . - - - - 2 206
New Developments (3). . . . . . . . . . - - 2 200 6 604
---------- ---------- ---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . 133 12,248 137 12,612 137 12,536
---------- ---------- ---------- ---------- ---------- ----------
Percentage increase (decrease) (2) (3%) (3%) 0% 1% (12%) (5%)
- --------
(1) Included in our consolidated portfolio of communities.
(2) The percentage increase (decrease) indicates the change from the prior
period.
(3) The communities under development at December 31, 2000, were developed
by third parties, but are currently managed by Emeritus.
We rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less expensive than in a skilled nursing facility, we believe that generally
only seniors with income or assets meeting or exceeding the regional median can
afford to reside in our communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for assisted living services could
therefore have an adverse effect on our business. All sources of revenue other
than residents' private resources constitute less than 10% of our total
revenues.
We have incurred net operating losses since our inception. As of December 31,
2001, we had an accumulated deficit of approximately $141.7 million. These
losses resulted from a number of factors, including:
* occupancy levels at our communities that were lower for longer periods
than we originally anticipated;
* financing costs that we incurred as a result of multiple financing and
refinancing transactions; and
* administrative and corporate expenses that we increased to facilitate our
growth and maintain operations.
During 1998, we decided to reduce acquisition and development activities and
dispose of select communities that had been operating at a loss. We believe
that slowing our acquisition and development activities has enabled us to use
our resources more efficiently and increase our focus on enhancing community
operations.
21
EMERITRUST TRANSACTIONS
In two separate transactions during the fall of 1998 and the spring of 1999, we
arranged for two investor groups to purchase an aggregate of 41 of our operating
communities and five communities under development for a total purchase price of
approximately $292.2 million. Of the 46 communities involved, 43 had been, or
were proposed to be, leased to us by Meditrust Company LLC under sale/leaseback
financing arrangements, and three had been owned by us. The first purchase,
consisting of 25 communities, which we will call the Emeritrust I communities,
was completed in December 1998 and the second purchase, consisting of 21
communities, 16 of which we will call the Emeritrust II Operating communities
and five of which we call the Emeritrust II Development communities, was
completed in March 1999.
Of the $168.0 million purchase price for the Emeritrust I communities, $138.0
million was financed through a three-year first mortgage loan with an
independent third party and $30.0 million was financed through subordinated debt
and equity investments from the investor group, which includes Daniel R. Baty,
our Chief Executive Officer, who is also a director and a principal shareholder.
Of the $124.2 million purchase price for the Emeritrust II Operating communities
and Emeritrust II Development communities, approximately $99.6 million was
financed through three-year first mortgage loans with independent third parties
and $24.6 million was financed through subordinated debt and equity investments
from the investor group, which includes Mr. Baty.
The investor groups retained us to manage all of the communities through
December 31, 2001, and granted us options to purchase the communities during
this period. During 2000, the Emeritrust I communities failed to comply with
covenants under the $138 million mortgage loan and in 2001 it became clear that
we would not be able to purchase the communities under the options. As a
result, in January 2002, the mortgage loans were restructured and the management
agreements and options to purchase were extended to June 30, 2003 (to December
31, 2003 in the case of the five Emeritrust II Development communities). The
discussion below reflects the terms of these arrangements as modified.
From January 1, 2002, through June 30, 2003, we will receive for the Emeritrust
I communities a base management fee of 3% of gross revenues generated by the
communities and an additional management fee of 4%, payable out of 50% of cash
flow. The availability of cash flow to pay management fees is subject to prior
payment of expenses and fees related to the restructuring of the mortgage loan
in 2001. For the Emeritrust II Operating communities and the Emeritrust II
Development communities, we have received and continue to receive a base
management fee of 5% of gross revenues and an additional management fee of 2%,
payable to the extent that the communities meet certain cash flow standards.
Prior to January 1, 2001, the management fees for the Emeritrust I communities
were also computed in this fashion.
Under the management agreements, we are obligated to reimburse the investor
groups for cumulative cash operating losses greater than $4.5 million in the
case of the Emeritrust I communities and $500, 000 in the case of each of the
five Emeritrust II Development communities. Since these thresholds have been
exceeded, we are currently responsible for most cash operating losses generated
by these communities if they occur. There is no such funding arrangement with
respect to the Emeritrust II Operating communities. Our funding obligations for
the Emeritrust I communities have been $1.3 million, $4.9 million and $1.9
million for 2001, 2000 and 1999, respectively. Our funding obligations for the
Emeritrust II Development communities have been $310,000 and $1.6 million in
2001 and 2000, respectively.
22
2000 and 1999, respectively. Our funding obligations for the Emeritrust II
Development communities have been $310,000 and $1.6 million in 2001 and 2000,
respectively.
Although the amounts of our funding obligation each year include management fees
earned by us under the management agreements, we do not recognize these
management fees as revenue in our financial statements to the extent that we are
funding the cash operating losses that include them. Correspondingly, we
recognize the funding obligation under the agreement, less the applicable
management fees, as an expense in our financial statements under the category
"Other, net." Conversely, if the applicable management fees exceed our funding
obligation, we recognize the management fees less the funding obligation as
management fee revenue in our consolidated financial statements. Management
fees earned for the Emeritrust I communities have been $4.0 million, $2.1
million and $1.9 million in 2001, 2000 and 1999, respectively, of which $2.8
million have been recognized in 2001. Management fees earned for the Emeritrust
II Development communities have been $766,000 and $360,000, of which $673,000
and $174,000 have been recognized in 2001 and 2000, respectively. Management
fees earned for the Emeritrust II Operating communities have been $1.9 million
earned and recognized in both 2001 and 2000.
We have an option to purchase 43 of the 46 Emeritrust Communities and a right of
first refusal with respect to the remaining three communities, both of which
expire June 30, 2003 (December 31, 2003 in the case of the five Emeritrust II
Development communities). The option must be exercised with respect to all
communities or may not be exercised at all. If investor groups require Mr. Baty
to purchase certain of the communities, upon the conditions described below, we
have the right to exercise our option within 60 days of receiving notice of this
action. The option price for the 43 Emeritrust communities is equal to the
original cost of the communities of approximately $292 million, plus an amount
that would provide the investor groups with an 18% rate of return, compounded
annually, on their original investment of $54.6 million (less any cash
distributions received). In connection with the exercise of the option, we are
also obligated to pay certain costs and fees.
The management agreements, including the options to purchase the related
communities, are subject to various termination provisions, including
cross-default provisions among all three groups of communities. The management
agreement for the Emeritrust I communities may be terminated if cash
distributions to the investor group do not meet certain levels or if the
communities fail to meet certain coverage requirements under the mortgage loan.
In addition, certain of the communities have been refinanced and, accordingly,
our ability to exercise the option will depend on whether we can assume or
refinance the debt secured by these communities. Termination of the management
agreements or failure to exercise the options could result in the loss of
management fees and the substantial decrease in the number of communities we
operate.
Under related agreements, the investor groups may require Mr. Baty to purchase
between ten and twelve of the Emeritrust communities, depending on the
occurrence of any one of the following events: (a) we do not exercise our
option to purchase the communities before the option expires, (b) we default
under the management agreements, (c) Mr. Baty's net worth falls below a certain
threshold, (d) we experience a change of control or (e) Mr. Baty ceases to be
our chief executive officer. If Mr. Baty is required to purchase some of the
communities, he will also have the option to purchase all of the Emeritrust
communities on the same terms under which we are entitled purchase the
communities, subject to our prior right to do so within a specified time period.
23
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates.
Emeritus's discussion and analysis of its financial condition and results of
Operations are based upon Emeritus's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Emeritus to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, Emeritus evaluates its estimates,
including those related to resident programs and incentives, bad debts,
investments, intangible assets, income taxes, financing operations,
restructuring, long-term service contracts, contingencies, and litigation.
Emeritus bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Emeritus believes the following critical accounting policies are more
significant to the judgments and estimates used in the preparation of its
consolidated financial statements. Revisions in such estimates are charged to
income in the period in which the facts that give rise to the revision become
known. Emeritus maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its residents to make required payments. If the
financial condition of Emeritus's residents were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Emeritus holds shares in ARV Assisted Living, Inc. amounting to less
than 5% of its shares. ARV is publicly traded and has a volatile share price.
Emeritus records an investment impairment charge when it believes this
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results underlying
this investment could result in losses or an inability to recover the carrying
value of the investment that may not be reflected in this investment's current
carrying value, thereby possibly requiring an impairment charge in the future.
Emeritus records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized, which at this time shows a
net asset valuation of zero. While Emeritus has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for a valuation allowance, in the event Emeritus were to determine that it would
be able to realize its deferred tax assets in the future in excess of its net
recorded amount, an adjustment to the deferred tax asset would increase income
in the period such determination was made.
24
The following table sets forth, for the periods indicated, certain items from
our Condensed Consolidated Statements of Operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to period.
Percentage of Revenues Year-to-Year
Years Ended December 31, Percentage Increase (Decrease)
---------------------------------------- ----------------------------------
2001 2000 1999 2000-2001 1999-2000
------------ ------------ ------------ ---------------- ----------------
Revenues . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 12.3% 2.1%
Expenses:
Community operations. . . . . . . . . . . . . 57.5 61.4 63.8 5.2 (1.7)
General and administrative. . . . . . . . . . 12.8 13.9 12.6 3.2 12.3
Depreciation and amortization . . . . . . . . 5.2 5.9 5.4 (1.7) 12.1
Facility lease expense. . . . . . . . . . . . 19.3 19.4 20.5 11.5 (3.3)
------------ ------------ ------------ ---------------- ----------------
Total operating expenses. . . . . . . . . 94.8 100.6 102.3 5.8 0.5
------------ ------------ ------------ ---------------- ----------------
Income (loss) from operations. . . . . . . . . . . 5.2 (0.6) (2.3) N/A (74.4)
Other income (expense):
Interest income . . . . . . . . . . . . . . . 0.7 0.8 0.5 (1.0) 47.8
Interest expense. . . . . . . . . . . . . . . (9.4) (12.0) (11.2) (11.9) 9.6
Impairment of investment securities . . . . . - - (6.1) N/A (99.6)
Other, net. . . . . . . . . . . . . . . . . . 0.5 (5.7) 2.0 N/A (386.6)
------------ ------------ ------------ ---------------- ----------------
Net other expense . . . . . . . . . . . . (8.2) (16.9) (14.8) (45.2) 17.8
------------ ------------ ------------ ---------------- ----------------
Loss before extraordinary item . . . . . (3.0) (17.5) (17.1) (80.7) 6.0
Extraordinary loss on early extinguishment of debt - - (0.3) N/A (100.0)
------------ ------------ ------------ ---------------- ----------------
Net loss . . . . . . . . . . . . . . . . (3.0)% (17.5)% (17.2)% (80.7)% 4.3%
============ ============ ============ ================ ================
Comparison of the Years Ended December 31, 2001 and 2000
- -----------------------------------------------------------------
Total Operating Revenues: Total operating revenues for the year ended December
31, 2001, increased by $15.4 million to $140.6 million from $125.2 million in
2000, or 12.3%. Approximately $4.1 million of the increase reflects revenue
from four communities that we first leased in late 2000, reduced by revenues
from leased communities we disposed of in late 2001. The balance of the change
in revenue is primarily the result of increases in the average monthly revenue
per unit due to our rate enhancement program. Average monthly revenue per unit
was $2,405 for 2001 compared to $2,213 for 2000, an increase of approximately
8.7%. These increases were partially offset by a small decrease in the
occupancy rate of 1.7 percentage points to 84.1% for 2001 from 85.8% for 2000.
An increase in management fee revenue of $4.2 million contributed significantly
to increased revenue. Improved performance of managed communities allowed us to
recognize base management fees and performance-driven contingent management
fees. Concurrently, our net funding obligation for the Emeritrust communities
was greatly reduced (see Other, net below).
Community Operations: Community operating expenses for the year ended December
31, 2001, increased $4.0 million to $80.8 million from $76.8 million for 2000,
or 5.2%. Approximately $1.8 million of the increase reflects operating expense
from four communities that we first leased in late 2000, reduced by operating
expense from leased communities we disposed of in late 2001. The balance of this
change was due to increases in personnel costs and above average increases in
utility costs and liability insurance
25
premiums. Community operating expenses as a percentage of total operating
revenue decreased to 57.5% in 2001 from 61.4% in 2000, primarily as a result of
increased revenues.
General and Administrative: General and administrative (G&A) expenses for the
year ended December 31, 2001, increased $561,000 to $18.0 million from $17.4
million for 2000, or 3.2%. This comparison reflects the effect of abnormally
high expenses in 2000 for professional consulting fees and for certain employee
benefits. Excluding these items, we experienced increases of approximately $1.5
million in personnel costs, liability insurance and utilities. As a percentage
of total operating revenues, G&A expenses decreased to 12.8% for 2001, compared
to 13.9% for 2000, primarily as a result of increased revenues. Since more than
half of the communities we operate are managed, G&A expense as a percentage of
operating revenues for all communities, including managed communities, may be
more meaningful for industry wide comparisons. These percentages were 6.6% and
7.2% for 2001 and 2000, respectively.
Depreciation and Amortization: Depreciation and amortization for the year ended
December 31, 2001 and 2000, were approximately $7.3 million and $7.4 million,
respectively. In 2001, this represents 5.2% of total operating revenues,
compared to 5.9% for 2000. The decrease as a percentage of revenues is due to
increased revenues.
Facility Lease Expense: Facility lease expense for the year ended December 31,
2001, was $27.1 million compared to $24.3 million for the year ended December
31, 2000, representing an increase of $2.8 million, or 11.5%. Approximately $1.8
million of the increase reflects rental from four communities that we first
leased in late 2000, reduced by rental from leased communities we disposed of in
late 2001. The balance of the increase is primarily attributable to rental
increases based on community performance under certain of our leases and to
higher rental on two leased communities that were refinanced through
sale/leaseback transactions. We leased 42 communities as of December 31, 2001,
compared to 45 communities as of December 31, 2000. Facility lease expense as a
percentage of revenues decreased to 19.3% from 19.4% for the years ended
December 31, 2001 and 2000, respectively.
Interest Income: Interest income for the year ended December 31, 2001, was
$980,000 versus $990,000 for the year ended December 31, 2000. The decrease is
primarily attributable to declining interest rates, offset by higher investment
amounts.
Interest Expense: Interest expense for the year ended December 31, 2001, was
$13.3 million compared to $15.1 million for the year ended December 31, 2000.
This decrease of $1.8 million, or 11.9%, is primarily attributable to lower
interest rates on our variable rate debt. As a percentage of total operating
revenues, interest expense decreased to 9.4% from 12.0% for the year ended
December 31, 2001 and 2000, respectively, reflecting increased revenues in
conjunction with lower interest rates.
Other, net: Other, net increased by $7.8 million to $707,000 income for the year
ended December 31, 2001, from $7.1 million expense for the year ended December
31, 2000. The amount for the year 2001 included a deficit-funding obligation of
$335,000 arising from our management of the Emeritrust communities, losses of
$313,000 associated with our investment in Senior Healthcare Partners, LLC, and
a gain of $1.2 million on sale of a community. The amount for the year 2000
includes a deficit funding obligation of $3.7 million arising from our
management of the Emeritrust communities, write-offs of $1.5 million relating to
26
receivables and capitalized development transaction costs that do not have
future realizable value, losses of $557,000 associated with our investment in
Senior Healthcare Partners, LLC, and other items aggregating $1.3 million.
Preferred dividends: For the year ended December 31, 2001 and 2000, the
preferred dividends were approximately $6.4 million and $5.3 million,
respectively. For the last six quarters we have not paid dividends on our
preferred stock but have been accruing such accumulated and unpaid dividends.
The terms of our preferred stock provide that accumulated and unpaid dividends
accrue at a higher rate than dividends that are paid currently. The amount of
dividends attributable to such higher rates is $2.1 million and $600,000 for
2001 and 2000, respectively. In addition, because we have failed to pay the
dividends on our Series A Stock for six quarters, effective January 1, 2002,
such dividends will be calculated on a compounded cumulative basis, retroactive
to our last payment, until they are paid current. Had we been required to
compound the dividends for the Series A Stock in prior years, both our preferred
dividends and net loss to common shareholders would have increased $275,000 and
$20,000 for 2001 and 2000, respectively.
Comparison of the Years Ended December 31, 2000 and 1999
- -----------------------------------------------------------------
Total Operating Revenues. Total operating revenues increased $2.6 million to
$125.2 million for 2000 from $122.6 million in 1999, representing a 2.1%
increase. Within total operating revenues, community revenue (including other
service fees) increased $2.8 million to $120.6 million in 2000 from $117.7
million in 1999. The first quarter of 1999, however, includes approximately
$6.3 million of community revenue from 21 communities (known as the Emeritrust
II communities, more fully discussed under Other, net) that were transferred at
the end of the quarter to a related party investor group under agreements
pursuant to which we continue to manage them. Accordingly, the first quarter of
2000 includes only management fees from these communities and no community
revenue. Excluding the Emeritrust II communities, revenues increased $9.1
million or 8% from 1999 to 2000, primarily as a result of a 4% increase in
revenue per unit (an increase of $79 per unit to $2,213 per unit at December 31,
2000) and the addition of six communities during 2000, partially offset by the
disposition of a skilled nursing facility.
Management fee revenue decreased $336,000 to $4.6 million in 2000 from $4.9
million in 1999. In 2000, we were not able to recognize fees earned from our
management of 25 communities (known as the Emeritrust I communities, more fully
discussed under Other, net) where the management agreements require us to fund
cash operating deficits, while in 1999 we recognized $1.4 million in management
fee revenue from these communities. This was partially offset by an increase of
$500,000 in management fees from the Emeritrust II communities from $1.4 million
to $1.9 million, the addition of several new management agreements and the
generally improving performance of our portfolio of managed communities.
Community Operations. Community operating expenses decreased $1.4 million to
$76.8 million for 2000 from $78.2 for 1999, representing a 1.7% decrease. As a
percentage of total operating revenues, community operations decreased to 61.4%
for 2000 compared to 63.8% for 1999. The first quarter of 1999, however,
includes approximately $3.9 million of community operating expenses from the
Emeritrust II communities, with no comparable offset in 2000. Excluding the
Emeritrust II communities, community operating expenses increased $2.5 million
or 3% from 1999 to 2000, primarily as a result of the addition of six new
27
buildings to our consolidated portfolio, slightly offset by the disposition of
one skilled nursing facility.
General and Administrative. General and administrative expenses increased $1.9
million to $17.4 million for 2000 from $15.5 million for 1999, representing a
12.3% increase. As a percentage of revenues, general and administrative expenses
increased to 13.9% for 2000 compared to 12.6% for 1999. The increase of general
and administrative costs as a percentage of revenues is due, in part, to
transferring our interest in the Emeritrust II communities. The overall increase
of $1.9 million is primarily attributable to settlement and legal costs of the
Corio mediation (See Item 3. Legal Proceedings) and additional costs associated
with increased professional liability insurance deductibles. Since more than
half of the communities we operate are managed, G&A expense as a percentage of
operating revenues for all communities, including managed communities, may be
more meaningful for industry wide comparisons. These percentages were 7.2% and
8.2% for 2000 and 1999, respectively.
Depreciation and Amortization. Depreciation and amortization expense increased
$798,000 to $7.4 million for 2000 from $6.6 million for 1999, representing a
12.1% increase. As a percentage of total revenue, depreciation and amortization
expenses increased to 5.9% in 2000 from 5.4% in 1999. This marginal increase is
principally the result of six community acquisitions in 2000, partially offset
by the disposition of one skilled nursing facility.
Facility Lease Expense: Facility lease expense decreased $829,000 to $24.3
million for 2000 from $25.1 million for 1999, representing a decrease of 3.3%.
