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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(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, 1997.
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, 1997
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:
Name of each exchange
Title of each class on which registered
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Common Stock, $.0001 par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), (2) and has been
subject to such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark that there is no disclosure of delinquent filers
in response to Item 405 of Regulation S-K contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ( )
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 1998 was $81,090,958.
As of March 20, 1998, 10,483,050 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part
III of Form 10-K (items 10-13) is incorporated herein by reference to
the Registrant's definitive Proxy Statement relating to its 1998 Annual
Meeting of Stockholders to be held on May 20, 1998.
EMERITUS CORPORATION
Index
Part I
Page No.
Item 1. Description of Business.................................. 1
Item 2. Description of Property.................................. 16
Item 3. Legal Proceedings........................................ 20
Item 4. Submission of Matters to a Vote of Security Holders...... 20
Executive Officers of the Registrant..................... 20
Part II
Item 5. Market for Registrant's Common Equity and Related 21
Stockholder Matters......................................
Item 6. Selected Financial Data.................................. 22
Item 7. Management's Discussion and Analysis of Financial 23
condition and Results of Operations......................
Item 8. Financial Statements and Supplementary Data.............. 31
Item 9. Changes in and Disagreements with Accountants on 31
Accounting and Financial Disclosure......................
Part III
Item 10. Directors and Executive Officers of the Registrant....... 31
Item 11. Executive Compensation................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and 32
Management...............................................
Item 13. Certain Relationships and Related Transactions........... 32
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................. 32
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW AND BACKGROUND
Emeritus Corporation ("Emeritus" or the "Company") is a long-term-
care services company focused on operating residential-style assisted-
living communities. Since its organization in 1993, the Company has
achieved significant growth in revenues, primarily due to the
acquisition and operation of residential communities. The Company
believes it is one of the largest providers of assisted-living services
in the United States. As of March 20, 1998, the Company held ownership,
leasehold or management interests in 101 residential communities (the
"Operating Communities") consisting of approximately 8,800 units with
the capacity for 10,200 residents, located in 26 states. Of the 101
Operating Communities, 11 and 20 newly developed communities were opened
during 1996 and 1997, respectively. Additionally, the Company completed
construction on an expansion to an existing community during 1997.
Subsequent to December 31, 1997, the Company entered into an agreement
with an affiliate to provide management services for an independent-
living community located in Ohio. The Company owns, has a leasehold
interest in, management interest in or has acquired an option to
purchase development sites for 26 new assisted-living communities (the
"Development Communities"). Sixteen of the Development Communities are
currently under construction, 14 of which are scheduled to open during
1998. The Company leases 77 of its residential communities, typically
from a financial institution such as a Real Estate Investment Trust
("REIT"), owns 18 communities, manages or provides administrative
services for five communities and has a partnership interest in one
community. Additionally, the Company holds a 26.2% minority interest in
Alert Care Corporation ("Alert"), an Ontario, Canada based owner and
operator of 22 assisted-living communities consisting of approximately
1,250 units with a capacity of approximately 1,350 residents. See "-
Strategic Relationships - Alert Relationship". Assuming completion of
the Development Communities scheduled to open throughout 1998 and
including the minority interest in Alert, the Company will own, lease,
have an ownership interest in or manage 137 properties in 28 states and
Canada, containing an aggregate of approximately 11,450 units with
capacity of over 13,100 residents. There can be no assurance, however,
that the Development Communities will be completed on schedule and will
not be affected by construction delays, the effects of government
regulation or other factors beyond the Company's control. See "Factors
Affecting Future Results and Forward Looking Statements -Emphasis on
Acquisitions; Difficulties of Integrating Acquisitions", "-Ability to
Develop Additional Assisted-Living Communities", and "-Need for
Additional Capital." The Company's management of assisted-living
communities owned or leased by others has not been material to the
Company's business or revenue.
Emeritus was founded in July 1993 by Daniel R. Baty, Raymond R.
Brandstrom and Frank A. Ruffo, Jr. to become a nationwide operator of
assisted-living communities. During the 16 years prior to 1987, Mr.
Baty, the Company's Chairman of the Board and Chief Executive Officer,
served as the chief executive officer of The Hillhaven Corporation
("Hillhaven"), one of the largest operators of skilled-nursing
facilities in the United States. In 1986, Mr. Baty left Hillhaven to
pursue opportunities in the independent-living market. In 1987, he
became the chairman of the board and principal shareholder of Holiday
Retirement Corp. ("Holiday"), one of the largest operators of
independent-living communities in the United States and served as its
chief executive officer from 1991 through September 1997. Mr.
Brandstrom, the Company's President and Chief Operating Officer, and Mr.
Ruffo, the Company's Vice President have worked with Mr. Baty in various
financial, administrative and operating capacities for an aggregate of
more than 40 years, including 12 years and 13 years, respectively, at
Hillhaven. In November 1996, Gary D. Witte, joined the Company as Vice
President, Operations. Prior to joining the Company, Mr. Witte last
served as the Vice President of Operations, Southern Region for Vencor
Inc. and previously for Hillhaven Corporation where he was involved in
operating senior housing and related services for over 20 years.
By December 31, 1994, the Company had acquired seven existing long-
term facilities containing approximately 600 units. During 1995, the
Company commenced an aggressive acquisition program, acquiring 16
existing long-term-care properties containing approximately 1,600 units,
and entered into a joint venture in connection with the acquisition of
one community containing approximately 20 units located in New
Hampshire. In 1996, the Company continued its aggressive acquisition
program acquiring 35 existing long-term-care properties containing
approximately 2,700 units and entered into an agreement to provide
management services for an independent-living community containing
approximately 80 units. In addition, the Company commenced operations
at 11 newly developed communities, eight developed by the Company and
three developed by others, representing approximately 900 units. In
1997, the Company focused on its development program and commenced
operations at 20 newly developed communities containing approximately
1,600 units. Also, the Company acquired seven existing long-term-care
properties containing approximately 1,000 units and entered into an
agreement to provide management services and administrative services for
three communities containing approximately 200 units. The Company ended
the fiscal year with 100 communities containing approximately 8,700
units. Subsequent to December 31, 1997, the Company entered into an
agreement with an affiliate to provide management services for an
1
independent-living community located in Ohio, entered into four
management agreements with a Holiday affiliate, whereby the Holiday
affiliate will provide management services for four of the Company's
newly developed communities located in Texas. As of March 20, 1998 the
Company owns, leases or manages 101 Operating Communities containing
approximately 8,800 units with capacity for 10,200 residents.
The following table sets forth a summary of the Company's property
interests.
As of December 31,
------------------------------------------------------------------------
1994 1995 1996 1997
---------------- ---------------- ----------------- -----------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------- ------ --------- ------ --------- ------- --------- -------
Owned 6 494 14 1,496 15 1,485 19 2,099
Leased 1 91 9 662 53 4,165 76 6,124
Managed - - - - 1 83 4 327
Joint Venture/Partnership - - 1 22 2 162 1 140
--------- ------ --------- ------ --------- ------- --------- -------
Sub Total 7 585 24 2,180 71 5,895 100 8,690
Annual Growth - % - % 243% 273% 196% 170% 41% 47%
Pending Acquisitions 3 461 13 895 8 1,028 - -
New Developments 9 720 26 2,112 27 2,296 26 2,483
Minority Interest - - - - 17 959 22 1,248
--------- ------ --------- ------ --------- ------- --------- -------
Total 19 1,766 63 5,187 123 10,178 148 12,421
--------- ------ --------- ------ --------- ------- --------- -------
Annual Growth - % - % 232% 194% 95% 96% 20% 22%
DEMOGRAPHICS
AGING POPULATION
The Company's target market, which is comprised of seniors, age 75
and older, is one of the fastest growing segments of the U.S. population
and, according to the U.S. Census Bureau, is expected to increase from
approximately 13.0 million in 1990 to over 16.8 million or approximately
31% by 2000. As the number of seniors age 75 and older continues to
grow, the Company believes there will be a corresponding increase in the
number of seniors who need assistance with activities of daily living.
According to the U.S. General Accounting Office, over 7.0 million people
in the United States in 1993 needed assistance with activities of daily
living, which number is expected to double by 2020.
The Company believes that assisted-living has become a more popular
approach to providing long-term care for seniors, particularly in light
of the increasing emphasis by both federal and state governments to
contain long-term-care costs, limitations imposed in many states on
construction of additional skilled-nursing facilities, which have
generally increased the level of care needed by residents in such
facilities and forced less acute seniors to seek alternative long-term-
care arrangements, the relative affluence of the most elderly segment of
the population and the decreasing availability of family care. The
Company believes that its communities are attractive to those seniors
who do not require 24-hour skilled-nursing care but do desire
supervision and assistance with activities of daily living, and that the
limited availability of governmental payment programs has created a
strong and growing market demand for noninstitutional long-term-care
services designed to fill the gap between independent-living facilities
and skilled-nursing facilities.
