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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
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, 2003
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 [X] No [ ]
Indicate by check mark that there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
Aggregate market value of common voting stock held by non-affiliates of the
registrant as of June 30, 2003, was $24,497,029.
Aggregate market value of common voting stock held by non-affiliates of the
registrant as of February 29, 2004, was $51,252,977.
As of February 29, 2004, 10,303,035 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III of Form 10-K (items 10-14) is
incorporated herein by reference to the Registrant's definitive Proxy Statement
to be filed on or before April 29, 2004.
EMERITUS CORPORATION
INDEX
PART I
PAGE NO.
--------
ITEM 1.. DESCRIPTION OF BUSINESS 1
ITEM 2.. DESCRIPTION OF PROPERTY 7
ITEM 3.. LEGAL PROCEEDINGS 14
ITEM 4.. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
. . . . EXECUTIVE OFFICERS OF EMERITUS 15
PART II
ITEM 5.. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
. . . . STOCKHOLDER MATTERS 17
ITEM 6.. SELECTED CONSOLIDATED FINANCIAL DATA 18
ITEM 7.. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
. . . . AND RESULTS OF OPERATIONS 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 41
ITEM 8.. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 42
ITEM 9.. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
. . . . ACCOUNTING AND FINANCIAL DISCLOSURE 42
ITEM 9A. CONTROLS AND PROCEDURES 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 43
ITEM 11. EXECUTIVE COMPENSATION 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
. . . . MANAGEMENT 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
. . . . FORM 8-K 45
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, 2003, we operated, or had an interest in, 175 assisted living
communities, consisting of approximately 14,845 units with a capacity for 18,208
residents, located in 33 states. These include 19 communities that we own, 109
communities that we lease, and 47 communities that we manage, including one in
which we hold a joint venture interest.
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 independently, 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, while also providing peace of mind knowing that
staff is available should the need arise. 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.
Emeritus's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments thereto, filed with the Securities and
Exchange Commission (SEC) pursuant to Section 13(a) of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder are made
available free of charge on Emeritus's web site (www.emeritus.com) as soon as
reasonably practicable after Emeritus electronically files such material with,
or furnishes it to, the SEC. The information contained on Emeritus's web site
is not being incorporated herein.
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, based in part on local regulations.
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.
* 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
is about $80,000 per year in the top ten most costly markets. In
contrast, assisted 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. According to the GE
Long Term Care Insurance Nursing Home Survey in 2002, the national
annual average cost of a year in a nursing home was $54,900. The survey
evaluated the cost of assistance in a nursing home with the activities
of daily living for a person suffering from a debilitation such as
Parkinson's disease. It did not include costs for therapy,
rehabilitation, or medications.
1
* 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 5.5% from
approximately 17.6 million in 2003 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 18.5% from approximately 4.9
million in 2003 to 5.8 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 in the August 2003
issue of the Archives of Neurology, an AMA publication, this population
will increase 13.3% from the current 4.5 million to 5.1 million people
by the year 2013. 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. According to the 2000
census data, more than 54% of the population over the age of 75 have
incomes over $20,000 per year and slightly more than 44% 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 increased during the
1990's and the geographical separation of senior family members from
their adult children correlates 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. The number of two-income households stopped
growing during the recession starting in March 2001, but is expected to
start increasing again in 2004, although at a slower pace than during
the 1990's.
* 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 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.
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 175 communities, 57 communities have
been built and opened since January 1, 1996. 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, 2003, the average cost per
unit of our owned and leased communities was approximately $68,200. 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.
2
* Geographic Diversification and Regional Focus. We operate our communities
in 33 states across 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
Chairman of the Board and Chief Executive Officer ("Mr. Baty"), has more
than 31 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,
and Columbia-Pacific Group, Inc., an operator of independent living
facilities and assisted living communities. In addition, our operating
vice presidents have an average of 17 years of experience with major
companies in the long-term care industry. We believe that this strong
senior leadership, with proven management skills, will allow us to take
advantage of the opportunities present in the assisted living industry.
Business Strategy
We believe that there is a significant demand for alternative long-term care
services that are well-positioned between the limited services offered by
independent living facilities and the higher-level medical and institutional
care offered by skilled nursing facilities. Our goal is to become the national
leader in the assisted living segment of the long-term care industry through the
following strategy:
* Focus on Operations and 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
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.
* Supplement Business through Management Agreements. From 1999 through
2002, we managed a significant number of communities, ranging from 68 in
1999 to 95 in 2002. With changes in the capital markets and
opportunities to own or lease communities, the number of managed
communities has declined to 47 in 2003 (most of those making up the
decline became leased communities in our consolidated portfolio) and we
expect it to decline further in 2004. Nevertheless, we will continue to
review management opportunities that fit into our existing operational
strategy as a supplement to our core business. We generally 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 purchase or lease 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 with a favorable current operating structure, and communities
that provide immediate positive cash flow opportunities with minimal
impact to existing operations. In 2002 and 2003, as the opportunities
arose, we acquired additional communities that satisfy our criteria. We
intend to continue to be 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.
3
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' 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 nutritious meals per day,
Alzheimer's and related * social and recreational activities,
dementia * weekly housekeeping and linen service,
* building maintenance, individual apartment maintenance,
and grounds keeping,
* 24-hour emergency response and security,
* licensed nurses on staff to monitor and coordinate care
needs, and organize wellness activities, and
* transportation to appointments, excursions, etc.
- ----------------------------------------------------------------------------------------------------------------------
Assisted living Assisted living residents Our assisted living services provided for each resident depend on
Services the recommended level of care or assistance required by the individual.
A thorough assessment of the individual's needs along with consultation
with the resident, the resident's physician, and the resident's family,
determine the level of care. The level of care is based on
the degree of assistance he/she requires in 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 care and assistance,
* psycho-social support,
* dining assistance, and
* miscellaneous services (including diabetic management,
prescription medication reviews, transfers, and simple treatments).
- ----------------------------------------------------------------------------------------------------------------------
Special Care Residents with Alzheimer's We have designed our Special Care program to meet the health,
Program and related dementia psychological, and social needs of our residents diagnosed with
(Alzheimer's & Alzheimer's or related dementia. In a manner consistent with our
related dementia) 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:
* personalized environment
* activities planned to support meaningful interaction,
* specialized dining and hydration programs,
* partnerships with families and significant others through
support groups, one-on-one meetings, and educational forums,
* behavior as communication
- ----------------------------------------------------------------------------------------------------------------------
4
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 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.
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, 2003, we managed and provided administrative services to 47
assisted living communities under management agreements that typically provide
for management fees ranging from 3% to 7% of gross revenues. Our management
agreements generally have terms ranging from two to five years, and may be
renewed or renegotiated at the expiration of the term. Management fees were
approximately $10.2 million for 2003, although we expect that to be
substantially less in 2004 because (i) we have acquired or leased a number of
communities that we formerly managed in 2003, (ii) we expect to acquire more of
the managed communities in 2004 and, (iii) in July 2003, we ceased managing 12
communities for a third party. We have various categories of management
agreements, including:
* a management agreement covering 23 communities that is a continuing
component of the Emeritrust I transaction referred to in "Item 7.
Management's Discussion and Analysis, Significant 2003 Transactions,
Emeritrust Transactions, Emeritrust I Communities Management". This
management agreement, which may be terminated by either party on 90 days
notice, provides for a base fee of 3% of gross revenues and an
additional fee of 4% of gross revenues to the extent of 50% of cash flow
from the communities. In March 2004, this management agreement was
amended to provide for a management fee of 5% of gross revenues.
* management agreements covering 19 communities owned by entities
controlled by Mr. Baty. We generally receive fees ranging from 4% to 6%
of the gross revenues generated by the communities. We have announced
that we have agreed to acquire up to 13 of these communities and will
lease and operate them following acquisition, which is scheduled for as
early as March 31, 2004, and as late as the end of the second quarter
2004.
* a management agreement covering one community owned by a joint venture in
which we have a financial interest. We receive management fees of 6% of
gross revenues.
* management agreements covering three communities owned by independent
third parties. We receive management fees ranging from 4% to 7% of gross
revenues, or similar arrangements based on occupied capacity.
* a management agreement covering one community owned by an independent
third party. We receive a management fees of the greater of $7,000 per
month or 6% of gross revenue with opportunities to earn additional fees
based on operating cash flow.
Upon completion of the transaction to acquire up to 13 previously managed
communities from Mr. Baty, we will continue to manage 34 communities, of which
23 are the Emeritrust I Communities under a management agreement that may be
terminated by either party on 90 days notice. If either party exercises its
option to terminate this management agreement, or if the management agreement
expires on September 30, 2005, and is 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
5
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, Great Lakes, and Western Operations. An
operational vice president heads each group. Each group may consist of one or
more divisions. 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 executive
director supervises day-to-day community operations, and in certain
jurisdictions, must satisfy various licensing requirements. We provide
management support services to each of our residential communities, including
establishing operating standards, recruiting, training, and financial and
accounting services.
We have centralized finance and other operational functions at our headquarters
in Seattle, Washington, in order to allow community-based personnel to focus on
resident care. The Seattle office establishes 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.
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 2004. We use
high quality hardware and operating systems from current and proven technologies
to support our 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 may have significantly greater resources, experience, and name
recognition within the healthcare community than we do.
Employees
At December 31, 2003, we had approximately 7,500 employees, including 5,521
full-time employees, of which approximately 119 were employed at our
headquarters. Of this total, approximately 2,156 were employed in our managed
communities, including 1,594 full-time employees. Although none of our employees
are currently represented by a union, there was an election held in one of our
facilities in Florida during October. The union is challenging the results of
the election and the election results are currently under review by the National
Labor Relations Board. If the union were successful in its challenge,
6
the Board would certify a bargaining unit of approximately 35 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, particularly
in nursing, 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.
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. Seventeen of our
operating communities offer some independent living services and three are
operated as skilled nursing facilities. The table below summarizes information
regarding our current operating communities as of December 31, 2003.
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------------------- ------------------ --------- ---- ------- --------------
Alabama
Galleria Oaks * Birmingham Oct-2002 71 107 Lease
Arizona
Arbor at Olive Grove * Phoenix Jun-1994 98 111 Lease
La Villita * Phoenix Jun-1994 92 92 Option/Manage
Loyalton of Flagstaff Flagstaff Jun-1999 61 67 Lease
Loyalton of Phoenix Phoenix Jan-1999 101 111 Lease
Scottsdale Royale ~ Scottsdale Aug-1994 63 63 Own
Village Oaks at Chandler * Chandler Oct-2002 66 105 Lease
Village Oaks at Glendale * Glendale Oct-2002 66 105 Lease
Village Oaks at Mesa * Mesa Oct-2002 66 105 Lease
California
Creston Village * Paso Robles Feb-1998 100 110 Lease
Emerald Hills Auburn Jun-1998 89 98 Lease
Fulton Villa Stockton Mar-1995 80 80 Own (2)
Loyalton of Folsom * Folsom Jan-2002 98 113 Manage
Loyalton of Rancho Solano * Fairfield Mar-1998 172 189 Lease
The Palms at Loma Linda Loma Linda Dec-2003 140 220 Own (4)
The Springs at Oceanside * Oceanside Dec-2003 113 236 Own (4)
The Terrace * Grand Terrace Mar-1996 87 87 Option/Manage
Villa Del Rey Escondido Mar-1997 84 84 Own (2)
Colorado
Loyalton of Broadmoor Colorado Springs Dec-2003 37 45 Own (4)
Connecticut
Cold Spring Commons * Rocky Hill Apr-1997 80 88 Lease
7
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------------------- ------------------ --------- ---- ------- --------------
Delaware
Gardens at Whitechapel Newark Oct-1995 100 110 Option/Manage
Green Meadows at Dover * Dover Jul-1998 52 63 Lease
Florida
Barrington Place * Lecanto May-1996 79 120 Option/Manage
Beneva Park Club Sarasota Jul-1995 96 102 Option/Manage
College Park Club * Bradenton Jul-1995 85 93 Option/Manage
La Casa Grande * New Port Richey May-1997 200 235 Own (2)
Madison Glen Clearwater May-1996 135 154 Option/Manage
Park Club of Brandon Brandon Jul-1995 88 88 Lease
Park Club of Fort Myers * Ft. Myers Jul-1995 77 82 Lease
Park Club of Oakbridge * Lakeland Jul-1995 88 88 Lease
River Oaks * Englewood May-1997 155 200 Own (2)
Springtree * Sunrise May-1996 179 246 Option/Manage
Stanford Centre * Altamonte Springs May-1997 118 180 Own (2)
The Colonial Park Club * Sarasota Aug-1996 88 90 Lease
The Lakes * Ft. Myers Jun-2000 154 190 Manage
The Lodge at Mainlands * Pinellas Park Aug-1996 154 162 Option/Manage
The Pavillion at Crossing Pointe ~ * Orlando Jul-1995 174 190 Option/Manage
Village Oaks at Conway * Orlando Oct-2002 66 103 Lease
Village Oaks at Melbourne Melbourne Oct-2002 66 103 Lease
Village Oaks at Orange Park Orange Park Oct-2002 66 103 Lease
Village Oaks at Southpoint * Jacksonville Oct-2002 66 103 Lease
Village Oaks at Tuskawilla Winter Springs Oct-2002 66 105 Lease
Idaho
Highland Hills Pocatello Oct-1996 49 55 Lease
Juniper Meadows Lewiston Nov-1997 82 90 Own (2)
Loyalton of Coeur d'Alene ~ Coeur d' Alene Mar-1996 108 114 Lease
Ridge Wind Chubbuck Aug-1996 80 106 Lease
Summer Wind Boise Sep-1995 49 53 Lease
Illinois
Canterbury Ridge * Urbana Nov-1998 101 111 Lease
Loyalton of Rockford * Rockford Jun-2000 100 110 Manage
Indiana
Meridian Oaks * Indianapolis Oct-2002 77 111 Lease
Village Oaks at Fort Wayne * Fort Wayne Oct-2002 66 105 Lease
Village Oaks at Greenwood * Indianapolis Oct-2002 66 105 Lease
Iowa
Silver Pines * Cedar Rapids Jan-1995 80 80 Own (2)
Kansas
Elm Grove Estates * Hutchinson Apr-1997 121 133 Option/Manage
8
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------------------- ------------------ --------- ---- ------- --------------
Liberal Springs Liberal Dec-2003 44 56 Own (4)
The Fairways of Augusta Augusta Dec-2003 21 27 Own (4)
Kentucky
Stonecreek Lodge Louisville Apr-1997 80 88 Lease
Louisiana
Kingsley Place at Alexandria * Alexandria May-2002 80 96 Lease
Kingsley Place at Lafayette * Lafayette May-2002 80 96 Lease
Kingsley Place at Lake Charles * Lake Charles May-2002 80 96 Lease
Kingsley Place at Shreveport * Shreveport May-2002 80 80 Lease
Maryland
Emerald Estates * Baltimore Oct-1999 120 134 Manage
Loyalton of Hagerstown Hagerstown Jul-1999 100 110 Lease
Massachusetts
Canterbury Woods * Attleboro Jun-2000 130 130 Manage
Meadow Lodge at Drum Hill Chelmsford Aug-1997 80 88 Lease (3)
The Lodge at Eddy Pond Auburn Jan-2000 108 110 Own (2)
The Pines at Tewksbury * Tewksbury Jan-1996 49 65 Lease
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 Lease (3)
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 (2)
Nevada
Concorde Las Vegas Nov-1996 116 128 Own (2)
Village Oaks at Las Vegas Las Vegas Oct-2002 66 105 Lease
The Seasons * Reno Feb-2002 94 109 Manage
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
9
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------------------- ------------------ --------- ---- ------- --------------
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
Loyalton of Lakewood Lakewood Jul-1999 83 91 Lease
Perinton Park Manor (1) Fairport Nov-1996 78 86 Lease
The Landing at Brockport * Brockport Jul-1999 84 92 Manage
The Landing at Queensbury * Queensbury Nov-1999 84 92 Manage
West Side Manor - Liverpool (1) Liverpool Nov-1996 78 80 Lease
West Side Manor - Rochester (1) Rochester Nov-1996 72 72 Lease
Woodland Manor (1) Vestal Nov-1996 60 116 Lease
North Carolina
Heritage Hills Retirement Hendersonville Feb-1996 99 99 Own
Heritage Lodge Assisted Living Hendersonville Feb-1996 20 24 Lease
Loyalton of Greensboro Greensboro May-2003 50 70 Lease
Pine Park Retirement ~ Hendersonville Feb-1996 110 110 Lease
The Pines of Goldsboro Goldsboro Sep-1998 101 111 Manage
Ohio
Brookside Estates * Middleberg Heights Sep-1998 99 101 Option/Manage
Loyalton of Ravenna Ravenna May-2003 55 60 Lease
Park Lane ~ Toledo Jan-1998 92 101 Manage
The Landing at Canton * Canton Aug-2000 84 92 Manage
Oregon
Meadowbrook Ontario Jun-1995 53 55 Lease
Pennsylvania
Green Meadows at Allentown * Allentown Oct-1995 76 97 Lease
Green Meadows at Latrobe * Latrobe Oct-1995 84 125 Lease
Loyalton of Bloomsburg Bloomsburg May-2003 46 67 Lease
Loyalton of Creekview * Mechanicsburg May-2003 101 120 Lease
Loyalton of Harrisburg Harrisburg May-2003 47 65 Lease
South Carolina
Anderson Place - Cottages Anderson Oct-1996 75 75 Lease
Anderson Place - Nursing Home Anderson Oct-1996 22 44 Lease
Anderson Place - Summer House # Anderson Oct-1996 30 40 Lease
Bellaire Place 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 Center # * Easley Feb-1996 24 44 Lease
Countryside Village Retirement Easley Feb-1996 72 75 Lease
Skylyn Health Center # * Spartanburg Feb-1996 26 48 Lease
Skylyn Personal Care Spartanburg Feb-1996 115 131 Lease
10
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------------------- ------------------ --------- ---- ------- --------------
Skylyn Retirement Spartanburg Feb-1996 120 120 Lease
The Willows at York * York Sep-1999 82 164 Manage
Tennessee
Walking Horse Meadows * Clarkesville Jun-1997 50 55 Option/Manage
Texas
Amber Oaks San Antonio Apr-1997 163 275 Lease
Beckett Meadows * Austin Oct-2002 72 72 Manage
Cambria Lodge * El Paso Sep-1996 79 87 Lease
Champion Oaks Houston Oct-2002 48 84 Lease
Collin Oaks * Plano Oct-2002 78 112 Lease
Dowlen Oaks Beaumont Dec-1996 79 87 Option/Manage
Eastman Estates Longview Jun-1997 70 77 Option/Manage
Elmbrook Estates Lubbock Dec-1996 79 87 Lease
Hamilton House * San Antonio Sep-2002 111 123 Lease
Kingsley Place at Henderson * Henderson May-2002 57 101 Lease
Kingsley Place at Oakwell Farms * San Antonio May-2002 80 160 Lease
Kingsley Place at Stonebridge Ranch * McKinney May-2002 80 166 Lease
Kingsley Place at the Medical Center * San Antonio May-2002 80 160 Lease
Lakeridge Place * Wichita Falls Jun-1997 79 87 Option/Manage
Loyalton of Austin * Austin Oct-2002 76 111 Lease
Loyalton of Lake Highlands * Dallas Oct-2002 78 112 Lease
Meadowlands Terrace Waco Jun-1997 71 78 Option/Manage
Memorial Oaks * Houston Oct-2002 68 105 Lease
Myrtlewood Estates * San Angelo May-1997 79 87 Option/Manage
Redwood Springs San Marcos Apr-1997 90 90 Lease
Saddleridge Lodge Midland Dec-1996 79 87 Option/Manage
Seville Estates * Amarillo Mar-1997 50 55 Option/Manage
Sherwood Place Odessa Sep-1996 79 87 Lease
Sugar Land Oaks * Sugar Land Oct-2002 75 110 Lease
Tanglewood Oaks * Fort Worth Oct-2002 78 112 Lease
The Palisades El Paso Apr-1997 158 215 Lease
Vickery Towers at Belmont ~ Dallas Apr-1995 301 331 Manage
Village Oaks at Cielo Vista El Paso Oct-2002 66 105 Lease
Village Oaks at Farmers Branch * Farmers Branch Oct-2002 66 105 Lease
Village Oaks at Hollywood Park * San Antonio Oct-2002 66 105 Lease
Woodbridge Estates San Antonio Oct-2002 78 112 Lease
Utah
Emeritus Estates * Ogden Feb-1998 83 91 Option/Manage
Virginia
Cobblestones at Fairmont Manassas Sep-1996 75 82 Lease (3)
Loyalton of Danville Danville May-2003 68 120 Lease
Loyalton of Harrisonburg Harrisonburg May-2003 57 114 Lease
Loyalton of Roanoke Roanoke May-2003 65 118 Lease
11
Emeritus
Operations Units Beds
Community Location Commenced (a) (b) Interest
- ----------------------------------------- ------------------ --------- ---- ------- --------------
Loyalton of Staunton Staunton Jul-1999 101 111 Lease
Wilburn Gardens * Fredericksburg Jan-1999 101 111 Manage
Washington
Arbor Place at Silverlake Everett Jun-1999 101 111 Manage
Cooper George ~ Spokane Jun-1996 140 158 Partnership
Emeritus Oaks of Silverdale * Silverdale Nov-2003 46 52 Lease
Evergreen Lodge Federal Way Apr-1996 98 124 Lease
Fairhaven Estates Bellingham Oct-1996 50 55 Lease
Garrison Creek Lodge Walla Walla Jun-1996 80 88 Lease
Harbour Pointe Shores Ocean Shores Feb-1997 50 55 Option/Manage
Hearthside of Issaquah * Issaquah Feb-2000 98 98 Own
Kirkland Lodge at Lakeside Kirkland Mar-1996 74 84 Lease (3)
Regent Court at Kent * Kent Jan-2002 24 48 Manage
Renton Villa Renton Sep-1993 79 97 Lease
Richland Gardens Richland May-1998 100 110 Manage
Seabrook Everett Jun-1994 60 62 Lease
The Courtyard at the Willows Puyallup Sep-1997 101 111 Own (2)
The Hearthstone Moses Lake Nov-1996 84 92 Lease
West Virginia
Charleston Gardens * Charleston Aug-2001 100 132 Manage
--------- ------- ------
Total Operating Communities 175 14,845 18,208
========= ======= ======
~ Currently offers independent living services.
# Currently operates as a skilled nursing facility.
* Currently offers memory loss (Alzheimer's or related dementia) care.
(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 party.
(2) As part of a refinancing agreement, we transferred all long-term
assets and liabilities related to these properties to Emeritus
Realty Corporation, a wholly owned subsidiary of Emeritus
included in the consolidated financial statements. Notwithstanding
consolidation for financial statement purposes, it is management's
intention that Emeritus Realty Corporation be a separate legal entity
wherein the assets and liabilities are not available to pay other
debts or obligations of the consolidated Company and the consolidated
Company is not liable for the liabilities of Emeritus Realty
Corporation, except as otherwise provided in connection with the
financing agreement.
(3) Due to financing requirements, these assets continue to be held by
certain of our wholly owned subsidiaries. It is management's intention
that the assets and liabilities of the subsidiaries are not available
to pay other debts or obligations of the consolidated Company and the
consolidated Company is not liable for the liabilities of the
subsidiaries except as otherwise provided in connection with these
financing requirements.
12
(4) Due to financing requirements, these assets continue to be held by one
of our wholly owned subsidiaries. It is management's intention that
the assets and liabilities of the subsidiary are not available to pay
other debts or obligations of the consolidated Company and the
consolidated Company is not liable for the liabilities of the
subsidiary except as otherwise provided in connection with these
financing requirements.
Executive Offices
Our executive offices are located in Seattle, Washington, where we lease
approximately 26,500 square feet of space. Our lease agreement runs for a term
of 10 years, expiring July 2006, and includes two five-year renewal options.
13
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to lawsuits and other matters in the normal
course of business, including claims related to general and professional
liability. Reserves for these claims have been accrued based upon actuarial
and/or estimated exposure, taking into account self-insured retention or
deductibles, as applicable. While we cannot predict the results with certainty,
we do not believe that any liability from any such lawsuits or other matters
will have a material effect on our financial position, results of operations, or
liquidity.