The decrease is primarily attributable to the transfer of the Emeritrust II
communities that converted to management agreements as discussed in Total
Operating Revenues above. These communities accounted for $1.9 million in rent
expense for 1999, partially offset by additional rent generation from six
community acquisitions and normal increases in lease expense obligations from
our existing portfolio. Facility Lease Expense as a percentage of revenues was
19.4% for 2000 compared to 20.5% for 1999.
Interest Income: Interest income for the year ended December 31, 2000, was
$990,000 versus $670,000 for the year ended December 31, 1999. This is
primarily attributable to the increase in cash available for earning interest in
2000 as compared to 1999.
Interest Expense: Interest expense for the year ended December 31, 2000, was
$15.1 million compared to $13.8 million for the year ended December 31, 1999.
This increase is primarily attributable to generally increasing mortgage
interest expense associated with our variable rate debt, as well as the addition
of six consolidated communities in early 2000. In addition, total debt
increased approximately $5 million to $175 million as of December 31, 2000,
compared to $170 million as of December 31, 1999. As a percentage of total
operating revenues, interest expense increased to 12.0% from 11.2% for the year
ended December 31, 2000 and 1999, respectively.
Impairment of Investment Securities. During 2000, we did not have an impairment
of investment securities. In 1999, we wrote down $7.4 million on our investment
in ARV Assisted Living, Inc., as we concluded the decline in the fair market
value of this investment was other than temporary.
Other, Net. Other, net was $7.1 million (expense) in 2000 and $2.5 million
income in 1999, representing a
28
net change of $9.6 million. The amount for the year 2000 includes a deficit
funding obligation of $3.7 million arising from our management of both the
Emeritrust I and Emeritrust II Development communities in which we are
responsible for cash operating deficits for such communities, write-offs of $1.5
million relating to receivables and capitalized development transaction costs
that do not have future realizable value, losses of $557,000 associated with our
investment in Senior Healthcare Partners, LLC, and other items aggregating $1.3
million. The amount for the year 1999 includes gain of $3.2 million arising from
a litigation settlement, gain of $762,000 from the sale of a Canadian
subsidiary, deficit-funding obligation of $1.4 million arising from our
management of the Emeritrust I communities described above, and other items
aggregating $600,000.
Extraordinary Item. We recognized extraordinary losses of approximately $333,000
in 1999 and none in 2000. Our 1999 extraordinary loss resulted from the
write-off of loan fees and other related costs in conjunction with the
refinancing of several of our mortgage-financed communities.
Same Community Comparison
We operated 57 communities on a comparable basis during both the three months
ended December 31, 2001 and 2000. The following table sets forth a comparison
of same community results of operations, excluding general and administrative
expenses, for the three months ended December 31, 2001 and 2000.
Three Months ended December 31,
(In thousands)
-------------------------------------------------
Dollar Percentage
2001 2000 Change Change
------------ ------------ -------- -----------
Revenue . . . . . . . . . . . $ 30,123 $ 28,949 $ 1,174 4.1%
Community operating expenses. (18,430) (17,466) (964) 5.5
------------ ------------ -------- -----------
Community operating income. 11,693 11,483 210 1.8
Depreciation & amortization . (1,433) (1,415) (18) 1.3
Facility lease expense. . . . (5,975) (5,778) (197) 3.4
------------ ------------ -------- -----------
Operating income. . . . . 4,285 4,290 (5) (0.1)
Interest expense, net . . . . (2,125) (2,913) 788 (27.1)
Other income (expense). . . . (92) 16 (108) (675.0)
------------ ------------ -------- -----------
Net income. . . . . . . . $ 2,068 $ 1,393 $ 675 48.5%
============ ============ ======== ===========
The same communities represented $30.1 million or 84.3% of our total revenue of
$35.7 million for the fourth quarter of 2001. Same community revenues increased
by $1.2 million or 4.1% for the quarter ended December 31, 2001, from the
comparable period in 2000. This was primarily due to rate increases, which
increased revenue per unit by 7.8%, partially offset by a decrease in average
occupancy to 82.6% in the fourth quarter of 2001 from 85.4% in the fourth
quarter of 2000. For the quarter ended December 31, 2001, we increased our net
income to $2.1 million from $1.4 million for the comparable period of 2000,
primarily as a result of decreased interest expense resulting from lower
interest rates.
29
We operated 57 communities on a comparable basis during both 2001 and 2000. The
following table sets forth a comparison of same community results of operations,
excluding general and administrative expenses, for 2001 and 2000.
Year Ended December 31,
(In thousands)
-------------------------------------------------
Dollar Percentage
2001 2000 Change Change
------------ ------------ -------- -----------
Revenue . . . . . . . . . . . $ 119,811 $ 112,775 $ 7,036 6.2%
Community operating expenses. (72,705) (69,912) (2,793) 4.0
------------ ------------ -------- -----------
Community operating income. 47,106 42,863 4,243 9.9
Depreciation & amortization . (5,638) (5,435) (203) 3.7
Facility lease expense. . . . (23,691) (22,900) (791) 3.5
------------ ------------ -------- -----------
Operating income. . . . . 17,777 14,528 3,249 22.4
Interest expense, net . . . . (10,139) (11,479) 1,340 (11.7)
Other income (expense). . . . (397) (111) (286) 257.7
------------ ------------ -------- -----------
Net income. . . . . . . . $ 7,241 $ 2,938 $ 4,303 146.5%
============ ============ ======== ===========
The same communities represented $119.8 million or 85.2% of our total revenue of
$140.6 million for the year ended December 31, 2001. Same community revenues
increased by $7.0 million or 6.2% for the year ended December 31, 2001, from the
year ended December 31, 2000. The increase in revenue is attributable to our
rate enhancement program, which resulted in same community average monthly
revenue per unit increasing to $2,411 for 2001, from $2,201 for 2000. This is
an increase of $210 or 9.5%. These results were partially offset by a decrease
in occupancy to 83.7% in 2001 from 86.2% in 2000. For the year ended December
31, 2001, we increased our net income to $7.2 million from $2.9 million for
2000, primarily through our rate enhancement program, controlling community
level costs and the effects of lower interest rates.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2001, net cash provided by operating activities
was $3.6 million compared to $9.2 million of cash used in operating activities
for the prior year. The primary component of the operating cash provided in the
year ended December 31, 2001, was the decrease of our net loss from $21.9
million in the year ended December 31, 2000 to $4.2 million for the year ended
December 31, 2001.
Net cash provided by investing activities amounted to $2.5 million for the year
ended December 31, 2001, and was comprised primarily of repayment of advances by
third parties and affiliates and proceeds received from the sale of two
communities, which was partially offset by the acquisition of property,
equipment, and new leases.
For the year ended December 31, 2001, net cash used in financing activities was
$3.8 million primarily from short-term and long-term debt repayments. For the
year ended December 31, 2000, net cash provided by
30
financing activities was $118,000 primarily from proceeds of long-term
borrowings, partially offset by debt repayment and preferred dividend payments.
In 2001, and as described in Note 21, we refinanced substantially all of our
debt obligations, extending such financings through 2003 or thereafter. In
addition, we achieved consecutive positive cash flows from operations for the
last three quarters and positive earnings before preferred dividends in the
fourth quarter of 2001. Including required debt service payments and capital
expenditures, management believes we will be able to sustain positive cash flow
through at least 2002.
The we have incurred significant operating losses since our inception and have a
working capital deficit of $12.1 million, although $7.4 million of preferred
dividends is only due if declared by the our board of directors. To date, we
have been dependent upon third party financing or disposition of assets to fund
operations. While we do not anticipate the need for third party financing or
dispositions of assets to fund operations, it cannot be guaranteed that, if
necessary, third party financing or disposition of assets will be available
timely or at all.
We are currently out of compliance with covenants on debt totaling $1.7 million
which will be repaid in June 2002 and is not cross-defaulted with any other
debt. In addition, many of our other debt instruments and leases contain
"cross-default" provisions pursuant to which a default under one obligation can
cause a default under one or more other obligations to the same lender or
lessor. Such cross-default provisions affect 14 owned assisted living
properties and 36 operated under leases. Accordingly, any event of default
could cause a material adverse effect on our financial condition if such debt or
leases are cross-defaulted.
The following table summarizes our contractual obligations at December 31, 2001:
Payments Due by Period (in thousands)
--------------------------------------------------------------
Less than 1 After 5
------------ --------
Total year 1 - 3 years 4 - 5 years years
----------- ------------ ------------ ----------- --------
Contractual Obligations
Long-Term Debt. . . . . $ 135,593 $ 4,523 $ 102,672 $ 5,841 $ 22,557
Operating Leases. . . . $ 231,363 $ 25,409 $ 50,772 $ 46,539 $108,643
IMPACT OF INFLATION
To date, inflation has not had a significant impact on Emeritus. Inflation
could, however, affect our future revenues and operating income due to our
dependence on the senior resident population, most of whom rely on relatively
fixed incomes to pay for our services. The monthly charges for the resident's
unit and assisted living services are influenced by the location of the
community and local competition. Our ability to increase revenues in proportion
to increased operating expenses may be limited. We typically do not rely to a
significant extent on governmental reimbursement programs. In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.
RISK FACTORS
Our business, results of operations and financial condition are subject to many
risks, including, but not limited to, those set forth below.
The following important factors, among others, could cause actual operating
results to differ materially from those expressed in forward-looking statements
included in this report and presented elsewhere by our
31
management from time to time. Do not place undue reliance on these
forward-looking statements, which speak only as of the date of this report. A
number of the matters and subject areas discussed in this report refer to
potential future circumstances, operations and prospects, and therefore, are not
historical or current facts. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations, and also may materially differ from our actual future experience
involving any one or more of such matters and subject areas relating to possible
excess assisted living capacity in our market areas affecting our occupancy and
pricing levels; uncertainties in increasing occupancy and pricing, generally;
effective management of costs and the effects of cost increases beyond our
control, such as utilities and insurance; the difficulty in reducing and
eliminating continuing operating losses; vulnerability to defaults in our debt
and lease financing as a result of noncompliance with various covenants; the
effects of cross-default terms; competition; and uncertainties relating to
construction, licensing, environmental and other matters that affect
acquisition, disposition and development of assisted living communities. We have
attempted to identify, in context, certain of the factors that may cause actual
future experience and results to differ from our current expectations regarding
the relevant matter or subject area. We are not obligated to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events. These and other factors are
discussed in more detail below.
We have incurred losses since we began doing business and may continue to incur
losses for the foreseeable future. We organized and began operations in July
1993 and have operated at a loss since we began doing business. For 2001, 2000
and 1999, we recorded net losses before preferred dividends of $4.2 million,
$21.9 million, and $21.0 million, respectively. We believe that the historically
aggressive growth of our portfolio through acquisitions and developments and
related financing activities were among the causes of these losses. To date, we
have been generally unable to stabilize occupancy and rate structures at our
communities that result in positive earnings. While we were able to
substantially reduce our net losses during 2001, we cannot guarantee that this
improvement will continue in 2002.
If we cannot generate sufficient cash flow to cover required interest, principal
and lease payments, we risk defaults on our debt agreements and operating
leases. At December 31, 2001, we had mortgage debt of $133.8 million, with
minimum principal payments of about $4.5 million due in 2002. At December 31,
2001, we were obligated under long-term operating leases requiring minimum
annual lease payments of which $25.4 million is payable in 2002. In addition, we
will have approximately $61.9 million and $40.7 million in principal amount of
debt repayment obligations that become due in 2003 and 2004, respectively. We
intend to continue to finance our communities through a combination of mortgage
financing and operating leases, including leases arising through sale/leaseback
transactions.
Because we are highly leveraged, we may not be able to respond to changing
business and economic conditions or continue our development and acquisition
program. Further, a substantial portion of our cash flow will be devoted to debt
service and lease payments. In the past we have been unable to generate
sufficient cash flow from operations to cover required interest, principal and
lease payments and we may be unable to do so in the future. If we cannot meet
these payments when due, we may need to renegotiate payments or obtain
additional equity or debt financing. We may not be successful or timely in doing
so, and the terms of any financing or refinancing may not be favorable.
If we fail to obtain alternative financing, a lender could foreclose on our
facilities secured by the respective indebtedness or, in the case of an
operating lease, could terminate our lease, resulting in loss of income and
32
asset value. In some cases, our indebtedness is secured by a particular
community and a pledge of our interests in a subsidiary entity that owns that
community. In the event of a default, a lender could avoid judicial procedures
required to foreclose on real property by foreclosing on our pledge instead,
thus accelerating its acquisition of that community. Furthermore, because of
cross-default and cross-collateralization provisions in certain of our mortgage
and sale/leaseback agreements, if we default on one of our payment obligations,
we could adversely affect a significant number of our communities.
We may be unable to increase or stabilize our occupancy rates that would result
in positive earnings. In previous years we had difficulty increasing our
occupancy levels. Our historical losses have resulted, in part, from lower than
expected occupancy levels at our newly developed and acquired communities.
Although we have reduced our acquisition and development activity substantially,
we have been unable to increase occupancy levels as we had anticipated and,
during the last year, occupancy levels declined slightly. We cannot guarantee
that our occupancy levels will increase.
We will occasionally seek additional funding through public or private
financing, including equity financing. We may not find adequate equity, debt or
sale/leaseback financing when we need it or on terms acceptable to us. This
could affect our ability to finance our operations or refinance our properties
to avoid the consequences of default and foreclosure under our existing
financing as described above. In addition, if we raise additional funds by
issuing equity securities, our shareholders may experience dilution of their
investment.
We may be unable to obtain the additional capital we will need to retain
important segments of our operating communities. We manage 46 of our operating
communities under short-term management agreements expiring December 31, 2003,
for the five Emeritrust II Development communities, and June 30, 2003, for the
remaining 41 communities, which we have referred to throughout this document as
the Emeritrust I and Emeritrust II Operating communities. We also have options
to purchase 43 communities, and a right of first refusal to purchase three of
these communities prior to December 31, 2003, for the five Emeritrust II
Development communities, and June 30, 2003, for the remaining 41 communities.
Based on formulas in the options, the purchase prices of the communities would
be substantially greater than the original purchase prices paid by the investor
groups that currently own them, depending on when the purchase occurs and the
performance of the communities. If we are unable to obtain the capital and
related mortgage financing necessary to complete these purchases, we could lose
control of these communities and the right to operate them, which represents
about 33% of our total operating capacity. The loss of these operating
communities would have a material adverse effect on our revenues and results of
operations.
If we fail to comply with financial covenants contained in our debt instruments,
our lenders may accelerate the related debt. From time to time, we have not
complied with certain covenants in our financing agreements. In the future we
may not be able to comply with these covenants, which generally relate to
matters such as net worth, cash flow and debt coverage ratios. If we fail to
comply with any of these requirements, our lenders could accelerate the related
indebtedness so that it becomes due and payable prior to its stated due date. We
may be unable to pay or refinance this debt if it becomes due.
Our liability insurance may be insufficient to cover the liabilities we face. In
recent years, participants in the long-term-care industry have faced an
increasing number of lawsuits alleging malpractice or related legal theories.
Many of these suits involve large claims and significant legal costs. We expect
that we occasionally will face such suits because of the nature of our business.
We currently maintain insurance
33
policies with coverage and deductibles we deem appropriate based on the nature
and risks of our business, historical experience and industry standards. We
could incur liability in excess of our insurance coverage or claims not covered
by our insurance. Claims against us, regardless of their merit or eventual
outcome, may also undermine our ability to attract residents or expand our
business and would require management to devote time to matters unrelated to the
operation of our business. Our liability insurance policies must be renewed
annually, and we may not be able to obtain liability insurance coverage in the
future or, if available, on acceptable terms. During the past several years,
deductible amounts and annual premiums have increased significantly, which have
substantially compounded our costs associated with insurance and claims defense.
We face risks associated with selective acquisitions. We intend to continue to
seek selective acquisition opportunities. However, we may not succeed in
identifying any future acquisition opportunities or completing any identified
acquisitions. The acquisition of communities presents a number of risks.
Existing residences available for acquisition may frequently serve or target
different market segments than those we presently serve. It may be necessary in
these cases to re-position and renovate acquired residences or turn over the
existing resident population to achieve a resident care level and income profile
that is consistent with our objectives. In the past, these obstacles have
delayed the achievement of acceptable occupancy levels and increased operating
and capital expenditures. As a consequence, we currently plan to target assisted
living communities with established operations, which could reduce the number of
acquisitions we can complete and increase the expected cost. Even in these
acquisitions, however, we may need to make staff and operating management
personnel changes to successfully integrate acquired communities into our
existing operations. We may not succeed in repositioning acquired communities or
in effecting any necessary operational or structural changes and improvements on
a timely basis. We also may face unforeseen liabilities attributable to the
prior operator of the acquired communities, against whom we may have little or
no recourse.
We expect competition in our industry to increase, which could cause our
occupancy rates and resident fees to decline. The long-term care industry is
highly competitive, and given the relatively low barriers to entry and
continuing health care cost containment pressures, we expect that our industry
will become increasingly competitive in the future. We believe that the industry
is experiencing over-capacity in several of our markets, thereby intensifying
competition and adversely affecting occupancy levels and pricing. We compete
with other companies providing assisted living services as well as numerous
other companies providing similar service and care alternatives, such as home
healthcare agencies, independent living facilities, retirement communities and
skilled nursing facilities. We expect that competition will increase from new
market entrants, as assisted living residences receive increased market
awareness and more states decide to include assisted living services in their
Medicaid programs. Many of these competitors may have substantially greater
financial resources than we do. Increased competition may limit our ability to
attract or retain residents or maintain our existing rate structures. This could
lead to lower occupancy rates or lower rate structures in our communities.
We also cannot predict the effect of the healthcare industry trend toward
managed care on the assisted living marketplace. Managed care, an arrangement
whereby service and care providers agree to sell specifically defined services
to public or private payers in an effort to achieve more efficiency with respect
to utilization and cost, is not currently a significant factor in the assisted
living marketplace. However, managed care plans sponsored by insurance companies
or HMOs may in the future affect pricing and the range of services provided in
the assisted living marketplace.
34
If development of new assisted living facilities outpaces demand, we may
experience decreased occupancy, depressed margins and diminished operating
results. We believe that some assisted living markets have become or are on the
verge of becoming overbuilt. The barriers to entry in the assisted living
industry are not substantial. Consequently, the development of new assisted
living facilities could outpace demand. Overbuilding in the markets in which we
operate could thus cause us to experience decreased occupancy and depressed
margins and could otherwise adversely affect our operating results.
Market forces could undermine our efforts to attract seniors with sufficient
resources. We rely on our residents' abilities to pay our fees from their own or
familial financial resources. Generally, only seniors with income or assets
meeting or exceeding the comparable median in the region where our assisted
living communities are located can afford our fees. Inflation or other
circumstances may undermine the ability of seniors to pay for our services. If
we encounter difficulty in attracting seniors with adequate resources to pay for
our services, our occupancy rates may decline and we may suffer losses that
could cause the value of your investment in our stock to decline.
Our labor costs may increase and may not be matched by corresponding increases
in rates we charge to our residents. We compete with other providers of assisted
living services and long-term care in attracting and retaining qualified and
skilled personnel. We depend on our ability to attract and retain management
personnel responsible for the day-to-day operations of each of our residences.
If we are unable to attract or retain qualified residence management personnel,
our results of operations may suffer. In addition, possible shortages of nurses
or trained personnel may require us to enhance our wage and benefits packages to
compete in the hiring and retention of personnel. We also depend on the
available labor pool of semi-skilled and unskilled employees in each of the
markets in which we operate. As a result of these and other factors, our labor
costs may increase and may not be matched by corresponding increases in rates we
charge to our residents.