COST-CONTAINMENT PRESSURES
In response to rapidly rising healthcare costs, governmental and
private-pay sources have adopted cost containment measures that have
encouraged reduced lengths of hospital stays. The federal government
has acted to curtail increases in healthcare costs under Medicare by
limiting acute-care hospital reimbursement for specific services to
preestablished fixed amounts. Private insurers have begun to limit
reimbursement for medical services in general to predetermined
"reasonable charges", while managed-care organizations, such as health
maintenance organizations, are attempting to limit hospitalization costs
by negotiating for discounted rates for hospital services and by
monitoring and reducing hospital use. In response, hospitals are
discharging patients earlier and referring seniors, who may be too sick
or frail to manage their lives unassisted, to skilled-nursing facilities
where the cost of providing care is lower than in a hospital. As a
result, an increased number of discharged hospital patients are seeking
skilled-nursing facility care. At the same time, skilled-nursing
facility operators continue to focus on improving occupancy and
expanding services to subacute patients requiring significantly higher
levels of skilled-nursing care. Based on its experience, the Company
estimates that between 25% to 40% of skilled-nursing facility patients
2
could be more appropriately cared for in a less institutional, less
costly environment such as an assisted-living community.
RESTRICTED SUPPLY OF NURSING FACILITY BEDS
A majority of states have adopted certificate of need ("CON") or
similar statues that generally require a state agency to determine that
a need exists for new beds and that certain other criteria are also
satisfied before construction of new nursing-facility beds commences,
new services are provided or certain expenditures are made, the cost of
which would be reimbursable either in whole or in part by one or more
state-funded programs. The Company believes that this CON process tends
to restrict the supply of skilled-nursing facility beds. The Company
also believes that high construction costs, limitations on governmental
reimbursement for the full costs of construction and start-up expenses
also constrain growth in the supply of such facilities and beds.
SENIOR AFFLUENCE AND REDUCED RELIANCE ON FAMILY CARE
The Company's target market is comprised of middle- to upper-middle-
income seniors who have accumulated some assets and receive income from
investments and pensions, as well as from Social Security. The Company
believes that many of these seniors have the economic resources to pay
for an assisted-living alternative to traditional long-term care without
financial assistance.
Historically, the family has been the primary provider of senior
care. The Company believes, however, that the increased percentage of
women in the workforce and the increased mobility of society are
reducing the family's role as the traditional caregiver for seniors,
which trend will make it necessary for many seniors to look outside the
family for assistance as they age.
GROWTH STRATEGY
The Company plans to expand its network of assisted-living
communities by (a) developing new assisted-living communities and, (b)
if attractive opportunities are available, acquisition of (i) existing
assisted-living communities and (ii) properties that it believes can be
effectively repositioned as assisted-living communities. The Company
believes that there is significant demand for alternative long-term-care
services that are positioned between the limited services offered by
independent-living facilities and the more medical and institutional
care offered by skilled-nursing facilities.
A significant component of the Company's growth strategy has been
the acquisition of existing senior housing facilities that either are
currently operated as assisted-living communities or can be efficiently
repositioned by the Company as assisted-living communities. The
Company believes that the terms on which it has acquired its interest in
the Operating Communities have generally been favorable and below the
estimated replacement cost. There can be no assurance, however, that
the Company's cost of acquiring appropriate properties will remain
favorable as additional experienced and well-financed competitors enter
the assisted-living market segment. See "Factors Affecting Future
Results and Forward-Looking Statements - Emphasis on Acquisitions;
Difficulty of Integrating Acquisitions and "-Need for Additional
Capital" for a description of factors that could affect the Company's
rate of acquisitions.
The Company believes that the popularity of assisted-living as a
long-term-care alternative is decreasing the number of existing long-
term-care facilities that are available at attractive prices and that
its growth may depend more on the successful development of new assisted-
living communities. As a result, the Company has increasingly focused
on the development of assisted-living communities, with a goal to open
10 to 15 per year. However, if attractive opportunities are made
available, the Company will continue to acquire ownership or leasehold
interests in existing long-term-care facilities. There can be no
assurance that acquisitions or development will proceed at the rate
currently expected by the Company as a result of such factors as
availability of attractive properties or development sites,
possibilities of over building, regulatory impediments, development and
construction delays and availability of capital. In pursuing its growth
strategy, the Company expects to face competition in the developing and
acquiring of assisted-living communities. The Company believes that if
the development of new assisted-living communities outpaces demand for
those communities in certain markets, such markets may become saturated
and that could have a material adverse effect on the Company's business,
financial condition and results of operations, as well as, difficulties
in obtaining attractive sites for developing. See "Factors Affecting
Future Results and Regarding Forward-Looking Statements -Emphasis on
Acquisition; Difficulties of Integrating Acquisitions", "-Ability to
Develop Additional Assisted-living communities" and "-Need for
Additional Capital" for other factors that could affect the Company's
rate of development.
3
MARKET SELECTION PROCESS
In selecting geographic markets for potential expansion, the
Company considers such factors as a potential market's population,
demographics and income levels, including the existing and anticipated
future population of seniors who may benefit from the Company's
services, the number of existing long-term-care facilities in the market
area and the income level of the target population. While the Company
does not apply its market selection criteria mechanically or inflexibly,
it generally seeks to select assisted-living community locations that
(a) are nonurban with populations of between 25,000 and 150,000 persons,
(b) have residents who generally enjoy mid-level incomes compared to
incomes generally realized in the region, (c) have a regulatory climate
that the Company considers favorable toward development, and (d) are
established and economically stable compared to newer, faster-growing
areas. The Company has found that communities with these
characteristics generally have a receptive population of seniors who
desire and can afford the services offered in the Company's assisted-
living communities.
In part because of Mr. Baty's close relationship with Holiday, four
of the sites currently under development or under consideration are near
existing or proposed Holiday independent-living facilities. The Company
believes that Mr. Baty's relationship with Holiday has provided, and
will continue to provide, the Company with opportunities to locate new
development sites near existing Holiday independent-living facilities
and enable the Company to gain knowledge that will allow it to select
advantageous development sites.
ACQUISITIONS
The Company has acquired, and plans to continue to acquire, if
attractive opportunities are made available, existing assisted-living
communities. The Company expects that, where an existing assisted-
living community has been well managed, has a stable occupancy and
financial performance and has in place a program of assisted-living
services comparable to those provided by the Company, the average per-
unit acquisition cost will generally be higher than for facilities that
require repositioning. The Company further expects, however, that the
expenditures otherwise associated with repositioning a facility will not
be as great, and that the anticipated time to achieve stabilized
occupancy and target resident mix will typically be shorter. Sixty-five
of the Company's 101 Operating Communities, containing 5,800 units, were
previously operated by others as assisted-living communities before
their acquisition by the Company. Of these, 11 required significant
repositioning.
Six of the Company's 101 Operating Communities, containing
approximately 400 units, were previously operated as independent-living
facilities. Under their prior owners, these properties often reflected
varying combinations of operating deficiencies, unstable occupancy and
deferred maintenance, which the Company believes enabled it to acquire
the properties at favorable prices. The Company typically implements
operating policies and procedures in assisted-living communities
previously operated as independent-living facilities to (a) stabilize
the resident population at appropriate levels with seniors who desire,
and have adequate resources for, the services offered in an assisted-
living environment and (b) aggressively market a broad array of assisted-
living services that can be provided on a basis consistent with the
Company's goal of maximizing the community's profitability.
Repositioning an acquired independent-living facility as an assisted-
living community generally requires approximately 12 to 24 months and
may require obtaining new or additional licenses, instituting policies
and procedures that implement the Company's assisted-living philosophy,
offering additional services typically provided by assisted-living
communities and improving the property to facilitate the provision of
those services and addressing deferred maintenance issues. The changes
typically involved in repositioning a facility are designed to increase
the facility's overall occupancy rate and to gradually alter the
resident mix so as to attract residents who can more readily use and
afford the additional services offered by the Company.
In certain circumstances the Company has acquired, and may continue
to acquire, independent-living and skilled-nursing facilities that for
various reasons it does not reposition as assisted-living communities.
These acquisitions will, however, generally be incidental to the
Company's overall focus on assisted-living communities, and the Company
will typically seek over time to divest itself of the ownership or
operation of properties that are inconsistent with its assisted-living
focus. There can be no assurance however, that the Company will
successfully operate such independent-living or skilled-nursing
facilities in the interim, that it will be able to locate qualified
purchasers or operators of such facilities or that the terms on which it
transfers ownership or operation of such facilities will be advantageous
to the Company. At December 31, 1997, the Company operated 15
properties or portions of properties, consisting of 1,300 units, as
independent living communities. Also, at December 31, 1997, the Company
owned one and leased three skilled-nursing communities, consisting of
approximately 100 units, three which are operated by the Company and one
which is operated by an independent third party.
4
DEVELOPMENT
To further address the market need for assisted-living communities
and to anticipate growing competition for attractively priced
acquisition targets, the Company initiated a program of developing new
assisted-living communities in 1994. In 1996 and 1997, the Company
commenced operations on 11 and 20 newly developed communities,
respectively. Of the 11 developed in 1996, three were acquired by the
Company and developed by others. The Company currently owns, has a
leasehold interest in, management interest in or has acquired an option
to purchase the development sites for 26 of the Development Communities.
The Company currently anticipates opening 10 to 15 Development
Communities in 1998 and expects that its development program will enable
it to open approximately 10 to 15 newly developed assisted-living
communities in 1999. See "Factors Affecting Future Results and
Regarding Forward-Looking Statements Ability to Develop Additional
Assisted-living Communities" and "Need for Additional Capital" for a
description of factors that could affect the Company's rate of
development.