In February 2004, the California Public Interest Research Group announced that
it intended to bring an action against operators of assisted living communities
(including us) and other senior housing facilities. The announced action seeks,
on behalf of residents of these facilities located in California, to recover
move-in or preadmission fees that have been paid over the past three years as
well as certain penalties. While we have not yet been served, we intend to
defend the action vigorously and have entered into a joint defense agreement
with other operators in California.
14
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, 2003.
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 . . . . 60 Chairman of the Board and Chief Executive Officer
Raymond R. Brandstrom. 51 Vice President of Finance, Secretary,
and Chief Financial Officer
Gary S. Becker . . . . 56 Senior Vice President of Operations
Martin D. Roffe. . . . 56 Vice President, Financial Planning
Suzette McCanless. . . 55 Vice President, Operations -- Eastern Division
Russell G. Kubik . . . 50 Vice President, Operations -- Central Division
P. Kacy Kang . . . . . 36 Vice President, Operations -- Western Division
Christopher M. Belford 42 Vice President, Operations -- Great Lakes Division
Susan A. Scherr. . . . 55 Vice President of Signature Services
Daniel R. Baty, one of Emeritus's founders, has served as its Chief Executive
Officer and as a director since its inception in 1993 and became Chairman of the
Board in April 1995. Mr. Baty also has served as the Chairman of the Board of
Holiday 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's founders, has served as a director
since its inception in 1993 and as Vice Chairman of the Board from March 1999
until March 2000. From 1993 to March 1999, Mr. Brandstrom also served as
Emeritus's President and Chief Operating Officer. In March 2000, Mr. Brandstrom
was elected Vice President of Finance, Chief Financial Officer, and Secretary of
Emeritus. From May 1992 to 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 30 years of health care management experience. From October 1993 to
December 1996 he was Vice President of Operations for the Western Division of
SunBridge Healthcare Corporation, the nursing home division of Sun Healthcare
Group, Inc. Sun Healthcare Group, Inc. is one of the largest providers of
long-term, subacute, and related specialty health care services in the United
States.
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 31 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, where he also held the previous positions of Sr. Application
Analyst and Director of Financial Planning. Hillhaven Corporation operated
nursing centers, pharmacies, and retirement housing communities.
15
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. Mrs. McCanless has 23 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., where she also held the
previous positions of Administrator and Regional Director of Operations. The
business of Beverly Enterprises, Inc. consists principally of providing
healthcare services, including the operation of nursing facilities, assisted
living centers, hospice and home care centers, outpatient therapy clinics and
rehabilitation therapy services.
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 19 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, Inc. in the Seattle/Puget Sound
area. Mr. Kubik also worked as Regional Director of Operations for Beverly
Enterprises, Inc. in Washington and Idaho.
P. 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, Inc. from 1991 to 1994
and for Sun Healthcare Group, Inc. from 1994 through 1997.
Christopher M. Belford joined Emeritus as Regional Director of Operations for
California in January 2001 and was promoted to Divisional Director of Operations
for the Southwest Division in May 2001. Mr. Belford was then promoted to Vice
President of Operations - Great Lakes Division in October 2003. Prior to
joining Emeritus, Mr. Belford served as Vice President of Operations for Regent
Assisted Living, Inc. from 1996 to 2000 in the Southwest Division. Mr. Belford
operated nursing, assisted, and independent living facilities for ERA Care in
the Seattle/Puget Sound area from 1991 to 1996.
Susan A. Scherr joined Emeritus as a Regional Support Specialist in October 1997
and was promoted to Director of Signature Services and a member of the Emeritus
Senior Management team in December 1999. In April 2001, she 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. Ms. Scherr brings to Emeritus more than 19
years' experience in the assisted living, acute and skilled care, and
hospice/home health care industries. Prior to her association with Emeritus,
she worked with SunBridge Healthcare Corporation, the nursing home division of
Sun Healthcare Group, Inc. and Jerry Erwin & Associates, an assisted living
company.
16
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the American Stock Exchange under the symbol
"ESC" since November 21, 1995, the date of our initial public offering. The
following table sets forth for the periods indicated the high and low closing
prices for our common stock as reported on AMEX.
High Low
----------- -----------
2003
First Quarter . . . . $ 5.78 $ 3.60
Second Quarter. . . . $ 4.49 $ 3.44
Third Quarter . . . . $ 8.09 $ 3.85
Fourth Quarter. . . . $ 8.50 $ 5.90
2002
First Quarter . . . . $ 5.22 $ 2.05
Second Quarter. . . . $ 5.00 $ 3.80
Third Quarter . . . . $ 4.50 $ 1.70
Fourth Quarter. . . . $ 5.68 $ 1.70
As of February 29, 2004, we had 131 holders of record of our Common Stock.
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.
17
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, 2003, are
derived from the consolidated financial statements of Emeritus Corporation. The
consolidated financial statements as of December 31, 2003 and 2002, and for each
of the years in the three-year period ended December 31, 2003, are included
elsewhere in this document.
Year Ended December 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In thousands, except per share data)
Consolidated Statements of Operations Data:
Total operating revenues . . . . . . . . . . . . . . . $206,657 $153,129 $140,577 $125,192 $122,642
Total operating expenses . . . . . . . . . . . . . . . 199,710 152,132 133,076 125,905 125,330
--------- --------- --------- --------- ---------
Income (loss) from operations. . . . . . . . . . . . . 6,947 997 7,501 (713) (2,688)
Net other expense. . . . . . . . . . . . . . . . . . . (10,354) (7,220) (11,735) (21,223) (18,349)
--------- --------- --------- --------- ---------
Loss before income taxes. . . . . . . . . . . . . . . (3,407) (6,223) (4,234) (21,936) (21,037)
Provision for income taxes . . . . . . . . . . . . . . (418) - - - -
--------- --------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . (3,825) (6,223) (4,234) (21,936) (21,037)
Preferred stock dividends. . . . . . . . . . . . . . . (6,238) (7,343) (6,368) (5,327) (2,250)
Gain on repurchase of Series A preferred stock . . . . 14,523 - - - -
--------- --------- --------- --------- ---------
Net income (loss) to common shareholders . . . . . . . $ 4,460 $(13,566) $(10,602) $(27,263) $(23,287)
========= ========= ========= ========= =========
Net income (loss) per common share:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . $ 0.43 $ (1.33) $ (1.04) $ (2.69) $ (2.22)
========= ========= ========= ========= =========
Diluted. . . . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ (1.33) $ (1.04) $ (2.69) $ (2.22)
========= ========= ========= ========= =========
Weighted average number of common shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . 10,255 10,207 10,162 10,117 10,469
========= ========= ========= ========= =========
Diluted. . . . . . . . . . . . . . . . . . . . . . . . 11,521 10,207 10,162 10,117 10,469
========= ========= ========= ========= =========
Consolidated Operating Data:
Communities in which we have an interest . . . . . . . 175 180 133 135 129
Number of units. . . . . . . . . . . . . . . . . . . . 14,845 15,762 12,248 12,412 11,726
December 31,
------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 6,368 $ 7,301 $ 10,194 $ 7,496 $ 12,860
Working capital (deficit). . . . . . . . . . . . . . . (33,361) (26,485) (12,100) (81,167) 6,828
Total assets . . . . . . . . . . . . . . . . . . . . . 178,587 163,159 168,811 178,079 198,370
Long-term debt, less current portion . . . . . . . . . 136,388 119,887 131,070 60,499 128,319
Convertible debentures . . . . . . . . . . . . . . . . 32,000 32,000 32,000 32,000 32,000
Redeemable preferred stock . . . . . . . . . . . . . . - 25,000 25,000 25,000 25,000
Shareholders' deficit. . . . . . . . . . . . . . . . . (79,094) (85,066) (74,141) (65,803) (37,290)
18
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.
From 1995 through 1999, we expanded rapidly through acquisition and internal
development and by December 31, 1999, operated 129 assisted living communities
with 11,726 units. We believe, however, that during this expansion, the
assisted living industry became significantly over-built, creating an
environment characterized by sluggish or falling occupancy and market resistance
to rate increases. As a result of these difficult operating circumstances, we
limited further growth and in 2000 began an increasing focus first on raising
our occupancy and later on operating efficiencies and cost controls as well as
implementing a systematic rate enhancement program.
We believe that the health of the assisted living industry is improving and that
there are developing opportunities to improve occupancy and adjust rates, as
well as greater access to capital. In light of these perceptions, we have
completed several acquisitions in the last two years and have, and are
continuing, to convert managed communities to owned or lease communities where
opportunities are available. In 2000 and 2001, we continued to operate
approximately 130 communities, but in 2002 and 2003, we increased that to 180
and 175 communities, respectively, primarily through the lease of 24 communities
formerly operated by Marriott and through other selected acquisitions. From the
end of 2000 to the end of 2003, the communities we manage decreased from 69 to
47 and the owned and leased communities increased from 61 to 128, reflecting
both our increasing confidence in the assisted living industry and the
availability of capital.
In 2004 we expect to continue reviewing acquisition opportunities and seeking to
take ownership or lease positions in communities that we manage. To this end,
we have announced a proposed lease acquisition of up to 13 communities that we
formerly managed, a second lease acquisition of nine memory loss facilities, and
two other communities.
The following table sets forth a summary of our property interests.
As of December 31,
----------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ----------------------
Buildings Units Buildings Units Buildings Units
---------- ---------- ---------- ---------- ---------- ----------
Owned (1) . . . . . . . . . . . . . 19 1,813 17 1,687 16 1,579
Leased (1) (2). . . . . . . . . . . 109 8,303 67 5,279 42 3,444
Managed/Admin Services (3)(4) . . . 46 4,589 94 8,577 70 6,620
Joint Venture/Partnership (5) . . . 1 140 2 219 5 605
---------- ---------- ---------- ---------- ---------- ----------
Operated Portfolio . . . . . . 175 14,845 180 15,762 133 12,248
Percentage increase (decrease) (2.8%) (5.8%) 35.3% 28.7% (1.5%) (1.3%)
- --------
(1) Included in our consolidated portfolio of communities.
(2) The leased communities are all operating leases, in which the revenues
and expenses from these communities are included in the Consolidated
Statement of Operations, but the assets and liabilities are not
included in the Consolidated Balance Sheets.
(3) Buildings managed decreased in 2003 due to termination of 13 Regent
management contracts, the 21 Emeritrust II communities, which were
leased as of September 30, 2003, and the 8 Horizon Bay communities,
which were leased as of December 31, 2003.
(4) One managed building has been shut down and was sold March 12, 2004.
(5) In 2003, 2002, and 2001, we managed 1, 1, and 2 of these communities,
respectively.
Two of the important factors affecting our financial results are the rates we
charge our residents and the occupancy levels we achieve in our communities. We
rely primarily on our residents' ability to pay our charges for services from
their own or familial resources and expect that we will do so for the
foreseeable future. Although care in an assisted living community is typically
less
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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. In this context, we must be sensitive to
our residents' financial circumstances and remain aware that rates and occupancy
are interrelated.
In evaluating the rate component, we generally rely on the average monthly
revenue per unit, computed by dividing the total revenue for a particular period
by the average number of occupied units determined on a monthly basis for the
same period. In evaluating the occupancy component, we generally rely on the an
average occupancy rate, computed by dividing the average units available,
determined on a monthly basis, during a particular period by the average number
of units occupied, determined on a monthly basis, during the period. In October
2002, we acquired 24 buildings through lease (with approximately 1,650 units)
and in March 2003, we acquired eight buildings through lease (with approximately
489 units). At the time of acquisition, these groups of communities had
different rate and occupancy characteristics and, therefore, have a distorting
effect on the rate and occupancy comparisons between 2002 and 2003. As a
consequence, the comparison including and excluding these communities is
presented below. We evaluate these and other operating components for our
consolidated portfolio, which included the communities we own and lease, and our
operating portfolio, which also includes the communities we manage as if we were
the owner or lessor.
In our consolidated portfolio, our average monthly revenue per unit increased
from $2,405 in 2001 to $2,577 in 2002 and to $2,767 in 2003. These changes
represented increases of 7.2% and 7.4% for each of the two years. Excluding the
acquisition communities referred to above, the corresponding changes were 6.3%
for 2002 and 5.6% for 2003. We believe that these improvements were a
consequence of a carefully designed rate enhancement program that we began
implementing in 2000.
In our consolidated portfolio, our average occupancy rate was 84.1% in 2001,
decreasing to 80.9% in 2002 and further decreasing to 77.4% in 2003. Excluding
the acquisition communities referred to above, our average occupancy rate was
81.8% in 2002 compared to 81.6% in 2003. We believe that these occupancy rates
reflect industry-wide factors, such as the supply of available units, which have
tended to keep pressure on occupancy levels, as well as, our own actions and
policies. At the time the acquisition communities were added to our
consolidated portfolio, their occupancy rates were lower (average rate for 2003
was 65.4%) and their average revenue per occupied unit was higher ($3,012 for
2003) than the balance of our portfolio. We also believe that our rate
enhancement program has affected occupancy growth and we continue to evaluate
the factors of rate and occupancy to find the optimum balance.
Since our inception in 1993, we have incurred operating losses and as of
December 31, 2003, we had an accumulated deficit of approximately $150.8
million. We believe that these losses have resulted from our early emphasis on
expansion, financing costs arising from multiple financing and refinancing
transactions related to this expansion, administrative and corporate expenses
that we incurred in anticipation of further expansion that did not materialize
and occupancy rates that have declined and remained lower for longer periods
than we anticipated.
SIGNIFICANT 2003 TRANSACTIONS
In 2003 we substantially increased the number of communities we lease, reduced
the number of communities we manage, repurchased all of our outstanding Series A
Preferred Stock and, in connection with these changes, increased and
restructured portions of our long-term financing obligations. The transactions
associated with these developments are summarized below.
Emeritrust Transactions
Since 1999, we have managed 46 communities under arrangements with several
related investor groups that involved (i) payment of management fees to us, (ii)
options for us to purchase the communities at a price determined by a formula,
and (iii) obligations to fund operating losses of certain communities.
Emeritrust I Communities Management. During 2003, 2002 and 2001, we managed the
Emeritrust I communities, which included 25 of the 46 communities, under a
management agreement providing for a base fee of 3% of gross revenues generated
by the communities and an additional management fee of 4% of gross revenues,
payable to the extent of 50% of cash flow from the communities. The management
agreement also required us to fund cash operating losses of the communities. In
each of
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
April and August 2003, the Emeritrust I owners disposed of a community, reducing
the number of managed communities to 23. Under this arrangement, we received
management fees (net of our funding obligations) of approximately $2.7 million,
$1.8 million, and $2.8 million in 2003, 2002 and 2001, respectively. This
management agreement, as extended several times, expired at the end of 2003. On
January 2, 2004, we and the Emeritrust I investors entered into a new management
agreement providing for management fees computed on the same basis and (i)
terminating all options to purchase the communities, (ii) terminating any
further funding obligation, and (iii) providing for a term expiring September
30, 2005, provided that either party may terminate the agreement on 90 days
notice. In March 2004, this management agreement was amended to provide for a
management fee of 5% of gross revenues. In 2004, we do not expect to receive
management fees for the Emeritrust I communities at the same level as we did in
2003. The interest rate on the mortgage financing of the communities was
increased effective June 30, 2003, and may be increased further in 2004, which
will have the effect of reducing cash flow from the communities and,
correspondingly, reducing our additional management fee that is payable to the
extent of 50% of cash flow. We also expect that additional communities could be
sold, thereby reducing the number of communities subject to the management
agreement. Because this management agreement can be terminated by either party
on short notice, there can be no guaranty that the management arrangement will
continue for its full term.
Emeritrust II Communities Management. During 2003 (through September 30), 2002,
and 2001, we managed the Emeritrust II communities, which included 21 of the 46
communities, under management agreements providing for a base management fee of
5% of gross revenue generated by the communities and an additional management
fee of 2%, payable if we met certain cash flow standards. The management
agreement for five of the communities also required us to fund cash operating
losses of those communities. Under this arrangement, we received management
fees (net of our funding obligations) of approximately $2.0 million in 2003
(through September 30), and approximately $2.6 million in each of the years 2002
and 2001.
Emeritrust II Communities Lease. On September 30, 2003, we acquired the 21
Emeritrust II communities for a cash purchase price of $118.6 million, financed
through a combination of lease and mortgage financing with an independent real
estate investment trust in the aggregate amount of $121.5 million. A master
operating lease covers the Emeritrust II communities and four other communities
originally leased from the real estate investment trust in March 2002. The
lease is for an initial 15-year period, with one 15-year renewal, and grants us
a right of first opportunity to purchase any of the Emeritrust II communities if
the trust decides to sell. The lease is a net lease, with annual base rent of
$14.7 million (of which $10.5 million is attributable to the Emeritrust II
communities), and periodic escalators. The real estate investment trust also
provided $11.5 million of debt financing secured by our leasehold interests in
the Emeritrust II communities. This debt was consolidated with other debt held
by the real estate investment trust as described below under "Debt
Consolidation." As part of the purchase price, we also agreed to issue to the
Emeritrust II investors warrants to purchase 500,000 shares of our common stock,
of which 400,000 shares have been issued. The warrants expire September 30,
2008, and have an exercise price of $7.60 (subject to certain adjustments). The
holders have limited registration rights. We included the fair value of these
warrants, totaling approximately $1.4 million, as lease acquisition costs that
we will amortize over the life of the lease.
Additional Information. The history and additional detail relating to
transactions involving the Emeritrust communities is contained in our Form 8-K
filed with the Securities and Exchange Commission on October 14, 2003. Mr.
Baty, our chief executive officer, held financial interests in the Emeritrust
investor groups and had certain obligations under the Emeritrust financing
arrangements and in the transactions completed in 2003. These are also
described in detail in this Form 8-K.
Repurchase of Series A Preferred Stock
In a two-part transaction that was completed August 28, 2003, we repurchased all
the outstanding shares of our Series A Preferred Stock for an aggregate purchase
price of $20.5 million. The Series A Preferred Stock had been issued originally
in October 1997 for $25.0 million. As a part of the repurchase, the holder of
the Series A Preferred Stock waived approximately $10.1 million in accrued and
unpaid dividends. As a result of the transaction, we recognized a gain of
approximately $14.5 million. Just prior to the repurchase, the Series A
Preferred Stock was accruing compounded, cumulative dividends of approximately
$3.7 million annually, with mandatory redemption in October 2004 at a price of
$25 million plus accrued and unpaid dividends. In completing the repurchase, we
avoided these future obligations. We obtained the funds to complete the
repurchase through three related financing transactions.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The first financing transaction involved three communities that we leased. Prior
to this financing transaction, we also held notes receivable in the aggregate
amount of $4.4 million that were secured by the same three communities and under
which we received interest of approximately $144,000 annually. In the
refinancing, the communities were transferred to a real estate investment trust,
which became the new owner and lessor, and we received net proceeds of $10.2
million in repayment of the notes we held and in exchange for our related
security and other property interests in the communities. The transfer of the
communities was subject to our leases, the terms of which did not change.
Because we disposed of our notes, we will no longer receive the interest we
formerly did. We recognized a deferred gain of approximately $8.5 million, which
we will amortize over the remaining life of the leases.
The second financing transaction, with the same real estate investment trust,
involved the sale/leaseback of four communities, three of which we owned and one
of which we held a 50% joint venture interest, resulting in net proceeds of $6.6
million. The lease is for a 15-year term with a 15-year extension and provides
for a base annual rent of approximately $3.5 million, with periodic escalators.
Prior to this refinancing, the communities secured mortgage financing of $24.6
million, with annual interest payments of approximately $2.4 million. We
recognized a deferred gain of $9.9 million, which we will amortize over the term
of the lease.
The third financing, again with the same real estate investment trust, was a
mortgage loan for $7.5 million secured by the seven communities involved in the
first two financing transactions. The debt matured in August 2006 and required
monthly interest-only payments at an initial rate of 12% per annum, with
periodic increases. This mortgage debt was subsequently consolidated with other
debt held by the real estate investment trust, as discussed below under "Debt
Consolidation".
Lease of Eight Communities in May
In May 2003, we entered into a lease with a real estate investment trust
covering eight assisted living communities in four states containing an
aggregate of 489 units. The lease is for an initial 10-year period with three
5-year extensions and includes an option to acquire the communities during the
second year for a price of $42.2 million and during the third year at the same
price plus a 3% premium. We believe this option exercise price is currently well
above fair value based on current operations. Under the lease we have a right of
first opportunity to purchase any of the properties if the owner decides to
sell. The lease is a net lease, with annual base rental of $3.45 million, and
rent adjustments at the end of the first and second lease years based on a
percentage of any increase in operating revenues, with an aggregate annual limit
of $275,000, and adjustments each year thereafter based on increases in the
consumer price index. The real estate investment trust has agreed to fund up to
$500,000 for capital expenditures, with amounts added to the lease base and
option price, and has provided us a 10-year working capital loan for $600,000,
with interest at 10% per annum payable monthly.
Lease of Eight Communities from Baty
On September 30, 2003, we entered into an agreement to lease eight communities
that we were then managing for entities owned or controlled by Mr. Baty, which
we have formerly referred to as the Horizon Bay communities. Under the
agreement, the Baty entities assigned, and we assumed, the existing leases
relating to seven of the facilities. In lieu of acquiring the remaining
community, which was owned by a Baty entity subject to mortgage financing, we
leased the community for a term of 10 years, with rent equal to the debt service
on the mortgage indebtedness (including interest and principal) plus 25% of cash
flow (after accounting for assumed management fees and capital expenditures).
The debt that is secured by this community may be cross-collateralized by Mr.
Baty with an Emeritrust I community that he may acquire and lease to us, as
described below. Annual rent relating to the eight communities is estimated at
$4.6 million, with annual adjustments based upon changes in the consumer price
level index. We will pay the Baty Entities approximately $70,000, which
represents their cash investment plus 9% per annum, as provided in the original
agreement related to the management of these communities between the Baty
Entities and us. Although this transaction closed December 31, 2003, the
economic and financial terms were effective June 30, 2003.
Debt Consolidation
The real estate investment trust that financed the Emeritrust II transaction
already held $6.8 million of our leasehold mortgage debt that matured in March
2005 and bore interest at 12% per annum, commencing March 2002 with periodic
increases up to 13% per annum. This real estate investment trust also provided
$7.5 million in leasehold mortgage financing incurred to support
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the Series A Preferred Stock repurchase in August 2003. On September 30, 2003,
these two financings, together with the $11.5 million leasehold mortgage
financing related to the Emeritrust II communities, were consolidated into a
single $25.8 million leasehold mortgage financing, secured by the 32 communities
and maturing on June 30, 2007. The debt bears interest at an initial rate of
12.13% per annum with periodic increases up to 13%. The consolidated loan
requires monthly payments of interest the first year and monthly payments of
principal and interest, based on a 10-year amortization, thereafter. Additional
principal reductions may occur, at our option, through the increase in the
amount of the lease financing based on the portfolio achieving certain coverage
ratios.
Alterra Transactions
In December 2003, we invested $7.3 million (representing an 11% ownership
interest), net of transaction costs, in a limited liability corporation (LLC)
that acquired Alterra Healthcare Corporation, a national assisted living company
headquartered in Milwaukee, Wisconsin that was the subject of a voluntary
Chapter 11 bankruptcy. Alterra operated 304 assisted living communities in 22
states. The purchase price for Alterra was $76 million and the transaction
closed on December 4, 2003, following approval by the Bankruptcy Court. The
members of the LLC consists of an affiliate of Fortress Investment Group LLC
(Fortress), a New York based private equity fund, which is the managing member,
an entity controlled by Mr. Baty, and us. Under the LLC agreement,
distributions are first allocated to Fortress until it receives its original
investment of $49 million together with a 15% preferred return, and then are
allocated to the three investors in proportion to their percentage interests, as
defined in the agreement, which are a 50% interest for Fortress and a 25%
interest for each of us and the entity controlled by Mr. Baty.
On December 31, 2003, independent of the LLC, we acquired five assisted living
communities, containing an aggregate of 355 units, from Alterra for the
assumption of $22.6 million of mortgage debt, which bears interest at 6.98% per
annum, provides for monthly payments of $178,000, including principal and
interest, and matures August 2008.