We face possible environmental liabilities at each of our properties. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be held liable for
the costs of removal or remediation of certain hazardous or toxic substances,
including asbestos-containing materials, that could be located on, in or under
its property. These laws and regulations often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances. We could face substantial costs of any required
remediation or removal of these substances, and our liability typically is not
limited under applicable laws and regulations. Our liability could exceed our
properties' value or the value of our assets. We may be unable to sell or rent
our properties, or borrow using our properties as collateral, if any of these
substances is present or if we fail to remediate them properly. Under these laws
and regulations, if we arrange for the disposal of hazardous or toxic substances
such as asbestos-containing materials at a disposal site, we also may be liable
for the costs of the removal or of the hazardous or toxic substances at the
disposal site. In addition to liability for these costs, we could be liable for
governmental fines and injuries to persons or properties.
Some of our facilities generate infectious medical waste due to the illness or
physical condition of the residents, including, for example, blood-soaked
bandages, swabs and other medical waste products and incontinence products of
those residents diagnosed with an infectious disease. The management of
infectious medical waste, including handling, storage, transportation, treatment
and disposal, is subject to regulation under various laws, including federal and
state environmental laws. These environmental laws set
35
forth the management requirements, as well as permit, record-keeping, notice and
reporting obligations. Each of our facilities has an agreement with a waste
management company for the proper disposal of all infectious medical waste. Any
finding that we are not in compliance with these environmental laws could
adversely affect our business and financial condition. Because these
environmental laws are amended from time to time, we cannot predict when and to
what extent liability may arise. In addition, because these environmental laws
vary from state to state, expansion of our operations to states where we do not
currently operate may subject us to additional restrictions on the manner in
which we operate our facilities.
Our chief executive officer has personal interest that may conflict with ours
due to his interest in Holiday Retirement Corporation. Mr. Baty, our Chief
Executive Officer, is a principal shareholder, director and Chairman of the
Board of Holiday Retirement Corporation. Substantially all of the independent
living facilities operated by Holiday are owned by partnerships that are
controlled by Mr. Baty and Holiday. Mr. Baty's varying financial interests and
responsibilities include the acquisition, financing and refinancing of
independent living facilities and the development and construction of, and
capital raising activities to finance, new facilities. The financial interests
and management and financing responsibilities of Mr. Baty with respect to
Holiday and its affiliated partnerships could present conflicts of interest with
us, including potential competition for residents in markets where both
companies operate and competing demands for the time and efforts of Mr. Baty.
Because Mr. Baty is both our Chief Executive Officer as well as Holiday's
Chairman of the Board, circumstances could arise that would distract him from
our operations. Our interests and Holiday's interests may on some occasions be
incompatible. We have entered into a noncompetition agreement with Mr. Baty, but
this noncompetition agreement does not limit Mr. Baty's current role with
Holiday or its related partnerships, so long as assisted living is only an
incidental component of Holiday's operation or management of independent living
facilities.
We have entered into agreements with several companies that are owned or
controlled by our affiliates, whose interests with respect to these companies
occasionally may conflict with ours. We have entered into agreements, including
most of our management agreements, with several entities that are owned or
controlled by certain of our officers and directors. Under these agreements, we
provide management and other services to senior housing communities owned by
those companies and we have material agreements relating to the purchase, sale
and financing of a number of our operating communities. There is a risk that our
dealings with these companies under these and any future arrangements will not
be negotiated at arm's length and may be regarded as less advantageous to us
than terms that would be negotiated with unrelated third parties. Because of our
affiliates' interests and responsibilities with respect to these other
companies, these affiliates may occasionally have interests that are not
compatible with ours.
We may be unable to attract and retain key management personnel. We depend upon,
and will continue to depend upon, the services of Mr. Baty, our Chief Executive
Officer. The loss of Mr. Baty's services, in part or in whole, could adversely
affect our business and our results of operations. Mr. Baty has financial
interests and management responsibilities with respect to Holiday and its
related partnerships. As a result, he does not devote his full time and efforts
to Emeritus. We may be unable to attract and retain other qualified executive
personnel critical to the success of our business.
Our costs of compliance with government regulations may significantly increase
in the future. Federal, state and local authorities heavily regulate the
healthcare industry. Regulations change frequently, and sometimes
36
require us to make expensive changes in our operations. A number of legislative
and regulatory initiatives relating to long-term care are proposed or under
study at both the federal and state levels that, if enacted or adopted, could
adversely affect our business and operating results. We cannot predict to what
extent legislative or regulatory initiatives will be enacted or adopted or what
effect any initiative would have on our business and operating results. Changes
in applicable laws and new interpretations of existing laws can significantly
affect our operations, as well as our revenues, particularly those from
governmental sources, and our expenses. Our residential communities are subject
to varying degrees of regulation and licensing by local and state health and
social service agencies and other regulatory authorities. While these
regulations and licensing requirements often vary significantly from state to
state, they typically address:
* fire safety,
* sanitation,
* staff training,
* staffing levels,
* living accommodations such as room size, number of bathrooms, and
ventilation, and
* health-related services.
We may be unable to satisfy all regulations and requirements or to acquire and
maintain any required licenses on a cost-effective basis.
In addition, with respect to our residents who receive financial assistance from
governmental sources for their assisted living services, we are subject to
federal and state regulations that prohibit certain business practices and
relationships. Failure to comply with these regulations could prevent
reimbursement for our healthcare services under Medicaid or similar state
reimbursement programs. Our failure to comply with such regulations also could
result in fines and the suspension or inability to renew our operating licenses.
Federal, state and local governments occasionally conduct unannounced
investigations, audits and reviews to determine whether violations of applicable
rules and regulations exist. Devoting management and staff time and legal
resources to such investigations, as well as any material violation by us that
is discovered in any such investigation, audit or review, could strain our
resources and affect our profitability. In addition, regulatory oversight of
construction efforts associated with refurbishment could cause us to lose
residents and disrupt community operations.
Our stock price has been highly volatile, and a number of factors may cause our
common stock price to decline. The market price of our common stock has
fluctuated and could fluctuate significantly in the future in response to
various factors and events, including, but not limited to:
* the liquidity of the market for our common stock;
* variations in our operating results;
* variations from analysts' expectations; and
* new statutes or regulations, or changes in the interpretation of existing
statutes or regulations, affecting the healthcare industry generally or
the assisted living residence business in particular.
37
In addition, the stock market in recent years has experienced broad price and
volume fluctuations that often have been unrelated to the operating performance
of particular companies. These market fluctuations also may cause the market
price of our common stock to decline.
Our share ownership and certain other factors may impede a proposed takeover of
our business. As of February 28, 2002, Mr. Baty, our Chief Executive Officer,
controls about 39% of our outstanding common stock. Together, our directors and
executive officers own, directly and indirectly, over 68% of the voting power of
our outstanding common and preferred stock. Accordingly, Mr. Baty and the other
members of our board and management would have significant influence over the
outcome of matters submitted to our shareholders for a vote, including matters
that would involve a change of control of Emeritus. Further, our Articles of
Incorporation require a two-thirds supermajority vote to approve a business
combination of
Emeritus with another company that is not approved by the board of directors.
Accordingly, the current management group and board of directors could prevent
approval of such a business combination. We currently have a staggered board in
which only one-third of the board stands for election each year. Thus, absent
removals and resignations, a complete change in board membership could not be
accomplished in fewer than approximately two calendar years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our financial instruments that are
sensitive to changes in interest rates. For our debt obligations, the table
presents principal repayments in thousands of dollars and current weighted
averages of interest rates on these obligations as of December 31, 2001. For
our debt obligations with variable interest rates, the rates presented reflect
the current rates in effect at the end of 2001. These rates are based on LIBOR
plus a margin of either 3.25% or 3.5%, and the prime rate plus 2%.
Expected maturity date Average
-------------------------------------------------------- Fair interest
2002 2003 2004 2005 2006 Thereafter Total value rate
------- ------- ------- ------- ------- ----------- ------- ------- ---------
Long-term debt:
Fixed rate. . $ 2,776 $ 8,857 $13,441 $ 1,876 $ 3,965 $ 22,557 $53,471 $48,769 7.84%
Variable rate $ 1,747 $53,087 $27,287 $ - $ - $ - $82,121 $82,121 5.58%
If market interest rates average 2% more in 2002 than they did in 2001, our
interest expense and net loss would increase by $1.5 million. These amounts are
determined by considering the impact of hypothetical interest rates on our
outstanding variable rate borrowings as of December 31, 2001, and do not
consider changes in the actual level of borrowings that may occur subsequent to
December 31, 2001. This analysis also does not consider the effects of the
reduced level of overall economic activity that could exist in such an
environment nor does it consider possible actions that management could take
with respect to our financial structure to mitigate the exposure to such a
change.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the Independent Auditors report are listed at Item
14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Executive Officers of the Registrant" in Part
I of this Form 10-K and under the captions "Election of Directors -- Nominees
for Election" and "Compliance with Section 16(a) of the Exchange Act of 1934" in
the Company's Proxy Statement relating to its 2002 annual meeting of
shareholders (the "Proxy Statement") is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" and "Election of
Directors -- Director Compensation" in the Company's Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the Company's Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the Company's Proxy
Statement is hereby incorporated by reference.
39
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) FINANCIAL STATEMENTS. The following financial statements of the
Registrant and the Report of Independent Public Accountants therein are
filed as part of this Report on Form 10-K:
Page
----
Independent Auditors' Report . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . F-5
Consolidated Statements of Shareholders' Deficit. . . F-6
Notes to Consolidated Financial Statements. . . . . . F-7
(2) FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and Qualifying
Accounts (contained on page S-1) Other financial statement schedules
have been omitted because the information required to be set forth
therein is not applicable, is immaterial or is shown in the
consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Registrant
during the quarter ended December 31, 2001.
(c) EXHIBITS: The following exhibits are filed as a part of, or incorporated by
reference into, this Report on Form 10-K:
Footnote
Number Description Number
- --------- --------------------------------------------------------------------- --------
3.1 Restated Articles of Incorporation of registrant (Exhibit
3.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
3.2 Amended and Restated Bylaws of the registrant (Exhibit
3.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006
(Exhibit 4.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
4.2 Indenture dated February 15, 1996, between the registrant
and Fleet National Bank ("Trustee") (Exhibit 4.2). . . . . . . . . . . . . . (2)
4.3 Preferred Stock Purchase Agreement (including Designation
of Rights and Preferences of Series A Convertible
Exchangeable Redeemable Preferred Stock of Emeritus
Corporation Agreement, Registration of Rights Agreement and
Shareholders Agreement) dated October 24, 1997, between the
registrant ("Seller") and Merit Partners, LLC ("Purchaser")
(Exhibit 4.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12)
10.1 Amended and Restated 1995 Stock Incentive Plan (Exhibit
99.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14)
10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2).. . . . . . . . . (2)
10.3 Form of Indemnification Agreement for officers and
directors of the registrant (Exhibit 10.3).. . . . . . . . . . . . . . . . . (1)
10.4 Noncompetition Agreements entered into between the
registrant and each of the following individuals:
10.4.1 Daniel R. Baty (Exhibit 10.4.1), Raymond R.
Brandstrom (Exhibit 10.4.2) and Frank A. Ruffo
(Exhibit 10.4.3). . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.6 Form of Stock Purchase Agreement dated July 31, 1995,
entered into between Daniel R. Baty and each of Michelle A.
Bickford, Jean T. Fukuda, James S. Keller, George T. Lenes
and Kelly J. Price (Exhibit 10.6). . . . . . . . . . . . . . . . . . . . . . (1)
10.8 Scottsdale Royale in Scottsdale, Arizona, and Villa
Ocotillo in Scottsdale, Arizona. The following agreements
are representative of those executed in connection with
these properties:
10.8.1 Loan Agreement dated December 31, 1996, in the
amount of $12,275,000 by the registrant
("Borrower") and Lender (Exhibit 10.9.1). . . . . . . . . . . . . . (5)
10.8.2 Promissory Note dated December 31, 1996, in the
amount of $5,500,000 between the registrant to
Bank United (the "Lender") with respect to
Scottsdale Royale and Villa Ocotillo (Exhibit
10.9.3).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.8.3 Deed of Trust, Security Agreement, Assignment of
Leases and Rents, and Fixture Filing (Financial
Statement) dated as of December 31, 1996, by the
registrant, as Trustor and debtor, to Chicago
Title Insurance Company, as Trustee, for the
benefit of the Lender, Beneficiary and secured
party with respect to Scottsdale Royale and Villa
Ocotillo (Exhibit 10.9.4).. . . . . . . . . . . . . . . . . . . . . (5)
40
10.9 Rosewood Court in Fullerton, California, the Arbor at Olive
Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington, Laurel Lake
Estates in Vorhees, New Jersey, Green Meadows--Allentown in
Allentown, Pennsylvania, Green Meadows--Dover in Dover,
Delaware, Green Meadows--Latrobe in Latrobe, Pennsylvania,
Green Meadows--Painted Post in Painted Post, New York,
Heritage Health Center in Hendersonville, North Carolina.
The following agreements are representative of those
executed in connection with these properties:
10.9.1 Lease Agreement dated March 29, 1996, between the
registrant ("Lessee") and Health Care Property
Investors, Inc. ("Lessor") (Exhibit 10.10.1). . . . . . . . . . . . (3)
10.9.2 First Amendment Lease Agreement dated April 25,
1996, by and between the registrant ("Lessee")
and Health Care Property Investors, Inc.
("Lessor") (Exhibit 10.10.2). . . . . . . . . . . . . . . . . . . . (3)
10.11 Summer Wind in Boise, Idaho
10.11.1 Lease Agreement dated as of August 31, 1995,
between AHP of Washington, Inc. and the
registrant (Exhibit 10.18.1). . . . . . . . . . . . . . . . . . . . (1)
10.11.2 First Amended Lease Agreement dated as of
December 31, 1996, by and between the registrant
and AHP of Washington, Inc. (Exhibit 10.16.2).. . . . . . . . . . . (5)
10.12 Silver Pines (formerly Willowbrook) in Cedar Rapids, Iowa
10.12.1 Purchase and Sale Agreement (including Real
Estate Contract) dated January 4, 1995, between
Jabo, Ltd. ("Jabo") and the registrant (Exhibit
10.19.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.12.2 Assignment and Assumption Agreement with respect
to facility leases dated as of January 17, 1995,
by and between Jabo, as Assignor, and the
registrant, as Assignee (Exhibit 10.19.2).. . . . . . . . . . . . . (1)
10.13 The Palisades in El Paso, Texas, Amber Oaks in San Antonio,
Texas and Redwood Springs in San Marcos, Texas. The
following agreements are representative of those executed
in connection with these properties.
10.13.1 Lease Agreement dated April 1, 1997, between ESC
III, L.P. D/B/A Texas-ESC III, L.P. ("Lessee")
and Texas HCP Holding , L.P. ("Lessor") (Exhibit
10.4.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.13.2 First Amendment to Lease Agreement dated April 1,
1997, between Lessee and Texas HCP Holding , L.P.
Lessor (Exhibit 10.4.2).. . . . . . . . . . . . . . . . . . . . . . (6)
10.13.3 Guaranty dated April 1, 1997, by the registrant
("Guarantor") in favor of Texas HCP Holding ,
L.P. (Exhibit 10.4.3) . . . . . . . . . . . . . . . . . . . . . . . (6)
10.13.4 Assignment Agreement dated April 1, 1997, between
the registrant ("Assignor") and Texas HCP Holding
, L.P. ("Assignee") (Exhibit 10.4.4). . . . . . . . . . . . . . . . (6)
10.14 Carriage Hill Retirement in Bedford, Virginia
10.14.1 Lease Agreement dated August 31, 1994, between
the registrant, as Tenant, and Carriage Hill
Retirement of Virginia, Ltd. as Landlord (Exhibit
10.23.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.14.2 Supplemental Lease Agreement dated September 2,
1994 (Exhibit 10.23.2). . . . . . . . . . . . . . . . . . . . . . . (1)
10.15 Green Meadows Communities
10.15.1 Consent to Assignment of and First Amendment to
Asset Purchase Agreement dated September 1, 1995,
among the registrant, The Standish Care Company
and Painted Post Partnership, Allentown Personal
Car General Partnership, Unity Partnership,
Saulsbury General Partnership and P. Jules Patt
(collectively, the "Partnerships"), together with
Asset Purchase Agreement dated July 27, 1995,
among The Standish Care Company and the
Partnerships (Exhibit 10.24.1). . . . . . . . . . . . . . . . . . . (1)
10.15.2 Agreement to Provide Administrative Services to
an Adult Home dated October 23, 1995, between the
registrant and P. Jules Patt and Pamela J. Patt
(Exhibit 10.24.6).. . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.15.3 Assignment Agreement dated October 19, 1995,
between the registrant, HCPI Trust and Health
Care Property Investors, Inc. (Exhibit 10.24.8).. . . . . . . . . . (1)
10.15.4 Assignment and Assumption Agreement dated August
31, 1995, between the registrant and The Standish
Care Company (Exhibit 10.24.9). . . . . . . . . . . . . . . . . . . (1)
10.15.5 Guaranty dated October 19, 1995, by Daniel R.
Baty in favor of Health Care Property Investors,
Inc., and HCPI Trust (Exhibit 10.24.10).. . . . . . . . . . . . . . (1)
10.15.6 Guaranty dated October 19, 1995, by the
registrant in favor of Health Care Property
Investors, Inc. (Exhibit 10.24.11). . . . . . . . . . . . . . . . . (1)
10.15.7 Second Amendment to Agreement to provide
Administrative Services to an Adult Home dated
January 1, 1997, between Painted Post Partners
and the registrant (Exhibit 10.2).. . . . . . . . . . . . . . . . . (10)
10.16 Carolina Communities
10.16.1 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Countryside Facility (Exhibit 10.23.1). . . . . . . . . . . . . . . (2)
10.16.3 Promissory Note dated as of January 26, 1996, in
the amount of $3,991,190 from Heritage Hills
Retirement, Inc. ("Borrower") to Health Care
Property Investors, Inc. ("Lender")
(Exhibit 10.23.4).. . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.4 Loan Agreement dated January 26, 1996, between
the Borrower and the Lender (Exhibit 10.23.5).. . . . . . . . . . . (2)
10.16.5 Guaranty dated January 26, 1996, by the
registrant in favor of the Borrower (Exhibit
10.23.6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.6 Deed of Trust with Assignment of Rents, Security
Agreement and Fixture Filing dated as of January
26, 1996, by and among Heritage Hills Retirement,
Inc. ("Grantor"), Chicago Title Insurance Company
("Trustee") and Health Care Property Investor,
Inc. ("Beneficiary") (Exhibit 10.23.7). . . . . . . . . . . . . . . (2)
10.16.7 Lease Agreement dated as of January 26, 1996,
between the registrant and Health Care Property
Investor, Inc. with respect to Heritage Lodge
Facility (Exhibit 10.23.8). . . . . . . . . . . . . . . . . . . . . (2)
10.16.8 Lease Agreement dated as of January 26, 1996,
between the registrant and Health Care Property
Investor, Inc. with respect to Pine Park Facility
(Exhibit 10.23.9).. . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.16.9 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Skylyn Facility (Exhibit 10.23.10). . . . . . . . . . . . . . . . . (2)
10.16.10 Lease Agreement dated January 26, 1996, between
the registrant and HCPI Trust with respect to
Summit Place Facility (Exhibit 10.23.11). . . . . . . . . . . . . . (2)
41
10.16.11 Amendment to Deed of Trust dated April 25, 1996,
between Heritage Hills Retirement, Inc.