The Company intends to develop assisted-living communities
generally ranging in size from 50 to 150 units, consisting of an
aggregate of approximately 30,000 to 80,000 square feet, which are
located on sites typically ranging from three to five acres. Unit sizes
range from 350 to 500 square feet. The Company estimates that the
development cost of most of it assisted-living communities will
generally be approximately $60,000 to $95,000 per unit, depending on
local variations in land and construction cost.
The Company intends to develop new assisted-living communities by
using a combination of in-house development personnel and experienced
third-party project managers and by acquiring newly constructed
communities from developers under "turnkey" purchase and sale
agreements. Where the Company hires an outside developer, it plans to
retain the right to approve all aspects of the development, including,
among other things, site selection, plans and specifications, the
proposed construction budget and the general contractor. The Company
generally requires outside general contractors to post a performance
completion bond for each community under development. Typically, the
general contractor will be responsible for cost overruns and will be
required to build each residence to completion within a predetermined
maximum construction period. The Company expects that the average
construction time for a typical assisted-living community will be
approximately 8 to 12 months, depending on the number of units. Once a
site is developed, the Company estimates that it will take approximately
12 to 24 months for the assisted-living community to achieve a
stabilized level of occupancy.
To the extent the Company acquires newly developed communities from
a developer on a "turnkey" basis, it intends to enter into a purchase
and sale agreement whereby the Company, subject to construction of the
facility to the Company's preapproved standards and satisfaction of
typical purchase and sale contingencies for the Company's benefit, will
commit to purchase the facility upon completion at a fixed price equal
to the total development costs plus a development fee. In some
instances, the Company may agree to allow a developer that has
sufficient experience operating long-term-care facilities to open a
newly developed community and operate the community until it achieves a
certain occupancy level, at which time the Company would acquire the
community at a price that reflects the reduced lease-up risk.
MANAGEMENT AGREEMENTS
From time to time, the Company has entered into agreements whereby
it manages or provides administrative services for assisted-living
communities and independent-living communities owned or leased by
others. The agreements have terms ranging from two to four years, with
options to renew, and provide for management fees ranging from 4% to 6%
of gross operating revenues, payable monthly for management agreements
and fixed fees of $4,000 payable monthly for administrative agreements.
Acorn Service Corporation ("Acorn"), a subsidiary of the Company,
currently manages four communities containing approximately 300 units
and provides administrative services for one community containing
approximately 100 units ("Managed Communities"). The Managed
Communities are owned by Columbia House I, Limited Partnership
("Columbia House"), which is partially owned indirectly by the Company's
Chairman and Chief Executive Officer. See "Strategic Relationships -
Columbia House Relationship." The Company currently plans to have
continuing involvement with Columbia House as well as management
interests in communities with respect to the joint venture between the
Company and Sanyo Electric Co., Ltd. ("Sanyo"), of Osaka, Japan and
Aurora Bay Investments, L.L.C. ("Aurora Bay"), all of which will be
managed by Acorn. See "Strategic Relationships -Sanyo Relationship and
Aurora Bay Relationship. Management and administrative services
agreements and the Managed Communities owned or leased by others are not
currently material to the Company's overall business or revenue.
5
STRATEGIC RELATIONSHIPS
HOLIDAY RELATIONSHIP
Twenty-eight of the Company's Operating Communities and two of its
Development Communities are located near existing or proposed
independent-living facilities operated by Holiday. The Company believes
that its focus on expanding in locations near Holiday facilities will
often enable it to gauge the need for its services in a particular
market by evaluating Holiday's operating performance, and that
successful Holiday facilities will generally reflect the combination of
criteria required for a successful assisted-living community. In
addition, the Company believes that, as a result of Mr. Baty's close
relationship with Holiday, opportunities may arise for (a) development
of assisted-living communities on sites near existing or proposed
Holiday independent-living facilities and (b) joint marketing programs
for attracting residents to the Company's assisted-living communities
and Holiday's independent-living facilities, depending on the level of
services required. Generally, the Company and Holiday have no written
agreement or formal understanding concerning their relationship, and
there can be no assurance that opportunities for such development or
joint marketing programs will arise and that the Company's and Holiday's
interests will be compatible in the future. In February 1998, however,
the Company and a Holiday affiliate entered into four management
agreements whereby the Holiday affiliate will provide management
services relating to four newly developed assisted-living communities
located in Texas. The agreements consist of initial terms of two years
six months and management fees based on 6% of gross revenues payable
monthly. The Company will pay a bonus fee per community to the Holiday
affiliate based on occupancy; one year after managing the communities,
if occupancy is between 75% and 89%, the Holiday affiliate will receive
a bonus fee of $25,000 and if occupancy is 90% or greater the bonus fee
will be $50,000. Mr. Baty and Mr. Colson, a director of the Company are
the principal shareholders, directors and senior executive officers of
Holiday, and substantially all the independent-living facilities
operated by Holiday are owned by partnerships controlled by Messrs. Baty
and Colson and in which they have varying financial interests.
PAINTED POST PARTNERS RELATIONSHIP
During 1995, the Company's two most senior executive officers, CEO
and President, formed a New York general partnership (the "Partnership")
to facilitate the operation of assisted-living communities in the state
of New York, which generally requires that natural persons be designated
as the licensed operators of assisted-living communities. The Company
and the Partnership have entered into Administrative Services Agreements
that extend for the term of the underlying leases. The fees payable to
the Company under the Administrative Services Agreements have been
established at a level that would equal or exceed the profit of the
community operated efficiently at full occupancy and, unless reset by
agreement of the parties, will rise automatically on an annual basis in
accordance with changes in the Consumer Price Index. In addition, the
Company has agreed to indemnify the partners against losses and in
exchange the partners have agreed to assign any profits to the Company.
As a part of the general noncompetition agreements of the CEO and
President, each has agreed that in the event he were to cease to be a
senior executive of the Company, he would transfer his interest in the
Partnership for a nominal charge to his successor at the Company or
other person designated by the Company.
ALERT RELATIONSHIP
In November 1996, the Company agreed to purchase up to 6,888,466
shares of convertible preferred stock of Alert, an Ontario, Canada based
owner and operator of assisted-living communities at prices ranging from
$0.67 to $0.74 per share (Cdn). In addition, the Company acquired an
option to purchase an additional 4,000,000 shares of convertible
preferred stock at an exercise price of $1.00 per share (Cdn), as well
as an option to purchase from Eclipse Capital Management ("Eclipse"),
the majority shareholder of Alert, and certain other shareholders of
Alert, 9,050,000 currently issued and outstanding shares of common stock
of Alert and 950,000 currently issued and outstanding shares of Class A
non-voting stock of Alert both at an exercise price of $3.25 per share
(Cdn).
Each Preferred Share is convertible into one common share or one
Class A nonvoting share, at the holder's election; the Preferred Shares
are immediately convertible into Class A nonvoting shares but are not
immediately convertible into common shares and are so convertible only
after the controlling persons of Alert have transferred to others (which
could include the Company) not less than 10 million shares of common or
Class A nonvoting shares (as of March 20, 1998 there are approximately
23.8 million such shares outstanding) and such controlling persons are
relieved of certain guarantees of indebtedness.
As of December 31, 1996, the Company had purchased and held
2,577,692 shares of preferred stock for a total investment of $1,800,000
(Cdn) or $1,331,000 (US). In 1997, the Company purchased an additional
5,010,774 shares of preferred stock increasing its ownership to
7,588,466 shares or $4,111,000 (US). As of December 31, 1997, the
6
Company's total investment in Alert represents on an as-converted basis
approximately 24.2% of the outstanding common and Class A nonvoting
shares taken together. This represents approximately 41.9% of the
common shares (assuming no Class A nonvoting share are converted into
common shares) and approximately 36.3% of the Class A nonvoting shares
(assuming no common shares are converted into Class A nonvoting shares).
In January 1998, the Company purchased an additional 850,000 shares of
preferred stock resulting in an ownership interest of 8,438,466 shares
or 26.2%.
Alert has entered into an exclusive management agreement to manage
the Company's future assisted-living communities in Ontario. Eclipse,
through its wholly-owned subsidiary, Eclipse Construction Inc., develops
and constructs retirement homes for Alert on a contract basis. Under
the agreement, Eclipse has entered into an exclusive development
agreement with the Company and Alert to develop their future
construction projects in Ontario. No communities have been developed
under these agreements as of March 20, 1998.
COLUMBIA HOUSE RELATIONSHIP
Columbia House I, Limited Partnership ("Columbia House"), a
Washington limited partnership in which Mr. Baty, the Company's Chairman
and Chief Executive Officer indirectly controls the general partner and
holds an indirect 60% interest, develops, owns and leases low income
senior housing projects. The Company has entered into five agreements
with Columbia House to provide certain administrative support, due
diligence and financial support services to Columbia House with respect
to the acquisition, development and administration of Columbia House
communities. The Company currently manages four communities containing
approximately 300 units and provides administrative services for one
community containing approximately 100 units. See "Growth Strategy -
Management Agreements." The Company may in the future manage other
communities owned or leased by Columbia House.