The following table summarizes the transactions described above:
Owned Leased Managed
------ ------ --------
December 31, 2002. . . . . . . . . . . . . . 18 67 95
Emeritrust I Communities Management. . . . . - - (2)
Sale-leaseback in connection with
repurchase of the Series A Preferred Stock (4) 4 -
Emeritrust II Communities Lease. . . . . . . - 21 (21)
Lease of Eight Communities in May. . . . . . - 8 -
Lease of Eight Communities from Baty . . . . - 8 (8)
Five Community Mortgage Assumption . . . . . 5 - -
Other Transactions . . . . . . . . . . . . . - 1 (17) *
----- -------- --------
December 31, 2003. . . . . . . . . . . . . . 19 109 47
====== ======= ========
* includes two communities not elsewhere discussed
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
Summary of Significant Accounting Policies and Use of Estimates
Our discussion and analysis of our financial condition and results of operations
are based upon our 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 us 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 ongoing basis, we evaluate our estimates, including those
related to resident programs and incentives such as move-in fees, bad debts,
investments, intangible assets, impairment of long-lived assets, income taxes,
restructuring, long-term service contracts, contingencies, self-insured
retention, health insurance, and litigation. We base our 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.
We believe the following accounting policies are most significant to the
judgments and estimates used in the preparation of our 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.
* For commercial general liability and professional liability insurance, we
use a captive insurance structure essentially to self-fund our primary
layer of insurance. This policy is claims-made based and covers losses
and liabilities associated with general and professional liability. The
primary layer has per occurrence and aggregate limits. Within that
primary layer is a self-insured retention, which also has a per
occurrence and aggregate limit. We also have an excess policy, which
applies to claims in excess of the primary layer on a per occurrence
basis. Losses within the primary layer, which include the self-insured
retention, are accrued based upon actuarial estimates of the aggregate
liability for claims incurred, which will vary based on actual versus
expected experience.
* For health insurance, we self-insure up to a certain level for each
occurrence above which a catastrophic insurance policy covers any
additional costs. Health insurance expense is accrued based upon
historical experience of the aggregate liability for claims incurred. If
these estimates are insufficient, additional charges may be required.
* For workers' compensation insurance for insured states (excluding Texas
and compulsory State Funds), we are on an incurred loss, retrospective
insurance policy, retroactively adjusted, upward or downward, based upon
total incurred loss experience. The premium charged by the insurance
underwriter is based upon a standard rate determined by the underwriter
to cover, amongst other things, estimated losses and other fixed costs.
The difference between the premium charged and the actuarial based
estimate of costs, which is expensed on a monthly basis, is carried as
an asset on the balance sheet. After the end of the policy year, the
insurance company conducts an audit and adjusts the total premium based
upon the actual payroll and actual incurred loss for the policy year.
Any premium adjustment for the differences between estimated and actual
payroll and estimated and actual losses will first be applied to the
accrued asset and then as an adjustment to workers' compensation expense
at the time such adjustment is determined. There is a reasonable
expectation that the incurred loss adjustment will be downward,
resulting in a premium refund. The incurred loss adjustment is limited
to 50% of the standard premium with the initial adjustment six months
after policy expiration on December 31, 2003, and annually thereafter.
For work-related injuries in Texas, we are a non-subscriber, meaning
that work-related losses are covered under a defined benefit program
outside of the Texas Workers' Compensation system. Losses are paid as
incurred and estimated losses are accrued on a monthly basis.
* We account for stock option awards to employees under the intrinsic
value-based method of accounting prescribed by APB No. 25, "Accounting
for Stock Issued to Employees". Under this method, no compensation
expense is recorded provided the exercise price is equal to or greater
than the quoted market price of the stock at the grant date. We make pro
forma disclosures of net income and earnings per share as if the fair
value-based method of accounting (the alternative method of accounting
for stock-based compensation) had been applied as required by FAS No.
123, "Accounting for Stock-Based Compensation". The fair value-based
method requires us to make assumptions to determine expected risk-free
interest rates, stock price volatility, dividend yield and
weighted-average option life. To
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the extent, such things as actual volatility or life of the options is
different from estimated, amounts expensed will be more or less than
would have been recorded otherwise.
* We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our residents to make required payments.
If the financial condition of our residents were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
* We record a valuation allowance to reduce our 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. We have considered future taxable
income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance. However, in the event we
were to determine that we would be able to realize our deferred tax
assets in the future in excess of our net recorded amount, an adjustment
to the deferred tax asset would increase income in the period such
determination was made.
COMMON-SIZE INCOME STATEMENTS AND PERIOD-TO-PERIOD PERCENTAGE CHANGE
The following table sets forth, for the periods indicated, certain items from
our 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)
--------------------------------------- ------------------------------------
2003 2002 2001 2003-2002 2002-2001
------------ ------------ ------------ ---------------- ----------------
Revenues: . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 35.0% 8.9%
Expenses:
Community operations . . . . . . . 61.6 61.3 57.5 35.7 16.1
General and administrative . . . . 11.6 13.8 12.7 13.9 18.2
Depreciation and amortization. . . 3.5 4.7 5.2 1.6 (0.5)
Facility lease expense . . . . . . 19.9 19.6 19.3 36.9 10.5
------------ ------------ ------------ ---------------- ----------------
Total operating expenses . . . 96.6 99.4 94.7 31.3 14.3
------------ ------------ ------------ ---------------- ----------------
Income from operations. . . . . . . . . 3.4 0.6 5.3 596.8 (86.7)
Other income (expense)
Interest income. . . . . . . . . . 0.3 0.3 0.7 65.3 (58.9)
Interest expense . . . . . . . . . (6.3) (7.7) (9.4) 12.1 (11.8)
Other, net . . . . . . . . . . . . 1.0 2.7 0.4 (48.3) 606.5
------------ ------------ ------------ ---------------- ----------------
Net other expense . . . . . . (5.0) (4.7) (8.3) 43.4 (38.5)
------------ ------------ ------------ ---------------- ----------------
Loss before income taxes..... (1.6) (4.1) (3.0) (45.3) 47.0
Provision for income taxes. . (0.2) - - N/A N/A
------------ ------------ ------------ ---------------- ----------------
Net loss. . . . . . . . . . . (1.8%) (4.1%) (3.0%) (38.5%) 47.0%
============ ============ ============ ================ ================
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of the Years Ended December 31, 2003 and 2002
- -----------------------------------------------------------------
Total Operating Revenues: Total operating revenues for the year ended December
31, 2003, increased by $53.6 million to $206.7 million from $153.1 million in
2002, or 35.0%. Approximately $36.3 million of the increase reflects revenue
from 24 communities that we began leasing in late 2002 and an 8 building lease
acquisition in the second quarter of 2003. 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 (excluding
the acquisition impact, which was favorable by $68) was $2,699 for 2003 compared
to $2,577 for 2002, an increase of approximately 5.6%. These increases were
partially offset by a decrease in the occupancy rate of 3.5 percentage points to
77.4% for 2003 from 80.9% for 2002. However, the occupancy rate excluding the
acquisition impact, which was unfavorable by 4.2 percentage points, decreased
0.2 percentage points from the prior year. Management fees decreased by
$649,000 in the year ended December 31, 2003, compared to 2002. This is
primarily due to the termination, expiration, or sale of various communities
under management contracts during 2003. As of December 31, 2003, we managed 47
communities compared to 95 as of December 31, 2002, a decline of 48 managed
communities. Of the 48 previously managed communities, 29 are currently leased
and included in our consolidated portfolio at December 31, 2003.
Community Operations: Community operating expenses for the year ended December
31, 2003, increased $33.5 million to $127.3 million from $93.8 million for 2002,
or 35.7%. Approximately $28.0 million of the increase reflects operating
expense from 24 communities that we began leasing in October 2002 and an 8
building lease acquisition in the second quarter of 2003. The balance of this
change was due to increases in personnel costs and increases in utilities, food
services, health, and workers' compensation insurance premiums. Community
operating expenses as a percentage of total operating revenue increased to 61.6%
in 2003 from 61.3% in 2002, primarily as a result of these increased expenses.
General and Administrative: General and administrative (G&A) expenses for the
year ended December 31, 2003, increased $2.9 million to $24.0 million from $21.1
million for 2002, or 13.9%. We experienced increases of approximately $2.7
million in personnel costs related to acquisitions and health and workers'
compensation insurance. As a percentage of total operating revenues, G&A
expenses decreased to 11.6% for 2003, compared to 13.8% for 2002, primarily as a
result of increased revenue due to additional communities in our consolidated
portfolio. Since approximately 25% of the communities we operate are managed
rather than owned or leased, G&A expense as a percentage of operating revenues
for all communities, including managed communities for which the operating
revenue is not included in our consolidated financial statements, may be more
meaningful for industry-wide comparisons. These percentages were 6.3% and 6.0%
for 2003 and 2002, respectively.
Depreciation and Amortization: Depreciation and amortization for the year ended
December 31, 2003, and 2002, were approximately $7.3 million and $7.2 million,
respectively. In 2003, this represents 3.5% of total operating revenues
compared to 4.7% for 2002. The decrease as a percentage of revenues is due to
increased revenues from our consolidated portfolio of communities.
Facility Lease Expense: Facility lease expense for the year ended December 31,
2003, was $41.0 million compared to $30.0 million for the year ended December
31, 2002, representing an increase of $11.0 million, or 36.9%. Approximately
$6.7 million of the increase reflects rental expense from 24 communities that we
began leasing in October 2002 and an 8 building lease acquisition in the second
quarter of 2003. Approximately $2.6 million of the increase was the result of a
lease acquisition of the Emeritrust II communities as discussed previously in
"Significant 2003 Transactions - Emeritrust Transactions". Approximately
$733,000 of the increase was the result of the sale-leaseback transaction in
connection with the repurchase of the Series A Preferred Stock also discussed in
"Significant 2003 Transactions - Repurchase of Series A Preferred Stock". The
balance of the increase is primarily attributable to rental increases based on
community performance under certain of our leases in 2003. We leased 109
communities as of December 31, 2003, compared to 67 communities as of December
31, 2002. Facility lease expense as a percentage of revenues increased to 19.9%
from 19.6% for the years ended December 31, 2003, and 2002, respectively.
Interest Income: Interest income for the year ended December 31, 2003, was
$666,000 versus $403,000 for the year ended December 31, 2002. This is
primarily attributable to a higher return on certain restricted deposits related
to a sale-leaseback transaction in the fourth quarter of 2002.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Interest Expense: Interest expense for the year ended December 31, 2003, was
$13.1 million compared to $11.7 million for the year ended December 31, 2002.
This increase of $1.4 million, or 12.1%, is primarily attributable to higher
amounts of outstanding debt in 2003 compared to 2002, as a result of a debt
consolidation in connection with the Emeritrust II transaction and the
repurchase of the Series A Preferred Stock all as discussed in "Significant 2003
Transactions." As a percentage of total operating revenues, interest expense
decreased to 6.3% from 7.7% for the year ended December 31, 2003 and 2002,
respectively, reflecting increased revenues in conjunction with lower interest
rates.
Other, net: Other, net decreased by $2.0 million to $2.1 million in income for
the year ended December 31, 2003, from $4.1 million in income for the year ended
December 31, 2002. The amount for 2003 includes a gain of $1.4 million on the
sale of our investment in ARV Assisted Living common stock in April 2003,
amortization of deferred gains related to the transactions in connection with
the repurchase of the Series A Preferred Stock of approximately $440,000, and
the Emeritrust II leasehold acquisition of approximately $278,000 all as
discussed in "Significant 2003 Transactions". The amount for the year 2002
includes a $5.1 million gain related to discounts we received upon the payoff of
existing financing, net of certain costs related to the transaction. This gain
was offset by approximately $1.2 million in write-offs of existing loan fees
related to a sales/leaseback transaction and a refinancing transaction.
Income taxes. Income taxes are due primarily because of gains on sale-leaseback
transactions involving several communities in the third quarter of 2003, which
have been deferred for accounting purposes. We believe that we will be required
to pay an alternative minimum income tax for 2003 on our federal income tax
return and, in certain states that have alternative minimum income tax
provisions, we will pay income or franchise tax.
Preferred dividends: For the year ended December 31, 2003 and 2002, the
preferred dividends were approximately $6.2 million and $7.3 million,
respectively. This decrease of $1.1 million is primarily due to a decrease of
$1.4 million in dividends for the Series A preferred stock, partially offset by
an increase of $256,000 in dividends for the Series B preferred stock. The
Series A preferred stock was repurchased in July and August 2003. For the last
fourteen quarters, we have not declared cash 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 $1.7 million and $2.1 million for 2003 and
2002, respectively.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Comparison of the Years Ended December 31, 2002 and 2001
- -----------------------------------------------------------------
Total Operating Revenues: Total operating revenues for the year ended December
31, 2002, increased by $12.5 million to $153.1 million from $140.6 million in
2001, or 8.9%. Approximately $9.7 million of the increase reflects revenue from
24 communities that we began leasing in late 2002. 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 and additional managed communities
throughout 2002 compared to 2001. Average monthly revenue per unit was $2,577
for 2002 compared to $2,405 for 2001, an increase of approximately 7.2%.
Management fees increased by $2.2 million in the year ended December 31, 2002,
compared to 2001. This is primarily due to the addition of 24 managed
communities in 2002 compared to 2001, as well as, increases in contingent
management fees from certain existing managed communities. These increases were
partially offset by a decrease in the occupancy rate of 3.2 percentage points to
80.9% for 2002 from 84.1% for 2001. Exclusive of the 24 communities
acquisition, occupancy decreased to 81.1% in 2002.
Community Operations: Community operating expenses for the year ended December
31, 2002, increased $13.0 million to $93.8 million from $80.8 million for 2001,
or 16.1%. Approximately $9.7 million of the increase reflects operating expense
from 24 communities that we began leasing in October 2002. The balance of this
change was due to increases in personnel costs and above average increases in
liability, health, and workers' compensation insurance premiums. Community
operating expenses as a percentage of total operating revenue increased to 61.3%
in 2002 from 57.5% in 2001, primarily as a result of these increased expenses.
General and Administrative: General and administrative (G&A) expenses for the
year ended December 31, 2002, increased $3.2 million to $21.1 million from $17.9
million for 2001, or 18.2%. We experienced increases of approximately $2.7
million in personnel costs related to acquisitions, health and workers'
compensation insurance, and other acquisition related expenses. As a percentage
of total operating revenues, G&A expenses increased to 13.8% for 2002, compared
to 12.7% for 2001, primarily as a result of higher expenses due to additional
communities in our consolidated portfolio. Since more than half of the
communities we operated were managed rather than owned or leased, G&A expense as
a percentage of operating revenues for all communities, including managed
communities for which the operating revenue is not included in our consolidated
financial statements, may be more meaningful for industry-wide comparisons.
These percentages were 6.0% and 6.6% for 2002 and 2001, respectively.
Depreciation and Amortization: Depreciation and amortization for the year ended
December 31, 2002, and 2001, were approximately $7.2 million and $7.3 million,
respectively. In 2002, this represents 4.7% of total operating revenues
compared to 5.2% for 2001. The decrease as a percentage of revenues is due to
increased revenues from leased communities.
Facility Lease Expense: Facility lease expense for the year ended December 31,
2002, was $30.0 million compared to $27.1 million for the year ended December
31, 2001, representing an increase of $2.9 million, or 10.5%. Approximately
$1.5 million of the increase reflects rental expense from 24 communities that we
began leasing in October 2002. Approximately $848,000 of the increase was the
result of a sale-leaseback transaction related to four communities, offset by
the disposition of one leased community and the repurchase of a leased
community. The balance of the increase is primarily attributable to rental
increases based on community performance under certain of our leases in 2002.
We leased 67 communities as of December 31, 2002, compared to 42 communities as
of December 31, 2001. Facility lease expense as a percentage of revenues
increased to 19.6% from 19.3% for the years ended December 31, 2002, and 2001,
respectively.
Interest Income: Interest income for the year ended December 31, 2002, was
$403,000 versus $980,000 for the year ended December 31, 2001. This was
primarily attributable to declining interest rates.
Interest Expense: Interest expense for the year ended December 31, 2002, was
$11.7 million compared to $13.3 million for the year ended December 31, 2001.
This decrease of $1.6 million, or 11.8%, is primarily attributable to reduced
amount of outstanding debt in 2002 compared to 2001, as a result of
sales-leaseback and refinancing transactions and lower interest rates on our
variable rate debt. As a percentage of total operating revenues, interest
expense decreased to 7.7% from 9.5% for the year ended December 31, 2002 and
2001, respectively, reflecting increased revenues in conjunction with lower
interest rates.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Other, net: Other, net increased by $3.5 million to $4.1 million in income for
the year ended December 31, 2002, from $581,000 income for the year ended
December 31, 2001. The amount for the year 2002 includes a $5.1 million gain
related to discounts we received upon the payoff of existing financing, offset
by certain costs related to the transaction. This gain was offset by
approximately $1.2 million in write-offs of existing loan fees related to a
sales-leaseback transaction and a refinancing transaction. 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 net gain of $1.1 million on
sale of two communities.
Preferred dividends: For the year ended December 31, 2002 and 2001, the
preferred dividends were approximately $7.3 million and $6.4 million,
respectively. As of December 31, 2002, for the previous ten quarters, we had
not declared cash dividends on our preferred stock but had 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 for both 2002 and 2001. In addition, because the board of
directors did not declare dividends on our Series A preferred stock for more
than six quarters, effective January 1, 2002, such dividends were calculated on
a compounded cumulative basis, retroactive to our last payment, until they are
paid current. Had we been required to pay the higher rate for the Series A
preferred stock, both our preferred dividends and net loss to common
shareholders would have increased $275,000 and $19,000 for 2001 and 2000,
respectively. This combined amount of $294,000 was recognized in 2002 as well
as an additional cumulative compounded dividend of $622,000 for 2002.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Same Community Comparison
Three months ended December 31, 2003, and 2002:
- ------------------------------------------------------
We operated 59 owned or leased communities on a comparable basis during both the
three months ended December 31, 2003 and 2002. 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, 2003 and 2002.
Three Months
Ended December 31,
--------------------------
Dollar % Change
2003 2002 Change Fav / (Unfav)
------------ ------------ -------- -------------
(In thousands)
Revenue . . . . . . . . . . . . . . . . . . $ 34,494 $ 33,516 $ 978 2.9%
Community operating expenses. . . . . . . . (20,442) (21,674) 1,232 5.7
------------ ------------ -------- -------------
Community operating income. . . . . . . 14,052 11,842 2,210 18.7
Depreciation & amortization . . . . . . . . (1,347) (1,572) 225 14.3
Facility lease expense. . . . . . . . . . . (7,956) (6,806) (1,150) (16.9)
------------ ------------ -------- -------------
Operating income. . . . . . . . . . . . 4,749 3,464 1,285 37.1
Interest expense, net . . . . . . . . . . . (2,209) (2,363) 154 6.5
------------ ------------ -------- -------------
Operating income after interest expense $ 2,540 $ 1,101 $ 1,439 130.7%
============ ============ ======== =============
The same communities represented $34.5 million or 57.6% of our total revenue of
$59.9 million for the fourth quarter of 2003. Same community revenues increased
by $978,000 or 2.9% for the quarter ended December 31, 2003, from the comparable
period in 2002. This was primarily due to rate increases, which increased
revenue per unit by 4.4%, partially offset by a decrease in average occupancy to
81.6% in the fourth quarter of 2003 from 82.3% in the fourth quarter of 2002.
Facility lease expense for the fourth quarter of 2003 increased primarily due to
various rent escalators related to certain leased facilities. For the quarter
ended December 31, 2003, our operating income after interest expense increased
to $2.5 million from $1.1 million for the comparable period of 2002, primarily
as a result of a combination of increased rates and decreased community
operating expenses mainly due to improvements in personnel and related costs;
taxes, licenses, and fees; insurance; and other operating expenses in 2003
compared to 2002.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Year ended December 31, 2003, and 2002:
- ---------------------------------------------
We operated 59 owned or leased communities on a comparable basis during both the
twelve months ended December 31, 2003 and 2002. The following table sets forth
a comparison of same community results of operations, excluding general and
administrative expenses, for 2003 and 2002.
Year Ended December 31,
--------------------------
Dollar % Change
2003 2002 Change Fav / (Unfav)
------------ ------------ -------- -------------
(In thousands)
Revenue . . . . . . . . . . . . . . . . . . $ 136,213 $ 130,956 $ 5,257 4.0%
Community operating expenses. . . . . . . . (82,133) (83,394) 1,261 1.5
------------ ------------ -------- -------------
Community operating income. . . . . . . 54,080 47,562 6,518 13.7
Depreciation & amortization . . . . . . . . (5,943) (6,098) 155 2.5
Facility lease expense. . . . . . . . . . . (28,844) (27,405) (1,439) (5.3)
------------ ------------ -------- -------------
Operating income. . . . . . . . . . . . 19,293 14,059 5,234 37.2
Interest expense, net . . . . . . . . . . . (9,755) (9,108) (647) (7.1)
------------ ------------ -------- -------------
Operating income after interest expense $ 9,538 $ 4,951 $ 4,587 92.6%
============ ============ ======== =============
The same communities represented $136.2 million or 65.9% of our total revenue of
$206.7 million for the year ended December 31, 2003. Same community revenues
increased by $5.3 million or 4.0% for the year ended December 31, 2003, from the
year ended December 31, 2002. The increase in revenue is attributable to our
rate enhancement program, which resulted in an increase in same community
average monthly revenue per unit to $2,715 for 2003, from $2,585 for 2002. This
is an increase of $130 or 5.0%. These results were partially offset by a
decrease in occupancy to 81.8% in 2003 from 81.9% in 2002. Facility lease
expense for the year ended December 31, 2003, increased primarily due to
variable rent escalators related to certain leased communities. For the year
ended December 31, 2003, our operating income after interest expense increased
to $9.5 million from $5.0 million for 2002, primarily as a result of a
combination of increased rates and decreased community operating expenses mainly
due to improvements in taxes, licenses, and fees; insurance; and other operating
expenses in 2003 compared to 2002.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2003, net cash provided by operating activities
was $6.4 million compared to $3.8 million for the prior year. The decrease in
net loss of $2.4 million between 2002 and 2003 was a major contributor to our
increased operating cash flow. Increases in current liabilities provided cash
of approximately $4.1 million primarily due to an increase in accounts payable
of $2.9 million and an increase in deferred revenue of $3.1 million, partially
offset by decreases in other current liabilities of $1.9 million. Net cash used
by increases in current assets were approximately $900,000, primarily from
increases in prepaid expenses.
Net cash provided by investing activities amounted to $23.0 million for the year
ended December 31, 2003, and was comprised primarily of proceeds from sale of
property and equipment of $44.8 million, proceeds from sale of investment
securities of $2.9 million, repayment of advances to affiliates of $1.5 million,
which was partially offset by management and lease acquisition costs of $12.6
million, a $7.7 million investment in Alterra, which includes transaction costs,
acquisition of property and equipment of $2.7 million, and the purchase of a
minority partner's interest of $2.5 million. Net cash provided by investing
activities amounted to $3.2 million for the year ended December 31, 2002, and
was comprised primarily of proceeds from sale of property and equipment related
to refinancing of four communities through sale/leaseback transactions, which
was partially offset by the acquisition of property, equipment, new leases, and
lease improvements.
For the year ended December 31, 2003, net cash used in financing activities was
$30.3 million primarily from the repurchase of Series A Preferred Stock for
$20.5 million, long-term debt repayments of $24.4 million, short-term debt
repayments of $2.8 million, and an increase in restricted deposits of $1.6
million, partially offset by proceeds from long-term borrowings of $19.6
million. For the year ended December 31, 2002, net cash used in financing
activities was $9.9 million primarily from short-term and long-term debt
repayments, and financing and debt issuance costs.
We have incurred significant operating losses since our inception and have a
working capital deficit of $33.4 million, although $6.1 million represents
deferred revenue and $8.2 million of preferred dividends is due only if declared
by our board of directors. In 2003, 2002, and 2001, we reported positive net
cash from operating activities in our consolidated statements of cash flows. At
times in the past, however, we have been dependent upon third party financing or
disposition of assets to fund operations and we cannot guarantee that, if
necessary in the future, such transactions will be available timely or at all,
or on terms attractive to us.