("Grantor"), and Health Care Property Investors,
Inc. ("Beneficiary") (Exhibit 10.21.12).. . . . . . . . . . . . . . (5)
10.17 Development Property in Fairfield, California
10.17.1 Loan Agreement in the amount of $12,800,000 dated
January 10, 1997, between Fairfield Retirement
Center, LLC ("Borrower") and the Finova Capital
Corporation ("Lender") (Exhibit 10.31.1). . . . . . . . . . . . . . (5)
10.17.2 Promissory Note dated January 10, 1997, in the
amount of $12,800,000 between Fairfield
Retirement Center, LLC ("Borrower") and Finova
Capital Corporation ("Lender") (Exhibit 10.31.2). . . . . . . . . . (5)
10.17.3 Deed of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing dated
January 10, 1997, between Fairfield Retirement
Center, LLC ("Trustor"), Chicago Title Company
("Trustee") and Finova Capital Corporation
("Beneficiary") (Exhibit 10.31.3).. . . . . . . . . . . . . . . . . (5)
10.17.4 Guaranty Agreement dated January 10, 1997,
between the registrant ("Guarantor") and Finova
Capital Corporation ("Lender") (Exhibit
10.31.4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.18 Garrison Creek Lodge in Walla Walla, Washington, Cambria
in El Paso Texas, and Sherwood Place in Odessa, Texas.
The following agreements are representative of those
executed in connection with these properties:
10.18.1 Lease Agreement dated July, August and
September 1996, between the registrant
("Lessee") and American Health Properties, Inc.
("Lessor") (Exhibit 10.3.1).. . . . . . . . . . . . . . . . . . . . (4)
10.18.2 First Amendment to Lease Agreement dated
December 31, 1996, between the registrant
("Lessee") and AHP of Washington, Inc.,
("Lessor") (Exhibit 10.35.2). . . . . . . . . . . . . . . . . . . . (5)
10.19 Cobblestone at Fairmont in Manassas, Virginia
10.19.1 Loan Agreement effective as of October 26,
1995, between the registrant and Health Care
REIT, Inc. (Exhibit 10.42.1). . . . . . . . . . . . . . . . . . . . (1)
10.19.2 Deed of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing dated as
of October 26, 1995, by the registrant to
Health Care REIT, Inc. (Exhibit 10.42.2). . . . . . . . . . . . . . (1)
10.19.3 Note dated October 26, 1995, from the
registrant to Health Care REIT, Inc. (Exhibit
10.42.3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)
10.19.4 Unconditional and Continuing Guaranty dated as
of October 26, 1995, by Daniel R. Baty in favor
of Health Care REIT, Inc. (Exhibit 10.42.4).. . . . . . . . . . . . (1)
10.20 Rosewood Court in Fullerton, California, The Arbor at
Olive Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington and Laurel
Lake Estates in Voorhees, New Jersey, Green Meadows--
Allentown in Allentown, Pennsylvania, Green Meadows--
Dover in Dover, Delaware, Green Meadows--Latrobe in
Latrobe, Pennsylvania, Green Meadows--Painted Post in
Painted Post, New York. The following agreements are
representative of those executed in connection with these
properties:
10.20.1 Second Amended Lease Agreement dated as of
December 30, 1996, by and between the
registrant and Health Care Property Investors,
Inc. (Exhibit 10.37.1). . . . . . . . . . . . . . . . . . . . . . . (5)
10.21 Cooper George Partners Limited Partnership
10.21.1 Deed of Trust, Trust Indenture, Assignment,
Assignment of Rents, Security Agreement,
Including Fixture Filing and Financing
Statement dated June 30, 1998, between Cooper
George Partners Limited Partnership
("Grantor"), Chicago Title Insurance Company
("Trustee") and Deutsche Bank AG, New York
Branch ("Beneficiary") (Exhibit 10.3.1) . . . . . . . . . . . . . . (15)
10.21.2 Partnership Interest Purchase Agreement dated
June 4, 1998, between Emeritus Real Estate LLC
IV ("Seller") and Columbia Pacific Master Fund
98 General Partnership ("Buyer") (Exhibit
10.3.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.21.3 Credit Agreement dated June 30, 1998, between
Cooper George Partners Limited Partnership
("Borrower") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.3.3). . . . . . . . . . . . . . . . . (15)
10.21.4 Amended and Restated Agreement of Limited
Partnership of Cooper George Partners Limited
Partnership dated June 29, 1998, between
Columbia Pacific Master Fund '98 General
Partnership, Emeritus Real Estate IV, L.L.C.
and Bella Torre De Pisa Limited Partnership
(Exhibit 10.3.4). . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.21.5 Guaranty and Limited Indemnity Agreement dated
June 30, 1998, between Daniel R. Baty
("Guarantor") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.3.6). . . . . . . . . . . . . . . . . (15)
10.21.6 Promissory Note dated June 30, 1998, between
Cooper George Limited Partnership ("Borrower")
and Deutsche Bank, AG, New York Branch
("Lender") (Exhibit 10.3.7) . . . . . . . . . . . . . . . . . . . . (15)
10.22 Registration Rights Agreement dated February 8, 1996,
with respect to the registrant's 6.25%
Convertible Subordinated Debentures due 2006 (Exhibit
10.44).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.23 Registration Rights Agreement dated February 8, 1996,
with respect to the registrant's 6.25%
Convertible Subordinated Debentures due 2006 (Exhibit
10.45).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)
10.24 Office Lease Agreement dated April 29, 1996, between
Martin Selig ("Lessor") and the registrant ("Lessee")
(Exhibit 10.8).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)
10.25 Colonie Manor in Latham, New York, Bassett Manor in
Williamsville, New York, West Side Manor in Liverpool, New
York, Bellevue Manor in Syracuse, New York, Perinton Park
Manor in Fairport, New York, Bassett Park Manor in
Williamsville, New York, Woodland Manor in Vestal, New York,
East Side Manor in Fayetteville, New York and West Side Manor
in Rochester, New York. The following agreement is
representative of those executed in connection with these
properties:
10.25.1 Lease Agreement dated September 1, 1996, between
Philip Wegman ("Landlord") and Painted Post
Partners ("Tenant") (Exhibit 10.4.1). . . . . . . . . . . . . . . . (4)
10.25.2 Agreement to Provide Administrative Services to an
Adult Home dated September 2, 1996, between the
registrant and Painted Post Partners ("Operator")
(Exhibit 10.4.2). . . . . . . . . . . . . . . . . . . . . . . . . . (4)
10.25.3 First Amendment to Agreement to Provide
Administrative Services to an Adult Home dated
January 1, 1997, between Painted Post Partners and
the registrant (Exhibit 10.1).. . . . . . . . . . . . . . . . . . . (10)
10.26 Columbia House Communities.
10.26.1 Management Services Agreement between the
Registrant ("Manager") and Columbia House, LLC
("Lessee") dated November 1, 1996, with respect to
Camlu Retirement (Exhibit 10.6.1).. . . . . . . . . . . . . . . . . (4)
42
10.26.2 Management Services Agreement dated January 1,
1998, between the registrant ("Manager") and
Columbia House LLC ("Lessee") with respect to York
Care. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.26.3 Commercial Lease Agreement dated January 13, 1997,
between Albert M. Lynch ("Landlord") and Columbia
House, LLC ("Tenant") with respect to York Care
(Exhibit 10.3.2). . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.26.4 Management Services Agreement dated June 1, 1997,
between the registrant ("Manager") and Columbia
House LLC ("Owner") with respect to Autumn Ridge
(Exhibit 10.3.1). . . . . . . . . . . . . . . . . . . . . . . . . . (9)
10.26.5 Agreement to Provide Accounting and Administrative
Services dated October 1, 1997, between Acorn
Service Corporation ("Administrator") and Vancouver
Housing, L.L.C., ("Manager") with respect to Van
Vista and Columbia House (Exhibit 10.6.1).. . . . . . . . . . . . . (12)
10.26.6 Assignment and First Amendment to Agreement to
Provide Management Services dated September 1,
1997, between the registrant, Columbia House,
L.L.C., Acorn Service Corporation and Camlu Coeur
d'Alene, L.L.C. with respect to Camlu.. . . . . . . . . . . . . . . (13)
10.26.7 Assignment and First Amendment to Agreement to
Provide Management Services dated September 1,
1997, between the registrant, Columbia House,
L.L.C., Acorn Service Corporation and Autumn Ridge
Herculaneum, L.L.C. with respect to Autumn Ridge. . . . . . . . . . (13)
10.26.8 Management Services Agreement dated January 1,
1998, between the registrant ("Manager") and
Columbia House LLC ("Owner") with respect to Park
Lane. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.27 Vickery Towers in Dallas, Texas
10.27.1 Partnership Interest Purchase and Sale Agreement
dated June 4, 1998, between ESC GP II, Inc. and
Emeritus Properties IV, Inc. (together "Seller")
and Columbia Pacific Master Fund 98 General
Partnership and Daniel R. Baty (together
"Purchaser") (Exhibit 10.4.1).. . . . . . . . . . . . . . . . . . . (15)
10.27.2 Amended and Restated Agreement of Limited
Partnership of ESC II, LP dated June 30, 1998,
between Columbia Pacific Master Fund '98 General
Partnership and Daniel R. Baty (Exhibit 10.4.2).. . . . . . . . . . (15)
10.27.3 Agreement to Provide Management Services To An
Independent and Assisted Living Facility dated June
30, 1998, between ESC II, LP ("Owner") and ESC III,
LP ("Manager") (Exhibit 10.4.3).. . . . . . . . . . . . . . . . . . (15)
10.28 Concorde in Las Vegas, Nevada
10.28.1 Purchase and Sale Agreement dated July 9, 1996,
between the registrant ("Purchaser") and Sunday
Estates, Inc. ("Seller") (Exhibit 10.56.1). . . . . . . . . . . . . (5)
10.28.2 First Amendment to Purchase and Sale Agreement
dated July 11, 1996, between the registrant the
Seller (Exhibit 10.56.2). . . . . . . . . . . . . . . . . . . . . . (5)
10.29 Development Properties in Auburn, Massachusetts, Louisville,
Kentucky and Rocky Hill, Connecticut. The following
agreements are representative of those executed in connection
with these properties:
10.29.1 Lease Agreement dated February 1996, between the
registrant ("Lessee") and LM Auburn Assisted Living
LLC, and LM Louisville Assisted Living LLC,
("Landlords") with respect to the development
properties in Auburn and Louisville (Exhibit
10.58.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.29.2 Amended and Restated Lease Agreement dated February
26, 1996, between the registrant ("Lessee") and LM
Rocky Hill Assisted Living Limited Partnership,
("Landlord") with respect to the development
property in Rocky Hill (Exhibit 10.58.2). . . . . . . . . . . . . . (5)
10.29.3 Lease Agreement dated October 10, 1996, between the
registrant ("Lessee") and LM Chelmsford Assisted
Living LLC, ("Landlord") with respect to the
development property in Chelmsford (Exhibit
10.58.3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.29.4 Promissory Note in the amount of $1,255,000 dated
December 1996, between the registrant ("Lender")
and LM Auburn Assisted Living LLC, ("Borrower")
with respect to the development property in
Auburn (Exhibit 10.58.4). . . . . . . . . . . . . . . . . . . . . . (5)
10.29.5 Promissory Note in the amount of $1,450,000 dated
January 1997, between the registrant ("Lender")
and LM Louisville Assisted Living LLC,
("Borrower") with respect to the development
property in Louisville (Exhibit 10.58.5). . . . . . . . . . . . . . (5)
10.29.6 Promissory Note in the amount of $1,275,000 dated
January 1997, between the registrant ("Lender")
and LM Rocky Hill Assisted Living Limited
Liability Partnership, ("Borrower") with respect
to the development property in Rocky Hill
(Exhibit 10.58.6).. . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.29.7 Promissory Note in the amount of $300,000 dated
January 1997, between the registrant ("Lender")
and LM Chelmsford Assisted Living LLC,
("Borrower") with respect to the development
property in Chelmsford (Exhibit 10.58.7). . . . . . . . . . . . . . (5)
10.30 Development Properties in Cheyenne, Wyoming and Auburn,
California. The following agreements are representative of
those executed in connection with these properties.
10.30.1 Management Agreement dated May 30, 1997, between
Willard Holdings, Inc., ("Owner") and the
registrant ("Manager") (Exhibit 10.5.1).. . . . . . . . . . . . . . (9)
10.30.2 Lease Agreement dated May 30, 1997, between
Willard Holdings, Inc., ("Lessor") and the
registrant ("Lessee") (Exhibit 10.5.2). . . . . . . . . . . . . . . (9)
10.31 Senior Management Employment Agreements and Amendments
entered into between the registrant and each of the
following individuals:
10.31.1 Frank A. Ruffo (Exhibit 10.6.2), Kelly J. Price
(Exhibit 10.6.3), Gary D. Witte (Exhibit 10.6.4),
Sarah J. Curtis (Exhibit 10.6.4), and Raymond R.
Brandstrom (Exhibit 10.6.5).. . . . . . . . . . . . . . . . . . . . (9)
10.31.2 Raymond R. Brandstrom (Exhibit 10.11.1), Gary D.
Witte ( Exhibit 10.11.2), Frank A. Ruffo (Exhibit
10.11.3), Sarah J. Curtis (Exhibit 10.11.4), and
Kelly J. Price (Exhibit 10.11.5). . . . . . . . . . . . . . . . . . (9)
10.32 La Casa Grande in New Port Richey, Florida, River Oaks in
Englewood, Florida, and Stanford Centre in Altamonte
Springs, Florida. The following agreements are
representative of those executed in connection with these
properties.
10.32.1 Stock Purchase Agreement dated September 30,
1996, between Wayne Voegele, Jerome Lang, Ronald
Carlson, Thomas Stanford, Frank McMillan, Lonnie
Carlson, and Carla Holweger ("Seller") and the
registrant ("Purchaser") with respect to La Casa
Grande (Exhibit 10.1).. . . . . . . . . . . . . . . . . . . . . . . (7)
10.32.2 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to La Case Grande
(Exhibit 10.2). . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.32.3 Stock Purchase Agreement dated September 30,
1996, between the Seller and the registrant with
respect to River Oaks (Exhibit 10.3). . . . . . . . . . . . . . . . (7)
10.32.4 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to River Oaks (Exhibit
10.4).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
43
10.32.5 Stock Purchase Agreement dated September 30,
1996, between the Seller and the registrant with
respect to Stanford Centre (Exhibit 10.5).. . . . . . . . . . . . . (7)
10.32.6 First Amendment to Stock Purchase Agreement dated
January 31, 1997, between the Seller and the
registrant with respect to Stanford Centre
(Exhibit 10.6). . . . . . . . . . . . . . . . . . . . . . . . . . . (7)
10.33 Painted Post Partnership
10.33.1 Painted Post Partners Partnership Agreement dated
October 1, 1995 (Exhibit 10.24.7).. . . . . . . . . . . . . . . . . (1)
10.33.2 First Amendment to Painted Post Partners
Partnership Agreement dated October 22, 1996,
between Daniel R. Baty and Raymond R. Brandstrom
(Exhibit 10.20.20). . . . . . . . . . . . . . . . . . . . . . . . . (5)
10.33.3 Indemnity Agreement dated November 3, 1996,
between the registrant and Painted Post Partners
(Exhibit 10.3). . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.33.4 First Amendment to Indemnity Agreement dated
January 1, 1997, between the registrant and
Painted Post Partners (Exhibit 10.4). . . . . . . . . . . . . . . . (10)
10.33.5 Undertaking and Indemnity Agreement dated October
23, 1995, between the registrant, P. Jules Patt
and Pamela J. Patt and Painted Post Partnership
(Exhibit 10.5). . . . . . . . . . . . . . . . . . . . . . . . . . . (10)
10.33.6 First Amendment to Undertaking and Indemnity
Agreement dated January 1, 1997, between Painted
post Partners and the registrant (Exhibit 10.6).. . . . . . . . . . (10)
10.33.7 First Amendment to Non-Competition Agreement
between the registrant and Daniel R. Baty
(Exhibit 10.1.1) and Raymond R. Brandstrom
(Exhibit 10.1.2). . . . . . . . . . . . . . . . . . . . . . . . . . (11)
10.34 Ridgeland Court in Ridgeland, Mississippi
10.34.1 Master Agreement and Subordination Agreement
dated September 5, 1997, between the
registrant, Emeritus Properties I, Inc., and
Mississippi Baptist Health Systems, Inc.
(Exhibit 10.1.1). . . . . . . . . . . . . . . . . . . . . . . . . . (12)
10.34.2 License Agreement dated September 5, 1997,
between the registrant and its subsidiary and
affiliated corporations and Mississippi Baptist
Health Systems, Inc. (Exhibit 10.1.2).. . . . . . . . . . . . . . . (12)
10.34.3 Economic Interest Assignment Agreement and
Subordination Agreement dated September 5,
1997, between the registrant, Emeritus
Properties I, Inc., and Mississippi Baptist
Health Systems, Inc. (Exhibit 10.1.3).. . . . . . . . . . . . . . . (12)
10.34.4 Operating Agreement for Ridgeland Assisted
Living, L.L.C. dated December 23, 1998, between
the registrant, Emeritust Properties XI, L.L.C.
and Mississippi Baptist Medical Enterprises,
Inc. (Exhibit 10.46.4). . . . . . . . . . . . . . . . . . . . . . . (16)
10.34.5 Purchase and Sale Agreement dated December 23,
1998, between the registrant and Meditrust
Company LLC. (Exhibit 10.46.5). . . . . . . . . . . . . . . . . . . (16)
10.35 Development Property in Urbana, Illinois.
10.35.1 Lease Agreement dated September 10, 1997,
between ALCO IV, L.L.C. ("Lessor") and the
registrant ("Lessee") (Exhibit 10.2.1). . . . . . . . . . . . . . . (12)
10.35.2 Management Agreement dated September 10, 1997,
between the registrant ("Manager" and ALCO IV,
L.L.C. ("Owner") (Exhibit 10.2.2).. . . . . . . . . . . . . . . . . (12)
10.36 Amendment to Office Lease Agreement dated September 6,
1996, between Martin Selig ("Lessor") and the registrant.. . . . . . . . . . (13)
10.37 Villa Del Rey in Escondido, California
10.37.1 Purchase and Sale Agreement dated December 19,
1996, between the registrant ("Purchaser") and
Northwest Retirement ("Seller") (Exhibit
10.1.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.38 Development Property in Paso Robles, California
10.38.1 Agreement of TDC/Emeritus Paso Robles
Associates dated June 1, 1995, between the
registrant and TDC Convalescent, Inc. (Exhibit
10.2.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.38.2 Loan Agreement in the amount of $6,000,000
dated February 15, 1997, between Finova Capital
Corporation ("Lender") and TDC/Emeritus Paso
Robles Associates ("Borrower") (Exhibit
10.2.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.38.3 Promissory Note dated February 28, 1997, in the
amount of $6,000,000 between Finova Capital
Corporation ("Lender") and TDC/Emeritus Paso
Robles Associates ("Borrower") (Exhibit
10.2.3).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.38.4 Deed of Trust, Security Agreement, Assignment
of Leases and Rents and Fixture Filing dated
February 18, 1997, between TDC/Emeritus Paso
Robles Associates ("Trustor"), Chicago Title
Company ("Trustee") and Finova Capital
Corporation ("Beneficiary") (Exhibit 10.2.4). . . . . . . . . . . . (6)
10.38.5 Guaranty between TDC Convalescent, Inc.
("Guarantor") and Finova Capital Corporation
(Exhibit 10.2.5). . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.38.6 Guaranty between the registrant ("Guarantor")
and Finova Capital Corporation (Exhibit
10.2.6).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6)
10.39 Development Property in Staunton, Virginia
10.39.1 Purchase and Sale Agreement dated February 5,
1997, between Greencastle Retirement Partners,
L.L.C. ("Purchaser") and Gail G. Brown
("Seller") (Exhibit 10.72.1). . . . . . . . . . . . . . . . . . . . (13)
10.39.2 Assignment and Assumption of Purchase and Sale
Agreement dated February 12, 1997, between
Greencastle Retirement Partners, L.L.C. and the
registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.40 Development Property in Jamestown New York
10.40.1 Purchase Agreement dated December 12, 1996,
between June Fagerstrom ("Seller") and Wegman
Family LLC ("Buyer") (Exhibit 10.73.1). . . . . . . . . . . . . . . (13)
10.40.2 Assignment and Assumption Agreement dated
December 30, 1997, between Wegman Family LLC
("Assignor") and Painted Post Partners
("Assignee") (Exhibit 10.73.2). . . . . . . . . . . . . . . . . . . (13)
10.41 Development Property in Danville, Illinois
10.41.1 Purchase and Sale Agreement dated October 14,
1997, between South Bay Partners, Inc.