SANYO RELATIONSHIP
In February 1998, the Company entered into a joint venture with
Sanyo to provide assisted living services in Japan. The joint venture,
Sanyo Emeritus Corporation, has been formed to provide a residential
based health care alternative for Japan's growing elderly population.
The Company will be initially capitalized with Y50 million, with each
company providing half the funds. The joint venture is expected to
complete its first assisted living project in Japan by the year 2000.
Similar to the United States, the elderly population in Japan is
experiencing dramatic growth. The Japanese Government expects that by
the year 2020, 27% of the Japanese population will be over 65 years of
age. In 1999, the Japanese Government is changing the current
reimbursement system and the Company expects that assisted-living
services will be an integral part of this new system thereby offering
Japan's elderly greater flexibility in making their health care choices.
AURORA BAY RELATIONSHIP
In January 1998, the Company entered into a $5.0 million credit
agreement with Aurora Bay, a limited liability company that acquires,
develops and operates Alzheimer's special care facilities to provide
room, board, and personal care services primarily to elderly persons
afflicted with Alzheimer's disease. Advances are evidenced by a
convertible promissory note (the "Convertible Note"), which is due in
January 2003 and accrues interest at 9.0% per annum. The Convertible
Note is convertible, at the Company's option, into a 48% equity interest
in Aurora Bay. The conversion rights will lapse if not exercised by the
Company on or prior to the maturity date of the Convertible Note. The
arrangement allows Aurora Bay to borrow up to $5.0 million to develop
Alzheimer's facilities. In January 1998, the Company advanced $535,000
to Aurora Bay for the first Alzheimer development located in Lubbock,
Texas. Under this agreement, the Company expects Aurora Bay to develop
eight to ten buildings, averaging 30 units per building with the
capacity of 56 residents per building over the next three years.
Funding for these buildings is expected to occur over the next 18 to 24
months. This relationship will allow for Aurora Bay to acquire, develop
and operate Alzheimer's communities and the Company to become a
significant owner of multiple Alzheimer's communities, with the
opportunity of obtaining financial and strategic growth in the
Alzheimer's industry without taking resources away from the development
and operations of assisted-living communities.
NORTHSTAR RELATIONSHIP
In October 1997, NorthStar Capital Partners LLC ("NorthStar"), a
private investment group with financial backing from a Union Bank of
Switzerland Securities affiliate and Quantum Realty Partners, a fund
advised by Soros Fund Management LLC, invested $25.0 million in the
Company through the purchase of 25,000 shares of Series A Convertible
Exchangeable Redeemable Preferred Stock (the "Series A Preferred
Stock"), representing approximately 10% ownership in the Company. Each
share of Series A Preferred Stock is convertible into that number of
shares of the Company's Common Stock equal to the liquidation value of a
share of Series A Preferred Stock ($1,000) divided by the conversion
price of $18.20 per share. Currently the Series A Preferred Stock is
7
convertible into an aggregate of 1,373,626 shares of Common Stock. The
Series A Preferred Stock is also exchangeable into convertible debt at
the option of the Company. The conversion price is subject to adjustment
in the event of stock dividends, stock subdivisions and combinations,
and extraordinary distributions. The Series A Preferred Stock has a
mandatory redemption date of October 24, 2004.
OPERATIONS
The senior housing services industry encompasses a broad range of
accommodations and healthcare services that are provided primarily to
seniors. For seniors who require limited services, home-based care,
either in their own or a family member's home, offers a viable option
for assistance on an "as required" basis. For seniors who are
interested in community housing, retirement centers and independent-
living facilities offer support services that are often limited to
meals, housekeeping and laundry. As a senior's need for assistance
increases, care in an assisted-living community is often preferable and
more cost-effective than care at home or in a facility that does not
regularly provide the required services. Care in an assisted-living
community also offers residents a comfortable residential environment,
particularly when compared to the institutional setting often associated
with a skilled-nursing facility. Residents typically enter an assisted-
living community when other facilities are no longer able to provide the
level of services required. Under the Company's operating approach,
seniors reside in a single- or double-occupancy residential unit for a
monthly fee that is based on each resident's overall service needs. The
Company believes that its focus on residential assisted-living
communities allows seniors to maintain a more independent lifestyle than
is possible in the more medical and institutional environment of skilled-
nursing facilities. The Company also believes that certain of its
services, such as assisting residents with their activities of daily
living (including bathing, dressing, personal hygiene, grooming,
ambulating and eating) and providing health-related assistance
(including supervising residents' medication and monitoring certain
health conditions), are attractive to many seniors who are inadequately
served by independent-living facilities. Generally, residents of
assisted-living communities require higher levels of care than residents
of independent-living facilities, but require lower levels of care than
residents of skilled-nursing facilities.
STRATEGY
Using its management's expertise in operating long-term-care
facilities, the Company seeks to provide high-quality services in its
assisted-living communities while at the same time increasing operating
margins primarily by (a) increasing occupancy levels through extensive
marketing efforts to area hospitals, independent-living facilities and
other referral sources, including joint marketing efforts with Holiday
that are designed to attract residents to communities operated by the
Company or Holiday, depending on the level of services required; (b)
encouraging residents to remain longer at the Company's communities by
offering them a range of service options that will keep pace with their
needs as they age; (c) increasing revenues through modifications in rate
structures, where appropriate; and (d) identifying opportunities to
create operating efficiencies and reduce costs.
MARKETING AND REFERRAL RELATIONSHIPS
The Company's operating strategy is designed to integrate its
assisted-living communities into the continuum of healthcare providers
in the geographic markets in which it operates. One objective of this
strategy is to enable residents who require additional healthcare
services to benefit from the Company's relationships with local
hospitals, home healthcare agencies and skilled-nursing facilities in
order to obtain the most appropriate level of care. Thus, the Company
seeks to establish relationships with local hospitals (including 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
the company's network of referral sources.
Of the Company's 101 Operating Communities and 26 Development
Communities, 30 are located in markets or proposed markets in which
Holiday also operates its independent-living facilities. The Company
believes that its assisted-living communities will offer an attractive
alternative for Holiday residents as they age and require more extensive
services. The Company and Holiday do not have any formal understanding
or written agreement regarding joint marketing programs. As a result,
there can be no assurance that joint marketing programs envisioned with
Holiday will be effected. Furthermore, there can be no assurance that,
if effected, such joint marketing programs will be successful in
attracting additional residents to the Company's assisted-living
communities or that the Company's and Holiday's interest will be
compatible in the future. See "-Strategic Relationships" and "Certain
Transactions".
8
RESIDENT-SERVICE PROGRAMS
The Company's assisted-living communities offer residents a
supportive, "home-like" setting and assistance with activities of daily
living. Residents of the Company's communities are typically unable to
live alone, but do not require the 24-hour care provided in skilled-
nursing facilities. Services provided to the Company's residents are
designed to respond to their individual needs and to improve their
quality of life, are available 24 hours a day to meet both anticipated
and unanticipated resident needs, and generally include three meals per
day, housekeeping and grounds keeping and building maintenance services.
Available support services include personal and routine nursing care,
social and recreational services, transportation and special services.
Personal services include bathing, dressing, personal hygiene, grooming,
ambulating and eating assistance. Health-related services, which are
made available and provided according to the resident's individual needs
and state regulatory requirements, may include assistance with taking
medication, skin care and injections, as well as healthcare monitoring.
Organized activities are available for social interaction and
entertainment. Special services include banking, shopping and pet care.
The Company provides its residents service options through its
FlexAssist living program, which employs a detailed individual
assessment and service-planning process that responds to each resident's
assistance needs.
All residents are offered the same categories of care at four
different levels. An individual resident's level of care is determined
by the degree of assistance he/she requires in each of the categories.
The more assistance required, the higher the level of care. The
categories of care include orientation to person/place/time, behavior
management, socialization, activities and transportation, medication,
continence, bathing, dressing, grooming, ambulation, dining assistance,
dietary assistance, housekeeping, laundry, medical management and
miscellaneous (which consists of diabetic management, PRN medication,
transfer, simple treatment, oxygen set up/maintenance and prosthesis).
All residents pay the base rate plus the rate for one of the levels of
care. The base rate includes apartment rent, three meals per day,
weekly housekeeping, changing of bed and bath linens, utilities
(excluding telephone), scheduled transportation, social and recreational
activities and an emergency call system.
The Company believes that its emphasis on quality and continuity of
service will enable it to increase its communities' occupancy rates,
thereby enhancing revenues. By creating a long-term-care environment
that maximizes resident autonomy and provides individualized service
programs, the Company seeks to attract seniors at an earlier state of
their search for long-term-care, before they need the higher-level care
provided in a skilled-nursing facility. By providing programs that are
designed to offer residents a range of service options as their needs
change, the Company seeks to achieve greater continuity of care,
enabling seniors to "age in place" and thereby maintain their residency
for a longer time period. The Company also believes that the physical
configuration of its facilities, combined with its level of service,
contributes to resident satisfaction and allows seniors residing at the
Company's communities to maintain an appropriate level of autonomy.