In 2002, we refinanced substantially all of our debt obligations, extending the
maturities of such financings to dates in 2005 or thereafter, at which time we
will need to refinance or otherwise repay the obligations. As a consequence of
our property acquisitions in 2003, our long-term debt has increased from $123.5
million at December 31, 2002, to $141.1 million at December 31, 2003, and our
obligations under operating leases have increased from $289.7 million to $605.0
million during the same period. In particular, the number of communities we
lease increased from 67 at December 31, 2002 to 109 at December 31, 2003. We
believe that, on the basis of the operating results of these communities (many
of which we managed) prior to the commencement of the leases, the cash flow from
such communities will be adequate to support the increased lease obligations.
Many of our 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 17 owned assisted living properties and 104 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. We expect
to be in compliance at least through 2004 and for the foreseeable future.
Management believes that we will be able to sustain positive operating cash flow
at least through 2004 and for the foreseeable future and will have adequate cash
from operations for all necessary investing and financing activities including
required debt service and capital expenditures.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The following table summarizes our contractual obligations at December 31, 2003
(In thousands):
Payments Due by Period
---------------------------------------------------------------
Less than After 5
Total 1 year 1 - 3 years 4 - 5 years years
------------ ----------- ----------- ------------- ---------
Contractual Obligations
Long-Term Debt, including current portion $ 141,138 $ 4,750 $ 75,274 $ 60,508 $ 606
Operating Leases. . . . . . . . . . . . . $ 604,953 $ 56,262 $ 113,211 $ 107,855 $327,625
Convertible Debentures. . . . . . . . . . $ 32,000 $ - $ 32,000 $ - $ -
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires us to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of tangible long-lived assets that
result from the acquisition, construction, development, and/or normal use of the
assets. We also record a corresponding asset that is depreciated over the life
of the asset. Subsequent to the initial measurement of the asset retirement
obligation, the obligation will be adjusted at the end of each period to reflect
the passage of time and changes in the estimated future cash flows underlying
the obligation. We adopted SFAS No. 143 on January 1, 2003. However, adoption
of SFAS No. 143 did not have an impact on our financial condition and results of
operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 are applied in fiscal
years beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002,
with early application encouraged. The adoption of SFAS No. 145 in the fourth
quarter of 2002 had no effect on our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Adoption of Interpretation No.
45 did not have an impact on our financial condition and results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities." This Interpretation was revised
in December 2003 and addresses consolidation by business enterprises of variable
interest entities (VIE's). A VIE is subject to the consolidation provisions of
FIN No. 46 if it cannot support its financial activities without additional
subordinated financial support from third parties or its equity investors lack
any one of the following characteristics: the ability to make decisions about
its activities through voting rights, the obligation to absorb losses of the
entity if they occur, or the right to receive residual returns of the entity if
they occur. FIN No. 46 requires a VIE to be consolidated by its primary
beneficiary. The primary beneficiary is the party that holds the variable
interests that expose it to a majority of the entity's expected losses and/or
residual returns. For purposes of determining a primary beneficiary, all
related party interests must be combined with our actual interests in the VIE.
The application of this Interpretation is immediate for VIE's created or altered
after January 31, 2003, and is effective at the end of the first quarter of 2004
for variable interest entities that existed prior to February 1, 2003.
We have evaluated the impact of FIN No. 46 on all its current related party
management agreements including those more fully discussed under Item 13
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," under sections denoted as
"Emeritrust Transactions" and "Baty Transactions" as well as other management
agreements and other arrangements with potential VIE's. We doe not believe we
have any VIE's that will require consolidation.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. For public
enterprises, like us, this statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. Management
has determined that none of our current financial instruments are covered by
this pronouncement.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 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, which may materially
differ from our actual future experience involving any one or more of such
matters and subject areas as a result of various factors, including: 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 release
publicly 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 2003, 2002,
and 2001, we recorded net losses before preferred dividends of $3.8 million,
$6.2 million, and $4.2 million, respectively. We believe that the historically
aggressive growth of our portfolio through acquisitions and developments and
related financing activities, as well as our inability (along with much of the
assisted living industry) to increase occupancy rates at our communities, were
among the causes of these losses. To date, at many of our communities, we have
been generally able to stabilize occupancy and rate structures to levels that
have resulted in positive cash flow but not earnings for the company as a whole.
Our operations may not become profitable in line with our current expectations
or may not become profitable at all.
If we cannot generate sufficient cash flow to cover required interest, principal
and lease payments, we risk defaults on our debt agreements and operating
leases. At December 31, 2003, we had total debt of $141.1 million, with minimum
principal payments of about $4.8 million due in 2004. At December 31, 2003, we
were obligated under long-term operating leases requiring minimum annual lease
payments of which $56.3 million is payable in 2004. In addition, we will have
approximately $6.4 million and $68.9 million in principal amount of debt
repayment obligations that become due in 2005 and 2006, respectively. If we are
unable to generate sufficient cash flow to make such payments as required and
are unable to renegotiate payments or obtain additional equity or debt
financing, a lender could foreclose on our communities secured by the respective
indebtedness or, in the case of an operating lease, could terminate our lease,
resulting in loss of income and asset value. In some cases, our indebtedness is
secured by a particular community and a pledge of our interests in a subsidiary
entity that owns that community. In the event of a default, a lender could
avoid judicial procedures required to foreclose on real property by foreclosing
on our pledge instead, thus accelerating its acquisition of that community.
Furthermore, because of cross-default and cross-collateralization provisions in
certain of our mortgage and sale-leaseback agreements, if we default on one of
our payment obligations, we could adversely affect a significant number of our
communities.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Because we are highly leveraged, we may not be able to respond to changing
business and economic conditions or continue with selected acquisitions. A
substantial portion of our future cash flow will be devoted to debt service and
lease payments. In the past, we have frequently been dependent on third party
financing and disposition of assets to fund these obligations in full and we may
be required to do so in the future. In addition, we are periodically required
to refinance these obligations as they mature. As a consequence of acquisitions
of communities, we have substantially increased our leverage in 2003. Our
long-term debt has increased from $123.5 million at December 31, 2002, to $141.1
million at December 31, 2003 and our obligations under operating leases have
increased from $289.7 million to $605.0 million during the same period. These
circumstances reduce our flexibility and ability to respond to our business
needs, including changing business and financial conditions such as increasing
interest rates and opportunities to expand our business through selected
acquisitions.
We may be unable to increase or stabilize our occupancy rates that would result
in positive earnings. In previous years, we have been unable to increase our
occupancy to levels that would result in net income on a sustained basis. Our
historical losses have resulted, in part, from occupancy levels that were lower
than anticipated when we acquired or developed our communities. During the last
three years, occupancy levels declined, although last year occupancy was nearly
flat, excluding the effects of acquired communities. 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.
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 failed to
comply 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 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 negligence, malpractice, or other related
legal theories. Many of these suits involve large claims and significant legal
costs. We expect that we occasionally will face such suits because of the
nature of our business. We currently maintain insurance policies with coverage
and self-insured retention (with respect to general and professional liability)
and deductibles (with respect to auto liability and property damage claims) we
deem appropriate based on the nature and risks of our business, historical
experience, industry standards, and the availability of insurance. We could
incur liability in excess of our insurance coverage or experience claims not
covered by our insurance, including punitive damages. 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, retained losses relating to high
self-insured retention 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 reposition and renovate acquired residences or turn over the
existing resident population to achieve a resident care level and income profile
that is consistent with our objectives. In the past, these obstacles have
delayed the achievement of acceptable occupancy levels and increased operating
and capital expenditures. As a consequence, we currently plan to target assisted
living communities with established 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
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
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
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 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 and Columbia-Pacific
Group, Inc. Mr. Baty, our Chief Executive Officer, is a principal shareholder,
director, and Chairman of the Board of Holiday Retirement Corporation, and is
the principal owner of Columbia-Pacific Group, Inc. 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. Columbia-Pacific and
affiliated partnerships operate assisted living communities and independent
living facilities, many of which we manage under various management agreements.
The financial interests and management and financing responsibilities of Mr.
Baty with respect to Holiday and Columbia-Pacific and their 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 and is the principal owner of Columbia-Pacific,
circumstances could arise that would distract him from our operations. Our
interests and those of Holiday and Columbia-Pacific 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 a number of entities that are owned or
controlled by Mr. Baty, whose interests with respect to these companies
occasionally may conflict with ours. We have entered into agreements, including
most of our management agreements, with a number of entities that are owned or
controlled by Mr. Baty. Under these agreements, we provide management and other
services to senior housing and assisted living communities owned by these
entities and we have material agreements with these entities relating to the
purchase, sale, and financing of a number of our operating communities. There
is a risk that the administration of these and any future arrangements could be
adversely affected by these continuing relationships because our interest and
those of Mr. Baty may not be consistent at all times.
Some of our recent transactions and the operations of certain communities that
we manage are supported financially by Mr. Baty with limited guarantees and
through his direct and indirect ownership of such communities; we would be
unable to benefit from these transactions and managed communities without this
support. Our recent transactions to lease an additional 24 communities and our
agreements to manage 24 communities involve limited guarantees by Mr. Baty and
rely on his direct and indirect ownership of the communities involved. We
believe that we would be unable to take advantage of these transactions and
management opportunities without Mr. Baty's individual and financial support.
The ongoing administration of these transactions, however, could be adversely
affected by these continuing relationships because our interests and those of
Mr. Baty may not be consistent at all times. In addition, we cannot guarantee
that such support will be available in the future.
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.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Our costs of compliance with government regulations may significantly increase
in the future. Federal, state, and local authorities heavily regulate the
healthcare industry. Regulations change frequently, and sometimes require us to
make expensive changes in our operations. A number of legislative and
regulatory initiatives relating to long-term care are proposed or under study at
both the federal and state levels that, if enacted or adopted, could adversely
affect our business and operating results. We cannot predict to what extent
legislative or regulatory initiatives will be enacted or adopted or what effect
any initiative would have on our business and operating results. Changes in
applicable laws and new interpretations of existing laws can significantly
affect our operations, as well as our revenues, particularly those from
governmental sources, and our expenses. Our residential communities are subject
to varying degrees of regulation and licensing by local and state health and
social service agencies and other regulatory authorities. While these
regulations and licensing requirements often vary significantly from state to
state, they typically address:
* fire safety,
* sanitation,
* staff training,
* staffing patterns,
* 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.
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 29, 2004, 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 61% of the voting power of
our outstanding common and preferred stock. Accordingly,
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about our financial instruments entered
into for purposes other than trading 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, 2003. For our debt obligations with variable
interest rates, the rates presented reflect the current rates in effect at the
end of 2003. These rates are based on LIBOR plus margins ranging from 4.15% to
7.75%.
Expected maturity date (In thousands)
--------------------------------------------------------
Average
Fair interest
2004 2005 2006 2007 2008 Thereafter Total value rate
------- ------- ------- ------- ------- ----------- ------- ------- ---------
Long-term debt:
Fixed rate. . $ 2,867 $ 4,611 $ 7,554 $40,412 $20,096 $ 606 $76,146 $72,248 9.90%
Variable rate $ 1,883 $ 1,806 $61,303 $ - $ - $ - $64,992 $64,992 6.27%
Our earnings are affected by changes in interest rates as a result of our
short-term and long-term borrowings. We manage this risk by obtaining fixed rate
borrowings when possible. At December 31, 2003, our variable rate borrowings
totaled approximately $65.0 million. Currently, all our variable rate borrowings
are based upon LIBOR, subject to a LIBOR floor ranging from 2.0% to 2.5%. As of
December 31, 2003, the LIBOR rates were below the floor. If LIBOR interest rates
were to average 2% more, our annual interest expense and net loss would increase
approximately $483,000 with respect to our variable rate borrowings. This amount
is determined by considering the impact of hypothetical interest rates on our
outstanding variable rate borrowings as of December 31, 2003, and does not
consider changes in the actual level of borrowings that may occur subsequent to
December 31, 2003. If LIBOR rates should increase above the floor, we will be
exposed to higher interest expense costs. 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 actions that management might be
able to take with respect to our financial structure to mitigate the exposure to
such a change.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the Independent Auditors' report are listed after
Item 15 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedure
The Company maintains a set of disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in its
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Based on their evaluation for the fourth quarter of 2003 and as of the
end of the period covered by this Annual Report on Form 10-K, the Company's
Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms.
Changes in internal controls
There were no changes during the fourth quarter in the Company's internal
control over financial reporting in connection with this evaluation that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
"Executive Officers of the Registrant" in Part I of this Form 10-K and in our
definitive Proxy Statement relating to our 2004 annual meeting of shareholders
(the "Proxy Statement") to be filed with the SEC pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to our
Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
EQUITY COMPENSATION PLAN INFORMATION
The information required by this Item is incorporated herein by reference to our
Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about our common stock that may be
issued upon the exercise of options under our existing equity compensation plans
and arrangements as of December 31, 2003, including the 1995 Stock Incentive
Plan and the Employee Stock Purchase Plan. The material terms of each of these
plans and arrangements are described in note 12 to the December 31, 2003,
consolidated financial statements.
Number of shares remaining Total of
Number of shares to be available for future issuance shares
issued upon exercise of Weighted-average exercise under equity compensation reflected in
outstanding options, price of outstanding options, plans(excluding shares columns (a)
warrants and rights warrants and rights reflected in column (a)(1) and (c)
---------------------- ------------------------------- ---------------------------- --------------
Plan Category (a) (b) (c) (d)
Equity compensation plans
approved by shareholders . . 2,151,443 $ 2.89 410,008 2,561,451
Equity compensation plans
not approved by shareholders - - - -
---------------------- ------------------------------- ---------------------------- --------------
Total. . . . . . . . . . . . 2,151,443 $ 2.89 410,008 2,561,451
====================== =============================== ============================ ==============
__________________
(1) Represents 224,025 shares available for purchase under the Employee Stock
Purchase Plan and 185,983 shares available for grant under the 1995 Stock
Incentive Plan, which includes director stock options.
43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to our
Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to our
Proxy Statement to be filed with the SEC pursuant to Regulation 14A.
44
ITEM 15. 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
and Comprehensive Operations F-7
Notes to Consolidated Financial Statements F-8
(2) FINANCIAL STATEMENT SCHEDULES.
Independent Auditors' Report on Financial Statement Schedule S-1
Schedule II Valuation and Qualifying Accounts S-2
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.
1. A report on Form 8-K (Item 2) dated October 13, 2003, was filed on
October 14, 2003, related to the acquisition of 21 communities.
2. A report on Form 8-K (Item 5 and 7) dated October 15, 2003, was filed on
October 16, 2003, related to a press release about an update to the
Alterra transaction.
3. A report on Form 8-K (Item 12) dated November 7, 2003, was furnished on
November 7, 2003, related to a press release announcing the results of
operations for the third quarter of 2003.
(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, L.L.C. ("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)
10.9 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 Voorhees, New Jersey,
Green Meadows--Allentown in Allentown, Pennsylvania, Green Meadows--Dover in Dover, Delaware,
Green Meadows--Latrobe in
45
Footnote
Number Description Number
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)
10.9.3 Amended and Restated Master Lease Agreement dated September 18, 2002, between Health Care
Property Investors, Inc., HCPI Trust, Texas HCP Holding, L.P. ("Lessor")
and Emeritus Corporation, ESC III, L.P. ("Lessee"). (27)
10.9.4 Promissory Note between Emeritus Corporation ("Maker") Health Care Property Investors, Inc. ("Lender"),
dated September 18, 2002. (27)
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)
10.13 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)
10.15 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)
46
Footnote
Number Description Number
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)
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)
10.18 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)
10.20 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
10.21.2 Partnership Interest Purchase Agreement dated June 4, 1998, between Emeritus Real Estate L.L.C. IV ("Seller")
and Columbia Pacific Master Fund 98 General Partnership ("Buyer") (Exhibit 10.3.2). (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)
10.22 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, L.L.C. ("Lessee")
dated November 1, 1996, with respect to Camlu Retirement (Exhibit 10.6.1). (4)
47
Footnote
Number Description Number
10.26.2 Management Services Agreement dated January 1, 1998, between the registrant ("Manager") and
Columbia House L.L.C. ("Lessee") with respect to York. (13)
10.26.4 Management Services Agreement dated June 1, 1997, between the registrant ("Manager") and
Columbia House L.L.C. ("Owner") with respect to Autumn Ridge (Exhibit 10.3.1). (9)
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 L.L.C. ("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 (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)
10.29 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 L.L.C.,
and LM Louisville Assisted Living L.L.C., ("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 L.L.C., ("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 L.L.C., ("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 L.L.C., ("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 L.L.C., ("Borrower") with respect to the development property in
Chelmsford (Exhibit 10.58.7). (5)
10.29.8 Real Estate Purchase and Sale Agreement under the purchase option on the lease dated January 1, 2000,
between Auburn Land L.L.C. ("Seller") and Emeritus Properties XIV, L.L.C. ("Buyer") dated August 26, 2002. (27)
10.29.9 Sublease Termination and Release Agreement between Sage Assisted Living L.L.C. ("Landlord") and
Emeritus Properties XIV, L.L.C. ("Tenant") dated August 26, 2002. (27)
10.29.10 Leasehold Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing between the registrant ("Mortgagor"), in favor of Health Care REIT, Inc("Mortgagee")
with respect to the Auburn, Massachusetts, Facility dated August 28, 2003. (32)
10.29.11 Leasehold Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing between the registrant ("Mortgagor"), in favor of Health Care REIT, Inc("Mortgagee")
with respect to the Louisville, Kentucky, Facility dated August 28, 2003. (32)
10.29.12 Leasehold Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing between the registrant ("Mortgagor"), in favor of Health Care REIT, Inc("Mortgagee")
with respect to the Rocky Hill, Connecticut, Facility dated August 28, 2003. (32)
48
Footnote
Number Description Number
10.29.13 Second Amendment to Lease Agreement between HCRI Eddy Pond Properties Trust ("Landlord")
and the Registrant ("Tenant") with respect to the Auburn, Massachusetts, Facility dated June 30, 2003. (32)
10.29.14 Second Amendment to Lease Agreement between HCRI Stone Creek Properties, LLC ("Landlord")
and the Registrant ("Tenant") with respect to the Louisville, Kentucky, Facility dated June 30, 2003. (32)
10.29.15 Second Amendment to Lease Agreement between HCRI Cold Spring Properties, LLC ("Landlord")
and the Registrant ("Tenant") with respect to the Rocky Hill, Connecticut, Facility dated June 30, 2003. (32)
10.29.16 Promissory Note in the amount of $3,100,000 dated August 28, 2003, between the registrant ("Borrower") (32)
and Health Care REIT, Inc("Lender") secured by the mortgage on the Ridgeland, Mississippi property.
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) and Raymond R. Brandstrom (Exhibit 10.6.5). (9)
10.31.2 Raymond R. Brandstrom (Exhibit 10.11.1) and Frank A. Ruffo (Exhibit 10.11.3) (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 La Casa Grande (Exhibit 10.2). (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)
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,
Emeritrust 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 L.L.C.
(Exhibit 10.46.5). (16)
10.34.6 Purchase and Sale Agreement by and between Mississippi Baptist Medical Enterprises, Inc. ("Seller"),
ESC-RIDGELAND, LLC ("Purchaser"), Emeritus Properties XI, LLC ("Emeritus XI"),
and Ridgeland Assisted Living LLC ("Company") dated September 29, 2003. (32)
49
Footnote
Number Description Number
10.34.7 Lease Agreement between HCRI Ridgeland Pointe Properties, LLC ("Landlord") and Ridgeland Assisted
Living, LLC ("Tenant") dated September 29, 2003. (32)
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)
10.38.7 Purchase and Sale Agreement between TDC Convalescent, Inc. ("Seller") and
the registrant ("Purchaser") dated March 26, 2002. (25)
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)
10.45 1998 Employee Stock Purchase Plan (Exhibit 99.2). (14)
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. ("RA L.L.C.") (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 L.L.C(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 L.L.C. (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 L.L.C. (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 L.L.C.
and AL Investors L.L.C. (Exhibit 10.66.3). (16)
10.52.4 Guaranty of Management Agreement and Shortfall Funding Agreement dated December 30, 1998,
between the registrant and AL Investors L.L.C. (Exhibit 10.66.4). (16)
10.52.5 Put and Purchase Agreement dated December 30, 1998, between Daniel R. Baty and
AL Investors L.L.C. (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 L.L.C. (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 L.L.C. (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 L.L.C. (24)
50
Footnote
Number Description Number
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 L.L.C. (24)
10.52.10 Third Amendment to Put and Purchase Agreement (AL I - Emeritrust 25 Facilities) dated January 1, 2002,
between Daniel R. Baty and AL Investors L.L.C. (24)
10.52.11 Waiver, Consent, and Amendment to Management Agreement dated May 1, 2002, (AL I-Laurel Place)
between Emeritus Management, L.L.C., the registrant, and AL I Investors, L.L.C. (25)
10.52.12 Third Amendment to Management Agreement with Option to Purchase by and among Emeritus Management
LLC ("Emeritus Management"), Emeritus Management I LP ("Texas Management"), Emeritus Corporation
("Emeritus"), and AL Investors LLC ("AL Investors"), effective June 30, 2003. (31)
10.52.13 Fourth Amendment to Management Agreement with Option to Purchase by and among Emeritus Management
LLC ("Emeritus Management"), Emeritus Management I LP ("Texas Management"), Emeritus Corporation
("Emeritus"), and AL Investors LLC ("AL Investors"), dated September 30, 2003, effective January 2, 2004. (31)
10.52.14 Side Letter to Management Agreement with Option to Purchase by and among Emeritus Management LLC
("Emeritus Management"), Emeritus Management I LP ("Texas Manager"), Emeritus Corporation
("Emeritus"), and AL Investors LLC ("AL Investors"), effective June 30, 2003. (31)
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.
and AL Investors II LLC (Exhibit 10.1.3). (17)
10.53.3 Guaranty of Management Agreement (AL II-14 Operating Facilities) dated March 26, 1999, between
the registrant and AL Investors II L.L.C. (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 L.L.C., AL Investors II L.L.C.