("Purchaser") and Elks Lodge No. 332, BPOE
("Seller") (Exhibit 10.74.1). . . . . . . . . . . . . . . . . . . . (13)
10.41.2 Assignment and Assumption of Purchase and Sale
Agreement dated October 21, 1997, between South
Bay Partners, Inc. and the registrant (Exhibit
10.74.2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.42 Development Property in Biloxi, Mississippi
10.42.1 Management Agreement dated December 18, 1997,
between the registrant ("Manager") and ALCO
VII, L.L.C. ("Owner") (Exhibit 10.75.1).. . . . . . . . . . . . . . (13)
44
10.42.2 Lease Agreement dated September 29, 2000,
between the registrant ("Lessee") and HR
Acquisition Corporation ("Lessor") (Exhibit
10.75.2).
10.43 Sanyo Electric Co., Ltd.
10.43.1 Agreement entered into on May 30, 1996, between
the registrant and Sanyo Electric Co., Ltd. for
the interest in jointly entering the
development, construction and /or operation of
the Senior Housing Business in Japan (Exhibit
10.76.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13)
10.43.2 Joint Venture Agreement entered into on July 9,
1997, between the registrant and Sanyo Electric
Co., Ltd. (Exhibit 10.76.2).. . . . . . . . . . . . . . . . . . . . (13)
10.44 Lakeridge Place in Wichita Falls, Texas, Meadowlands
Terrace in Waco, Texas, Saddleridge Lodge in Midland,
Texas and Sherwood Place in Odessa, Texas. The following
agreements are representative of those executed in
connection with these properties.
10.44.1 Management and Consulting Agreement dated
February 1, 1998, between ESC I, L.P., and XL
Management Company L.L.C. (Exhibit 10.78.1).. . . . . . . . . . . . (13)
10.45 1998 Employee Stock Purchase Plan (Exhibit 99.2).. . . . . . . . . . . . . . (14)
10.46 River Oaks in Englewood, California, Stanford Center in
Alamonte Springs, La Casa Grande in New Port Richey,
Florida, Silver Pines in Cedar Rapids, Iowa, Villa Del
Rey in Escondido, California, Spring Meadows in Bozeman,
Montana, Juniper Meadows in Lewiston, Idaho and Fulton
Villa in Stockton, California.
10.46.1 Credit Agreement dated April 29, 1998, between
Emeritus Properties II, Inc., Emeritus
Properties V, Inc., and Emeritus Properties
VII, Inc. ("Borrowers") and Deutsche Bank AG,
New York Branch ("Lender") (Exhibit 10.2.1).. . . . . . . . . . . . (15)
10.46.2 Amended and Restated Guaranty and Limited
Indemnity Agreement dated June 30, 1998,
between Emeritus Corporation ("Guarantor") and
Deutsche Bank AG ("Lender") (Exhibit 10.2.2). . . . . . . . . . . . (15)
10.46.3 Amendment to Credit Agreement and Restatement
of Article IX dated June 30, 1998, between
Emeritus Properties II, Inc., Emeritus
Properties III, Inc., Emeritus Properties V and
Emeritus Properties VII, Inc. (together
"Borrowers") and Deutsche Bank AG ("Lender")
(Exhibit 10.2.3). . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.46.4 Guaranty and Limited Indemnity Agreement dated
April 29, 1998, between Emeritus Corporation
("Grantor") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.2.4). . . . . . . . . . . . . . . . . (15)
10.46.5 Promissory Note dated June 30, 1998, between
Emeritus Properties III, Inc. ("Borrower") and
Deutsche Bank AG, New York Branch ("Lender")
(Exhibit 10.2.5). . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.46.6 Future Advance Promissory Note dated April 29,
1998, between Emeritus Properties V, Inc.
("Borrower") and Deutsche Bank AG, New York
Branch ("Lender") (Exhibit 10.2.6). . . . . . . . . . . . . . . . . (15)
10.46.7 Extension Agreement dated May 31, 2001, between
Emeritus Properties II, Inc., Emeritus Properties V, Inc.,
Emeritus Properties VII, Inc. ("Original Borrrowers"),
Emeritus Properties III, Inc. ("Additional Borrower"),
and Deutsche Bank AG, New York Branch ("Lender") (Exhibit 10.1). . . (22)
10.46.8 Loan Agreement dated February 8, 2002, between Heller
Healthcare Finance, Inc. ("Lender") and ESC - Puyallup, LLC,
ESC - Port St. Richie, LLC, and ESC - Bozeman, LLC ("Borrower"). . . (24)
10.47 Courtyard at the Willows In Puyallup, Washington
10.47.1 Deed of Trust, Trust Indenture, Assignment,
Assignment of Rents, Security Agreement,
Including Fixture Filing and Financing
Statement dated June 30, 1998, between Emeritus
Properties III, Inc. ("Grantor") and Chicago
Title Insurance Company ("Trustee") and
Deutsche Bank AG, New York Branch
("Beneficiary") (Exhibit 10.7.1). . . . . . . . . . . . . . . . . . (15)
10.47.2 Mortgage, Open-End Mortgage, Advance Money
Mortgage, Trust Deed, Deed Of Trust, Trust
Indenture, Assignment, Assignment of Rents,
Security Agreement, Including Fixture Filing
and Financing Statement dated June 30, 1998,
between Emeritus Properties III, Inc.
("Grantor, Mortgagor") and Deutsche Bank, AG,
New York Branch (Exhibit 10.7.2). . . . . . . . . . . . . . . . . . (15)
10.48 Silver Pines in Cedar Rapids, Iowa, Spring Meadows in
Bozeman, Montana and Juniper Meadows in Lewiston, Idaho.
10.48.1 Promissory Note dated April 29, 1998, between
Emeritus Properties II ("Borrower") and
Deutsche Bank AG, New York Branch (Exhibit
10.8.1).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.49 Richland Gardens in Richland, Washington, Charlton Place
in Tacoma Washington, The Pines of Goldsboro in
Goldsboro, North Carolina, Silverleaf Manor in Meridian,
Mississippi and Wilburn Gardens in Fredericksburg,
Virginia. The following agreement is representative of
those executed in connection with these properties.
10.49.1 Agreement To Provide Management Services To An
Assisted Living Facility dated February 2,
1998, between Richland Assisted, L.L.C.
("Owner") and Acorn Service Corporation
("Manager") (Exhibit 10.9.1). . . . . . . . . . . . . . . . . . . . (15)
10.50 Richland Gardens in Richland, Washington, The Pines of
Goldsboro in Goldsboro, North Carolina, Silverleaf Manor
in Meridian, Mississippi, Wilburn Gardens in
Fredericksburg, Virginia and Park Lane in Toledo, Ohio.
The following agreement is representative of those
executed in connection with these properties.
10.50.1 Marketing Agreement dated February 2, 1998,
between Acorn Service Corporation ("Acorn") and
Richland Assisted, L.L.C. ("RALLC") (Exhibit
10.10.1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15)
10.51 Kirkland Lodge in Kirkland, Washington
10.51.1 Purchase and Sale Agreement dated December 23,
1998, between the registrant and Meditrust
Company LLC. (Exhibit 10.46.5). . . . . . . . . . . . . . . . . . . (16)
10.51.2 Loan Agreement dated December 28, 1998, between
Emeritus Properties X, L.L.C and Guaranty
Federal Bank (Exhibit 10.65.2). . . . . . . . . . . . . . . . . . . (16)
10.51.3 Promissory Note Agreement dated December 28,
1998, between Emeritus Properties X, L.L.C and
Guaranty Federal Bank (Exhibit 10.65.3).. . . . . . . . . . . . . . (16)
10.51.4 Guaranty Agreement dated December 28, 1998,
between the registrant and Guaranty Federal
Bank (Exhibit 10.65.3). . . . . . . . . . . . . . . . . . . . . . . (16)
10.52 Emeritrust Communities
10.52.1 Purchase and Sale Agreement dated December 30,
1998, between the registrant, Emeritus
Properties VI, Inc., ESC I, L.P. and AL
Investors LLC. (Exhibit 10.66.1). . . . . . . . . . . . . . . . . . (16)
10.52.2 Supplemental Purchase Agreement in Connection
with Purchase of Facilities dated December 30,
1998, between the registrant, Emeritus
Properties I, Inc. Emeritus Properties VI,
Inc., ESC I, L.P. and AL Investors LLC.
(Exhibit 10.66.2).. . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.52.3 Management Agreement with Option to Purchase
dated December 30, 1998, between the
registrant, Emeritus Management I LP, Emeritus
Properties I, Inc, ESC I, L.P., Emeritus
Management LLC and AL Investors LLC. (Exhibit
10.66.3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16)
45
10.52.4 Guaranty of Management Agreement and Shortfall
Funding Agreement dated December 30, 1998,
between the registrant and AL Investors LLC.
(Exhibit 10.66.4).. . . . . . . . . . . . . . . . . . . . . . . . . (16)
10.52.5 Put and Purchase Agreement dated December 30,
1998, between Daniel R. Baty and AL Investors
LLC. (Exhibit 10.66.5) Second Emeritrust. . . . . . . . . . . . . . (16)
10.52.6 First Amendment to Management Agreement with Option
to Purchase (AL I - Emeritrust 25 Facilities) dated March 22, 2001,
between the registrant, Emeritus Management I LP, and AL
Investors LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.52.7 Amendment to Guaranty of Management Agreement and
Shortfall Funding Agreement (Emeritrust 25) dated March 22, 2001,
between the registrant and AL Investors LLC.. . . . . . . . . . . . (24)
10.52.8 Second Amendment to Put and Purchase Agreement (AL I -
Emeritrust 25 Facilities) dated March 22, 2001, between Daniel R.
Baty and AL Investors LLC. . . . . . . . . . . . . . . . . . . . . (24)
10.52.9 Second Amendment to Management Agreement with Option to
Purchase (AL I - Emeritrust 25 Facilities) dated January 1, 2002,
between the registrant, Emeritus Management I LP, and AL
Investors LLC.. . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.52.10 Third Amendment to Put and Purchase Agreement (AL I -
Emeritrust 25 Facilities) dated January 1, 2002, between
Danel R. Baty and AL Investors LLC.. . . . . . . . . . . . . . . . (24)
10.53 Emeritrust II Communities
10.53.1 Supplemental Purchase Agreement in Connection
with Purchase of Facilities (AL II--14
Operating Facilities) dated March 26,1999,
between the registrant, Emeritus Properties I,
Inc. ESC G.G. I, Inc., ESC I, L.P. and AL
Investors II LLC (Exhibit 10.1.1).. . . . . . . . . . . . . . . . . (17)
10.53.2 Management Agreement with Option to Purchase
(AL II--14 Operating Facilities) dated March
26, 1999, between the registrant, Emeritus
Management I LP, Emeritus Properties I, Inc.,
ESC G.P. I, Inc., ESC I, L.P., Emeritus
Management LLC and AL Investors II LLC (Exhibit
10.1.2).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.3 Guaranty of Management Agreement (AL II--14
Operating Facilities) dated March 26, 1999,
between the registrant and AL Investors II LLC
(Exhibit 10.1.3). . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.4 Supplemental Purchase Agreement in Connection
with Purchase of Facilities (AL II--5
Development Facilities) dated March 26, 1999,
between the registrant, Emeritus Properties I,
Inc. and AL Investors Development LLC (Exhibit
10.1.4).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.5 Management Agreement with Option to Purchase
(AL II--5 Development Facilities) dated
March 26, 1999, between the registrant,
Emeritus Properties I, Inc., Emeritus
Management LLC and AL Investors Development LLC
(Exhibit 10.1.5). . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.6 Guaranty of Management Agreement and Shortfall
Funding Agreement (AL II--5 Development
Facilities) dated March 26, 1999, between the
registrant and AL Investors Development LLC
(Exhibit 10.1.6). . . . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.7 Put and Purchase Agreement (AL II Holdings--14
Operating Facilities and 5 Development
Facilities) dated March 26, 1999, between
Daniel R. Baty and AL II Holdings LLC, AL
Investors II LLC and AL Investors Development
LLC (Exhibit 10.1.7). . . . . . . . . . . . . . . . . . . . . . . . (17)
10.53.8 Second Amendment to Management Agreement (AL II -
14 Operating Facilities) (GMAC) dated March 22, 2001, between the
registrant, Emeritus Management LLC, Emeritus Management I,
and AL Investors II LLC.. . . . . . . . . . . . . . . . . . . . . . (24)
10.53.9 Second Amendment to Put and Purchase Agreement (AL
II Holdings - 14 Operating Facilities and 5 Development Facilities)
dated March 22, 2001, between Daniel R. Baty and AL II Holdings
LLC, AL Investors II LLC and AL Investors Development LLC.. . . . . (24)
10.53.10 First Amendment to Management Agreement (AL II -
5 Development Facilities) dated January 1, 2002, between the
registrant, Emeritus Management LLC, and AL Investors
Development LLC.. . . . . . . . . . . . . . . . . . . . . . . . . . (24)
10.53.11 Third Amendment to Put and Purchase Agreement (AL II
Holdings - 14 Operating Facilities and 5 Development Facilities)
dated January 1, 2002, between Daniel R. Baty and AL II Holdings
LLC, AL Investors II LLC, and AL Investors Development LLC.. . . . . (24)
10.53.12 Third Amendment to Management Agreement (AL II -
14 Operating Facilities) (GMAC) dated January 1, 2002, between
the registrant, Emeritus Management LLC, Emeritus Management I LP,
and AL Investors II LLC. . . . . . . . . . . . . . . . . . . . . . . (24)
10.54 Meadow Lodge at Drum Lodge Hill in Chelmsford,
Massachusetts
10.54.1 Purchase and Sales Agreement dated April 23,
1999, between LM Chelmsford Assisted Living,
LLC ("Seller") and the registrant ("purchaser")
(Exhibit 10.1.1). . . . . . . . . . . . . . . . . . . . . . . . . . (18)
10.55 Meadow Lodge at Drum Hill in Chelmsford, Massachusetts,
Cobblestones at Fairmont in Manassas, Virginia, Kirkland
Lodge in Kirkland, Washington and Ridgeland Pointe in
Ridgeland, Mississippi. The following agreements are
representative of those executed in conjunction with these
properties.
10.55.1 Fixed Rate Noted dated September 29, 1999,
between Amresco Capital, L.P. ("Payee") and the
registrant ("Maker") (Exhibit 10.2.1). . . . . . . . . . . . . . . (18)
10.55.2 Mortgage and Security Agreement dated September
29, 1999, between Amresco Capital, L.P.
(Mortgagee") and the registrant ("mortgagor")
(Exhibit 10.2.2).. . . . . . . . . . . . . . . . . . . . . . . . . (18)
10.56 Series B Preferred Stock Purchase Agreement dated as of
December 10, 1999, between Emeritus Corporation and Saratoga
Partners IV, L.P. (Exhibit 4.1). . . . . . . . . . . . . . . . . . . . . . . (19)
10.57 Designation of Rights and Preferences of Series B
Convertible Preferred Stock as filed with the Secretary of
State of Washington on December 29, 1999 (Exhibit 4.2).. . . . . . . . . . . (19)
10.58 Shareholders Agreement dated as of December 30, 1999, among
Emeritus Corporation, Daniel R. Baty, B.F., Limited
Partnership and Saratoga Partners IV, L.P. (Exhibit 4.3).. . . . . . . . . . (19)
10.59 Registration Rights Agreement dated as of December 30, 1999,
between Emeritus Corporation and Saratoga Partners IV, L.P.
(Exhibit 4.4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19)
10.60 Investment Agreement dated as of December 30, 1999, among
Emeritus Corporation, Daniel R. Baty, B.F., Limited
Partnership and Saratoga Partners IV, L.P., Saratoga
Partners IV, L.P. and Saratoga Management Company LLC.
(Exhibit 4.5). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19)
10.61 Canterbury Ridge in Urbana, Illinois
10.61.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). . . . . . . . . . . . . . . . . . (20)
10.62 Emerald Hills in Auburn
46
10.62.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). . . . . . . . . . . . . . . . . . (20)
10.62.2 Lease agreement dated September 5, 2001, between Health
Care Property Investors, Inc. ("Lessor"), and Emeritus
Corporation ("Lessee"). . . . . . . . . . . . . . . . . . . . . . . (24)
10.63 Sierra Hills in Cheyenne, Wyoming
10.63.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). . . . . . . . . . . . . . . . . . (20)
10.63.2 Lease Assignment and Operations Transfer Agreement dated
September 30, 2001, between Emeritus Corporation ("Tenant")
and Sierra Hills Assisted Living Community, LLC,
("Assignee") and Jon M. and Kristin P. Harder, husband and
wife, Darryl E. and Carol L. Fisher, husband and wife, Eric
W. and Marti M. Jacobson, husband and wife and Sunwest
Management, Inc. ("Guarantor"). . . . . . . . . . .. . . . . . . . .(24)
10.64 Villa Ocotillo in Scottsdale, Arizona
10.64.1 Purchase and sale agreement originally dated
October 21, 1997, and effective January 2001,
between Melchor and Isabel Balazs, as Trustees
("Purchaser") and Emeritus Corporation
("Seller").. . . . . . . . . . . . . . . . . . . . . . . . . . . . (21)
10.64.2 Lease agreement dated December 29, 2000 and
effective December 29, 2000, between Melchor
Balazs and Isabel Balazs ("Lessor") and Emeritus
Corporation ("Lessee").. . . . . . . . . . . . . . . . . . . . . . (21)
10.64.3 Transfer of Operations Agreement dated August 14, 2001,
between Emeritus Corporation and Melchor Balazs.. . . . . . . . . . (24)
10.65 Loyalton of Hattiesburg in Hattiesburg, Mississippi
10.65.1 Lease agreement dated June 10, 1998, and
effective October 1, 2000, between ALCO XII, LLC
("Lessor") and Emeritus Corporation ("Lessee").. . . . . . . . . . (21)
10.66 Loyalton of Biloxi in Biloxi, Mississippi
10.66.1 Lease agreement dated September 29, 2000, and
effective October 1, 2000, between HR
Acquisitions I Corporation ("Lessor") and
Emeritus Corporation ("Lessee"). . . . . . . . . . . . . . . . . . (21)
10.66.2 Lease agreement dated September 5, 2001, between Health
Care Property Investors, Inc. ("Lessor"), and Emeritus
Corporation ("Lessee").. . . . . . . . . . . . . . . . . . . . . . (24)
10.67 Amended 1998 Employee Stock Purchase Plan (as amended and
restated on May 19, 1999, and August 17, 2001). (Appendix B). . . . . . (23)
21.1 Subsidiaries of the registrant.. . . . . . . . . . . . . . . . . . . . . . . (24)
23.1 Consent of KPMG LLP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24)
(1) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-1 (File No. 33-97508)
declared effective on November 21, 1995.
(2) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 29,
1996.
(3) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on
August 14, 1996.
(4) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1996.
(5) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1997.
(6) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May
15, 1997.
(7) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on May 16,
1997.
(8) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K Amendment No. 1 (File No.
1-14012) on July 14, 1997.
(9) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on
August 14, 1997.