RATE STRUCTURE
The Company believes that its residents' average monthly charges
are approximately 55% to 65% of the average monthly charge for residents
receiving nursing care in private rooms at unskilled-nursing facilities
due in part to the less labor-intensive services required by seniors who
comprise the Company's target market. The Company initially
experimented with a menu-based system of charges for the services
offered at its communities. However, it has shifted to its FlexAssist
program, a tiered service structure based on the number and frequency of
activities of daily living with which a resident needs assistance.
SERVICE REVENUE SOURCES
The Company currently and for the foreseeable future expects to
rely primarily on its residents' ability to pay the Company's charges
from their own or familial resources. Although care in an assisted-
living community is typically less expensive than in a skilled-nursing
facility, the Company believes generally only seniors with income or
assets meeting or exceeding the regional median can afford to reside in
the Company's communities. Inflation or other circumstances that
adversely affect seniors' ability to pay for services such as those
provided by the Company could have an adverse effect on the Company's
business or operations. For example, if the Company were unable to
attract residents able to pay for its services, it would have to modify
its business strategy of relying primarily on the private-pay market and
be forced to rely more on the limited number of governmental
reimbursement programs. Furthermore, the federal government does not
currently provide any reimbursement for the type of assisted-living
services provided by the Company. Although some states have
reimbursement programs in place, in many cases the level of
reimbursement is insufficient to cover the total costs of delivering the
level of care that the Company currently provides.
9
The Company currently serves a limited number of residents who are
eligible for subsidies in the form of additional Supplemental Security
Insurance ("SSI") payments and were residing at a facility when it was
acquired by the Company. SSI, a federal recipient assistance program
that is administered primarily at the state level, provides financial
assistance to indigent persons requiring placement in a residential-care
facility. Qualifications are generally similar to those of Medicaid,
and the Company is subject to various regulatory and governmental
reimbursement policies. Net revenues from state reimbursement programs
for the years 1996 and 1997 accounted for less than 10% of the Company's
operating revenues for such years. Payments to the Company under state
reimbursement programs in which the Company participates are currently
sufficient to cover virtually all the operating (but not financing)
costs allocable to the Company's participating residents. As third
party reimbursement programs continue to grow in certain states
(Washington, Texas, Massachusetts), the Company will pursue
reimbursement from the third party, if appropriate, given the level of
care provided to its residents. However, there can be no assurance
that the Company will continue to improve its private-pay mix or that it
will not in the future become more dependent on governmental
reimbursement programs.
ADMINISTRATION AND COST CONTAINMENT
The Company has recruited experienced key employees from several
established operators in the long-term-care services field and believes
that it has assembled the administrative, development and financial
personnel that will enable it to manage its growth and operating
strategies effectively. In 1996, the Company restructured its operations
department through the recruiting of individuals with strong backgrounds
in the senior housing industry. In November 1996, the Company hired
Gary D. Witte as its Vice President, Operations whose background
consists of over 20 years experience in the industry and in March 1997,
the Company hired a Sarah Curtis as its Vice President, Sales and
Marketing with over 15 years experience in the industry. The Company
also recruited individuals with a strong background in senior housing
for its regional director positions. In addition the Company has
developed the internal procedures, policies and standards it believes
are necessary for effective operation and management of its residential
communities. The Company provides management support services to each of
its residential communities, including establishment of operating
standards, recruiting, training, and financial and accounting services.
The Company has established Central, Eastern and Western Operational
Divisions. Each division is headed by a director who reports to the
Company's Chief Operating Officer and its Vice President, Operations.
The divisions contain two to eight operational regions for the Mid
Atlantic states, Arizona, California, Florida, New York and Texas. Each
operational region is headed by a regional director who provides
supervisory oversight for each of the communities in their respective
regions. Day to day community operations are supervised by an on-site
administrator who, in certain jurisdictions, must satisfy certain
licensing requirements.
To contain costs and maximize operating efficiency, the Company
employs an integrated structure of management and financial systems and
controls. The Company utilizes centralized accounting systems and
computer systems that link each community with the Company's executive
offices to provide management with on-line revenue and expense
information regarding its residential communities. The Company's
systems provide an on-line analysis capability for resident billing,
occupancy, marketing and statistical information.
COMMUNITY DISPOSITIONS
As of December 31, 1997, the Company is exploring strategic
alternatives regarding the disposition of five to ten of the Company's
assisted-living communities. Strategic alternatives involve possible
sublease, sale or partnership with respect to certain communities and
may depend on the geographical regions.
COMPETITION
The number of assisted-living communities in the United States, the
ownership of which is fragmented, is increasing rapidly. The Company is
experiencing an increase in competition through the development of
assisted-living communities. As the assisted-living industry continues
to grow, fewer attractive development sights are made available. This
market saturation could have an adverse effect on the Company's newly
developed communities and their availability to fill-up and achieve a
stabilized occupancy . 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
multifacility operations. While there are several national and regional
companies that provide senior living alternatives, the Company
anticipates that its primary source of competition will come from local
and regional assisted-living companies that operate, manage and develop
residences within the same geographic area as the Company, 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. The Company believes that quality
of service, reputation, a facility's location and physical appearance,
and price will be significant competitive factors. Some of
10
the Company's competitors have significantly greater resources,
experience and recognition within the healthcare community than does the
Company.
EMPLOYEES
As of December 31, 1997, the Company had 4,106 employees, including
708 full time employees, of which 90 were employed at the Company's
headquarters. None of the Company's employees are currently represented
by a labor union, and the Company is not aware of any union-organizing
activity among its employees. The Company believes that its
relationship with its employees is good.
Although the Company believes it is able to employ sufficient
skilled personnel to staff the communities it operates or manages, a
shortage of skilled personnel in any of the geographic areas in which it
operates could adversely affect the Company's ability to recruit and
retain qualified employees and control its operating expenses.
TRADEMARKS
The Registration of the Company's FlexAssist service mark was
granted in February 1997.
FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING
STATEMENTS
The Company's business, results of operations and financial
condition are subject to many risks, including those set forth below.
In addition, the following important factors, among others, could cause
the Company's actual results to differ materially from those expressed
in the Company's forward-looking statements in this report and presented
elsewhere by management from time to time. When used in this report,
the words "believes", "anticipates" and similar expressions are intended
to identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak
only as of the date of this report. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence
of unanticipated events.
RECENT ORGANIZATION; HISTORY OF LOSSES. The Company was organized
and began operations in July 1993 and has operated at a loss since its
inception. For 1996 and 1997, the Company recorded a net loss of
$8.2 million and $28.2 million, respectively. The majority of the
Operating Communities that have been acquired operated at a loss
following acquisition. The Company, if provided with attractive
opportunities, intends to continue to acquire long-term-care facilities
that are likely to operate at a loss for at least 12 months to 18 months
after the Company acquires its interest in each facility. In addition,
the Company is developing new assisted-living communities, all of which
are expected to incur start-up losses for at least twelve months after
commencing operations. As a result, the Company expects to continue to
incur losses at least through the end of 1999. There can be no
assurance, however, that the Company's operations will become profitable
at the rate currently expected by the Company, if at all. The Company's
inability to achieve profitability on a timely basis could have an
adverse effect on the Company's business, operating results and
financial condition and the market price of its Common Stock.
EMPHASIS ON ACQUISITIONS; DIFFICULTIES OF INTEGRATING ACQUISITIONS.
The Company's growth strategy has emphasized a program of acquiring
existing assisted-living communities and properties that it believes it
can efficiently reposition as assisted-living communities. During the
first half of 1997, the Company acquired ownership of or leasehold
interests in seven long-term-care facilities. No further acquisitions
occurred during the year due to the unavailability of attractive
facilities and no acquisitions are currently in process. However, if
attractive opportunities are made available, the Company will continue
to acquire ownership or leasehold interest in existing long-term-care
facilities. Acquisitions of long-term-care facilities are typically
subject to a number of closing conditions, including those regarding the
status of title to real property included in the acquisition, the
results of environmental investigations performed on the Company's
behalf, the transfer of applicable licenses or permits and the
availability of appropriate financing. There can be no assurance that
the Company's acquisition of long-term-care facilities will occur at the
rate currently expected by the Company or that future acquisitions will
be completed in a timely manner, if at all. Due in part to management's
industry experience and contacts, the Company may be presented with more
attractive acquisition proposals than currently is expected and, as a
result, may attempt to purchase long-term-care facilities at a
substantially higher rate than currently expected, which could cause the
Company to overextend its management and financial resources. To the
extent that acquisitions are consummated, there can be no assurance that
the Company will, where appropriate, successfully reposition an acquired
facility or integrate a newly acquired or repositioned community with
its other operations. In addition, the Company has from time to time
acquired, and may under certain circumstances continue to acquire,
independent-living or skilled-nursing facilities that for various
reasons it does not reposition as assisted-living communities. There
11
can be no assurance that the Company will successfully operate such
independent-living or skilled-nursing facilities. Even if the Company
should determine to transfer ownership or operation of such independent-
living or skilled-nursing facilities, there can be no assurance that it
will be able to locate qualified purchasers or operators of such
facilities or that the terms on which it transfers ownership or
operation of such facilities will be advantageous to the Company, either
of which could adversely affect the market price of the shares of Common
Stock as well as the Company's results of operations and financial
position. Furthermore, the acquisition of independent-living facilities
and the development of assisted-living communities by the Company may
exacerbate potential conflicts of interest between the Company and
Holiday and could expose management of the Company to claims that duties
to one or both companies have not been met. See "Conflicts of Interest
with Holiday". Finally, any failure by the Company with respect to the
repositioning, integration or operation of any acquired facilities may
have a material adverse effect on the Company's business, operating
results and financial condition.