and AL Investors Development L.L.C. (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 L.L.C., Emeritus Management I, and AL Investors II L.L.C. (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 L.L.C.,
AL Investors II L.L.C. and AL Investors Development L.L.C. (24)
10.53.10 First Amendment to Management Agreement (AL II - 5 Development Facilities) dated January 1, 2002,
between the registrant, Emeritus Management L.L.C., and AL Investors Development L.L.C. (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 L.L.C.,
AL Investors II L.L.C., and AL Investors Development L.L.C. (24)
10.53.12 Third Amendment to Management Agreement (AL II - 14 Operating Facilities) (GMAC) dated January 1, 2002,
between the registrant, Emeritus Management L.L.C., Emeritus Management I LP, and AL Investors II L.L.C. (24)
10.53.13 Fourth Amendment to Management Agreement (AL II - 14 Operating Facilities) (GMAC) dated June 30, 2003,
between the registrant, Emeritus Management L.L.C., Emeritus Management I LP, and AL Investors II L.L.C. (31)
10.53.14 Amended and Restated Loan Agreement between Health Care REIT, Inc. ("Lender") and the registrant
("Borrower") dated September 30, 2003. (31)
10.53.15 Amended and Restated Note for $25.8 million between Health Care REIT, Inc. ("Lender") and the registrant
("Borrower") dated September 30, 2003. (31)
51
Footnote
Number Description Number
10.53.16 Amended and Restated Leasehold Mortgage/Deed of Trust, Security Agreement, Assignment of Leases and Rents,
Financing Statement and Fixture Filing by the registrant ("Trustor") and Commonwealth Land Title Insurance
Company, Mid South Title Co., Lawyers Title of Arizona, Inc., Transnation Title & Escrow, Inc., Carson Mills,
AmeriTitle, William Fairbanks, Lawyers Title Realty Services, Inc., Transnation Title Insurance Company
(collectively "Trustee") in favor of Health Care REIT, Inc. ("Beneficiary") dated September 30, 2003. (31)
10.53.17 Warrant for the Purchase of Shares of Common Stock by Emeritus Corporation ("Issuer"), for Senior Housing
Partners I, LP ("Holder") for an aggregate of 400,000 shares, dated September 30, 2003. (31)
10.53.18 Master Agreement between Owners and Emeritus Corporation Regarding Sale of AL II Assisted Living
Portfolio, dated September 30, 2003. (31)
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, L.L.C. ("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)
10.55.3 Unsecured Promissory Note in the amount of $4,400,000 dated August 28, 2003, between the registrant
("Borrower") and Health Care REIT, Inc("Lender"). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32)
10.55.4 Lease Agreement between HCRI Drum Hill Properties, LLC ("Landlord") and Emeritus Properties IX, LLC
("Tenant") dated September 29, 2003. (32)
10.55.5 Lease Agreement between HCRI Fairmont Properties, LLC ("Landlord") and Emeritus Properties XII, LLC
("Tenant") dated September 29, 2003. (32)
10.55.6 Lease Agreement between HCRI Kirkland Properties, LLC ("Landlord") and Emeritus Properties X, LLC
("Tenant") dated September 29, 2003. (32)
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 L.L.C. (Exhibit 4.5). (19)
10.62 Emerald Hills in Auburn
10.62.2 Lease agreement dated September 5, 2001, between Health Care Property Investors, Inc. ("Lessor"),
and Emeritus Corporation ("Lessee"). (24)
10.65 Loyalton of Hattiesburg in Hattiesburg, Mississippi
10.65.2 Purchase agreement for Hattiesburg between ALCO XII L.L.C. ("Seller") and the registrant ("Purchaser")
dated March 27, 2002. (25)
10.66 Loyalton of Biloxi in Biloxi, Mississippi
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)
10.68 Kingsley Place at Alexandria, Louisiana; Kingsley Place at Lake Charles, Louisiana; Kingsley Place at
Lafayette, Louisiana; Kingsley Place of Shreveport, Louisiana; Kingsley Place of Henderson, Texas;
Kingsley Place at Oakwell Farms, Texas; Kingsley Place at the Medical Center, Texas; Kingsley Place at
Stonebridge, Texas. The following agreements are representative of those executed in connection
with these properties:
10.68.1 Horizon Bay Lease Facilities Purchase Agreement between Integrated Living Communities of Alexandria, L.L.C.,
Integrated Living Communities of Lake Charles, L.L.C., Integrated Living Communities of Lafayette, L.L.C.,
Integrated Living Communities of Henderson, L.P., Integrated Living Communities of Oakwell, L.P.,
Integrated Living Communities of San Antonio, L.P., and Integrated Living Communities of McKinney, L.P.,
(collectively, the "Seller") and the registrant ("Purchaser") dated April 4, 2002. (25)
52
Footnote
Number Description Number
10.68.2 Horizon Bay Purchase Agreement between the registrant ("Purchaser") and Senior Lifestyle Shreveport, L.L.C.
("Seller"), dated April 17, 2002. (25)
10.68.3 First Amendment to the Horizon Bay Lease Facilities Purchase Agreement between the registrant ("Purchaser")
and Integrated Living Communities of Alexandria, L.L.C., Integrated Living Communities of Lake Charles,
L.L.C., Integrated Living Communities of Lafayette, L.L.C., Integrated Living Communities of Henderson, L.P.,
Integrated Living Communities of Oakwell, L.P., Integrated Living Communities of San Antonio, L.P.,
and Integrated Living Communities of McKinney, L.P., (collectively, the "Seller") dated May 1, 2002. (25)
10.68.4 First Amendment to the Horizon Bay Purchase Agreement between the registrant ("Purchaser")
and Senior Lifestyle Shreveport, L.L.C. ("Seller"), dated May 1, 2002. (25)
10.68.5 Amended and restated funding agreement between the registrant and HB-ESC I, L.L.C., HB-ESC II, L.L.C.,
and HB-ESC V, L.P., dated May 1, 2002. (25)
10.68.6 Agreement to provide management services to assisted living facilities (Lafayette) between HB-ESC II, L.P.,
and the registrant dated May 1, 2002. (25)
10.68.7 Agreement to provide management services to assisted living facilities (Lake Charles) between HB-ESC II, L.P.,
and the registrant dated May 1, 2002. (25)
10.68.8 Agreement to provide management services to assisted living facilities (Alexandria) between HB-ESC II, L.P.,
and the registrant dated May 1, 2002. (25)
10.68.9 Agreement to provide management services to assisted living facilities (Shreveport) between HB-ESC I, L.P.,
and the registrant dated May 1, 2002. (25)
10.68.10 Agreement to provide management services to assisted living facilities (Henderson) between HB-ESC V, L.P.,
and the registrant dated May 9, 2002. (25)
10.68.11 Agreement to provide management services to assisted living facilities (Medical Center) between
HB-ESC V, L.P., and the registrant dated May 9, 2002. (25)
10.68.12 Agreement to provide management services to assisted living facilities (Oakwell Farms) between
HB-ESC V, L.P., and the registrant dated May 9, 2002. (25)
10.68.13 Agreement to provide management services to assisted living facilities (Stonebridge) between
HB-ESC V, L.P., and the registrant dated May 9, 2002. (25)
10.68.14 Second Amendment to the Horizon Bay Purchase Agreement between the registrant ("Purchaser")
and Senior Lifestyle Shreveport, L.L.C. ("Seller"), dated May 31, 2002. (25)
10.68.15 Third Amendment to the Horizon Bay Purchase Agreement between the registrant ("Purchaser")
and Senior Lifestyle Shreveport, L.L.C. ("Seller"), dated June 14, 2002. (25)
10.68.16 Fourth Amendment to the Horizon Bay Purchase Agreement between the registrant ("Purchaser")
and Senior Lifestyle Shreveport, L.L.C. ("Seller"), dated June 28, 2002. (25)
10.68.17 Termination of Amended and Restated Funding Agreement by and between Emeritus Corporation ("Emeritus")
and HB-ESC I, LLC, HB-ESC II, LLC, and HB-ESC V, LP (collectively "HB Entities") effective June 30, 2003. (31)
10.68.18 Global Amendment to Management Agreements by and between Emeritus Corporation ("Emeritus") and
HB-ESC I, LLC, HB-ESC II, LLC, HB-ESC IV, LP, and HB-ESC V, LP (collectively "HB Licenses")
effective June 30, 2003. (31)
10.68.19 Assignment and assumption of leases by and among HB-ESCII, LLC ("Assignor"), Emeritus Corporation,
("Assignee"), and Daniel R. Baty, ("Guarantor"), dated December 31, 2003. (33)
10.68.20 Assignment and assumption of lease agreement (KP Stonebridge) by and among HB-ESC V, L.P., ("Assignor"),
ESC IV, L.P., doing business in Texas as Texas-ESC IV, L.P. ("Assignee"), EMERITUS CORPORATION,
("Emeritus"), DANIEL R. BATY, ("Existing Guarantor"), and HR ACQUISITION OF SAN ANTONIO, LTD.,
formerly known as Capstone Capital of San Antonio, Ltd., d/b/a Cahaba of San Antonio, Ltd. ("Lessor"),
dated December 31, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33)
10.68.21 Assignment and assumption of lease agreement (KP Henderson) by and among HB-ESC V, L.P., ("Assignor"),
ESC IV, L.P., doing business in Texas as Texas-ESC IV, L.P. ("Assignee"), EMERITUS CORPORATION,
("Emeritus"), DANIEL R. BATY, ("Existing Guarantor"), and HR ACQUISITION OF SAN ANTONIO, LTD.,
formerly known as Capstone Capital of San Antonio, Ltd., d/b/a Cahaba of San Antonio, Ltd. ("Lessor"),
dated December 31, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . (33)
10.68.22 Assignment and assumption of lease agreement (KP Medical) by and among HB-ESC V, L.P., ("Assignor"),
ESC IV, L.P., doing business in Texas as Texas-ESC IV, L.P. ("Assignee"), EMERITUS CORPORATION,
("Emeritus"), DANIEL R. BATY, ("Existing Guarantor"), and HR ACQUISITION OF SAN ANTONIO, LTD.,
formerly known as Capstone Capital of San Antonio, Ltd., d/b/a Cahaba of San Antonio, Ltd. ("Lessor"),
dated December 31, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. (33)
53
Footnote
Number Description Number
10.68.23 Assignment and assumption of lease agreement (KP Oakwell) by and among HB-ESC V, L.P., ("Assignor"),
ESC IV, L.P., doing business in Texas as Texas-ESC IV, L.P. ("Assignee"), EMERITUS CORPORATION,
("Emeritus"), DANIEL R. BATY, ("Existing Guarantor"), and HR ACQUISITION OF SAN ANTONIO, LTD.,
formerly known as Capstone Capital of San Antonio, Ltd., d/b/a Cahaba of San Antonio, Ltd. ("Lessor"),
dated December 31, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33)
10.68.24 Master Lease Agreement between HB-ESC I, LLC ("Landlord"), and Emeritus Corporation ("Tenant")
dated December 31, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . (36)
10.71 Lodge at Eddy Pond, Massachusetts. The following agreements are representative of those executed
in connection with the property:
10.71.1 Loan Agreement between Heller Healthcare Finance, Inc. ("Lender") and Emeritus Properties XIV, L.L.C.
("Borrower") dated August 26, 2002. (27)
10.71.2 Promissory Note A between Heller Healthcare Finance, Inc. ("Holder") and Emeritus Properties XIV, L.L.C.
("Maker") dated August 26, 2002. (27)
10.71.3 Subordinate Promissory Note B between Heller Healthcare Finance, Inc. ("Holder") and Emeritus Properties
XIV, L.L.C. ("Maker") dated August 26, 2002. (27)
10.71.4 Real Property Mortgage with Power of Sale and Security Agreement (Massachusetts) dated August 21, 2002. (27)
10.71.5 Collateral Assignment of Management Agreement and Waiver of Property Management and
Broker Liens dated August 26, 2002. (27)
10.71.6 Guaranty by registrant ("Guarantor") to Heller Healthcare Finance, Inc. ("Lender") dated August 26, 2002. (27)
10.71.7 Lease and Rent Assignment Agreement between Emeritus Properties XIV, L.L.C. ("Assignor")
to Heller Healthcare Finance, Inc. ("Assignee") dated August 21, 2002. (27)
10.71.8 Side Letter regarding Deutsche Bank Refinancing and the registrants intent on refinancing with
Heller Healthcare Finance, Inc. ("Lender") dated August 26, 2002. (27)
10.71.9 Senior Housing Rider between Emeritus Properties XIV, L.L.C. ("Borrower"), Emeritus Corporation
("Manager") and Heller Healthcare Finance, Inc. ("Lender") dated August 26, 2002. (27)
10.71.10 Hazardous Materials Indemnity Agreement between Emeritus Properties XIV, L.L.C. ("Borrower"),
Emeritus Corporation ("Guarantor") and Heller Healthcare Finance, Inc. ("Lender") dated August 26, 2002. (27)
10.72 Champion Oaks, Texas, Collin Oaks, Texas, Galleria Oaks, Alabama, Loyalton of Austin, Texas,
Loyalton of Lake Highlands, Texas, Memorial Oaks, Texas, Meridian Oaks, Indiana, Sugar Land Oaks, Texas,
Tanglewood Oaks, Texas, Woodbridge Estates, Texas, Village Oaks at Chandler, Arizona, Cielo Vista, Texas,
Conway, Florida, Farmers Branch, Texas, Fort Wayne, Indiana, Glendale, Arizona, Greenwood, Indiana,
Hollywood Park, Texas, Las Vegas, Nevada, Melbourne, Florida, Mesa, Arizona, Orange Park, Florida,
Southpoint, Florida, Tuskawilla, Florida. The following agreements are representative of those executed
in connection with the properties:
10.72.1 Master Lease Agreement between various subsidiaries and affiliates of Fretus Investors L.L.C. ("Landlord")
and Emeritus Properties-NGH, L.L.C. and ESC-NGH, L.P. ("Tenant") dated October 1, 2002. (26)
10.73 Concorde, Nevada, Courtyard at the Willows, Washington, Fulton Villa, California, Juniper Meadows, Idaho,
La Casa Grande, Florida , Lodge at Eddy Pond, Massachusetts, River Oaks, Florida, Silver Pines, Iowa ,
Springmeadows, Montana, Stanford Centre, Florida, Villa del Rey, California. The following agreements
are representative of those executed in connection with these properties:
10.73.1 Master Lease by Emeritus Realty II, LLC, Emeritus Realty III, LLC, Emeritus Realty V, LLC,
Emeritus Realty VII, LLC, Emeritus Realty XIV, LLC, Emeritus Realty Puyallup, LLC,
Emeritus Realty Bozeman, LLC, ESC-Port St. Richie, LLC, (collectively "Lessor") and Emeritus Corporation,
Emeritus Properties II, Inc., Emeritus Properties III, Inc., Emeritus Properties V, Inc., Emeritus Properties
XIV, LLC, ESC-New Port Richey, LLC, ESC-Bozeman, LLC, dated December 6, 2002. (28)
10.73.2 Loan Agreement by and between General Electric Capital Corporation, a Delaware corporation, and
Emeritus Realty II, LLC, Emeritus Realty III, LLC, Emeritus Realty V, LLC, Emeritus Realty VII, LLC,
Emeritus Realty XIV, LLC, Emeritus Realty Bozeman, LLC, Emeritus Realty Puyallup, LLC,
ESC-Port St. Richie. LLC, dated December 6, 2002. (28)
10.73.3 Promissory Note A by Emeritus Realty II, LLC, Emeritus Realty III, LLC, Emeritus Realty V, LLC,
Emeritus Realty VII, LLC, Emeritus Realty XIV, LLC, Emeritus Realty Bozeman, LLC, Emeritus Realty
Puyallup, LLC, ESC-Port St. Richie. LLC, to General Electric Capital Corporation, a Delaware corporation,
dated December 6, 2002. (28)
10.73.4 Subordinated Promissory Note B by ESC-Port St. Richie, LLC, a Washington limited liability company,
to General Electric Capital Corporation, dated December 6, 2002. (28)
54
Footnote
Number Description Number
10.73.5 Loan Agreement by and between Emeritus Realty Corporation, a Nevada corporation and
Health Care Property Investors, Inc., a Maryland corporation, dated December 6, 2002. (28)
10.73.6 Promissory Note by Emeritus Realty Corporation, a Nevada corporation, to Health Care Property investors,
Inc., a Maryland corporation, dated December 6, 2002. (28)
10.74 Hearthside Issaquah, Washington. The following agreements are representative of those executed
in connection with these properties:
10.74.1 Second Amendment to Loan Agreement by and between Emeritus Properties XIII, LLC ("Borrower") and
GMAC Commercial Mortgage Corporation, ("Lender") dated January 29, 2003. (28)
10.74.2 Restatement, Amendment, and Bifurcation of Promissory Note A between Emeritus Properties XIII, LLC
("Borrower"), and GMAC Commercial Mortgage Corporation ("Lender") dated January 29, 2003. (28)
10.74.3 Restatement, Amendment, and Bifurcation of Promissory Note B between Emeritus Properties XIII, LLC
("Borrower"), and GMAC Commercial Mortgage Corporation ("Lender") dated January 29, 2003. (28)
10.74.4 Amendment to Promissory Note between M&M Properties ("Holder") and Emeritus Corporation and
Emeritus Properties XIII, LLC ("Maker") dated January 29, 2003. (28)
10.75 Loyalton of Bloomsburg, Pennsylvania; Loyalton of Creekview, Pennsylvania; Loyalton of Harrisburg,
Pennsylvania; Loyalton of Danville, Virginia; Loyalton of Harrisonburg, Virginia; Loyalton of Roanoke,
Virginia; Loyalton of Greensboro, North Carolina; Loyalton of Ravenna, Ohio. The following agreements
are representative of those executed in connection with these properties:
10.75.1 Lease Agreement by HR Acquisition I Corporation ("Tenant"), Capstone Capital of Pennsylvania, Inc.,
and HRT Holdings, Inc. (collectively the "Lessor") and Emeritus Corporation ("Lessee") dated May 1, 2003. (29)
10.75.2 Promissory Note by Emeritus Corporation ("Maker"), for HR ACQUISITION I CORPORATION ("Payee")
for principal amount of $600,000.00 dated May 1, 2003. (29)
10.75.3 Bill of Sale, Blanket Conveyance and Assignment by BCC at Bloomsburg, Inc. ("Tenant") and
BCC Development and Management Co. ("Manager") to and for the benefit of Capstone Capital of
Pennsylvania, Inc. ("HCRT Assignee") and Emeritus Corporation ("Emeritus Assignee") dated May 1, 2003. (29)
10.75.4 Bill of Sale, Blanket Conveyance and Assignment by ALCO VI, LLC ("Tenant") and Balance Care at
Mechanicsburg, Inc. ("Manager") to and for the benefit of Capstone Capital of Pennsylvania, Inc.
("HCRT Assignee") and Emeritus Corporation ("Emeritus Assignee") dated May 1, 2003. (29)
10.75.5 Bill of Sale, Blanket Conveyance and Assignment by Extended Care Operators of Harrisburg, LLC ("Tenant")
and BCC at Harrisburg, Inc. ("Manager") to and for the benefit of Capstone Capital of Pennsylvania, Inc.
("HCRT Assignee") and Emeritus Corporation ("Emeritus Assignee") dated May 1, 2003. (29)
10.75.6 Bill of Sale, Blanket Conveyance and Assignment by ALCO XI, LLC ("Tenant") and BCC at Danville, Inc.
("Manager") to and for the benefit of HRT Holdings, Inc. ("HCRT Assignee") and Emeritus Corporation
("Emeritus Assignee") dated May 1, 2003. (29)
10.75.7 Bill of Sale, Blanket Conveyance and Assignment by ALCO IX, LLC ("Tenant") and BCC at Harrisonburg, Inc.
("Manager") to and for the benefit of HRT Holdings, Inc. ("HCRT Assignee") and Emeritus Corporation
("Emeritus Assignee") dated May 1, 2003. (29)
10.75.8 Bill of Sale, Blanket Conveyance and Assignment by ALCO X, LLC ("Tenant") and BCC at Roanoke, Inc.
("Manager") to and for the benefit of HRT Holdings, Inc. ("HCRT Assignee") and Emeritus Corporation
("Emeritus Assignee") dated May 1, 2003. (29)
10.75.9 Bill of Sale, Blanket Conveyance and Assignment by Extended Care Operators of Greensboro, LLC ("Tenant")
and BCC at Greensboro, Inc. ("Manager") to and for the benefit of HR Acquisition I Corporation
("HCRT Assignee") and Emeritus Corporation ("Emeritus Assignee") dated May 1, 2003. (29)
10.75.10 Bill of Sale, Blanket Conveyance and Assignment by Extended Care Operators of Ravenna, LLC ("Tenant")
and BCC at Ravenna, Inc. ("Manager") to and for the benefit of HR Acquisition I Corporation
("HCRT Assignee") and Emeritus Corporation ("Emeritus Assignee") dated May 1, 2003. (29)
10.75.11 Operations and Transfer Agreement by and among BCC at Bloomsburg, Inc. ("Tenant"), BCC Development
and Management Co. ("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation
("New Operator") and Capstone Capital of Pennsylvania, Inc. ("Owner") dated April 30, 2003. . . . . .. . . . . (29)
10.75.12 Operations and Transfer Agreement by and among ALCO VI, LLC ("Tenant"), Balanced Care at
Mechanicsburg, Inc. ("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation
("New Operator") and Capstone Capital of Pennsylvania, Inc. ("Owner") dated April 30, 2003. . . . . . . . . . (29)
10.75.13 Operations and Transfer Agreement by and among Extended Care Operators of Harrisburg, LLC ("Tenant"),
BCC at Harrisburg, Inc. ("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation
("New Operator") and HR Acquisition I Corporation ("Owner") dated April 30, 2003. . . .. . . . . . . . . . . . (29)
55
Footnote
Number Description Number
10.75.14 Operations and Transfer Agreement by and among ALCO XI, LLC ("Tenant"), BCC at Danville, Inc.
("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation ("New Operator") and
HRT Holdings, Inc. ("Owner") dated April 30, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.15 Operations and Transfer Agreement by and among ALCO IX, LLC ("Tenant"), BCC at Harrisonburg, Inc.
("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation ("New Operator") and
HRT Holdings, Inc. ("Owner") dated April 30, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.16 Operations and Transfer Agreement by and among ALCO X, LLC ("Tenant"), BCC at Roanoke, Inc.
("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation ("New Operator") and
HRT Holdings, Inc. ("Owner") dated April 30, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.17 Operations and Transfer Agreement by and among Extended Care Operators of Greensboro, LLC ("Tenant"),
BCC at Greensboro, Inc. ("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation
("New Operator") and HR Acquisition I Corporation ("Owner") dated April 30, 2003. . . . . . . . . . . . . . . (29)
10.75.18 Operations and Transfer Agreement by and among Extended Care Operators of Ravenna, LLC ("Tenant"),
BCC at Ravenna, Inc. ("Manager") and Balanced Care Corporation ("Parent") and Emeritus Corporation
("New Operator") and HR Acquisition I Corporation ("Owner") dated April 30, 2003. . . . . . . . . . . . . . . (29)
10.75.19 Assignment and Assumption Agreement by and among BCC at Bloomsburg, Inc. (the "Tenant"),
BCC Development and Management Co. ("Manager") and Emeritus Corporation (the "Assignee")
dated April 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . (29)
10.75.20 Assignment and Assumption Agreement by and among ALCO VI, LLC (the "Tenant"), Balanced Care at
Mechanicsburg, Inc. ("Manager") and Emeritus Corporation (the "Assignee") dated April 30, 2003. . . . .. . . . (29)
10.75.21 Assignment and Assumption Agreement by and among Extended Care Operators of Harrisburg, LLC
(the "Tenant"), BCC at Harrisburg, Inc. ("Manager") and Emeritus Corporation (the "Assignee")
dated April 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.22 Assignment and Assumption Agreement by and among ALCO XI, LLC (the "Tenant"), BCC at Danville, Inc.
("Manager") and Emeritus Corporation (the "Assignee") dated April 30, 2003.. . . . . . . . . . . . . . . . . . (29)
10.75.23 Assignment and Assumption Agreement by and among ALCO IX, LLC (the "Tenant"), BCC at
Harrisonburg, Inc. ("Manager") and Emeritus Corporation (the "Assignee") dated April 30, 2003.. . . . . . . . (29)
10.75.24 Assignment and Assumption Agreement by and among ALCO X, LLC (the "Tenant"), BCC at Roanoke, Inc.
("Manager") and Emeritus Corporation (the "Assignee") dated April 30, 2003. . . . . . . . . . . . . . . . . . (29)
10.75.25 Assignment and Assumption Agreement by and among Extended Care Operators of Greensboro, LLC
(the "Tenant"), BCC at Greensboro, Inc. ("Manager") and Emeritus Corporation (the "Assignee")
dated April 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.26 Assignment and Assumption Agreement by and among Extended Care Operators of Ravenna, LLC
(the "Tenant"), BCC at Ravenna, Inc. ("Manager") and Emeritus Corporation (the "Assignee")
dated April 30, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.27 Leasehold Mortgage with Security Agreement and Assignment of Rents for location: Bloomsburg,
Pennsylvania, by Emeritus Corporation ("Mortgagor"), for the benefit of Capstone Capital of
Pennsylvania, Inc.("Mortgagee"), dated May 1, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.28 Leasehold Mortgage with Security Agreement and Assignment of Rents for location: Mechanicsburg,
Pennsylvania, by Emeritus Corporation ("Mortgagor"), for the benefit of Capstone Capital of
Pennsylvania, Inc.("Mortgagee"), dated May 1, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.29 Leasehold Mortgage with Security Agreement and Assignment of Rents for location: Harrisburg, Pennsylvania,
by Emeritus Corporation ("Mortgagor"), for the benefit of Capstone Capital of Pennsylvania, Inc.