(10) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 2 (File No.
333-20805) on August 14, 1997.
(11) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 3 (File No.
333-20805) on October 29, 1997.
(12) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1997.
(13) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 30,
1998.
(14) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-8 (File No. 333-60323) on
July 31, 1998.
(15) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on
August 14, 1998
(16) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1999.
(17) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May
10, 1999.
(18) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 15, 1999.
(19) Incorporated by reference to the indicated exhibit filed with the
Company's Form 8-K (File No. 1-14012) on January 14, 2000.
(20) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 2000.
(21) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on April 2,
2001.
(22) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on July 18,
2001.
(23) Incorporated by reference to the indicated exhibit filed with the
Company's Definitive Proxy Statement on Form DEF 14A on August 17,
2001.
(24) Filed herewith.
47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
Emeritus Corporation
(Registrant)
Dated: March 29, 2002
Signature. . . . . . . . . . Title
---------------------------- ---------------------------
/s/ Daniel R. Baty . . . . Chief Executive Officer and
----------------------------
Daniel R. Baty . . . . . . . Chairman of the Board
/s/ Raymond R. Brandstrom. Vice President of Finance,
----------------------------
Raymond R. Brandstrom. . . Secretary, Chief Financial
Officer, and Vice Chairman
of the Board
/s/ Patrick Carter . . . . Director
----------------------------
Patrick Carter
/s/ Charles P. Durkin. . . Director
----------------------------
Charles P. Durkin
/s/ David Hamamoto . . . . Director
----------------------------
David Hamamoto
/s/ David W. Niemiec . . . Director
----------------------------
David W. Niemiec
/s/ Motoharu Iue . . . . . Director
----------------------------
Motoharu Iue
48
Page
----
Independent Auditors' Report . . . . . . . . . . . . F-2
Consolidated Balance Sheets . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . F-5
Consolidated Statements of Shareholders' Deficit. . . F-6
Notes to Consolidated Financial Statements. . . . . . F-7
Schedule II--Valuation and Qualifying Accounts. . . ..S-1
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Emeritus Corporation
We have audited the accompanying consolidated balance sheets of Emeritus
Corporation and subsidiaries ("the Company") as of December 31, 2001 and 2000,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for each of the years in the three-year period ended December 31,
2001. In connection with our audits of the consolidated financial statements, we
have also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emeritus Corporation
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/KPMG LLP
Seattle, Washington
March 8, 2002
F-2
EMERITUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
ASSETS
December 31, December 31,
2001 2000
-------------- --------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,811 $ 7,496
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,376 425
Current portion of restricted deposits . . . . . . . . . . . . . . . . . . . . . . - 361
Trade accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . 1,172 1,817
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,859 4,969
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . 2,463 3,072
Property held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,242 6,475
-------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,923 24,615
-------------- --------------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,200 134,762
Property held for development . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,040 310
Notes receivable from and investments in affiliates . . . . . . . . . . . . . . . . 3,675 4,380
Restricted deposits, less current portion . . . . . . . . . . . . . . . . . . . . . 5,520 5,907
Lease acquisition costs, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,864 5,983
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,206 2,122
-------------- --------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,428 $ 178,079
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 1,650
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 4,523 80,978
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,105 3,143
Accrued employee compensation and benefits . . . . . . . . . . . . . . . . . . . . 3,301 2,449
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,861 2,991
Accrued real estate taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,415 1,806
Accrued dividends on preferred stock. . . . . . . . . . . . . . . . . . . . . . . 7,429 2,329
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,690 9,221
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,699 1,215
-------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 32,023 105,782
-------------- --------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . 131,070 60,499
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 32,000
Deferred gain on sale of communities . . . . . . . . . . . . . . . . . . . . . . . 18,671 17,709
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,404 2,132
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 256 256
-------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,424 218,378
-------------- --------------
Minority interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,145 504
Redeemable preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 25,000
Commitments and contingencies
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 70,000 shares; issued and outstanding
30,609 and 30,609 at December 31, 2001, and December 31, 2000, respectively . . - -
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and
outstanding 10,196,030 and 10,120,045 shares at December 31, 2001, and
December 31, 2000, respectively . . . . . . . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,686 66,373
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . (136) (1,087)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141,692) (131,090)
-------------- --------------
Total shareholders' deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (74,141) (65,803)
-------------- --------------
Total liabilities and shareholders' deficit. . . . . . . . . . . . . . . . . . $ 168,428 $ 178,079
============== ==============
See accompanying notes to consolidated financial statements.
F-3
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended December 31,
2001 2000 1999
--------------- --------------- ---------------
Revenues:
Community revenue. . . . . . . . . . . . . . . . $ 129,887 $ 118,948 $ 116,063
Other service fees . . . . . . . . . . . . . . . 1,965 1,684 1,683
Management fees. . . . . . . . . . . . . . . . . 8,725 4,560 4,896
--------------- --------------- ---------------
Total operating revenues . . . . . . . . 140,577 125,192 122,642
Expenses:
Community operations . . . . . . . . . . . . . . 80,829 76,838 78,193
General and administrative . . . . . . . . . . . 17,990 17,429 15,468
Depreciation and amortization. . . . . . . . . . 7,260 7,383 6,585
Facility lease expense . . . . . . . . . . . . . 27,123 24,255 25,084
--------------- --------------- ---------------
Total operating expenses . . . . . . . . 133,202 125,905 125,330
--------------- --------------- ---------------
Income (loss) from operations. . . . . . 7,375 (713) (2,688)
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . 980 990 670
Interest expense . . . . . . . . . . . . . . . . (13,296) (15,066) (13,751)
Impairment of investment securities. . . . . . . - - (7,429)
Other, net . . . . . . . . . . . . . . . . . . . 707 (7,147) 2,494
--------------- --------------- ---------------
Net other expense. . . . . . . . . . . . (11,609) (21,223) (18,016)
--------------- --------------- ---------------
Loss before extraordinary item . . . . . (4,234) (21,936) (20,704)
Extraordinary loss on early extinguishment of debt - - (333)
--------------- --------------- ---------------
Net loss . . . . . . . . . . . . . . . . (4,234) (21,936) (21,037)
Preferred stock dividends. . . . . . . . . . . . . 6,368 5,327 2,250
--------------- --------------- ---------------
Net loss to common shareholders. . . . . $ (10,602) $ (27,263) $ (23,287)
=============== =============== ===============
Loss per common share - basic and diluted:
Loss before extraordinary item . . . . . . . . $ (1.04) $ (2.69) $ (2.19)
Extraordinary loss . . . . . . . . . . . . . . - - (0.03)
--------------- --------------- ---------------
Loss per common share. . . . . . . . . . . . . . . $ (1.04) $ (2.69) $ (2.22)
=============== =============== ===============
Weighted average number of common shares
outstanding - basic and diluted. . . . . . . 10,162 10,117 10,469
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-4
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
2001 2000 1999
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,234) $ (21,936) $ (21,037)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 7,260 7,213 6,845
Amortization of deferred gains and income. . . . . . . . . . . . . . . . (221) (190) (363)
Gain on sale of properties . . . . . . . . . . . . . . . . . . . . . . . (1,392) - -
Write down of lease acquisition costs. . . . . . . . . . . . . . . . . . 835 - -
Provision for doubtful accounts. . . . . . . . . . . . . . . . . . . . . 466 359 693
Extraordinary loss on early extinguishment of debt . . . . . . . . . . . - - 333
Impairment of investment securities. . . . . . . . . . . . . . . . . . . - - 7,429
Write off of property held for development . . . . . . . . . . . . . . . - 1,267 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894 377 (191)
Changes in operating assets and liabilities:. . . . . . . . . . . . . . . . - - -
Trade accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . 179 (281) (75)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . 265 (55) 2,176
Trade accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (1,038) (491) (3,480)
Accrued employee compensation and benefits . . . . . . . . . . . . . . . 852 (909) 121
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130) 194 477
Accrued real estate taxes. . . . . . . . . . . . . . . . . . . . . . . . (391) (228) (881)
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (531) 4,593 (322)
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 484 691 (463)
Security deposits and other long-term liabilities. . . . . . . . . . . . 14 (14) (435)
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272 245 308
-------------- -------------- --------------
Net cash provided by (used in) operating activities. . . . . . . . 3,584 (9,165) (8,865)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment. . . . . . . . . . . . . . . . . . (1,429) (11,441) (12,875)
Acquisition of property held for development . . . . . . . . . . . . . . - - (560)
Proceeds from sale of property and equipment . . . . . . . . . . . . . . 2,350 565 3,705
Purchase of investment securities. . . . . . . . . . . . . . . . . . . . - - (50)
Construction advances--leased communities. . . . . . . . . . . . . . . . - - 17,295
Construction expenditures--leased communities . . . . . . . . . . . . . (694) (197) (17,794)
Change in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . - 13,500 (13,500)
Repayments from and (advances to) investments in affiliates, net . . . . 2,699 2,199 (4,679)
Additions to lease acquisition costs . . . . . . . . . . . . . . . . . . (416) (943) -
Sale of investments in affiliates. . . . . . . . . . . . . . . . . . . . - - 8,177
-------------- -------------- --------------
Net cash provided by (used in) investing activities. . . . . . . . 2,510 3,683 (20,281)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in restricted deposits . . . . . . . . . . . . . . . 748 261 (39)
Proceeds from (repayment of) short-term borrowings, net. . . . . . . . . (1,650) 650 (6,324)
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . 145 7,879 27,355
Repayment of long-term borrowings. . . . . . . . . . . . . . . . . . . . (3,067) (2,883) (17,700)
Proceeds from sale of preferred stock. . . . . . . . . . . . . . . . . . - - 28,981
Repurchase/retirement of common stock. . . . . . . . . . . . . . . . . . - (1,400) (1,100)
Payment of preferred stock dividends . . . . . . . . . . . . . . . . . . - (4,024) -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 (365) (629)
-------------- -------------- --------------
Net cash provided by (used in) financing activities. . . . . . . . (3,779) 118 30,544
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . - - 20
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 2,315 (5,364) 1,418
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . 7,496 12,860 11,442
-------------- -------------- --------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . $ 9,811 $ 7,496 $ 12,860
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest . . . . . . . . . . . . . . . . . $ 13,426 $ 13,659 $ 13,273
============== ============== ==============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of property and equipment to property held for sale . . . . . . - 270 6,307
Transfer of property held for development from property held for sale. . 730 - -
Notes receivable from buyers in sales . . . . . . . . . . . . . . . . . 1,000 - -
Assumption of debt by buyer in sale. . . . . . . . . . . . . . . . . . . 3,162 - -
Unrealized holding gains (losses) in investment securities . . . . . . . 951 (708) (3,409)
Declared and issued Series B preferred stock in-kind dividends . . . . . - 609 -
Accrued but not issued Series B preferred stock in-kind dividends. . . . 1,268 615 -
Accrued preferred stock cash dividends . . . . . . . . . . . . . . . . . 5,100 2,329 2,250
Transfer of other assets to property and equipment . . . . . . . . . . . - 1,002 -
See accompanying notes to consolidated financial statements.
F-5
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(In thousands, except per share data)
Accumulated
Preferred stock Common stock other
---------------- ------------------ Additional Comprehensive Total
Number Number paid-in income Accumulated shareholders'
of shares Amount of shares Amount capital (loss) deficit deficit
--------- ------- ----------- ------- ------------ -------- ---------- ---------------
Balances at December 31, 1998 . . - $ - 10,484,050 $ 1 $ 38,995 $(4,420) $ (80,540) $ (45,964)
Unrealized loss on investment
securities . . . . . . . . . . - - - - - (3,409) - (3,409)
Write-down for impairment of
investment securities. . . . . - - - - - 7,429 - 7,429
Foreign currency translation
adjustment . . . . . . . . . . - - - - - 20 - 20
Repurchase of common stock. . . . - - (163,700) - (1,100) - - (1,100)
Proceeds from issuance of
preferred stock. . . . . . . . 30,000 - - - 28,981 - - 28,981
Stock options exercised . . . . . - - 3,600 - 40 - - 40
Preferred stock dividends . . . . - - - - - - (2,250) (2,250)
Net loss for the year ended
December 31, 1999 . . . . . . - - - - - - (21,037) (21,037)
--------- ------- ----------- ------- ------------ -------- ---------- ---------------
Balances at December 31, 1999 . . 30,000 $ - 10,323,950 $ 1 $ 66,916 $ (380) $(103,827) $ (37,290)
Unrealized loss on investment
securities . . . . . . . . . . - - - - - (708) - (708)
Additional costs from issuance of
preferred stock .. . . . . . . - - - - (516) - - (516)
Foreign currency translation
adjustment . . . . . . . . . . - - - - - 1 - 1
Repurchase of common stock. . . . - - (260,200) - (1,400) - - (1,400)
Issuances of shares under
Employee Stock Purchase Plan . - - 56,295 - 149 - - 149
Preferred stock dividends . . . . 609 - - - 1,224 - (5,327) (4,103)
Net loss for the year ended
December 31, 2000 . . . . . . - - - - - - (21,936) (21,936)
--------- ------- ----------- ------- ------------ -------- ---------- ---------------
Balances at December 31, 2000 . . 30,609 $ - 10,120,045 $ 1 $ 66,373 $(1,087) $(131,090) $ (65,803)
Unrealized loss on investment
securities . . . . . . . . . . - - - - - 951 - 951
Issuances of shares under
Employee Stock Purchase Plan . - - 75,985 - 45 - - 45
Preferred stock dividends . . . . - - - - 1,268 - (6,368) (5,100)
Net loss for the year ended
December 31, 2001 . . . . . . - - - - - - (4,234) (4,234)
--------- ------- ----------- ------- ------------ -------- ---------- ---------------
Balances at December 31, 2001 . . 30,609 $ - 10,196,030 $ 1 $ 67,686 $ (136) $(141,692) $ (74,141)
========= ======= =========== ======= ============ ======== ========== ===============
See accompanying notes to consolidated financial statements.
F-6
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Emeritus Corporation ("Emeritus" or the "Company") is a nationally integrated
assisted living company focused on operating residential style communities.
These communities provide a residential housing alternative for senior citizens
that need help with the activities of daily living, with an emphasis on assisted
living and personal care services. The Company also provides management services
to third party and related-party owners of assisted living communities,
including management agreements covering 46 communities in connection with the
Emeritrust transactions, which are referred to extensively throughout these
financial statements, summarized as follows (see Note 17):
* EMERITRUST I: 25 communities that the Company began managing in December
1998. Until December 31, 2001, the Company received a base management fee
of 5% of gross revenues, but was entitled to receive up to 7% depending
on the cash flow performance of the communities managed. As of January 1,
2002, however, the Company will receive a base management fee of 3% of
gross revenues, but may receive up to 7% depending on the cash flow
performance of the communities managed. Additionally, the Company is
required by its management contracts to fund cash operating deficits.
* EMERITRUST II: 21 communities that the Company began managing in March
1999, consisting of:
* EMERITRUST II OPERATING: 16 communities for which the Company has no
obligation to fund cash operating deficits. The Company receives a
base management fee of 5% of gross revenues, but may receive up to
7% depending on the cash flow performance of the communities
managed.
* EMERITRUST II DEVELOPMENT: 5 communities for which the Company is
required to fund cash operating deficits. The Company receives a
base management fee of 5% of gross revenues, but may receive up to
7% depending on the cash flow performance of the communities
managed.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires Emeritus to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, Emeritus evaluates its estimates, including
those related to resident programs and incentives, bad debts, investments,
intangible assets, income taxes, financing operations, restructuring, long-term
service contracts, contingencies, and litigation. Emeritus bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the
F-7
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Emeritus believes the following critical accounting policies are most
significant to the judgments and estimates used in the preparation of its
consolidated financial statements. Emeritus maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its residents to
make required payments. If the financial condition of Emeritus's residents were
to deteriorate, resulting in an impairment of their ability to make payments,
additional charges may be required. Emeritus holds shares in ARV Assisted
Living, Inc. amounting to less than 5% of its shares. ARV is publicly traded and
has a volatile share price. Emeritus records an investment impairment charge
when it believes this investment has experienced a decline in value that is
other than temporary. Future adverse changes in market conditions or poor
operating results underlying this investment could result in losses or an
inability to recover the carrying value of the investment that may not be
reflected in this investment's current carrying value, thereby possibly
requiring an impairment charge in the future. Emeritus records a valuation
allowance to reduce its deferred tax assets to the amount that is more likely
than not to be realized, which at this time shows a net asset valuation of zero.
While Emeritus has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event Emeritus were to determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. In addition, the accounts of limited liability
companies and partnerships are consolidated where the Company maintains
effective control over such entities' assets and operations, notwithstanding a
lack of technical majority ownership. All significant inter-company balances and
transactions are eliminated in consolidation.
Revenue Recognition
Operating revenue consists of resident fee revenue and management services
revenue. Resident units are rented on a month-to-month basis and rent is
recognized in the month the unit is occupied. Service fees paid by residents for
assisted living and other related services and management fees are recognized in
the period services are rendered. Management services revenue is comprised of
revenue from management contracts and is recognized in the month in which
services are performed in accordance with the terms of the management contract.
F-8
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of money market investments,
commercial paper and certificates of deposit with a maturity date at purchase of
three months or less. Cash equivalents at December 31, 2001, were insignificant.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets as follows: buildings and improvements, 25 to 40 years; furniture,
equipment and vehicles, five to seven years; leasehold improvements, over the
lesser of the estimated useful life or the lease term.
For long-lived assets, including property and equipment, the Company evaluates
the carrying value of the assets by comparing the estimated future cash flows to
be generated from the use of the assets and their eventual disposition with the
assets' reported net book values. The carrying values of assets are evaluated
for impairment when events or changes in circumstances occur which may indicate
the carrying amount of the assets may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed discounted future cash
flows expected to be generated by such assets. Assets to be disposed of are
reported at the lower of their carrying amount or fair market value less costs
to sell.
Investments
Investment securities are classified as available-for-sale and are recorded at
fair value. Unrealized holding gains and losses, net of any related tax effect,
are excluded from results of operations and are reported as a component of other
comprehensive income (loss).
Investments in 20% to 50% owned affiliates are accounted for under the equity
method except where a lack of voting power exists. Investments in less than 20%
owned entities are accounted for under the cost method unless the Company
exercises significant influence by means other than ownership.
Intangible Assets
Intangible assets, which are comprised of deferred financing costs (included in
other assets) and lease acquisition costs, are amortized on the straight-line
method over the term of the related debt or lease agreement.
F-9
Income Taxes
Deferred income taxes are provided based on the estimated future tax effects of
loss carryforwards and temporary differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
that are expected to apply to taxable income in the years in which those
carryforwards and temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is recorded for deferred tax assets when it is more likely than not
that such deferred tax assets will not be realized.
Deferred Rent
Deferred rent primarily represents lease incentives that are deferred and
amortized using the straight-line method over the terms of the associated
leases.
Deferred Gain on Sales of Communities
Deferred gains on sales of communities consist of deferred gains on
sale/leaseback transactions and deferred gains on sale transactions. Deferred
gains on sale/leaseback transactions are amortized using the straight-line
method over the lives of the associated leases where the Company has no
continued financial involvement in communities that it has sold and leased back
outside the leaseback. Deferred gains on sale/leaseback and sale transactions
where the Company has continuing financial involvement, other than the
leasebacks, are deferred until such involvement terminates.
Community Operations
Community operations represent direct costs incurred to operate the communities
and include costs such as resident activities, marketing, housekeeping, food
service, payroll and benefits, facility maintenance, utilities, taxes and
licenses.