DIFFICULTIES IN DEVELOPING ADDITIONAL ASSISTED-LIVING COMMUNITIES.
The Company's prospects for growth are directly affected by its ability
to develop additional assisted-living communities. The Company expects
to open approximately 10 to 15 newly developed assisted-living
communities in 1999. Currently, the Company has 26 assisted-living
communities in various stages of development and it anticipates opening
10 to 15 assisted-living communities in 1998. In connection with the
development communities, the Company has construction commitments of
$34.8 million and $30.7 million on owned and leased developments,
respectively, for which the Company has financing in place at December
31, 1997. See "Management Discussion and Analysis". To date, the
Company has opened 31 newly developed communities, 28 developed by the
Company and three developed by others and acquired by the Company.
There can be no assurance that the Company will not suffer delays in its
development program, which could slow the Company's growth. Development
of assisted-living communities can be delayed or precluded by various
zoning, healthcare licensing and other applicable governmental
regulations and restrictions. The nature of such licenses and approvals
and the timing and likelihood of obtaining them vary widely from state
to state, depending on the community, or its operation, and the type of
services to be provided. If the Company's development schedule is
delayed, the Company's business, operating results and financial
condition could be adversely affected.
SUBSTANTIAL DEBT AND LEASE OBLIGATIONS OF THE COMPANY. At
December 31, 1997, the Company had mortgage indebtedness in an aggregate
amount of $120.9 million, with minimum principal payments estimated to
be approximately $12.8 million in 1998. Of the $120.9 million,
approximately $45.3 million represents borrowings under construction
loans totaling $51.0 million in connection with the Development
Communities. As of December 31, 1997, approximately $66.6 million
principal amount of the Company's indebtedness bore interest at
fluctuating rates (including $21.6 million of construction loans);
therefore, increases in prevailing interest rates would increase the
Company's interest payment obligations and could have an adverse effect
on the Company's operating results and financial condition. At December
31, 1997, the Company was also a party to long-term operating leases for
76 of its residential communities, which leases require minimum annual
lease payments aggregating $41.7 million, and generally provide for
annual rent increases. In addition, the Company will have approximately
$12.8 and $33.3 million in principal amount of debt repayment
obligations that become due in 1998 and 1999, respectively. The Company
intends to continue to finance its properties through a combination of
mortgage financing and operating leases, including leases arising
through sale/leaseback transactions, and, accordingly, the amount of
mortgage indebtedness and annual lease payments is expected to increase
as the Company pursues its growth strategy. As a result of such
mortgages and leases, a substantial portion of the Company's cash flow
will be devoted to debt service and lease payments. There can be no
assurance that the Company will generate sufficient cash flow from
operations to cover required interest, principal and lease payments.
Furthermore, from time to time the Company has not been in compliance
with certain covenants in its financing agreements. While to date the
Company has been able to obtain waivers for such noncompliance, there
can be no assurance that in the future it will be able to comply with
such covenants, which generally relate to matters such as cash flow and
debt coverage ratios. If the Company were unable to meet interest,
principal or lease payments, it could be required to seek renegotiation
of such payments or obtain additional equity or debt financing. There
can be no assurance, however, that such efforts would be successful or
timely or that the terms of any such financing or refinancing would be
acceptable to the Company. Furthermore, because of cross-default and
cross-collateralization provisions in certain of the Company's mortgage
and sale/leaseback agreements, a default by the Company on one of its
payment obligations could adversely affect a significant number of the
Company's properties. The Company's leverage may also adversely affect
the Company's ability to respond to changing business and economic
conditions or continue its development and acquisition program.
NEED FOR ADDITIONAL CAPITAL; NEGATIVE CASH FLOW AND FINANCING
REQUIREMENTS. The Company expects negative operating cash flow to
continue through at least 1998 as it continues to develop and acquire
assisted-living communities. The Company does not expect any of its
newly developed assisted-living communities to generate positive cash
flow for at least nine months after commencing operations. In addition,
the Company expects that the properties it acquires for repositioning as
assisted-living communities will typically require at least 12 months to
18 months after acquisition to begin to generate positive cash flows.
There can be no assurance that any newly developed or repositioned
community will achieve a stabilized occupancy rate and resident mix that
meets the Company's expectations, generate positive cash flow or
operating results sufficient to allow the Company to refinance
12
outstanding indebtedness secured by the community through sale/leaseback
transactions. To successfully continue its aggressive growth, the
Company must have sufficient financial resources to fund its development
and acquisition activities and anticipated operating losses.
Furthermore, the Company's future success depends in part on arranging
sale/leaseback financing or mortgage refinancing for assisted-living
communities that have achieved stabilized occupancy rates, resident mix
and operating margins after initial development or repositioning. The
Company will from time to time seek additional funding through public or
private financing, including equity financing. If additional funds are
raised by issuing equity securities, the Company's shareholders may
experience dilution. There can be no assurance, however, that adequate
equity, debt or sale/leaseback financing will be available as needed or
on terms acceptable to the Company. A lack of available funds may
require the Company to delay, scale back or eliminate all or some of its
development and acquisition projects.
CONFLICTS OF INTEREST WITH HOLIDAY. Mr. Baty, the Company's Chief
Executive Officer, and Mr. Colson, a director of the Company, are the
principal shareholders, directors and senior executive officers of
Holiday, and substantially all the independent-living facilities
operated by Holiday are owned by partnerships controlled by Messrs. Baty
and Colson and in which they have varying financial interests.
Messrs. Baty's and Colson's responsibilities to Holiday and its
affiliates include overseeing the management of independent-living
facilities, the acquisition, financing and refinancing of existing
facilities and the development and construction of, and capital-raising
activities to finance, new facilities. Although the Company believes
that its relationship with Holiday is beneficial, the financial
interests and management and financing responsibilities of Messrs. Baty,
Colson, Brandstrom and Ruffo with respect to Holiday and its affiliated
partnerships could present conflicts of interest, including conflicts
relating to the selection of future development or acquisition sites,
competition for potential residents in markets where both companies
operate and the allocation of time and efforts of Mr. Baty. Because
Mr. Baty is the Chief Executive Officer of the Company and a principal
executive officer of Holiday circumstances could arise that would
distract them from the Company's operations, which distractions could
have an adverse effect on the Company's business, operating results and
financial condition. Moreover, there can be no assurance that the
Company's and Holiday's interests will remain compatible.
DIFFICULTIES OF MANAGING RAPID EXPANSION. Since its inception, the
Company has pursued an aggressive expansion program, and it expects that
its growth will continue as it implements its development program for
new assisted-living communities. The Company's success will depend in
large part on identifying suitable development and acquisition
opportunities, and its ability to pursue such opportunities, complete
developments, consummate acquisitions and effectively operate its
assisted-living communities. The Company's growth has placed a
significant burden on the Company's management and operating personnel.
In late 1996 and early 1997, the Company reorganized its operating and
marketing staffs with individuals having a strong background in the
senior housing industry. The Company's ability to manage its growth
effectively will require it to continue to improve its operational,
financial and management information systems and to continue to attract,
train, motivate, manage and retain key employees. If the Company is
unable to manage its growth effectively, its business, operating results
and financial condition could be adversely affected.
DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL. The Company
depends, and will continue to depend, on the services of Daniel R. Baty,
its Chairman of the Board and Chief Executive Officer, Raymond R.
Brandstrom, its President and Chief Operating Officer, and Frank A.
Ruffo, Jr., its Vice President. The loss of the services of Mr. Baty or
either of Messrs. Brandstrom or Ruffo would have a material adverse
effect on the Company's operating results and financial condition. In
addition, Mr. Baty has financial interests in and management
responsibilities with respect to Holiday and its related partnerships.
And, as a result, he will not be devoting his full time and efforts to
the Company. Under certain circumstances, Mr. Baty also could have
conflicts of interest in allocating his time and efforts between the
Company and Holiday. The Company has entered into a noncompetition
agreement with Mr. Baty but this noncompetition agreement does not limit
Mr. Baty's current role with Holiday, or the related partnerships which
own or lease properties currently operated by Holiday, so long as
assisted-living is an incidental component to Holiday's operation or
management of independent-living facilities. The Company has obtained a
key employee insurance policy covering the lives of each of Messrs. Baty
and Brandstrom in the amounts of $5.0 million and $1.0 million,
respectively. The Company also depends on its ability to attract and
retain management personnel who will be responsible for the day-to-day
operations of each of its residential communities. If the Company is
unable to hire qualified management to operate its assisted-living
communities, the Company's business, operating results and financial
condition could be adversely affected.