("Mortgagee"), dated May 1, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.30 Leasehold Deed of Trust with Security Agreement and Assignment of Rents for location: Danville, Virginia, by
Emeritus Corporation ("Grantor"), for the benefit of HRT Holdings, Inc.("Beneficiary"), dated May 1, 2003. . . (29)
10.75.31 Leasehold Deed of Trust with Security Agreement and Assignment of Rents for location: Harrisonburg, Virginia,
by Emeritus Corporation ("Grantor"), for the benefit of HRT Holdings, Inc.("Beneficiary"), dated May 1, 2003 . (29)
10.75.32 Leasehold Deed of Trust with Security Agreement and Assignment of Rents for location: Roanoke, Virginia,
by Emeritus Corporation ("Grantor"), for the benefit of HRT Holdings, Inc.("Beneficiary"), dated May 1, 2003 . (29)
10.75.33 Leasehold Deed of Trust with Security Agreement and Assignment of Rents for location: Greensboro,
North Carolina, by Emeritus Corporation ("Grantor"), for the benefit of HR Acquisition I Corporation
("Beneficiary"), dated May 1, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.75.34 Leasehold Deed of Trust with Security Agreement and Assignment of Rents for location: Ravenna, Ohio,
by Emeritus Corporation ("Grantor"), for the benefit of HR Acquisition I Corporation ("Beneficiary"),
dated May 1, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29)
10.76 Emeritus Oaks of Silverdale, Washington. The following agreements are representative of those executed
in connection with this property:
10.76.1 Lease Agreement by WASHINGTON LESSOR SILVERDALE, INC., ("Lessor"), and ESC-Silverdale, LLC,
("Lessee") dated August 15, 2003, effective November 1, 2003. (36)
10.76.2 Guaranty given by Emeritus Corporation ("Guarantor"), in favor of WASHINGTON LESSOR - SILVERDALE,
INC., ("Lessor") dated August 15, 2003. (36)
56
Footnote
Number Description Number
10.77 The Palms at Loma Linda, California, The Springs at Oceanside, California, The Fairways of Augusta, Kansas,
Liberal Springs, Kansas, Loyalton of Broadmoor, Colorado. The following agreements are representative
of those executed in connection with this property:
10.77.1 Loan Assumption Agreement by and between LaSalle Bank National Association, formerly known as
LaSalle National Bank as Trustee for GMAC commercial Mortgage Pass-through certificates, series 1998-C2.
("Lendor"), ALS Financing Inc. ("Borrower"), Emeritus Properties XVI, Inc. ("Purchaser"), Alterra
Healthcare Corporation ("Alterra"), and Emeritus Corporation ("New Indemnitor"),
dated December 31, 2003, effective January 1, 2004. (34)
10.77.2 Assumption by Emeritus Properties XVI, Inc., ("New Borrower"), of $25,000,000 Loan (the "Loan")
originally made by GMAC Commercial Mortgage Corporation, ("Original Lender"), to ALS Financing, Inc.,
a Kansas corporation ("Existing Borrower"), pursuant to that certain Loan Agreement, dated as of
June 30, 1998, by and between Original Lender and Existing Borrower (the "Loan Agreement"), which Loan
is evidenced by that certain Promissory Note, dated July 30, 1998, and made by Existing Borrower payable to
the order of Original Lender in the stated principal amount of $25,000,000 (the "Note"), is secured by
certain security instruments (collectively, the "Security Instruments"; and the Loan Agreement, the Note, and
the Security Instruments, together with any and all other instruments and documents evidencing, securing, or
otherwise pertaining to the Loan are hereinafter referred to collectively as the "Loan Documents")
encumbering five assisted living facilities located in Kansas, Colorado, and California
(collectively, the "Projects"), and is now owned and held by LaSalle Bank National Association,
formerly known as LaSalle National Bank, as Trustee for GMAC Commercial Mortgage Securities, Inc.,
Commercial Mortgage Pass-Through Certificates, Series 1998-C2 ("Lender"), dated December 31, 2003. . . . . .. (35)
10.77.3 Assignment, Amendment and Restatement of Lease Agreement by and between ALS FINANCING, INC.,
("ALS"), EMERITUS PROPERTIES XVI, INC. ("Emeritus XVI") and ALTERRA HEALTHCARE
CORPORATION ("Alterra") dated December 31, 2003.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35)
10.77.4 CONVEYANCE AND OPERATIONS TRANSFER AGREEMENT (the "Agreement") by and among
ALS FINANCING, INC., (the "Seller"), ALTERRA HEALTHCARE CORPORATION, ("Alterra"), and
EMERITUS PROPERTIES XVI, INC., (the "Purchaser") is made and entered into as of the 31st day of
December, 2003 (the "Execution Date"). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35)
10.77.5 UNCONDITIONAL GUARANTY OF PAYMENT AND PERFORMANCE (this "Guaranty"), by
EMERITUS CORPORATION, a Washington corporation ("Guarantor"), in favor of LASALLE BANK
NATIONAL ASSOCIATION, FORMERLY KNOWN AS LASALLE NATIONAL BANK, AS TRUSTEE FOR
GMAC COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-C2 ("Lender")
is made as of the 31st day of December, 2003, and is effective as of January 1, 2004. . . . . . . . . . . . . (35)
10.78 Royalton Court Kent, Washington. The following agreements are representative of those executed in
connection with this property:
10.78.1 Agreement to provide management services to assisted living facility by and between Royalton/Kent, LLC,
("Licensee") and Emeritus Corporation, ("Manager") dated February 16, 2003. . . . . . . . . . . . . . . . . . (36)
21.1 Subsidiaries of the registrant. (36)
23.1 Consent of KPMG LLP. (36)
31.1 Certification of Periodic Reports
31.1.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for Daniel R. Baty dated March 29, 2004. (36)
31.1.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for Raymond R. Brandstrom dated March 29, 2004. (36)
32.1 Certification of Periodic Reports
32.1.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for Daniel R. Baty dated March 29, 2004. (36)
32.1.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 for Raymond R. Brandstrom dated March 29, 2004. (36)
99.1 Press Releases
99.1.1 Press Release dated March 4, 2004, reports on fourth quarter and year 2003 results. (35)
(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.
57
(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) 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, 2002.
(25) 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, 2002.
(26) Incorporated by reference to the indicated exhibit filed with the Company's
Form 8-K (File No. 1-14012) on October 15, 2002.
(27) 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 8, 2002.
(28) Incorporated by reference to the indicated exhibit filed with the Company's
Annual Report on Form 10-K (File No. 1-14012) on March 27, 2003.
(29) 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 9, 2003.
(30) 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 8, 2003.
(31) Incorporated by reference to the indicated exhibit filed with the Company's
Form 8-K (File No. 1-14012) on October 14, 2003.
(32) 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 7, 2003.
(33) Incorporated by reference to the indicated exhibit filed with the Company's
Form 8-K (File No. 1-14012) on January 14, 2004.
(34) Incorporated by reference to the indicated exhibit filed with the Company's
Form 8-K (File No. 1-14012) on January 14, 2004.
(35) Incorporated by reference to the indicated exhibit filed with the Company's
Form 8-K (File No. 1-14012) dated March 4, 2004, filed on March 5, 2004.
(36) Filed herewith.
58
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.
Dated: March 29, 2004
Emeritus Corporation
(REGISTRANT)
BY: /S/ RAYMOND R. BRANDSTROM
---------------------------------
NAME: RAYMOND R. BRANDSTROM
------------------------------
TITLE: VICE PRESIDENT OF FINANCE,
SECRETARY, AND CHIEF FINANCIAL
OFFICER
Signature. . . . . . . . . . Title Date
---------------------------- --------------------------- ---------------------
/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, and Chief Financial
Officer
/s/ Patrick Carter . . . . Director
----------------------------
Patrick Carter
/s/ Charles P. Durkin. . . Director
----------------------------
Charles P. Durkin
/s/ David W. Niemiec . . . Director
----------------------------
David W. Niemiec
59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001 F-5
Consolidated Statements of Shareholders' Deficit and
Comprehensive Operations for the years ended
December 31, 2003, 2002, and 2001 F-7
Notes to Consolidated Financial Statements F-8
Independent Auditors' Report on Financial Statement Schedule S-1
Schedule II--Valuation and Qualifying Accounts S-2
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Emeritus Corporation
We have audited the consolidated balance sheets of Emeritus Corporation and
subsidiaries ("the Company") as of December 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' deficit and comprehensive
operations, and cash flows for each of the years in the three-year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
Seattle, Washington
March 5, 2004
F-2
EMERITUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31, December 31,
2003 2002
-------------- --------------
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,368 $ 7,301
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,759
Trade accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,769 1,647
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,961 3,645
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 6,663 5,217
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,761 20,569
-------------- --------------
Long-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,678 -
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,546 119,583
Property held for development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254 1,254
Notes receivable from and investments in affiliates. . . . . . . . . . . . . . . . . . . . . . 2,409 6,358
Restricted deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,306 5,555
Lease acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,052 6,081
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,581 3,759
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 178,587 $ 163,159
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,750 $ 3,604
Trade accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,774 3,108
Accrued employee compensation and benefits. . . . . . . . . . . . . . . . . . . . . . . . . . 5,885 5,355
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,888 1,737
Accrued real estate taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,702 2,463
Accrued dividends on preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,228 13,457
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,941 9,080
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,075 2,884
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,879 5,366
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,122 47,054
-------------- --------------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,388 119,887
Convertible debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 32,000
Deferred gain on sale of communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,389 20,324
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 2,508
Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 894
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257,681 222,667
-------------- --------------
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 558
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 25,000
Commitments and contingencies
Shareholders' Deficit:
Preferred stock, $.0001 par value. Authorized 5,000,000 shares.
Series B, Authorized 70,000 shares; issued and outstanding 34,830 and 33,473 at
December 31, 2003, and December 31, 2002, respectively . . . . . . . . . . . . . . . . . . - -
Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and outstanding
10,297,449 and 10,247,226 shares at December 31, 2003, and December 31, 2002, respectively 1 1
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,703 68,944
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1,247
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150,798) (155,258)
-------------- --------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,094) (85,066)
-------------- --------------
Total liabilities and shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . . . . $ 178,587 $ 163,159
============== ==============
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,
-------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Revenues:
Community revenue. . . . . . . . . . . . . . . . $ 191,979 $ 137,662 $ 129,561
Other service fees . . . . . . . . . . . . . . . 4,435 4,575 2,291
Management fees. . . . . . . . . . . . . . . . . 10,243 10,892 8,725
--------------- --------------- ---------------
Total operating revenues . . . . . . . . 206,657 153,129 140,577
--------------- --------------- ---------------
Expenses:
Community operations . . . . . . . . . . . . . . 127,290 93,822 80,829
General and administrative . . . . . . . . . . . 24,041 21,112 17,864
Depreciation and amortization. . . . . . . . . . 7,336 7,223 7,260
Facility lease expense . . . . . . . . . . . . . 41,043 29,975 27,123
--------------- --------------- ---------------
Total operating expenses . . . . . . . . 199,710 152,132 133,076
--------------- --------------- ---------------
Income from operations . . . . . . . . . 6,947 997 7,501
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . 666 403 980
Interest expense . . . . . . . . . . . . . . . . (13,144) (11,728) (13,296)
Other, net . . . . . . . . . . . . . . . . . . . 2,124 4,105 581
--------------- --------------- ---------------
Net other expense. . . . . . . . . . . . (10,354) (7,220) (11,735)
--------------- --------------- ---------------
Loss before income taxes . . . . . . . . (3,407) (6,223) (4,234)
Provision for income taxes . . . . . . . (418) - -
--------------- --------------- ---------------
Net loss . . . . . . . . . . . . . . . . (3,825) (6,223) (4,234)
Preferred stock dividends. . . . . . . . . . . . . (6,238) (7,343) (6,368)
Gain on repurchase of Series A preferred stock . . 14,523 - -
--------------- --------------- ---------------
Net income (loss) to common shareholders $ 4,460 $ (13,566) $ (10,602)
=============== =============== ===============
Income (loss) per common share:
Basic. . . . . . . . . . . . . . . . . . . . . $ 0.43 $ (1.33) $ (1.04)
=============== =============== ===============
Diluted. . . . . . . . . . . . . . . . . . . . $ 0.39 $ (1.33) $ (1.04)
=============== =============== ===============
Weighted average common shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . 10,255 10,207 10,162
=============== =============== ===============
Diluted. . . . . . . . . . . . . . . . . . . . 11,521 10,207 10,162
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-4
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
----------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (3,825) $ (6,223) $ (4,234)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . 7,336 7,223 7,260
Amortization of deferred gain. . . . . . . . . . . . . . . (1,073) (320) (221)
Gain on refinancings and sale of properties, net . . . . . - (4,544) (1,392)
Impairment of long-lived asset . . . . . . . . . . . . . . 950 - -
Gain on sale of investment securities. . . . . . . . . . . (1,437) - -
Write down of lease acquisition costs. . . . . . . . . . . 25 262 835
Write down of loan fees and amortization . . . . . . . . . 896 381 -
Write off of deferred gain . . . . . . . . . . . . . . . . - 265 -
Provision for doubtful accounts. . . . . . . . . . . . . . (30) (71) 466
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 345 364 894
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable. . . . . . . . . . . . . . . . . (456) (404) 179
Other receivables. . . . . . . . . . . . . . . . . . . . . 559 (404) -
Prepaid expenses and other current assets. . . . . . . . . (1,055) (2,545) 265
Trade accounts payable . . . . . . . . . . . . . . . . . . 2,890 1,003 (1,038)
Accrued employee compensation and benefits . . . . . . . . (772) 2,054 852
Accrued interest . . . . . . . . . . . . . . . . . . . . . 173 (1,259) (130)
Accrued real estate taxes. . . . . . . . . . . . . . . . . (866) 1,048 (391)
Other accrued expenses . . . . . . . . . . . . . . . . . . 928 (33) (531)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 3,171 2,884 -
Other current liabilities. . . . . . . . . . . . . . . . . (808) 3,428 867
Security deposits and other long-term liabilities. . . . . (553) 627 14
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . (26) 104 272
-------------- -------------- --------------
Net cash provided by operating activities. . . . . . 6,372 3,840 3,967
-------------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . . . (2,738) (11,698) (1,429)
Purchase of minority partner interest. . . . . . . . . . . . (2,500) (3,070) -
Sale of property and equipment . . . . . . . . . . . . . . . 44,800 25,010 2,350
Construction expenditures - leased properties. . . . . . . . (382) (1,154) (694)
Proceeds from sale of investment securities. . . . . . . . . 2,949 - -
Management and lease acquisition costs . . . . . . . . . . . (12,587) (2,229) (416)
Advances to affiliates and other managed communities . . . . 1,469 (941) 2,699
Proceeds from sales of interest in affiliates. . . . . . . . - 750 -
Investment in Alterra. . . . . . . . . . . . . . . . . . . . (7,678) - -
Investment in affiliates . . . . . . . . . . . . . . . . . . (79) (2,971) -
Distributions to minority partners . . . . . . . . . . . . . (250) (500) -
-------------- -------------- --------------
Net cash provided by investing activities. . . . . . 23,004 3,197 2,510
-------------- -------------- --------------
Cash flows from financing activities:
Decrease (increase) in restricted deposits . . . . . . . . . (1,636) (35) 748
Repayment of short-term borrowings . . . . . . . . . . . . . (2,791) (2,210) (1,650)
Debt issue and other financing costs . . . . . . . . . . . . (578) (3,374) -
Repurchase of Series A preferred stock . . . . . . . . . . . (20,524) - -
Proceeds from long-term borrowings . . . . . . . . . . . . . 19,600 120,838 145
Repayment of long-term borrowings. . . . . . . . . . . . . . (24,350) (125,092) (3,067)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (30) (57) 45
-------------- -------------- --------------
Net cash used in financing activities. . . . . . . . (30,309) (9,930) (3,779)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (933) (2,893) 2,698
Cash and cash equivalents at the beginning of the period . . . 7,301 10,194 7,496
-------------- -------------- --------------
Cash and cash equivalents at the end of the period . . . . . . $ 6,368 $ 7,301 $ 10,194
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-5
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- -------------
Supplemental disclosure of cash flow information -
cash paid during the period for interest. . . . . . . . . . . . . . $ 12,992 $ 12,852 $ 13,426
Noncash investing and financing activities:
Transfer of property held for sale to property and equipment. . . . . $ - $ 2,028 $ -
Transfer of property and equipment from property held for development $ - $ 214 $ 730
Notes receivable from buyer in sales. . . . . . . . . . . . . . . . . $ - $ - $ 1,000
Assumption of debt by buyer in sale . . . . . . . . . . . . . . . . . $ - $ - $ 3,162
Unrealized holding gains in investment securities . . . . . . . . . . $ 144 $ 1,383 $ 951
Accrued and in-kind preferred stock dividends . . . . . . . . . . . . $ 6,238 $ 7,343 $ 6,368
Gain on repurchase of Series A preferred stock. . . . . . . . . . . . $ 14,523 $ - $ -
Common stock warrants issued. . . . . . . . . . . . . . . . . . . . . $ 1,358 $ - $ -
Note from affiliates. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,359 $ - $ -
Debt assumed for acquisition of property and equipment. . . . . . . . $ 22,639 $ - $ -
See accompanying notes to consolidated financial statements.
F-6
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND COMPREHENSIVE OPERATIONS
(In thousands, except 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, 2000. . . . 30,609 $ - 10,120,045 $ 1 $ 66,373 $(1,087) $(131,090) $ (65,803)
Unrealized gain 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)
Unrealized gain on investment
securities. . . . . . . . . . . . - - - - - 1,383 - 1,383
Issuances of shares under
Employee Stock Purchase Plan,
net of repurchases . . . . . . - - 43,695 - (73) - - (73)
Options exercised. . . . . . . . . . - - 7,501 - 16 - - 16
Preferred stock dividends. . . . . . 2,864 - - - 1,315 - (7,343) (6,028)
Net loss for the year ended
December 31, 2002. . . . . . . . . - - - - - - (6,223) (6,223)
--------- ------ ---------- ------ ----------- ------- --------- --------------
Balances at December 31, 2002. . . . 33,473 - 10,247,226 1 68,944 1,247 (155,258) (85,066)
Unrealized gain on investment
securities. . . . . . . . . . . . - - - - - 144 - 144
Realized gain on investment
securities. . . . . . . . . . . . - - - - - (1,391) - (1,391)
Issuances of shares under
Employee Stock Purchase Plan,
net of repurchases . . . . . . - - - - (92) - - (92)
Options exercised. . . . . . . . . . - - 50,223 - 122 - - 122
Warrants issued in lease acquisition - - - - 1,358 - - 1,358
Preferred stock dividends. . . . . . 1,357 - - - 1,371 - (6,238) (4,867)
Gain on repurchase of
Series A preferred stock . . . . - - - - - - 14,523 14,523
Net loss for the year ended
December 31, 2003. . . . . . . . . . - - - - - - (3,825) (3,825)
--------- ------ ---------- ------ ----------- ------- --------- --------------
Balances at December 31, 2003. . . . 34,830 $ - 10,297,449 $ 1 $ 71,703 $ - $(150,798) $ (79,094)
========= ====== ========== ====== =========== ======= ========= ==============
See accompanying notes to consolidated financial statements.
F-7
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Emeritus Corporation ("Emeritus" or the "Company") is a nationally integrated
assisted living company focused on operating residential style communities.
These 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. The Company owns 19 communities and leases
109 communities. These 128 communities comprise the communities included in the
consolidated financial statements.
In addition, the Company also provides management services to independent and
related-party owners of assisted living communities for an additional 47
communities, for which only management fees are recognized in the consolidated
financial statements.
The management agreements included management agreements covering 46 communities
in connection with the Emeritrust transactions, which are referred to
extensively throughout these financial statements, through September 30, 2003,
which were subsequently reduced to 23 Emeritrust I communities as of December
31, 2003, detailed as follows:
* 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, for these communities, 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 received
a base management fee of 3% of gross revenues, but could have received up
to 7% depending on the cash flow performance of the communities managed.
Additionally, the Company was required by its management contracts to
fund cash operating deficits. In May 2002, the Company entered into an
agreement for a third party to operate one of these communities located
in San Bernardino, California. The new operator had responsibility for
all economic benefits and detriments and had an option to purchase this
community from the owner of the community. In April of 2003, the new
operator exercised their option to purchase this community reducing the
number of communities managed from 25 to 24. In August of 2003, the
owners sold another building in Casper, Wyoming, further reducing the
number of communities managed from 24 to 23. In March 2004, this
management agreement was amended to provide for a management fee of 5% of
gross revenues. In the third quarter of 2003, the Company executed a
short-term extension of the management agreement for the 23 remaining
communities from June 30, 2003, to January 2, 2004. This extension
removed the purchase option in the original agreement. Additionally, the
Company was indemnified against any funding obligations it may have had
under the extended management agreement by certain of the Emeritrust I
investors, including Daniel R. Baty ("Mr. Baty"), the Company's Chairman
and Chief Executive Officer and one of its principal shareholders.
Subsequently, the Company executed a longer term extension from January
2, 2004, to September 30, 2005, which extension also excludes any funding
obligation or purchase option, but which may be terminated by either
party with 90 days notice.
* EMERITRUST II: 21 communities that the Company began managing in the
time period from March 1999 to September 2003. Mr. Baty held an indirect
non-controlling interest in the entities that owned these communities.
As of September 30, 2003, the owners of the Emeritrust II communities
sold them to a real estate investment trust, which leased these
communities back to the Company in a master operating lease and are now
included in the Company's consolidated results. The Emeritrust II
communities consisted of:
* EMERITRUST II OPERATING: 16 communities for which the Company had no
obligation to fund cash operating deficits. The Company received a base
management fee of 5% of gross revenues, but may have received up to 7%
depending on the cash flow performance of the communities managed. As
of September 30, 2003, these communities were included in the Company's
consolidated results.
* EMERITRUST II DEVELOPMENT: 5 communities for which the Company was
required to fund cash operating deficits. The Company received a base
management fee of 5% of gross revenues, but may have received up to 7%
depending on the cash flow performance of the communities managed. As
of September 30, 2003, these communities were included in the Company's
consolidated results.
Other management agreements are as follows:
* management agreements covering 19 communities owned by entities
controlled by Mr. Baty. The Company generally receives fees ranging from
4% to 6% of the gross revenues generated by these communities.
F-8
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
* a management agreement covering one community owned by a joint venture in
which the Company has a financial interest. The Company receives
management fees of 6% of gross revenues for this community.
* management agreements covering three communities owned by independent
third parties. The Company receives management fees ranging from 4% to 7%
of gross revenues, or similar arrangement based on occupied capacity.
* a management agreement covering one community owned by an independent
third party. The Company receives management fees of the greater of
$7,000 per month or 6% of gross revenue from this community, with
opportunities to earn additional fees based on operating cash flow.
Summary of Significant Accounting Policies and Use of 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 ongoing basis, Emeritus evaluates its estimates, including
those related to resident programs and incentives such as move in fees, bad
debts, investments, intangible assets, impairment of long-lived assets, income
taxes, restructuring, long-term service contracts, contingencies, self-insured
retention, insurance deductibles, health insurance, 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 most
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.
* For commercial general liability and professional liability insurance,
Emeritus uses a captive insurance structure essentially to self-fund its
primary layer of insurance. This policy is claims-made based and covers
losses and liabilities associated with general and professional
liability. The primary layer has per occurrence and aggregate limits.
Within that primary layer is a self-insured retention, which also has a
per occurrence and aggregate limit. The Company also has an excess
policy, which applies to claims in excess of the primary layer on a per
occurrence basis. Losses within the primary layer, which include the
self-insured retention, are accrued based upon actuarial estimates of the
aggregate liability for claims incurred, which will vary based on actual
versus expected experience.
* For health insurance, Emeritus self-insures up to a certain level for
each occurrence above which a catastrophic insurance policy covers any
additional costs. Health insurance expense is accrued based upon
historical experience of the aggregate liability for claims incurred. If
these estimates are insufficient, additional charges may be required.
* For workers' compensation insurance for insured states (excluding Texas
and compulsory State Funds), the Company is on an incurred loss,
retrospective insurance policy, retroactively adjusted, upward or
downward, based upon total incurred loss experience. The premium charged
by the insurance underwriter is based upon a standard rate determined by
the underwriter to cover, amongst other things, estimated losses and
other fixed costs. The difference between the premium charged and the
actuarial based estimate of costs, which is expensed on a monthly basis,
is carried as an asset on the balance sheet. After the end of the policy
year, the insurance company conducts an audit and adjusts the total
premium based upon the actual payroll and actual incurred loss for the
policy year. Any premium adjustment for the differences between estimated
and actual payroll and estimated and actual losses will first be applied
to the accrued asset and then as an adjustment to workers' compensation
expense at the time such adjustment is determined. There is a reasonable
expectation that the incurred loss adjustment will be downward, resulting
in a premium refund. The incurred loss adjustment is limited to 50% of
the standard premium with the initial adjustment six months after policy
expiration on December 31, 2003, and annually thereafter. For
work-related injuries in Texas, the Company is a non-subscriber, meaning
that work-related losses are covered under a defined benefit program
outside of the Texas Workers' Compensation system. Losses are paid as
incurred and estimated losses are accrued on a monthly basis.