Stock-Based Compensation
The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees
and related interpretations in measuring compensation costs for its stock option
plans. The Company discloses pro forma net loss and net loss per share as if
compensation cost had been determined consistent with Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
F-10
Net Loss Per Share
Basic net loss per share is computed based on weighted average shares
outstanding and excludes any potential dilution. Diluted net loss per share is
computed on the basis of the weighted average number of shares outstanding plus
dilutive potential common shares (if any) using the treasury stock method. The
capital structure of the Company includes convertible debentures, redeemable and
non-redeemable convertible preferred stock, as well as stock options and common
stock warrants. The assumed conversion and exercise of these securities have
been excluded from the calculation of diluted net loss per share, as their
effect is anti-dilutive.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other gains and
losses affecting shareholders' equity, which under accounting principles
generally accepted in the United States, are excluded from results of
operations. For the Company, these consist of unrealized gains and losses on
investment securities and foreign currency translation adjustments, net of any
related tax effect.
Foreign Currency Translation
Foreign currency amounts attributable to foreign operations have been translated
into U.S. dollars using year-end exchange rates for assets and liabilities,
historical rates for equity, and average annual rates for revenues and expenses.
Unrealized gains and losses arising from fluctuations in the year-end exchange
rates are recorded as a component of other comprehensive income (loss).
Reclassifications
Certain reclassifications of 1999 and 2000 amounts have been made to conform to
the 2001 presentation.
(2) INVESTMENT SECURITIES
In 1999, the Company wrote down its investment in the common stock of ARV
Assisted Living, Inc. ("ARV") by $7.4 million as management concluded the
decline in the fair market value of this investment was other than temporary.
Details regarding the ARV investment as of December 31, as follows:
Gross Fair
Amortized Unrealized Market
Cost Losses Value
------------ ------------- -----------
In thousands
2001 . . . $ 1,512 ($136) $ 1,376
============ ============= ===========
2000 . . . $ 1,512 ($1,087) $ 425
============ ============= ===========
1999 . . . $ 1,512 ($378) $ 1,134
============ ============= ===========
F-11
In September 1999, the Company prevailed in a claim against ARV and settled for
$5.0 million. The settlement terms provided for $1.5 million to be paid
immediately with the remaining balance of $3.5 million to be paid through 2001,
with a discount provision for early payment. As of December 31, 1999, the
Company collected $4.3 million as full settlement on this claim. The settlement,
net of all related legal costs, is included in other income.
(3) OTHER RECEIVABLES
Other receivables consisted of the following at December 31:
2001 2000
----------- -----------
(in thousands)
Working capital advances to third parties and affiliates $ 1,859 $ 4,968
Notes receivable from buyer in sale of communities . . . 1,000 1
----------- -----------
$ 2,859 $ 4,969
=========== ===========
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
2001 2000
---------- ---------
(in thousands)
Land and improvements. . . . . . . . . . . . . $ 13,779 $ 13,492
Buildings and improvements . . . . . . . . . . 120,827 118,610
Furniture and equipment. . . . . . . . . . . . 14,764 13,385
Vehicles . . . . . . . . . . . . . . . . . . . 3,461 3,323
Leasehold improvements . . . . . . . . . . . . 5,402 3,635
-------- --------
158,233 152,445
Less accumulated depreciation and amortization 27,167 20,075
-------- --------
131,066 132,370
Construction in progress . . . . . . . . . . . 134 2,392
-------- --------
$131,200 $134,762
======== ========
F-12
(5) NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATED COMPANIES
In November 1996, the Company agreed to purchase up to 6,888,466 shares of
convertible preferred stock of Alert Care Corporation ("Alert"), an Ontario,
Canada-based owner and operator of assisted living communities at prices ranging
from $0.67 to $0.74 per share (Cdn). In addition, the Company acquired an option
to purchase an additional 4,000,000 shares of convertible preferred stock at an
exercise price of $1.00 per share (Cdn), as well as an option to purchase from
Eclipse Capital Management ("Eclipse"), the majority shareholder of Alert, and
certain other shareholders of Alert, 9,050,000 currently issued and outstanding
shares of common stock of Alert and 950,000 currently issued and outstanding
shares of Class A non-voting stock of Alert both at an exercise price of $3.25
per share (Cdn). There was no cost in acquiring the option to purchase
additional shares from Alert and the Company assigned no value to the option.
In September 1999, the Company sold 38.9% of its holdings in Alert, or 4,235,613
shares, to an entity in which a principal shareholder and a Board member of the
Company are investors at a price per share equal to the Company's cost basis of
$0.85 per share (Cdn) or $0.59 per share (US). Subsequently, in November 1999,
Alert repurchased all of its preferred stock for $1.10 per share (Cdn). The
Company realized a gain of $760,000 on this transaction, which is included in
other income for 1999. Prior to its disposition, the investment in Alert was
accounted for under the cost method, as the Company's equity ownership consisted
of non-voting preferred stock.
During 1998, the Company sold an interest in a community located in Texas to a
partnership in which the principal shareholder of the Company is a partner,
retaining an approximately 12% interest. Pursuant to the purchase and sale
agreement, the Company advanced funds to the partnership of $800,000, payable on
demand. The purchase and sale agreement contained additional funding provisions
whereby the Company funds 20% of the losses generated by the community up to
$500,000, of which $500,000 was outstanding at December 31, 2001. This balance
bears interest at 9% and is due in June 2008. In addition, the Company has
advanced the partnership $450,000 under a repair note, bearing interest at 9%
and due June 2008. At December 31, 2001, the Partnership's obligations to the
Company were $2.1 million, including accrued interest. The Company's share of
losses in 2001, 2000, and 1999 were $208,000, $321,000, and $551,000,
respectively, and the investment balance at December 31, 2001 and 2000 was
negative $1,080,000 and $872,000, respectively.
In January 2000, the Company purchased a 30% equity interest in Senior
Healthcare Partners, LLC, a pharmaceutical supply limited liability company. The
Company has an obligation to contribute up to $1.8 million. At December 31,
2000, the Company had contributed the entire $1.8 million and during 2001 and
2000 recognized its share of partnership losses of $313,000 and $557,000,
respectively, which are included in "Other, net".
F-13
(6) RESTRICTED DEPOSITS
Restricted deposits consist of funds required by various Real Estate Investment
Trusts ("REITs") to be placed on deposit until the Company's communities meet
certain debt coverage and/or cash flow coverage ratios, at which time the funds
will be released to the Company.
(7) SHORT-TERM BORROWINGS
In December 2000, the Company entered into a 9% demand note payable with a
related party investor group for $1.65 million. The note was repaid in full on
January 3, 2001.
(8) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2001 2000
------------- --------
In thousands
Notes payable, interest only at LIBOR* plus 3.25% (5.4% at . . . $ 46,287 $ 47,687
December 31, 2001) payable monthly, unpaid principal and
interest due December 2001, refinanced with long-term debt
(principal and interest due May 2002, with an option to extend
to extend to May 2003), see note 21
Notes payable, interest only at LIBOR plus 3,25% (5,4% at . . . . 25,548 25,548
December 31, 2001), payable monthly, unpaid principal and
interest due December 2001, refinanced with long-term debt
(principal and interest due February 2003), See note 21
Notes payable, interest only at LIBOR plus 3,25% (5.4% at . . . . 1,747 5,270
December 31, 2001), payable monthly, unpaid principal and
interest due on demand
Note payable, interest at 7.82% payable in monthly installments, 12,130 12,428
unpaid principal and interest due July 2004
Note payable, interest at 8.38% payable in monthly installments, 5,719 5,818
unpaid principal and interest due February 2003
Notes payable, interest only at LIBOR plus 3.5% (5.7% at . . . . 6,800 6,800
December 31, 2001) payable monthly, unpaid principal and
interest due February 2003
Notes payable, interest at 7.43%, payable in monthly . . . . . . 25,075 25,480
installments, unpaid principal and interest due October 2009
Notes payable, interest at rates form 8.0% to 10.5%, payable in. 12,287 12,446
monthly installments, due through July 2009
------------- --------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,593 141,477
Less current portion . . . . . . . . . . . . . . . . . . . . . . 4,523 80,978
------------- --------
Long-term debt, less current portion . . . . . . . . . . . . . . $ 131,070 $ 60,499
============= ========
- ---------------------
* LIBOR is the London Interbank Offering Rate.
F-14
Substantially all long-term debt is secured by the Company's property and
equipment.
During 1999, the Company refinanced approximately $15.9 million of outstanding
debt and wrote off $333,000 of related deferred costs as extraordinary items. No
additional refinancing or write-offs of deferred costs occurred during 2000 or
2001.
Certain of the Company's indebtedness include restrictive provisions related to
cash dividends, investments and borrowings, and require maintenance of specific
operating ratios, levels of working capital and net worth. As of December 31,
2001, the Company was in compliance with all such covenants with the exception
of a 62-unit community in Scottsdale, Arizona, with a principal balance of $1.7
million that is due in June 2002 and presented as short-term borrowings. The
Company plans to cure this covenant violation by remitting a reduction of
outstanding principal in the amount of $530,000.
Principal maturities of long-term debt at December 31, 2001 are as follows:
in thousands
-------------
2002. . . . . . $ 4,523
2003. . . . . . 61,944
2004. . . . . . 40,728
2005. . . . . . 1,876
2006. . . . . . 3,965
Thereafter. . . 22,557
-------------
Total . . . . . $ 135,593
=============
(9) CONVERTIBLE DEBENTURES
The Company has $32.0 million of 6.25% convertible subordinated debentures (the
"Debentures") that are due in 2006. The Debentures are convertible into common
stock at the rate of $22 per share, which equates to an aggregate of
approximately 1,454,545 shares of the Company's common stock and bear interest
payable semiannually on January 1 and July 1 of each year. The Debentures are
unsecured and subordinated to all other indebtedness of the Company.
The Debentures are subject to redemption, as a whole or in part, at a redemption
price of 100% of the principal amount.
(10) REDEEMABLE PREFERRED STOCK
The Company has authorized 5,000,000 shares of preferred stock, $0.0001 par
value. Pursuant to such authority, in October 1997, the Company sold 25,000
shares of Series A cumulative convertible,
F-15
exchangeable, redeemable preferred stock for $25,000,000. The Series A
redeemable Preferred Stock is entitled to receive quarterly dividends payable in
cash. The dividend rate is 9% of the stated value of $25,000,000. Dividends
accumulate, whether or not declared or paid. If cash dividends are not paid
quarterly, the dividend rate will increase to 11% ("arrearage rate") until the
unpaid cash dividends have been fully paid. The preferred stock has a mandatory
redemption date of October 24, 2004, at a price equal to $1,000 per share, plus
any accrued but unpaid dividends. Each share of preferred stock may be
converted, at the option of the holder, into 55 shares of common stock, at the
trading price at the time of conversion. The preferred stock is also
exchangeable in whole only, at the option of the Company, into 9% subordinated
convertible notes due October 24, 2004. The 9% subordinated notes would contain
the same conversion rights, restrictions and other terms as the preferred stock.
For the year ended December 31, 2000, the Company paid dividends outstanding
from 1999 of $2.6 million and two quarterly dividends of $1.1 million at the
normal dividend rate of 9% and accumulated two quarterly dividends aggregating
$1.4 million at the arrearage dividend rate of 11%. For the year ended December
31, 2001, the Company accumulated dividends aggregating $2.7 million at the
arrearage dividend rate of 11%.
At December 31, 2001, the Company has accrued excess dividends of $750,000 to
our Series A preferred shareholders related to non-payment of the cash portion
of their dividends. Since the Company was unable to pay these dividends for six
consecutive quarters, their Series A shareholders became entitled to elect one
additional director to their board of directors at each annual shareholders'
meeting until such time the Company has paid the accrued dividends. In
addition, because the Company has been unable to pay dividends to their Series A
shareholders after six consecutive quarters, beginning in 2002, the Series A
dividends will be calculated on a compounded cumulative basis, retroactively.
The Company may redeem the preferred stock, in whole or in part, for $1,050 per
share plus accrued dividends, provided that the market price of common stock is
at least 130% of the conversion price for the preferred stock. In the event of
liquidation of the Company, the holders of outstanding preferred stock are
entitled to receive a distribution of $1,000 per share plus accrued dividends.
(11) INCOME TAXES
Income taxes reported by the Company differ from the amount computed by applying
the statutory rate primarily due to limitations on utilizing net operating
losses.
F-16
The tax effect of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities are comprised of the
following at December 31:
2001 2000
--------- ---------
(in thousands)
Gross deferred tax liabilities-depreciation and amortization $(1,801) $(1,919)
Gross deferred tax assets:
Net operating loss carryforwards . . . . . . . . . . . . 29,914 29,612
Deferred gains on sale/leaseback . . . . . . . . . . . . 6,086 6,320
Impairment of investment securities. . . . . . . . . . . 2,411 2,411
Unearned rental income . . . . . . . . . . . . . . . . . 562 411
Vacation accrual . . . . . . . . . . . . . . . . . . . . 452 409
Health insurance accrual . . . . . . . . . . . . . . . . 502 500
Insurance accrual. . . . . . . . . . . . . . . . . . . . 491 -
Incentive Compensation accrual . . . . . . . . . . . . . 312 -
Deferred Lease Payments. . . . . . . . . . . . . . . . . 586 -
Other .. . . . . . . . . . . . . . . . . . . . . . . . . 656 794
-------- --------
Gross deferred tax assets . . . . . . . . . . . . . 41,972 40,457
Less valuation allowance. . . . . . . . . . . . . . . . . . . 40,171 38,538
-------- --------
Deferred tax assets, net. . . . . . . . . . . . . . . . . . . 1,801 1,919
-------- --------
Net deferred tax assets . . . . . . . . . . . . . . $ - $ -
======== ========
The increase in the valuation allowance was $1,633,000, $4,780,000 and
$7,122,000 for 2001, 2000 and 1999, respectively. The increases were primarily
due to the impairment of investment securities and the amount of net operating
loss carryforwards, for which management does not believe that it is more likely
than not that realization is assured.
For federal income tax purposes, the Company has net operating loss
carryforwards at December 31, 2001, available to offset future federal taxable
income, if any, of approximately $87,983,000 expiring beginning in 2012.
(12) SHAREHOLDERS' DEFICIT
In January 1998 and subsequently in August 1999, the Company's board of
directors authorized a stock repurchase program to acquire up to aggregate
1,000,000 shares of the Company's common stock. In March 2000, the stock
repurchase plan was discontinued. At December 31, 2000, the Company had acquired
and retired a total of 941,100 shares of its common stock at a cumulative cost
of $8.3 million. No stock repurchases were made in 2001.
F-17
Preferred Stock
In December 1999, the Company entered an agreement to sell 40,000 shares of its
Series B preferred stock to Saratoga Partners IV, L.P. ("Saratoga") and certain
investors related to Saratoga for a purchase price of $1,000 per share. On
December 30, 1999, the Company completed the sale of 30,000 shares of Series B
Stock, and agreed to complete the sale of the remaining 10,000 shares during the
first half of 2000. Each share of Series B Stock has voting authority, and is
convertible into the number of shares of common stock equal to the stated value
of $1,000 divided by an initial conversion price of $7.22, to be adjusted for
any anti-dilutive transactions. The net proceeds to be received by the Company
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 the Company's use of the proceeds would be subject to Saratoga's approval
after June 2000 if a substantial portion had not been used for the acquisition
of specified properties. Under a letter agreement dated May 15, 2000, the
agreements with Saratoga were modified 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) provide that the Company would issue to Saratoga a seven-year
warrant ("the Warrant") to purchase one million shares of Common Stock at an
exercise price of $4.30 per share or, in the alternative, make a specified cash
payment to Saratoga. On August 31, 2000, the Warrant was issued to Saratoga.
The Series B Stock is entitled to receive quarterly dividends payable in a
combination of cash and additional shares of Series B Stock. From issuance to
January 1, 2004, the dividend rate will be 6% of the stated value of $1,000, of
which 2% is payable in cash and 4% is payable in Series B Stock at the rate of
one share of Series B Stock for every $1,000 of dividend. After January 1, 2004,
the dividend rate will be 7%, of which 3% is payable in cash and 4% is payable
in Series B Stock. Dividends accumulate, whether or not declared or paid. Prior
to January 1, 2007, however, if the cash portion of the dividend is not paid,
the cash dividend rate will increase to 7% ("arrearage rate"), until the unpaid
cash dividends have been fully paid or until January 1, 2007, whichever first
occurs. Beginning January 10, 2003, the Company can redeem all of the Series B
Stock at $1,000 per share plus unpaid dividends, if the closing price for the
common stock on the American Stock Exchange is at least 175% of the then
conversion price for 30 consecutive trading days. In 2000, the Company accrued
$1.3 million in cash dividends, including one quarter at the higher arrearage
rate, and $1.2 million equivalent to 1,224 shares of Series B Stock as in-kind
dividends, of which $302,000 were paid and 609 shares were issued in 2000. In
2001, the Company accrued $2.4 million in cash dividends at the higher arrearage
rate, and $1.3 million equivalent to 1,268 shares of Series B Stock as in-kind
dividends, none of which were paid or issued in 2001. Accordingly, the Company
had a cumulative commitment to issue 615 shares of Series B Stock at December
31, 2000, and 1,883 shares of Series B Stock at December 31, 2001.
At December 31, 2001, the Company had accrued additional dividends of $2.0
million as a result of the arrearage rate, which is included in the total of
$5.1 million of dividends on Series B Stock that the Company has accrued. Since
the Company has failed to pay these dividends for six consecutive quarters, the
Series B shareholders are entitled to elect one additional director to at each
annual shareholders' meeting until such time the Company has paid the accrued
dividends.
F-18
1995 Stock Incentive Plan
The Company has a 1995 stock incentive plan ("1995 Plan") which combines the
features of an incentive and non-qualified stock option plan, stock appreciation
rights and a stock award plan (including restricted stock). The 1995 Plan is a
long-term incentive compensation plan and is designed to provide a competitive
and balanced incentive and reward program for participants.
The Company has authorized 2,500,000 shares of common stock to be reserved for
grants under the 1995 Plan of which 1,201,098 remained available for future
awards at December 31, 2001. Options generally vest between three-year to
five-year periods, at the discretion of the Compensation Committee of the Board
of Directors, in cumulative increments beginning one year after the date of the
grant and expire not later than ten years from the date of grant. The options
are granted at an exercise price equal to the fair market value of the common
stock on the date of the grant.
In May 2001, the Company announced an offer to exchange options under the 1995
Plan held by current employees, including executive officers, for new options to
be granted under the 1995 Plan and new option letter agreements. Under the
offer, employees were required to tender all or none of their options in
exchange for new options subject to the same number of shares of common stock as
the options tendered for exchange. Approximately 99% of outstanding options
were exchanged. The new options were granted on December 10, 2001, which was
the first business day that was at least six months and one day after the date
tendered options were accepted for exchange. The new options have an exercise
price of $2.11 and will fully vest 2 1/2 years from the date the new options are
granted under 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 are the same as the terms of the options
tendered for exchange.
Had compensation cost for the Company's stock option plan been determined
pursuant to SFAS 123, the Company's pro forma net loss and pro forma net loss
per share would have been as follows for the years ended December 31:
2001 2000 1999
------------ ------------ ------------
(in thousands, except per share data)
Net loss to common shareholders:
As reported . . . . . . . . . . . . . . . . . . $ (10,602) $ (27,263) $ (23,287)
Pro forma . . . . . . . . . . . . . . . . . . . (11,047) (29,043) (25,055)
Net loss per common share -- basic and diluted:
As reported . . . . . . . . . . . . . . . . . . $ (1.04) $ (2.69) $ (2.22)
Pro forma . . . . . . . . . . . . . . . . . . . (1.09) (2.87) (2.39)
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions used
for grants in 1999, 2000 and 2001: dividend yield of 0.0% for all periods;
expected volatility of 50.2% for 1999, 48.0% to 49.6% for 2000, and 80.7% to
82.1%
F-19
for 2001; risk-free interest rates of 6.47% to 6.63% for 1999, 6.06% to 6.69%
for 2000, and 4.12% to 4.39% for 2001; and an expected option term of 4 years
for 2001, 2000, and 1999.