POSSIBLE ENVIRONMENTAL LIABILITIES. 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, without limitation, asbestos-containing
materials, that could be located on, in or under such property. Such
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. The costs of any required remediation or removal
of these substances could be substantial and the liability of an owner
or operator as to any property is generally not limited under such laws
and regulations, and could exceed the property's value and the aggregate
assets of the owner or operator. The presence of these substances or
13
failure to remediate such substances properly may also adversely affect
the owner's ability to sell or rent the property, or to borrow using the
property as collateral. Under these laws and regulations, an owner,
operator or any entity who arranges for the disposal of hazardous or
toxic substances such as asbestos-containing materials, at a disposal
site may also be liable for the costs of any required remediation or
removal of the hazardous or toxic substances at the disposal site. In
connection with the ownership or operation of its properties, the
Company could be liable for these costs, as well as certain other costs,
including governmental fines and injuries to persons or properties. As
a result, the presence, with or without the Company's knowledge, of
hazardous or toxic substances at any property held or operated by the
Company could have an adverse effect on the Company's business,
operating results and financial condition.
DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY.
The Company currently, and for the foreseeable future, expects to rely
primarily on its residents' ability to pay the Company's 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
the Company's assisted-living communities are located can afford the
Company's fees. Inflation or other circumstances that adversely affect
the ability of seniors to pay for the Company's services could have an
adverse effect on the Company. If the Company encounters difficulty in
attracting seniors with adequate resources to pay for its services, its
business, operating results and financial condition could be adversely
affected.
STAFFING AND LABOR COSTS. The Company competes with other long-
term-care providers with respect to attracting with retaining qualified
or skilled personnel. The Company also depends on the available labor
pool of low-wage employees. A shortage of nurses or other trained
personnel or general inflationary pressures may require the Company to
enhance its wage and benefits package in order to compete. There can be
no assurance that the Company's labor costs will not increase or, if
they do, that they can be matched by corresponding increases in private-
payor revenues or governmental reimbursement. Any significant failure
by the Company to attract and retain qualified employees, to control its
labor costs or to match increases in its labor expenses with
corresponding increases in revenues could have a material adverse effect
on the Company's business, operating results and financial condition.
GOVERNMENTAL REGULATION. Healthcare is heavily regulated at the
federal, state and local levels and represents an area of expensive and
frequent regulatory change. 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
have an adverse effect on the Company's business and operating results.
The Company cannot predict whether and to what extent any such
legislative or regulatory initiatives will be enacted or adopted, and
therefore cannot assess what effect any current or future initiative
would have on the Company's business and operating results. Changes in
applicable laws and new interpretations of existing laws can
significantly affect the Company's operations, as well as its revenues
(particularly those from governmental sources) and expenses. The
Company's residential communities are subject to varying degrees of
regulation and licensing by local and state health and social service
agencies and other regulatory authorities specific to their location.
While regulations and licensing requirements often vary significantly
from state to state, they typically relate to fire safety, sanitation,
staff training, staffing levels and living accommodations such as room
size, number of bathrooms and ventilation, as well as regulatory
requirements relating specifically to certain of the Company's health-
related services. The Company's success will depend in part of its
ability to satisfy such regulations and requirements and to acquire and
maintain any required licenses. In addition, with respect to its
residents who receive financial assistance from governmental sources for
their assisted-living services, the Company is subject to certain
federal and state regulations that prohibit certain business practices
and relationships that might affect healthcare services reimbursable
under Medicaid or similar state reimbursements programs. The Company's
failure to comply with such regulations could jeopardize its
reimbursement payments for any affected residents and, if egregious,
could result in fines and the suspension or failure to renew the
Company's 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 the Company that is
discovered in any such investigation, audit or review, could have a
material adverse effect on the Company's business and operating results.
There can be no assurance that regulatory oversight of construction
efforts associated with repositionings will not result in loss of
residents and disruption of community operations.
COMPETITION. The long-term-care industry is highly competitive,
and the Company believes that the assisting-living segment, in
particular, will become even more competitive in the future. The
Company will be competing with numerous other companies providing
similar long-term-care alternatives such as home healthcare agencies,
community-based service programs, retirement communities and
convalescent centers. The Company expects that, as the provision of
assisted-living services receives increased attention and the number of
states providing reimbursement for assisted-living rises, competition
will intensify as a result of new market entrants. The Company also
faces potential competition from skilled-nursing facilities that provide
long-term-care services. Moreover, in implementing its growth strategy,
the Company expects to face competition in its efforts to develop and
acquire assisted-living communities. Some of the Company's present and
14
potential competitors are significantly larger and have, or may obtain,
greater financial resources than those of the Company. Consequently,
there can be no assurance that the Company will not encounter increased
competition in the future that could limit its ability to attract
residents or expand its business and therefore have a material adverse
effect on its business, operating results and financial condition.
POTENTIAL ADVERSE IMPACT OF GOVERNMENTAL REIMBURSEMENT PROGRAMS.
Currently, the federal government does not provide any reimbursement for
the type of assisted-living services offered by the Company. Although
some states have reimbursement programs in place, the level of
reimbursement is generally insufficient to cover the costs of the
Company's assisted-living services. Depending in part on the results of
the Company's acquisition program, net revenues from governmental
reimbursement programs could increase from time to time. In 1996 and
1997, less than 10% of the Company's revenues were from residents who
receive governmental assistance from a state medicaid program. There
can be no assurance that the Company will continue to meet the
requirements for participating in governmental reimbursement programs.
Furthermore, governmental reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and governmental funding restrictions, some of
which could have a material adverse effect on the future rate of payment
to communities operated by the Company. A substantial dependence on
governmental reimbursement programs, changes in the funding levels of
such programs or the failure of the Company's operations to qualify for
governmental reimbursement could have an adverse effect on the Company's
business, operating results and financial condition.
LIABILITY AND INSURANCE. The Company's business entails an
inherent risk of liability. In recent years, participants in the long-
term-care industry have become subject to an increasing number of
lawsuits alleging malpractice or related legal theories, many of which
involve large claims and significant legal costs. The Company expects
that from time to time it will be subject to such suits as a result of
the nature of its business. The Company currently maintains insurance
policies in amounts and with such coverage and deductibles as it deems
appropriate, based on the nature and risks of its business, historical
experience and industry standards. There can be no assurance, however,
that claims in excess of the Company's insurance coverage or claims not
covered by the Company's insurance coverage will not arise. A
successful claim against the Company not covered by, or in excess of,
the Company's insurance could have a material adverse effect on the
Company's operating results and financial condition. Claims against the
Company, regardless of their merit or eventual outcome, may also have a
material adverse effect on the Company's ability to attract residents or
expand its business and would require management to devote time to
matters unrelated to the operation of the Company's business. In
addition, the Company's insurance policies must be renewed annually, and
there can be no assurance that the Company will be able to obtain
liability insurance coverage in the future or, if available, that such
coverage will be on acceptable terms.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the
Company's Common Stock could be subject to significant fluctuations in
response to various factors and events, including the liquidity of the
market for the Common Stock, variations in the Company's operating
results, variations from analysts expectations, 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 adversely affect the
market price of the Common Stock.
15
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
The Company's assisted-living communities generally consist of one-
to three-story buildings and include common dining and social areas.
Twelve of the Company's Operating Communities, containing approximately
1,000 units, were previously or are currently operated as independent-
living facilities. Of these facilities, five have been or are in the
process of being, repositioned to assisted-living communities, which
process typically involves changing their operating licenses, policies
and standards, offering additional services required by assisted-living
residents and making physical improvement to the property. Four of the
Company's Operating Communities, containing approximately 100 units, are
currently operated as skilled-nursing facilities. Of these facilities,
one is managed by an independent third party.
The table below summarizes certain information regarding the
Operating Communities.