* Emeritus accounts for stock option awards to employees under the
intrinsic value-based method of accounting prescribed by APB No. 25,
"Accounting for Stock Issued to Employees". Under this method, no
compensation expense is recorded provided the exercise price is equal to
or greater than the quoted market price of the stock at the grant date.
The Company makes pro forma disclosures of net income and earnings per
share as if the fair value-based method of accounting (the alternative
method of accounting for stock-based compensation) had been applied as
required by FAS No. 123, "Accounting for Stock-Based Compensation". The
fair value-based method requires the Company to make assumptions to
determine expected risk-free interest rates, stock price volatility,
dividend
F-9
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
yield and weighted-average option life. To the extent, such things as
actual volatility or life of the options is different from estimated,
amounts expensed will be more or less than would have been recorded
otherwise.
* 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 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. Emeritus has considered future
taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance. However, 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. The Company's management contracts do not
result in control and those entities are not consolidated. All significant
inter-company balances and transactions are eliminated in consolidation.
Revenue Recognition
Operating revenue consists of resident fee revenue, community revenue, other
service fees, 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
are recognized in the period services are rendered. Management fees are
comprised of revenue from management contracts and are recognized in the month
in which services are performed in accordance with the terms of the management
contract.
In 2001 and prior years, the Company recognized nonrefundable move-in fees at
the time the resident occupied the unit and the related services were performed.
This treatment was not materially different from recognition of such fees over
the average period of occupancy. However, in 2002, the Company began charging
significantly higher fees for move-ins than were previously charged. Therefore,
the Company has instituted a policy consistent with SEC Staff Accounting
Bulletin 101 "Revenue Recognition", to defer such fees and recognize them over
the average period of occupancy, approximately 16 months. The Company has not
deferred any of the costs related to move-ins.
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, 2003, and 2002, were
not material.
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
lease term.
The Company accounts for impairment of long-lived assets, which primarily
include property and equipment, investments, and amortizable intangible assets,
in accordance with the provisions of SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets or SFAS No. 142 Goodwill and Other Intangible
Assets, as applicable. An impairment review is performed whenever a change in
condition occurs which indicates that the carrying amounts of assets may not be
recoverable. Such changes include changes in the Company's business strategies
and plans, changes in the quality or structure of its relationships with its
F-10
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
partners, and deteriorating operating performance of individual communities. The
Company uses a variety of factors to assess the realizable value of assets
depending on their nature and use. Such assessments are primarily based upon the
sum of expected future undiscounted net cash flows over the expected period the
asset will be utilized, as well as market values and conditions. The computation
of expected future undiscounted net cash flows can be complex and involves a
number of subjective assumptions. Any changes in these factors or assumptions
could impact the assessed value of an asset and result in an impairment charge
equal to the amount by which its carrying value exceeds its actual or estimated
fair value.
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.
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 terms of the associated leases where the Company has no
continued financial involvement in communities that it has sold and leased back.
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 expenses 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.
F-11
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
Had compensation costs for the Company's stock option plan been determined
pursuant to SFAS 123, the Company's pro forma net income (loss) and pro forma
net income (loss) per share would have been as follows (in thousands, except
per share amounts):
Year ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Net income (loss) to common shareholders:
As reported. . . . . . . . . . . . . . . . . . . . . . . . $ 4,460 $ (13,566) $ (10,602)
Add: Stock-based employee compensation expense
included in reported net income (loss) . . . . . . . . . - - -
Deduct: Stock-based employee compensation
determined under fair value based method for all awards. (1,156) (773) (1,074)
------------ ------------ ------------
Pro forma. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,304 $ (14,339) $ (11,676)
============ ============ ============
Net income (loss) per common share:
As reported - Basic. . . . . . . . . . . . . . . . . . . . $ 0.43 $ (1.33) $ (1.04)
============ ============ ============
Pro forma - Basic. . . . . . . . . . . . . . . . . . . . . $ 0.32 $ (1.40) $ (1.15)
============ ============ ============
As reported - Diluted. . . . . . . . . . . . . . . . . . . $ 0.39 $ (1.33) $ (1.04)
============ ============ ============
Pro forma - Diluted. . . . . . . . . . . . . . . . . . . . $ 0.29 $ (1.40) $ (1.15)
============ ============ ============
The Company estimates the fair value of its options using the Black-Scholes
option value model, which is one of several methods that can be used to estimate
option values. The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimates. The fair value of options granted and employee
purchase plan shares were estimated at the date of grant using the following
weighted average assumptions:
Year ended December 31,
-------------------------------------------
2003 2002 2001
-------------- ------------ --------------
Expected life from vest date (in years) 4 4 4
Risk-free interest rate . . . . . . . . 1.96% - 2.6% 2.9% - 4.3% 4.12% - 4.39%
Volatility. . . . . . . . . . . . . . . 89.3% - 90.0% 90.4%-93.3% 80.7% - 82.1%
Dividend yield. . . . . . . . . . . . . - - -
Weighted average fair value (per share) $ 2.55 $ 1.99 $ 1.31
F-12
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Income (Loss) Per Share
The capital structure of Emeritus includes convertible debentures, and
redeemable and non-redeemable convertible preferred stock, common stock
warrants, and stock options. Basic net income (loss) per share is computed
based on weighted average shares outstanding and excludes any potential
dilution. Diluted net income (loss) per share is computed based on the weighted
average number of shares outstanding plus dilutive potential common shares.
Options and warrants are included under the "treasury stock method" to the
extent they are dilutive. Certain shares issuable upon the exercise of stock
options and warrants and conversion of convertible debentures and preferred
stock have been excluded from the computation because the effect of their
inclusion would be anti-dilutive. The following table summarizes those that are
excluded in each period because they are anti-dilutive (in thousands):
Year ended December 31,
----------------------
2003 2002 2001
----- ------ -----
Convertible Debentures. . . . . . . . . . . 1,455 1,455 1,455
Options . . . . . . . . . . . . . . . . . . 30 1,714 1,193
Warrants - Senior Housing Partners I, L.P.. 400 - -
Warrants - Saratoga Partners. . . . . . . . - 1,000 1,000
Series A Preferred (1). . . . . . . . . . . - 1,374 1,374
Series B Preferred. . . . . . . . . . . . . 4,824 4,636 4,239
----- ------ -----
6,709 10,179 9,261
===== ====== =====
(1) Repurchased in July and August 2003.
Dilutive potential common shares and adjustments to net income (loss) to common
shareholders arising under the assumed conversion into common stock of the
convertible debentures, Series A redeemable convertible preferred, and Series B
convertible preferred stock are included under the "if-converted method".
The following table summarizes the computation of basic and diluted net income
(loss) per common share amounts presented in the accompanying consolidated
statements of operations (in thousands, except per share data):
Year ended December 31,
------------------------------
2003 2002 2001
------- --------- ---------
Basic:
Numerator for basic net income (loss) per share:
Net income (loss) to common shareholders . . . . . . $ 4,460 $(13,566) $(10,602)
======= ========= =========
Denominator for basic net income (loss) per share:
Weighted average number of common shares outstanding. 10,255 10,207 10,162
======= ========= =========
Basic net income (loss) per share. . . . . . . . . . . . $ 0.43 $ (1.33) $ (1.04)
======= ========= =========
Diluted:
Numerator for diluted net income (loss) per share:
Net income (loss) to common shareholders . . . . . . $ 4,460 $(13,566) $(10,602)
======= ========= =========
Denominator for diluted net income (loss) per share:
Weighted average number of common shares outstanding 10,255 10,207 10,162
Assumed exercise of options and warrants . . . . . . 1,265 - -
------- --------- ---------
11,521 10,207 10,162
======= ========= =========
Diluted net income (loss) per share. . . . . . . . . . . $ 0.39 $ (1.33) $ (1.04)
======= ========= =========
F-13
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, net of any related tax effect.
Recent Accounting Pronouncements
In June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement
of the asset retirement obligation, the obligation will be adjusted at the end
of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The Company adopted SFAS No. 143
on January 1, 2003. Adoption did not have an impact on the Company's financial
condition and results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 are applied in fiscal
years beginning after May 15, 2002. The provisions of the Statement related to
Statement No. 13 were effective for transactions occurring after May 15, 2002,
with early application encouraged. The adoption of SFAS No. 145 in the fourth
quarter of 2002 had no effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002. Adoption did not have an impact
on the Company's financial condition and results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN No. 46),
"Consolidation of Variable Interest Entities." This Interpretation was revised
on December 2003 and addresses consolidation by business enterprises of variable
interest entities (VIE's). A VIE is subject to the consolidation provisions of
FIN No. 46 if it cannot support its financial activities without additional
subordinated financial support from third parties or its equity investors lack
any one of the following characteristics: the ability to make decisions about
its activities through voting rights, the obligation to absorb losses of the
entity if they occur, or the right to receive residual returns of the entity if
they occur. FIN No. 46 requires a VIE to be consolidated by its primary
beneficiary. The primary beneficiary is the party that holds the variable
interests that expose it to a majority of the entity's expected losses and/or
residual returns. For purposes of determining a primary beneficiary, all
related party interests must be combined with the actual interests of the
Company in the VIE. The application of this Interpretation is immediate for
VIE's created or altered after January 31, 2003, and is effective at the end of
the first quarter of 2004, for variable interest entities that existed prior to
February 1, 2003.
The Company has evaluated the impact of FIN No. 46 on all its current related
party management agreements including those more fully discussed under Item 13
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," under sections denoted as
"Emeritrust Transactions" and "Baty Transactions" as well as other management
agreements and other arrangements with potential VIE's. The Company does not
believe it has any VIE's that will require consolidation.
F-14
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. For public
enterprises, such as the Company, this statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Management has determined that no current financial instruments of the
Company are covered by this pronouncement.
(2) SHORT-TERM INVESTMENTS
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, which is designated as available for sale,
as of December 31, as follows (In thousands):
Gross
Unrealized Fair
Amortized Gains Market
Cost (losses) Value
---------- ------------ -------
2003.. . . $ - $ - $ -
========== ============ =======
2002.. . . $ 1,512 $ 1,247 $ 2,759
========== ============ =======
2001.. . . $ 1,512 $ (136) $ 1,376
========== ============ =======
On April 23, 2003, ARV announced that, at a special meeting held on that date,
its shareholders voted to approve the Agreement and Plan of Merger, dated as of
January 3, 2003, between ARV and Prometheus Assisted Living LLC ("Prometheus").
ARV further announced that the merger transaction closed and trading of the ARV
stock on the American Stock Exchange ceased on April 23, 2003. Under the terms
of the merger, shares of ARV's stock held by shareholders other than Prometheus
and its affiliates were converted into the right to receive merger consideration
of $3.90 per share, without interest. On April 25, 2003, the Company received
approximately $2.9 million in exchange for its 755,884 shares of ARV common
stock in which it had a carrying value of approximately $1.5 million, thus
recognizing a gain of approximately $1.4 million, which is included in "Other,
net" in the Company's Consolidated Statements of Operations and a reduction in
"Accumulated other comprehensive gain" in the Company's Consolidated Balance
Sheets.
(3) LONG-TERM INVESTMENTS
In December 2003, the Company invested $7.3 million (representing an 11%
ownership interest), net of transaction costs, in a limited liability
corporation (LLC) that acquired Alterra Healthcare Corporation, a national
assisted living company headquartered in Milwaukee, Wisconsin that was the
subject of a voluntary Chapter 11 bankruptcy. Alterra operated 304 assisted
living communities in 22 states. The purchase price for Alterra was $76 million
and the transaction closed on December 4, 2003, following approval by the
Bankruptcy Court. The members of the LLC consists of an affiliate of Fortress
Investment Group LLC (Fortress), a New York based private equity fund, which is
the managing member, an entity controlled by Mr. Baty, and Emeritus. Under the
LLC agreement, distributions are first allocated to Fortress until it receives
its original investment of $49 million together with a 15% preferred return, and
then are allocated to the three investors in proportion to their percentage
interests, as defined in the agreement, which are a 50% interest for Fortress
and a 25% interest for the entity controlled by Mr. Baty and Emeritus,
respectively.
F-15
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) OTHER RECEIVABLES
Other receivables consisted of the following at December 31 (In thousands):
2003 2002
------ ------
Working capital advances to third parties and affiliates $ 152 $1,264
Interest receivable . . . . . . . . . . . . . . . . . . . 470 772
Other receivables.. . . . . . . . . . . . . . . . . . . . 1,339 1,609
------ ------
$1,961 $3,645
====== ======
(5) PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (In thousands):
2003 2002
--------- ---------
Land and improvements. . . . . . . . . . . . . $ 13,824 $ 12,378
Buildings and improvements . . . . . . . . . . 106,629 112,085
Furniture and equipment. . . . . . . . . . . . 14,730 14,298
Vehicles . . . . . . . . . . . . . . . . . . . 5,413 4,247
Leasehold improvements . . . . . . . . . . . . 8,282 6,529
-------- --------
148,878 149,537
Less accumulated depreciation and amortization 32,202 30,335
-------- --------
116,676 119,202
Construction in progress . . . . . . . . . . . 870 381
-------- --------
$117,546 $119,583
======== ========
(6) NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATED COMPANIES
In January 2000, the Company purchased a 30% equity interest in Senior
Healthcare Partners, LLC, a pharmaceutical supply limited liability company.
The Company has cash funding obligations of up to $1.8 million. As of December
31, 2001, the Company had funded the entire $1.8 million. The Company
recognized its share of partnership gain of $175,000 and $98,000 in 2003 and
2002, respectively, and its share of partnership losses of $313,000 in 2001,
which is included in "Other, net".
(7) 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.
F-16
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) LONG-TERM DEBT
Long-term debt consists of the following at December 31 (In thousands):
2003 2002
----------------- -----------------
Notes payable, principal and interest at LIBOR* plus 4.15%
with a floor of 6.5% (6.5% at December 31, 2003) payable
monthly, unpaid principal and interest due December 2006,
with an option to extend to September 2007). . . . . . . . . . . . $ 57,042 $ 58,000
Notes payable, interest only at 12% payable monthly, plus
capitalized interest of 1.75% (13.75% at December 31, 2003),
unpaid principal and interest due December 2007. . . . . . . . . . 16,298 16,020
Note payable, interest only at 12.13% (12.13% at December 31,
2003) payable monthly with a 50 basis point increase each
anniversary capped at 13%, principal and interest starting the
second year, and unpaid principal and interest due June 2007 . . . 25,800 6,800
Notes payable, principal & interest at LIBOR* plus 4.5% and
LIBOR plus 7.75% (7% and 9.75% at December 31, 2003)
payable monthly, unpaid principal and interest due March 2006. . . 6,647 6,800
Notes payable, interest at 7.43%, payable in monthly
installments, unpaid principal and interest due October 2009,
refinanced with long-term debt . . . . . . . . . . . . . . . . . . - 24,640
Notes payable, interest at rates from 8% to 12%, payable in
monthly installments, due through March 2013 . . . . . . . . . . . 11,412 11,231
Notes payable, principal and interest at 6.98%, payable in
monthly installments, due August 2008. . . . . . . . . . . . . . . 22,639 -
Notes payable, principal and interest at prime, payable in
monthly installments, due September 2005 . . . . . . . . . . . . . 1,300 -
----------------- -----------------
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,138 123,491
Less current portion . . . . . . . . . . . . . . . . . . . . . . . 4,750 3,604
----------------- -----------------
Long-term debt, less current portion . . . . . . . . . . . . . . . $ 136,388 $ 119,887
================= =================
* LIBOR is the London Interbank Offering Rate.
Substantially all long-term debt is secured by the Company's property and
equipment.
In January 2003, the Company reached an agreement with General Motors Acceptance
Corporation ("GMAC") to extend a $6.8 million note set to mature February 1,
2003. The original $6.8 million note has been bifurcated into a $6.2 million
Note A and a $560,000 Note B. The new notes of $6.8 million matures March, 1,
2006, and provides for monthly principal payments of approximately $22,000 in
addition to interest at LIBOR plus 4.5% and LIBOR plus 7.75%, respectively.
Additionally, related to the GMAC extension, the original Seller note for $1
million was also extended. The original seller note principal balance for the
year ended December 31, 2003, was $921,000 with a maturity of March 1, 2003.
This amendment extends the principal maturity to March 1, 2006, and requires
$12,500 monthly principal and interest payments, with interest accruing at 12%.
The Company made a $200,000 principal paydown in February 2003. This note is
included in the $11.4 million in the table above.
F-17
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In May 2003, in connection with the Lease of Eight Communities in May
transaction discussed in Note 17, "Sales and Acquisitions, including Certain
Related-Party Transactions", a real estate investment trust loaned $600,000 to
the Company for general working capital purposes and for capital and other
improvements (included in the note for $11.4 million in the table above). This
loan has a 10-year term with no extensions, bearing interest at 10% annually
with monthly interest-only payments. In addition, if the Company exercises its
purchase option at any time on any of the eight communities, the pro rata
principal portion of the loan will become due at the time the closing of the
sale of such facility occurs.
Debt Consolidation. The real estate investment trust that financed the
Emeritrust II transaction held $6.8 million of the Company's leasehold mortgage
debt that matured in March 2005 and bore interest at 12% per annum, commencing
March 2002 with periodic increases up to 13% per annum. This real estate
investment trust also provided $7.5 million in leasehold mortgage financing
incurred to support the Series A Preferred Stock repurchase in August 2003 and
$11.5 million in leasehold mortgage financing to support the purchase of the
Emeritrust II communities. On September 30, 2003, these three financings were
consolidated into a single $25.8 million leasehold mortgage financing, secured
by the 32 communities and maturing on June 30, 2007. The debt bears interest at
an initial rate of 12.13% per annum with periodic increases up to 13%. The
consolidated loan requires monthly payments of interest the first year and
monthly payments of principal and interest, based on a 10-year amortization,
thereafter. Additional principal reductions may occur, at the Company's option,
through the increase in the amount of the lease financing based on the portfolio
achieving certain coverage ratios.
Certain of the Company's wholly owned subsidiaries, established pursuant to
financing requirements, continue to hold assets, which include certain
properties operated by the Company and which also may include cash that has been
swept into the Company's deposit accounts. Notwithstanding consolidation for
financial statement purposes, it is management's intention that the assets and
liabilities of the subsidiaries are not available to pay other debts or
obligations of the consolidated Company and the consolidated Company is not
liable for the liabilities of the subsidiaries, except as otherwise provided in
connection with these financing requirements.
Certain of the Company's indebtedness include restrictive provisions related to
cash dividends, investments, and borrowings and require maintenance of specific
operating ratios, and levels of working capital. As of December 31, 2003, the
Company was in compliance with all such covenants. Many of our debt instruments
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. Such cross-default provisions affect 17 owned assisted living
properties. Accordingly, any event of default could cause a material adverse
effect on our financial condition if such debts are cross-defaulted. The Company
expects to be in compliance at least through 2004 and for the foreseeable
future.
Principal maturities of long-term debt at December 31, 2003, are as follows (In
thousands):
2004.. . . $ 4,750
2005.. . . 6,417
2006.. . . 68,857
2007.. . . 40,412
2008.. . . 20,096
Thereafter 606
--------
Total. . . $141,138
========
(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. Interest on the
debenture is 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.
F-18
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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, exchangeable, redeemable preferred
stock for $25,000,000. The holder of the Series A redeemable Preferred Stock
was entitled to receive quarterly dividends payable in cash. The dividend rate
was 9% of the stated value of $25,000,000. Dividends accumulate, whether or not
declared or paid. If cash dividends were not paid quarterly, the dividend rate
increased to 11% ("arrearage rate") until the unpaid cash dividends had been
fully paid. The preferred stock had 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 could 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 was 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 have contained the same conversion
rights, restrictions and other terms as the preferred stock. For each of the
years ended December 31, 2003, 2002, and 2001, the Company accumulated dividends
aggregating $1.7 million, $2.75 million, and $2.75 million, respectively, at the
arrearage dividend rate of 11%, for a total of $7.2 million.
Since the Company was unable to pay dividends for more than six consecutive
quarters, the 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 had paid the accrued dividends. The Series A shareholders
opted not to elect an additional director. In addition, because the Company was
unable to pay dividends to their Series A shareholders for more than six
consecutive quarters, beginning in 2002, the Series A dividends were calculated
on a compounded cumulative basis, retroactively. The retroactive adjustment of
Series A dividends for 2000 and 2001 were $19,000 and $275,000, respectively,
which were recognized in 2002. The cumulative compounding for 2003 and 2002 was
an additional $586,000 and $622,000, respectively.
Repurchase of Series A Preferred Stock. In a two-part transaction that was
completed August 28, 2003, the Company repurchased all the outstanding shares of
its Series A Preferred Stock for an aggregate purchase price of $20.5 million.
The Series A Preferred Stock had been issued originally in October 1997 for
$25.0 million. As a part of the repurchase, the holder of the Series A
Preferred Stock waived approximately $10.1 million in accrued and unpaid
dividends. As a result of the transaction, the Company recognized a gain of
approximately $14.5 million. Just prior to the repurchase, the Series A
Preferred Stock was accruing compounded, cumulative dividends of approximately
$3.7 million annually with mandatory redemption in October 2004 at a price of
$25 million plus accrued and unpaid dividends. In completing the repurchase,
the Company avoided these future obligations. The Company obtained the funds to
complete the repurchase through three related financing transactions.
The first financing transaction involved three communities that Emeritus leased.
Prior to this financing transaction, the Company also held notes receivable in
the aggregate amount of $4.4 million that were secured by the same three
communities and under which it received interest of approximately $144,000
annually. In the refinancing, the communities were transferred to a real estate
investment trust, which became the new owner and lessor, and the Company
received net proceeds of $10.2 million in repayment of the notes we held and in
exchange for its related security and other property interests in the
communities. The transfer of the communities was subject to the Company's
leases, the terms of which did not change. Because Emeritus disposed of its
notes, the Company will no longer receive the interest it formerly did. The
Company recognized a deferred gain of approximately $8.5 million, which will be
amortized over the remaining life of the leases.
The second financing transaction, with the same real estate investment trust,
involved the sale/leaseback of four communities, three of which Emeritus owned
and one of which it held a 50% joint venture interest, resulting in proceeds of
$6.6 million, net of repayment of $24.6 million of debt. The lease is for a
15-year term with a 15-year extension and provides for a base annual rent of
approximately $3.5 million, with periodic escalators. Prior to this
refinancing, the communities secured mortgage financing of $24.6 million, with
annual interest payments of approximately $2.4 million. The Company recognized
a deferred gain of $9.9 million, which will be amortized over the term of the
lease.
The third financing, again with the same real estate investment trust, was a
mortgage loan for $7.5 million secured by the seven communities involved in the
first two financing transactions discussed above. The debt matured in August
2006 and requires monthly interest-only payments at an initial rate of 12% per
annum, with periodic increases. This mortgage debt was subsequently
consolidated with other debt held by the real estate investment trust, as
discussed in Note 8, "Long-term Debt".
F-19
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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.
Income taxes of $418,000 in 2003 are due primarily because of gains on
sale-leaseback transactions involving several communities in 2003, which have
been deferred for accounting purposes. The Company believes that it will be
required to pay an alternative minimum income tax for 2003 on its federal income
tax return and in certain states, it will pay income or franchise tax.
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, (In thousands):
2003 2002
--------- ---------
Gross deferred tax liabilities-Insurance, depreciation and amortization. $(2,701) $(1,880)
Gross deferred tax assets:
Net operating loss carryforwards 25,303 29,433
Deferred gains on sale/leaseback 13,811 7,621
Impairment of investment securities - 2,411
Unearned rental income and deferred move-in fees 4,012 1,066
Vacation accrual 740 481
Health insurance accrual 928 723
Insurance accrual - 746
Incentive compensation accrual 485 270
Deferred lease payments 86 665
Federal AMT credit 142 -
Other 88 55
-------- --------
Gross deferred tax assets 45,595 43,471
Less valuation allowance 42,894 41,591
-------- --------
Deferred tax assets, net 2,701 1,880
-------- --------
Net deferred tax assets $ - $ -
======== ========
The increase in the valuation allowance was $1.3 million, $1.4 million, and $1.6
million for 2003, 2002, and 2001, respectively. The increases were primarily
due to the amount of net operating loss carryforwards and deferred gains, 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, 2003, available to offset future federal taxable
income, if any, of approximately $74.4 million expiring beginning in 2005.