A summary of the activity in the Company's stock option plans follows:
2001 2000 1999
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ----------- -----------
Outstanding at beginning of year . . . 1,344,790 $ 9.14 1,785,083 $ 9.23 1,443,366 $ 9.84
Granted. . . . . . . . . . . . . . . . 1,144,083 $ 2.11 17,000 $ 2.73 459,750 $ 7.45
Exercised. . . . . . . . . . . . . . . - - - - (3,600) $ 9.81
Canceled . . . . . . . . . . . . . . . (1,271,738) $ 9.14 (457,293) $ 9.27 (114,433) $ 9.75
------------ ----------- ------------ ----------- ----------- -----------
Outstanding at end of year . . . . . . 1,217,135 $ 2.52 1,344,790 $ 9.14 1,785,083 $ 9.23
Options exercisable at year-end. . . . 185,589 $ 4.09 785,605 $ 9.42 616,644 $ 9.97
Weighted-average fair value of options
granted during the year. . . . . . . . $ 1.31 $ 1.24 $ 3.44
The following is a summary of stock options outstanding at December 31, 2001:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---------- ---------- ----------- -----------
$ 1.60.- 2.11 1,144,083 9.94 $ 2.11 136,463 $ 2.11
$ 2.56.- 4.06 16,000 9.55 $ 2.73 10,000 $ 2.56
$ 6.50.- 7.81 6,086 8.96 $ 6.63 2,008 $ 6.63
$ 9.63.- 9.81 25,466 7.86 $ 9.76 16,977 $ 9.76
$ 10.25 - 15.25 25,500 6.95 $ 12.89 20,140 $ 13.26
----------- ----------- ---------- ---------- ------------
1,217,135. 9.82 $ 2.52 185,589 $ 4.09
========== ========== ========== ========== ============
F-20
Employee Stock Purchase Plan
In July 1998, the Company adopted an Employee Stock Purchase Plan (the Plan) to
provide substantially all employees who have completed six months of service an
opportunity to purchase shares of its common stock through payroll deductions,
at a price equal to 85% of the fair market value. A total of 200,000 shares are
available for purchase under the Plan. Quarterly, participant account balances
are used to purchase shares of stock on the open market at the lesser of the
fair market value of shares on the first or last day of the participation
period. Employees may not exceed $25,000 in annual purchases or 15% of eligible
compensation. The Employee Stock Purchase Plan expires in May 2008. In 2001 and
2000, employees purchased an aggregate of 75,985 and 56,295 common shares,
respectively, through the Employee Stock Purchase Plan.
(13) COMPREHENSIVE LOSS
Comprehensive loss consists of the following for the years ended December 31,
2001, 2000, and 1999, respectively:
Year Ended December 31,
2001 2000 1999
-------------- -------------- --------------
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (10,602) $ (27,263) $ (23,287)
Other comprehensive income (loss):
Foreign currency translation adjustments. . . . . - 1 20
Unrealized holding gains (losses) on investment
securities. . . . . . . . . . . . . . . . . . 951 (708) (3,409)
Reclassification for losses included in net loss. - - 7,429
-------------- -------------- --------------
Total other comprehensive income (loss). . 951 (707) 4,040
-------------- -------------- --------------
Comprehensive loss . . . . . . . . . . . . . . . . . $ (9,651) $ (27,970) $ (19,247)
============== ============== ==============
(14) FINANCIAL INSTRUMENTS
The Company has financial instruments other than investment securities
consisting of cash and cash equivalents, trade accounts receivable, other
receivables, notes receivable from affiliates, short-term borrowings, accounts
payable, convertible debentures, redeemable preferred stock and long-term debt.
The fair value of the Company's financial instruments based on their short-term
nature or current market indicators such as prevailing interest rates
approximates their carrying value with the exception of the following: long-term
debt had an estimated fair value, based on the Company's incremental borrowing
rate, of $130.9 million versus a carrying value of $135.6 million; the
convertible debentures had an estimated fair value, based on the Company's
incremental borrowing rate and the conversion price, of $28.6 million versus a
book value of $32.0 million; and the redeemable preferred stock had an estimated
fair value, based on the Company's incremental borrowing rate and the conversion
price, of $24.9 million versus a book value of $25.0 million at December 31,
2001.
F-21
(15) RELATED-PARTY MANAGEMENT AGREEMENTS
During 1995, the Company's two most senior executive officers, its Chief
Executive Officer and then former President, and now current Vice President of
Finance, Chief Financial Officer, and Secretary, formed a New York general
partnership (the "Partnership") to facilitate the operation of assisted living
communities in the state of New York, which generally requires that natural
persons be designated as the licensed operators of assisted living communities.
The Partnership operates ten leased communities in New York. The Company has
agreements with the Partnership and the partners under which all of the
Partnership's profits have been assigned to the Company and the Company has
indemnified the partners against losses. As the Company has unilateral and
perpetual control over the Partnership's assets and operations, the results of
operations of the Partnership are consolidated with those of the Company.
A number of limited partnerships which are partly owned indirectly by Mr. Baty,
the Company's Chairman and Chief Executive Officer, develop, own and lease
senior housing projects, some of which cater to low income seniors. The Company
has agreements with these partnerships to provide certain administrative,
financial and management services with respect to these communities. The
agreements have terms ranging from two to four years, with options to renew, and
provide for management fees ranging from 4% to 7% of gross operating revenues
and fixed administrative fees. Management fee revenue earned under these
agreements was approximately $2,417,000, $1,731,000, and $774,000, in 2001,
2000, and 1999, respectively.
In 1998, the Company and XL Management Company L.L.C., ("XL Management"), an
affiliate of Holiday Retirement Corp., an owner and operator of independent
living communities, entered into four management agreements whereby XL
Management was to provide management services relating to four newly developed
assisted living communities located in Texas. The agreements had initial terms
of two years six months with management fees based upon 6% of gross revenues
payable monthly. XL Management ceased management of these buildings during 2000.
Total fees in 2000 amounted to $150,000 as compared to $316,000 in 1999. The
Company's Chairman and Chief Executive Officer and a former member of the
Company's board of directors are principal shareholders and officers of Holiday.
(16) LEASES
At December 31, 2001, the Company leases office space and 46 assisted living
communities. The office lease expires in 2006 and contains two five-year renewal
options. The community leases expire from 2004 to 2017 and contain two to six
extension options, ranging from five to ten years.
F-22
Minimum lease payments under noncancelable operating leases at December 31, 2001
are as follows:
In Thousands
-------------
2002 . . . . $ 25,409
2003 . . . . 25,476
2004 . . . . 25,296
2005 . . . . 23,620
2006 . . . . 22,919
Thereafter . 108,643
-------------
$ 231,363
=============
Facility lease expense under noncancelable operating leases was approximately
$26,796,000, $24,240,000, and $25,135,000 for 2001, 2000, and 1999,
respectively. A number of operating leases provide for additional lease payments
after 24 months computed at 5% of additional revenues of the community. In 2001,
additional facility lease expense under this provision was not significant.
(17) SALES AND ACQUISITIONS
In two separate transactions during the fall of 1998 and the spring of 1999, the
Company arranged for two investor groups to purchase an aggregate of 41 of its
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 the Company by Meditrust Company
LLC under sale/leaseback financing arrangements, and three had been owned by the
Company. The first purchase, consisting of 25 communities, which we will call
the Emeritrust I communities, was completed in December 1998 and the second
purchase, consisting of 21 communities, 16 of which we will call the Emeritrust
II Operating communities and five of which we call the Emeritrust II Development
communities, was completed in March 1999.
Of the $168.0 million purchase price for the Emeritrust I communities, $138.0
million was financed through a three-year first mortgage loan with an
independent third party and $30.0 million was financed through subordinated debt
and equity investments from the investor group, which includes Daniel R. Baty,
the Company's Chief Executive Officer, who is also a director and a principal
shareholder. Of the $124.2 million purchase price for the Emeritrust II
Operating communities and Emeritrust II Development communities, approximately
$99.6 million was financed through three-year first mortgage loans with
independent third parties and $24.6 million was financed through subordinated
debt and equity investments from the investor group, which includes Mr. Baty.
The investor groups retained the Company to manage all of the communities
through December 31, 2001, and granted the Company options to purchase the
communities during this period. During 2000, the Emeritrust I communities
failed to comply with covenants under the $138 million mortgage loan and in 2001
it became clear that the Company would not be able to purchase the communities
under the options. As a result, the mortgage loans were restructured and the
management agreements and options to purchase
F-23
were extended to June 30, 2003 (to December 31, 2003 in the case of the five
Emeritrust II Development communities). The discussion below reflects the terms
of these arrangements as modified.
From January 1, 2002, through June 30, 2003, the Company will receive for the
Emeritrust I communities a base management fee of 3% of gross revenues generated
by the communities and an additional management fee of 4%, payable out of 50% of
cash flow. The availability of cash flow to pay management fees is subject to
prior payment of expenses and fees related to the restructuring of the mortgage
loan in 2001. For the Emeritrust II Operating communities and the Emeritrust II
Development communities, the Company has received and continues to receive a
base management fee of 5% of gross revenues and an additional management fee of
2%, payable to the extent that the communities meet certain cash flow standards.
Prior to January 1, 2001, the management fees for the Emeritrust I communities
were also computed in this fashion.
Under the management agreements, the Company is obligated to reimburse the
investor groups for cumulative cash operating losses greater than $4.5 million
in the case of the Emeritrust I communities and $500,000 in the case of each of
the five Emeritrust II Development communities. Since these thresholds have been
exceeded, the Company is currently responsible for most cash operating losses
generated by these communities if they occur. There is no such funding
arrangement with respect to the Emeritrust II Operating communities. The
Company's funding obligations for the Emeritrust I communities have been $1.3
million, $4.9 million and $1.9 million for 2001, 2000 and 1999, respectively.
The Company's funding obligations for the Emeritrust II Development communities
have been $310,000 and $1.6 million in 2001 and 2000, respectively.
Although the amounts of our funding obligation each year include management fees
earned by us under the management agreements, we do not recognize these
management fees as revenue in our financial statements to the extent that we are
funding the cash operating losses that include them. Correspondingly, we
recognize the funding obligation under the agreement, less the applicable
management fees, as an expense in our financial statements under the category
"Other, net." Conversely, if the applicable management fees exceed our funding
obligation, we recognize the management fees less the funding obligation as
management fee revenue in our consolidated financial statements. Management
fees earned for the Emeritrust I communities have been $4.0 million, $2.1
million and $1.9 million in 2001, 2000 and 1999, respectively, of which $2.8
million have been recognized in 2001. Management fees earned for the Emeritrust
II Development communities have been $766,000 and $360,000, of which $673,000
and $174,000 have been recognized in 2001 and 2000, respectively. Management
fees earned for the Emeritrust II Operating communities have been $1.9 million
earned and recognized in both 2001 and 2000.
The Company has an option to purchase 43 of the 46 Emeritrust communities and a
right of first refusal with respect to the remaining three communities, both of
which expire June 30, 2003 (December 31, 2003 in the case of the five Emeritrust
II Development communities). The option must be exercised with respect to all
communities or may not be exercised at all. If investor groups require Mr. Baty
to purchase certain of the communities, upon the conditions described below, the
Company has the right to exercise its option within 60 days of receiving notice
of this action. The option price for the 43 Emeritrust communities is equal to
the original cost of the communities of approximately $292 million, plus an
amount that would
F-24
provide the investor groups with an 18% rate of return, compounded annually, on
their original investment of $54.6 million (less any cash distributions
received). In connection with the exercise of the option, the Company is also
obligated to pay certain costs and fees.
The management agreements, including the options to purchase the related
communities, are subject to various termination provisions, including
cross-default provisions among all three groups of communities. The management
agreement for the Emeritrust I communities may be terminated if cash
distributions to the investor group do not meet certain levels or if the
communities fail to meet certain coverage requirements under the mortgage loan.
In addition, certain of the communities have been refinanced and, accordingly,
the Company's ability to exercise the option will depend on whether the Company
can assume or refinance the debt secured by these communities. Termination of
the management agreements or failure to exercise the options could result in the
loss of management fees and the substantial decrease in the number of
communities the Company operates.
Under related agreements, the investor groups may require Mr. Baty to purchase
between ten and twelve of the Emeritrust communities, depending on the
occurrence of any one of the following events: (a) the Company does not
exercise its option to purchase the communities before the option expires, (b)
the Company defaults under the management agreements, (c) Mr. Baty's net worth
falls below a certain threshold, (d) the Company experiences a change of control
or (e) Mr. Baty ceases to be the Company's chief executive officer. If Mr. Baty
is required to purchase some of the communities, he will also have the option to
purchase all of the Emeritrust communities on the same terms under which the
Company is entitled purchase the communities, subject to the Company's prior
right to do so within a specified time period.
In September 1999, the Company acquired a community that it previously leased
for a purchase price of $8.0 million. This acquisition was financed through
borrowings.
In January 2001, the Company sold one of its communities to a new operator and
various third parties. The sale included terms for the Company to lease and
continue to operate the facility for an interim period, which concluded in the
third quarter of 2001. The Company recognized a gain on the sale of the facility
of $1.3 million.
In April 1998, the Company assigned its economic interest in a 172-unit assisted
living community located in Fairfield, California, to a related party investor
group for $2.8 million in cash. Its economic interest consisted of a 66 2/3%
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 the Company to the operating company, and the obligation to
make additional capital contributions under the agreement establishing the
operating company. The Company continues to manage the operations of the
community pursuant to a management agreement and to manage the affairs of the
operating limited liability company. In January 2000, the Company repurchased
25% of its original interest in the community (16 2/3% of the operating limited
liability company) for a total of $791,000. During the quarter ended September
30, 2001, the Company entered into an agreement with the related party investor
to offset against interest payable any amounts that the Company had previously
funded or will fund the assisted living community on their behalf. This
agreement
F-25
allows for collection of a note receivable in the amount of
approximately $477,000 that had previously been fully reserved. Therefore, the
Company recorded a recovery of approximately $428,000 in Other, net and
approximately $49,000 as a decrease in interest expense. In December 2001, the
Company acquired an additional 16 2/3% interest in the community from a third
party minority owner for a purchase price of $250,000. The purchase was paid
with cash and notes payable due in certain terms ranging from 30 days through
January 31, 2005. As of December 31, 2001, the Company's effective economic
interest in the community is 33 1/3% in the profits, losses, and distributions.
(18) COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings, claims and litigation arising in
the ordinary course of business. In the opinion of management, the outcome of
these matters will not have a material effect on the Company's results of
operations or financial position.
The Company is self-insured for certain employee health benefits. The Company's
policy is to accrue amounts equal to the actuarial liabilities that are based on
historical information along with certain assumptions about future events.
Changes in assumptions for such matters as health care costs and actual
experience could cause these estimates to change.
The following table summarizes the Company's contractual obligations at December
31, 2001:
Payments Due by Period (in thousands)
--------------------------------------------------------------
Less than 1 After 5
Total year 1 - 3 years 4 - 5 years years
----------- ------------ ------------ ----------- --------
Contractual Obligations
Long-Term Debt. . . . . $ 135,593 $ 4,523 $ 102,672 $ 5,841 $ 22,557
Operating Leases. . . . $ 231,363 $ 25,409 $ 50,772 $ 46,539 $108,643
(19) LIQUIDITY
In 2001, and as described in Note 21, the Company refinanced substantially all
of its debt obligations, extending such financings through 2003 or thereafter.
In addition, the Company achieved consecutive positive cash flows from
operations for the last three quarters and positive earnings before preferred
dividends in the fourth quarter of 2001. Including required debt service
payments and capital expenditures, management believes the Company will be able
to sustain positive cash flow through at least 2002.
The Company has incurred significant operating losses since its inception and
has a working capital deficit of $12.1 million, although $7.4 million of
preferred dividends is only due if declared by the Company's board of directors.
To date, the Company has been dependent upon third party financing or
disposition of assets to fund operations. While the Company does not anticipate
the need for third party financing or dispositions of assets to fund operations,
it cannot be guaranteed that, if necessary, third party financing or disposition
of assets will be available timely or at all.
F-26
The Company is currently out of compliance with covenants on debt totaling $1.7
million which will be repaid in June 2002 and is not cross-defaulted with any
other debt. In addition, many of the Company's other debt instruments and leases
contain "cross-default" provisions pursuant to which a default under one
obligation can cause a default under one or more other obligations to the same
lender or lessor. Such cross-default provisions affect 14 owned assisted living
properties and 36 operated under leases. Accordingly, any event of default could
cause a material adverse effect on the Company's financial condition if such
debt or leases are cross-defaulted.
(20) QUARTERLY RESULTS (UNAUDITED)
Quarterly Results (Unaudited)
Q1 Q2 Q3 Q4
-------- -------- -------- --------
2001
Total Operating revenue. . . . . . . . . . $34,781 $35,177 $34,964 $35,655
Income (loss) from operations. . . . . . . 1,317 1,905 953 3,200
Other income and expense . . . . . . . . . (3,434) (3,327) (1,799) (3,049)
Net loss . . . . . . . . . . . . . . . . . (2,117) (1,422) (846) 151
Preferred dividends. . . . . . . . . . . . 1,611 1,620 1,565 1,572
Net loss to common shareholders. . . . . . $(3,728) $(3,042) $(2,411) $(1,421)
Loss per common share -- basic and diluted $ (0.37) $ (0.30) $ (0.24) $ (0.14)
2000 Q1 Q2 Q3 Q4
-------- -------- -------- --------
Total Operating revenue. . . . . . . . . . $30,566 $30,350 $30,822 $33,454
Income (loss) from operations. . . . . . . (811) 579 490 (971)
Net loss . . . . . . . . . . . . . . . . . (5,298) (3,582) (4,941) (8,115)
Net loss to common shareholders. . . . . . $(6,373) $(4,671) $(6,503) $(9,716)
Loss per common share -- basic and diluted $ (0.63) $ (0.46) $ (0.64) $ (0.96)
The sum of quarterly per share data may not equal the per share total reported
for the year.
(21) SUBSEQUENT EVENTS
In February 2002, the Company reached an agreement with Heller Healthcare
Finance to refinance three of the properties in our $71.8 million portfolio that
previously was financed by Deutsche Bank AG and matured December 14, 2001. The
new loan of $25.5 million matures February 2004 and provides for monthly
principal payments of approximately $40,000 in addition to interest at LIBOR
plus four percent. This refinancing in turn satisfied our extension agreement
dated May 31, 2001, with Deutsche Bank AG to extend the maturity date of the
remaining debt of $46.3 million secured by seven properties in the original
portfolio to May 31, 2003, provided that the Company pays to the lender a fee
equal to 1% of the outstanding portfolio balance at May 31, 2002. As a result
of this refinancing, the Company has reclassified the entire $71.8 million
principal balance on this portfolio to long-term debt from current debt in its
December 31, 2001, financial statements.
F-27
Emeritus Corporation
Valuation and Qualifying Accounts
Years Ended December 31, 2001, 2000, and 1999
(in thousands)
Column A Column B Column C Column D Column E
- --------------------------------------------- ---------- ------------- --------------- ---------
Balance Charged
at to Balance
Beginning Other Costs at End
of Year and Expenses Deductions (1) of Year
---------- ------------- --------------- ---------
Description
- -----------
Year ended December 31, 2001:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 594 $ 466 $ 662 $ 398
========== ============= =============== =========
Year ended December 31, 2000:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 583 $ 359 $ 348 $ 594
========== ============= =============== =========
Year ended December 31, 1999:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 538 $ 693 $ 648 $ 583
========== ============= =============== =========
_____________
(1) Represents amounts written off
S-1