(12) SHAREHOLDERS' DEFICIT
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
Preferred Stock, and agreed to complete the sale of the remaining 10,000 shares
during the first half of 2000. Each share of Series B Preferred 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
F-20
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the Series B Preferred 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 Preferred 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 Preferred Stock is entitled to receive quarterly dividends payable
in a combination of cash and additional shares of Series B Preferred 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
Preferred Stock at the rate of one share of Series B Preferred 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 Preferred 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
Preferred 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 Preferred 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 1,266 shares of Series B
Preferred Stock as in-kind dividends, none of which were paid or issued in 2001.
In 2002, the Company accrued $2.4 million in cash dividends at the higher
arrearage rate, and $1.3 million equivalent to 1,317 shares of Series B
Preferred Stock as in-kind dividends. In the third quarter of 2002, the Company
issued 2,533 shares of Series B Preferred Stock for the in-kind dividends
accrued from 2000, 2001, and the first two quarters of 2002. In the fourth
quarter of 2002, another 331 shares of Series B Preferred Stock were issued for
the third quarter accrual. During 2003, additional shares of Series B Preferred
Stock were issued on a quarterly basis on the first day following the quarter to
which they were related. Thus, an additional 1,357 shares, equivalent to $1.4
million, of Series B Preferred Stock were issued as paid-in-kind dividends
during 2003. Accordingly, the Company had a cumulative commitment to issue 348
shares, 334 shares, and 1,881 shares of Series B Preferred Stock at December 31,
2003, 2002, and 2001, respectively.
As of December 31, 2003, the Company has accrued its obligation to pay cash
dividends to the Series B preferred shareholders, which amounted to
approximately $8.2 million, including all penalties for non-payment. Since the
Company had not paid these dividends for more than six consecutive quarters,
under the Designation of Rights and Preferences of the Series B preferred stock
in the Company's Articles of Incorporation, the Series B preferred shareholders
may designate one director in addition to the other directors that they are
entitled to designate under the shareholders' agreement. As of January 1, 2002,
the Series B preferred shareholders became entitled to designate an additional
director under the Articles, but thus far have chosen not to do so.
Series B preferred dividends are to be paid in cash and in additional shares of
Series B preferred shares. As of December 31, 2003, an additional 4,830 Series
B preferred shares had been issued as paid-in-kind dividends for all periods
through the third quarter of 2003. As of January 1, 2004, an additional 348
shares of Series B preferred stock were issued as paid-in-kind dividends for the
fourth quarter of 2003.
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 2,400,000 shares of common stock to be reserved for
grants under the 1995 Plan of which 185,983 were available for future awards at
December 31, 2003. 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
F-21
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 were the same as the terms of the options
tendered for exchange.
A summary of the activity in the Company's stock option plans follows:
2003 2002 2001
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of year . . . 1,714,333 $ 2.56 1,192,552 $ 2.39 1,321,707 $ 9.13
Granted. . . . . . . . . . . . . . . . 536,500 $ 3.94 601,000 $ 2.94 1,144,083 $ 2.11
Exercised. . . . . . . . . . . . . . . (50,223) $ 2.44 (7,501) $ 2.11 - $ -
Canceled . . . . . . . . . . . . . . . (49,167) $ 3.03 (71,718) $ 2.96 (1,273,238) $ 9.13
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year . . . . . . 2,151,443 $ 2.89 1,714,333 $ 2.56 1,192,552 $ 2.39
Options exercisable at year-end. . . . 916,941 $ 2.57 420,110 $ 2.82 49,869 $ 9.21
The following is a summary of stock options outstanding at December 31, 2003:
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 1,076,030 7.95 $ 2.11 714,963 $ 2.10
$2.56 - $ 4.06 1,045,663 8.64 $ 3.45 172,228 $ 2.95
$6.50 - $ 7.25 5,750 5.98 $ 6.60 5,750 $ 6.60
$9.63 - $ 9.81 500 4.88 $ 9.63 500 $ 9.63
$10.25 - $15.25 23,500 3.87 $ 13.01 23,500 $ 13.01
----------- ------------- ----------- ----------- ---------
2,151,443 8.23 $ 2.89 916,941 $ 2.57
=========== ============= =========== =========== =========
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
400,000 shares are available for purchase under the Plan. Periodically,
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 Plan expires in May 2008. In
2003, 2002, and 2001, employees purchased, net of open market
F-22
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
repurchases; zero; 43,695; and 75,985 common shares, respectively, through the
Plan, for an aggregate total of 175,975 since inception of the Plan.
(13) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of the following for the years ended
December 31, 2003, 2002, and 2001, respectively (In thousands):
2003 2002 2000
-------------- -------------- --------------
Net income (loss) to common shareholders. . . $ 4,460 $ (13,566) $ (10,602)
Other comprehensive income (loss):
Unrealized holding gains
on investment securities. . . . . . 144 1,383 951
Realized gains on investment securities. (1,391) - -
-------------- -------------- --------------
Comprehensive income (loss) . . . . . . . . . $ 3,213 $ (12,183) $ (9,651)
============== ============== ==============
(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 $137.2 million versus a carrying value of $141.1 million; and the
convertible debentures have an estimated fair value, based on the Company's
incremental borrowing rate, of $31.9 million versus a book value of $32.0
million at December 31, 2003.
(15) RELATED-PARTY MANAGEMENT AGREEMENTS
During 1995, the Company's two most senior executive officers, its Chief
Executive Officer, and its then President, who is now its Chief Financial
Officer, 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.
The Company has management agreements with a number of entities owned or
controlled by Baty relating to 20 communities at December 31, 2003. 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.
Management fee revenue earned under these and previous agreements was
approximately $4.4 million, $4.3 million, and $2.4 million in 2003, 2002, and
2001, respectively.
Mr. Baty, the Company's Chief Executive Officer, is a principal shareholder,
director, and Chairman of the Board of Holiday Retirement Corporation, and is
the principal owner of Columbia-Pacific Group, Inc. 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. Columbia-Pacific and
affiliated partnerships operate assisted living communities and independent
living facilities, many of which the Company manages under various management
agreements. The financial interests and management and financing
responsibilities of Mr. Baty with respect
F-23
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
to Holiday and Columbia-Pacific and their affiliated partnerships could present
conflicts of interest with the Company, including potential competition for
residents in markets where both companies operate and competing demands for the
time and efforts of Mr. Baty.
(16) LEASES
At December 31, 2003, the Company leased office space and 109 assisted living
communities. The office lease expires in 2006 and contains two five-year
renewal options. The community leases expire from 2004 to 2018 and contain
various extension options, ranging from five to fifteen years.
Minimum lease payments under noncancelable operating leases at December 31,
2003, are as follows (In thousands):
2004 . . . . $ 56,262
2005 . . . . 56,572
2006 . . . . 56,639
2007 . . . . 55,222
2008 . . . . 52,633
Thereafter . 327,625
--------
Total. . . . $604,953
========
Facility lease expense under noncancelable operating leases was approximately
$41.0 million, $29.9 million, and $27.1 million for 2003, 2002, and 2001,
respectively. A number of operating leases provide for additional lease
payments after 24 months computed at 5% of additional revenues of the community.
In 2003, additional facility lease expense under these provisions was
approximately $2.1 million. Additional lease payment after 13 months computed
at rates ranging from 7% to 8.5% of gross revenues in excess of a specified
threshold are related to a 24 community lease acquisition from the fourth
quarter of 2002.
Many of the Company's 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 lessor. Such cross-default provisions affect 104
assisted living properties operated under leases. Accordingly, any event of
default could cause a material adverse effect on the Company's financial
condition if such leases are cross-defaulted. The Company expects to be in
compliance at least through 2004 and for the foreseeable future.
(17) SALES AND ACQUISITIONS, INCLUDING CERTAIN RELATED-PARTY TRANSACTIONS
Since 1999, the Company managed 46 communities under arrangements with several
related investor groups that involved (i) payment of management fees to the
Company (ii) options for Emeritus to purchase the communities at a price
determined by a formula, and (iii) obligations to fund operating losses of
certain communities.
Emeritrust I Communities Management. During 2003, 2002, and 2001, the Company
managed the Emeritrust I communities, which included 25 of the 46 communities,
under a management agreement providing for a base fee of 3% of gross revenues
generated by the communities and an additional management fee of 4% of gross
revenues, payable to the extent of 50% of cash flow from the communities. The
management agreement also required the Company to fund cash operating losses of
the communities. In each of April and August 2003, the Emeritrust I owners
disposed of a community, reducing the number of managed communities to 23. Under
this arrangement, the Company received management fees (net of its funding
obligations) of approximately $2.7 million, $1.8 million, and $2.8 million in
2003, 2002, and 2001, respectively. This management agreement, as extended
several times, expired at the end of 2003. On January 2, 2004, the Company and
the Emeritrust I investors entered into a new management agreement providing for
management fees computed on the same basis and (i) terminating all options to
purchase the communities, (ii) terminating any further funding obligation, and
(iii) providing for a term expiring September 30, 2005, provided that either
party may terminate the agreement on 90 days notice. In March 2004, this
management agreement was
F-24
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
amended to provide for a management fee of 5% of gross revenues. In 2004, the
Company does not expect to receive management fees for the Emeritrust I
communities at the same level as it did in 2003. The interest rate on the
mortgage financing of the communities was increased effective June 30, 2003, and
may be increased further in 2004, which will have the effect of reducing cash
flow from the communities and, correspondingly, reducing the additional
management fee that is payable to the extent of 50% of cash flow. The Company
also expects that additional communities could be sold, thereby reducing the
number of communities subject to the management agreement. Because this
management agreement can be terminated by either party on short notice, there
can be no guaranty that the management arrangement will continue for its full
term.
Emeritrust II Communities Management. During 2003 (through September 30), 2002
and 2001 , the Company managed the Emeritrust II communities, which included 21
of the 46 communities, under management agreements providing for a base
management fee of 5% of gross revenue generated by the communities and an
additional management fee of 2%, payable if the Company met certain cash flow
standards. The management agreement for the five of the communities also
required the Company to fund cash operating losses of those communities. Under
this arrangement, Emeritus received management fees (net of its funding
obligations) of approximately $2.0 million in 2003 (through September 30), and
approximately $2.6 million in each of the years 2002 and 2001.
Emeritrust II Communities Lease. On September 30, 2003, the Company acquired
the 21 Emeritrust II communities for a cash purchase price of $118.6 million,
financed through a combination of lease and mortgage financing with an
independent real estate investment trust in the aggregate amount of $121.5
million. A master operating lease covers the Emeritrust II communities and four
other communities originally leased from the real estate investment trust in
March 2002. The lease is for an initial 15-year period, with one 15-year
renewal, and grants the Company a right of first opportunity to purchase any of
the Emeritrust II communities if the trust decides to sell. The lease is a net
lease, with annual base rent of $14.7 million (of which $10.5 million is
attributable to the Emeritrust II communities), and periodic escalators. The
real estate investment trust also provided $11.5 million of debt financing
secured by the Company's leasehold interests in the Emeritrust II communities.
This debt was consolidated with other debt held by the real estate investment
trust as described in Note 8, "Long-Term Debt." As part of the purchase price,
the Company also agreed to issue to the Emeritrust II investors warrants to
purchase 500,000 shares of its common stock, of which 400,000 shares have been
issued. The warrants expire September 30, 2008, and have an exercise price of
$7.60 (subject to certain adjustments). The holders have limited registration
rights. The Company included the fair value of these warrants, totaling
approximately $1.4 million, as lease acquisition costs and will amortize them
over the life of the lease.
Lease of Eight Communities in May. In May 2003, the Company entered into a lease
with a real estate investment trust covering eight assisted living communities
in four states containing an aggregate of 489 units. The lease is for an initial
10-year period with three 5-year extensions and includes an option to acquire
the communities during the second year for a price of $42.2 million and during
the third year at the same price plus a 3% premium. The Company believes this
option exercise price is currently well above fair value based on current
operations. Under the lease Emeritus have a right of first opportunity to
purchase any of the properties if the owner decides to sell. The lease is a net
lease, with annual base rental of $3.45 million, and rent adjustments at the end
of the first and second lease years based on a percentage of any increase in
operating revenues, with an aggregate annual limit of $275,000, and adjustments
each year thereafter based on increases in the consumer price index. The real
estate investment trust has agreed to fund up to $500,000 for capital
expenditures, with amounts added to the lease base and option price, and has
provided the Company with a 10-year working capital loan for $600,000, with
interest at 10% per annum payable monthly.
Transactions in Connection with the Repurchase of the Series A Preferred Stock.
In July 2003, the Company entered into a transaction involving three leased,
purpose-built assisted living communities located in Louisville, Kentucky;
Auburn, Massachusetts; and Rocky Hill, Connecticut, wherein the three leases
with the Company were transferred to a new lessor. This lease transfer
facilitated the first tranche of the repurchase of the Series A preferred stock
discussed below. The Company received approximately $10.2 million in cash
proceeds and recognized a gain of approximately $8.5 million, of which $2.2
million of deferred rent was reclassified as deferred gains, all of which was
deferred and will be amortized over the remaining life of the leases. As part
of the transaction, approximately $4.4 million in notes and interest receivable
related to the three facilities was retired.
On September 30, 2003, the Company's wholly owned subsidiaries, which owned
three buildings and jointly owned one building, pursuant to financing
requirements, participated with a real estate investment trust in the
sale-leasebacks of four buildings. The
F-25
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
leasehold assets continue to be owned by the subsidiaries and are designed to be
not available to satisfy debts or obligations of the consolidated Company,
except as otherwise provided in connection with the financing. The four
buildings are purpose-built assisted living communities located in Manassas,
Virginia; Kirkland, Washington; Chelmsford, Massachusetts; and Ridgeland,
Mississippi. The jointly owned building was 50% owned by the Company's
subsidiary and 50% owned by an unrelated third party. The Company purchased the
unrelated third party interest for $2.5 million. The consideration for the
transaction was paid by the real estate investment trust by assuming the
underlying debt on the facilities and paying cash consideration to the Company.
The Company received approximately $6.6 million in cash proceeds net of
retirement of $24.6 million of associated debt. As a result of this transaction,
the Company recognized a gain of $9.9 million, which will be deferred over the
term of the new operating leases.
Lease of Eight Communities from Baty. On September 30, 2003, Emeritus entered
into an agreement to lease eight communities that it was then managing for
entities owned or controlled by Mr. Baty, which the Company has formerly
referred to as the Horizon Bay communities. Under the agreement, the Baty
entities assigned, and the Company assumed, the existing leases relating to
seven of the facilities. In lieu of acquiring the remaining community, which was
owned by a Baty entity subject to mortgage financing, the Company leased the
community for a term of 10 years, with rent equal to the debt service on the
mortgage indebtedness (including interest and principal) plus 25% of cash flow
(after accounting for assumed management fees and capital expenditures). The
debt that is secured by this community may be cross-collateralized by Mr. Baty
with an Emeritrust I community that he may acquire and lease to the Company, as
described below. Annual rent relating to the eight communities is estimated at
$4.6 million, with annual adjustments based upon changes in the consumer price
level index. The Company will pay the Baty Entities approximately $70,000, which
represents their cash investment plus 9% per annum, as provided in the original
agreement related to the management of these communities between the Baty
Entities and the Company. Although this transaction closed December 31, 2003,
the economic and financial terms were effective June 30, 2003.
Other Transactions. Effective July 1, 2003, the Company ceased managing 12
Regent Assisted Living communities. On August 1, 2003, the Company ceased
managing an additional Regent Assisted Living community. Effective October 1,
2003, the Company ceased managing two communities located in Tacoma, Washington,
and Coeur d'Alene, Idaho.
On November 1, 2003, the Company entered into a lease agreement for an
Alzheimer's community located in Silverdale, Washington, containing an aggregate
of 46 units. The lease is for an initial 10-year period with two 10-year
extension options. The lease is a net lease, with base rental approximating
$235,000 annually with fixed escalators after the second year and variable
escalators at the end of the sixth lease year based on a percentage of increases
in the consumer price index. This lease, after the end of third lease year,
also includes an option to terminate. The property in this acquisition is a
purpose-built Alzheimer's community in which the Company plans to offer memory
loss services.
Five Community Mortgage Assumption. On December 31, 2003, independent of the
LLC transaction in Note 3, "Long-term Investments", the Company acquired five
assisted living communities (the "Five Properties"), containing an aggregate of
355 units, from Alterra for the assumption of $22.6 million of mortgage debt,
which bears interest at 6.98% per annum, provides for monthly payments of
$178,000, including principal and interest, and matures August 2008. The Five
Properties in this acquisition are purpose-built assisted living communities in
which the Company plans to offer both assisted and memory loss services to
select communities.
The initial allocations of purchase cost at fair value are based upon available
information for the acquired businesses and are finalized when any contingent
purchase price amounts are resolved. The final allocations did not differ
materially from the initial allocations. Aggregate purchase cost allocations
were as follows (In thousands):
December 31,
----------------
2003 2002
------- -------
Tangible assets . . . . $23,055 $22,162
Liabilities assumed . . 22,639 23,678
------- -------
Aggregate purchase cost $45,694 $45,840
======= =======
F-26
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summary, prepared on a pro forma basis, combines the results of
operations as if the above acquisitions (Emeritrust II Communities Lease, Lease
of Eight Communities in May, Lease of Eight Communities from Baty, and the Five
Community Mortgage Assumption) and a 24 community lease acquisition in the
fourth quarter of 2002, had been consummated as of the beginning of both of the
periods presented, after including the impact of certain adjustments such as
amortization of acquisition costs, elimination of management fees, lease costs
and income tax effects (In thousands, except per share data).
Year ended December 31,
2003 2002
--------- ----------
(unaudited)
Net revenues . . . . . . . . . . . . . . . . . . . $261,915 $254,942
Net loss . . . . . . . . . . . . . . . . . . . . . (8,560) (8,670)
Preferred dividends. . . . . . . . . . . . . . . . (6,238) (7,343)
Gain on repurchase of Series A preferred stock . . 14,523 -
--------- ---------
Net income (loss) to common shareholders $ (275) $(16,013)
========= =========
Income (loss) per common share:
Basic and diluted. . . . . . . . . . . . . . . $ (0.03) $ (1.57)
========= =========
Weighted average common shares outstanding:
Basic and diluted. . . . . . . . . . . . . . . 10,255 10,207
========= =========
These unaudited pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been completed as of the
beginning of both of the periods presented. In addition, they are not intended
to be a projection of future results and do not reflect all of the synergies,
additional revenue-generating services or reductions in direct community
operating expenses that might be achieved from combined operations.
F-27
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(18) COMMITMENTS AND CONTINGENCIES
In February 2004, the California Public Interest Research Group announced that
it intended to bring an action against operators of assisted living communities
(including us) and other senior housing facilities. The announced action seeks,
on behalf of residents of these facilities located in California, to recover
move-in or preadmission fees that have been paid over the past three years as
well as certain penalties. While the Company has not yet been served, it
intends to defend the action vigorously and has entered into a joint defense
agreement with other operators in California.
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.
(19) LIQUIDITY
The Company has incurred significant operating losses since its inception and
has a working capital deficit of $33.4 million, although $6.1 million represents
deferred revenue and $8.2 million of preferred dividends is due only if declared
by the Company's board of directors. In 2003, 2002, and 2001, the Company
reported positive net cash from operating activities in its consolidated
statements of cash flows. At times in the past, however, the Company has been
dependent upon third party financing or disposition of assets to fund operations
and the Company cannot guarantee that, if necessary in the future, such
transactions will be available timely or at all, or on terms attractive to the
Company.
In 2002, the Company refinanced substantially all of its debt obligations,
extending the maturities of such financings to dates in 2005 or thereafter, at
which time the Company will need to refinance or otherwise repay the
obligations. Many of the Company's 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 17 owned assisted living properties
and 104 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. Management believes the Company will be in
compliance at least through 2004 and for the foreseeable future.
Management believes that the Company will be able to sustain positive operating
cash flow at least through 2004 and for the foreseeable future and will have
adequate cash from operations for all necessary investing and financing
activities including required debt service and capital expenditures.
F-28
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(20) QUARTERLY RESULTS (UNAUDITED)
(In thousands, except per share data)
Q1 Q2 Q3 Q4
-------- -------- -------- --------
2003
Total operating revenue . . . . . . . . . . . . $47,177 $49,398 $50,209 $59,873
Income from operations. . . . . . . . . . . . . 2,677 2,637 436 1,197
Other income and (expense). . . . . . . . . . . (3,070) (1,664) (3,042) (2,578)
Income (loss) before income taxes . . . . . . . (393) 973 (2,606) (1,381)
Provision for income taxes. (a) . . . . . . . . - - (576) 158
Net income (loss) . . . . . . . . . . . . . . . (393) 973 (3,182) (1,223)
Preferred dividends . . . . . . . . . . . . . . (1,870) (1,905) (1,464) (999)
Gain on repurchase of Series A preferred stock. - - 14,465 58
Net income (loss) to common shareholders. . . . (2,263) (932) 9,819 (2,164)
Income (loss) per common share:
Basic . . . . . . . . . . . . . . . . . . . . $ (0.22) $ (0.09) $ 0.96 $ (0.21)
Diluted . . . . . . . . . . . . . . . . . . . $ (0.22) $ (0.09) $ 0.63 $ (0.21)
2002 Q1 Q2 Q3 Q4
-------- -------- -------- --------
Total operating revenue . . . . . . . . . . . . $36,146 $34,015 $36,037 $46,931
Income (loss) from operations . . . . . . . . . 2,082 (1,021) 243 (307)
Other income and (expense). . . . . . . . . . . (3,384) (2,913) (2,945) 2,022 (b)
Net income (loss) . . . . . . . . . . . . (1,302) (3,934) (2,702) 1,715
Preferred dividends . . . . . . . . . . . . . . (1,997) (1,732) (1,777) (1,837)
Net loss to common shareholders . . . . . . . . $(3,299) $(5,666) $(4,479) $ (122)
Loss per common share -- basic and diluted. . . $ (0.32) $ (0.56) $ (0.44) $ (0.01)
The sum of quarterly per share data may not equal the per share total reported
for the year.
(a) Tax provision relates to alternative minimum tax liability from
sale-leaseback transactions.
(b) Other income in Q4 includes a gain of $5.1 million related to discounts
received upon the payoff of existing financing, partially offset by
interest expense of $3.1 million.
(21) SUBSEQUENT EVENTS (Unaudited)
Since January 2004, the Company has been reviewing acquisition opportunities and
seeking to take ownership or lease positions in communities that the Company
manages. To this end, the Company intends to pursue an operating lease
acquisition with a real estate investment trust for up to 13 communities that
the Company formerly managed, nine communities with memory loss facilities, and
two other communities, for a total of 24 communities. These purpose-built
assisted living and memory loss communities are located in 13 states, and have
an aggregate capacity of approximately 1,740 units. Mr. Baty holds an interest
in the entities that will be the sellers of the properties in this proposed
transaction.
The preliminary master operating lease agreement has a 15-year lease term, with
three 5-year extension options. The lease is a net lease, with base rental
approximating $16.8 million annually with variable lease escalators based on the
lesser of four times CPI or 3%. Management believes that the Company will close
this transaction as early as March 31, 2004, and as late as the end of the
second quarter of 2004.
F-29
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Emeritus Corporation:
Under date of March 5, 2004, we reported on the consolidated balance sheets
of Emeritus Corporation and subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of operations, shareholders' deficit and
comprehensive operations, and cash flows for each of the years in the three-year
period ended December 31, 2003, which are included in the Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule for each of the years in the three-year period ended December 31, 2003
in the Form 10-K. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Seattle, Washington
March 5, 2004
S-1
Schedule II
Emeritus Corporation
Valuation and Qualifying Accounts
Years Ended December 31, 2003, 2002, and 2001
(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, 2003:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 327 $ 234 $ (203) $ 358
========== ============= =============== =========
Year ended December 31, 2002:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 398 $ 346 $ (417) $ 327
========== ============= =============== =========
Year ended December 31, 2001:
Valuation accounts deducted from assets:
Allowance for doubtful receivables. $ 594 $ 466 $ (662) $ 398
========== ============= =============== =========
(1) Represents amounts written off
S-2