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- --------------------------------------------- ----------------- ---------- --------- -------- --------------
Arizona
Olive Grove (d) Phoenix Jun. 1994 98 111 Lease
La Villita (d) Phoenix Jun. 1994 92 92 Own
Scottsdale Royale (1) Scottsdale Aug. 1994 63 63 Own
Villa Ocotillo Scottsdale Sep. 1994 102 106 Own
California
Fulton Villa (c) Stockton Apr. 1995 80 80 Own
Laurel Place (c) (d) San Bernadino Apr. 1996 71 72 Lease
Rosewood Court Fullerton Mar. 1996 71 78 Lease
The Terrace (c) Grand Terrace Jan. 1996 87 87 Lease
Villa Del Rey (c) (d) Escondido Mar. 1997 84 84 Own
Connecticut
Cold Spring Commons (d) Rocky Hill May 1997 80 88 Lease
Delaware
Green Meadows at Dover Dover Oct. 1995 52 63 Lease
Florida
Barrington Place LeCanto May 1996 79 120 Lease
Beneva Park Club Sarasota Jul. 1995 96 102 Lease
Central Park Village (d) (5) Orlando Jul. 1995 174 190 Lease
College Park Club (d) Brandenton Jul. 1995 85 93 Lease
Colonial Park Club Sarasota Aug. 1996 88 90 Lease
La Casa Grande New Port Richey May 1997 200 235 Own
Park Club of Brandon Brandon Jul. 1995 88 88 Lease
Park Club of Fort Myers Fort Myers Jul. 1995 77 82 Lease
Park Club of Oakbridge Lakeland Jul. 1995 88 88 Lease
Madison Glen Clearwater May 1996 135 154 Own
River Oaks Englewood May 1997 155 200 Own
Springtree Sunrise May 1996 179 246 Lease
Stanford Centre Altamonte Springs May 1997 118 180 Own
The Lodge at Mainlands Pinellas Park Aug. 1996 154 162 Lease
Idaho
Camlu Retirement (1) Coeur d'Alene Nov. 1996 83 86 Management
Highland Hills Pocatelo Oct. 1996 49 55 Lease
Juniper Meadows Lewiston Dec. 1997 82 90 Own
Ridge Wind Chubbock Aug. 1996 80 106 Lease
Summer Wind Boise Sep. 1995 49 53 Lease
The Lakewood Inn (6) Coeur d'Alene Mar. 1996 108 114 Lease
Iowa
Silver Pines Cedar Rapids Jan. 1995 80 80 Own
Kansas
Elm Grove Estates Hutchinson Jun. 1997 121 133 Lease
16
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- --------------------------------------------- ----------------- ---------- --------- -------- --------------
Kentucky
Stonecreek Lodge (d) Louisville May 1997 80 88 Lease
Massachusetts
Meadow Lodge at Drum Hill (d) Chelmsford Oct. 1997 80 88 Lease
The Pines at Tewksbury (d) Tewksbury Jan. 1996 49 65 Lease
Woods at Eddy Pond (d) Auburn Jun. 1997 80 88 Lease
Mississippi
Ridgeland Court (d) Ridgeland Aug. 1997 79 87 Lease
Missouri
Autumn Ridge (5) Herculaneum Jun. 1997 94 94 Management
Montana
Springmeadows Residence Bozeman May 1997 74 81 Own
Nevada
Concorde (d) Las Vegas Nov. 1996 116 128 Own
New Jersey
Laurel Lake Estates Voorhees Jul. 1995 117 119 Lease
New York
Bassett Manor Williamsville Nov. 1996 103 105 Lease(2)
Bassett Park Manor Williamsville Nov. 1996 78 80 Lease(2)
Bellevue Manor Syracuse Nov. 1996 90 90 Lease(2)
Colonie Manor Latham Nov. 1996 94 94 Lease(2)
East Side Manor Fayettville Nov. 1996 80 88 Lease(2)
Green Meadows at Painted Post Painted Post Oct. 1995 73 96 Lease(2)
Perinton Park Manor Fairport Nov. 1996 78 86 Lease(2)
West Side Manor - Rochester Rochester Nov. 1996 72 72 Lease(2)
West Side Manor - Syracuse Syracuse Nov. 1996 78 80 Lease(2)
Woodland Manor Vestal Nov. 1996 60 116 Lease(2)
North Carolina
Heritage Health Center (3) Hendersonville Feb. 1996 66 134 Lease
Heritage Hills Retirement Community (1) Hendersonville Feb. 1996 99 99 Own
Heritage Lodge Assisted-Living Hendersonville Feb. 1996 20 24 Lease
Pine Park Retirement Community (1) Hendersonville Feb. 1996 110 110 Lease
Ohio
Park Lane (5) Toledo Jan. 1998 92 101 Management
Oregon
Meadowbrook Retirement (c) 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
South Carolina
Anderson Place - The Summer House Anderson Oct. 1996 30 40 Lease
Anderson Place - The Village (1) Anderson Oct. 1996 75 75 Lease
Anderson Place - The Health Center (4) Anderson Oct. 1996 22 44 Lease
Bellaire Place (d) Greenville Jul. 1997 81 89 Lease
Countryside Village Health Care Center (4) Easley Feb. 1996 24 44 Lease
Countryside Village Assisted-Living Easley Feb. 1996 48 78 Lease
Countryside Village Retirement Center (1) Easley Feb. 1996 72 75 Lease
Countryside Park Easley Feb. 1996 48 66 Lease
Skylyn Health Center (4) Spartanburg Feb. 1996 26 48 Lease
Skylyn Personal Care Center Spartanburg Feb. 1996 80 119 Lease
Skylyn Retirement Community (1) Spartanburg Feb. 1996 155 155 Lease
York Care York Apr. 1997 50 100 Management
Tennessee
Walking Horse Meadows (d) Clarksville Jun. 1997 50 55 Lease
17
Emeritus
Operations
Community Location Commenced Units (a) Beds (b) Interest
- --------------------------------------------- ----------------- ---------- --------- -------- --------------
Texas
Amber Oaks (d) (5) San Antonio Apr. 1997 163 275 Lease
Cambria (d) El Paso Oct. 1996 79 87 Lease
Dowlen Oaks Beaumont Mar. 1997 79 87 Lease
Eastman Estates Longview Jul. 1997 70 77 Lease
Elmbrook Estates Lubbock Feb. 1997 79 87 Lease
Lakeridge Place (7) Wichita Falls Jul. 1997 79 87 Lease
Meadowlands Terrace (d) (7) Waco Jul. 1997 71 78 Own
Myrtlewood Estates San Angelo Aug. 1997 79 87 Lease
Redwood Springs San Marcos Apr. 1997 90 90 Lease
Saddleridge Lodge (7) Midland Mar. 1997 79 87 Lease
Seville Estates (d) Amarillo Mar. 1997 50 55 Lease
Sherwood Place (d) (7) Odessa Oct. 1996 79 87 Lease
The Palisades (d) (5) El Paso Apr. 1997 158 215 Lease
Vickery Towers at Belmont (5) Dallas Apr. 1995 301 331 Own
Virginia
Carriage Hill Retirement Bedford Sep. 1994 91 137 Lease
Cobblestones at Fairmont (d) Manassas Sep. 1996 75 82 Own
Washington
Cooper George (d) (5) Spokane Jun. 1996 140 158 Partnership
Evergreen Lodge Federal Way Apr. 1996 98 124 Lease
Fairhaven Estates (d) Bellingham Oct. 1996 50 55 Lease
Garrison Creek Lodge (d) Walla Walla Jun. 1996 80 88 Lease
Harbour Pointe Shores Ocean Shores Mar. 1997 50 55 Lease
Kirkland Lodge at Lakeside Kirkland Feb. 1996 74 84 Lease
Renton Villa (d) Renton Sep. 1993 79 97 Lease
Seabrook (d) Everett Jun. 1994 60 62 Lease
The Court Yard at the Willows (d) Puyallup Oct. 1997 101 111 Own
The Hearthstone Moses Lake Nov. 1996 84 92 Lease
Van Vista Vancouver Oct. 1997 100 100 Admin Services
Wyoming
Park Place (c) Casper Feb. 1996 60 60 Lease
--------- --------
Total 8,782 10,184
========= ========
(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.
(c) Previously operated as an independent-living facility,
currently repositioned as an assisted-living community.
(d) Near an existing or proposed Holiday facility.
(1) Operated as an independent-living facility; the Company does
not currently plan to reposition this facility as an assisted-
living community.
(2) The Company provides administrative services to the community
which is operated by Painted Post Partnership through a lease
agreement with an independent third party. See "Strategic
Relationships - Painted Post Partners Relationship".
(3) Operated as a skilled-nursing facility and managed by an
independent third party; the Company does not currently plan
to reposition this facility as an assisted-living community.
(4) Operated as a skilled-nursing facility; the Company does not
currently plan to reposition this facility as an assisted-
living community.
(5) Operated as both an independent-living facility and assisted-
living facility; the Company does not currently plan to
reposition the portion of the independent-living facility as
an assisted-living community.
(6) Operated as an independent-living facility; an assisted-living
addition opened during 1997.
(7) Managed by Holiday.
18
DEVELOPMENTS
The following table summarizes certain information regarding the
Development Communities under construction, which are communities where
construction activities, such as ground-breaking activities, exterior
construction or interior build-out have commenced.
Site
Scheduled Ownership
Community Location Opening Units (a) Beds (b) Interest
- -------------------------- ------------------- ------------- --------- -------- ----------------
Anticipated 1998 Openings:
Arizona
North Phoenix (c) Phoenix 4th Quarter 101 111 Lease
California
Auburn Oaks (c) Auburn 2nd Quarter 89 98 Manage/Lease (3)
Northbay Retirement (1) Fairfield 2nd Quarter 172 189 Joint Venture
Creston Village (2) Paso Robles 2nd Quarter 100 110 Joint Venture
Delaware
White Chapel Village Newark 3rd Quarter 100 110 Lease
Illinois
Urbana Urbana 3rd Quarter 101 111 Manage/Lease (3)
Mississippi
Biloxi Biloxi 4th Quarter 83 91 Manage/Lease (3)
North Hill Estates Meridian 3rd Quarter 101 111 Manage
North Carolina
The Pines of Goldsboro Goldsboro 3rd Quarter 101 111 Manage
Ohio
Middleburg Heights Middleburg Heights 3rd Quarter 99 101 Lease
Utah
Emeritus Estates Ogden 1st Quarter 83 91 Lease
Virginia
Wilburn Gardens Fredericksburg 4th Quarter 101 111 Manage
Washington
Richland Gardens Richland 3rd Quarter 100 110 Manage
Wyoming
Cheyenne Cheyenne 2nd Quarter 83 91 Manage/Lease (3)
--------- --------
Total 1998 Openings 1,414 1,546
========= ========
Anticipated 1999 Openings:
Maryland
Essex Essex - 97 107 Manage
Virginia
Stauton Stauton - 100 110 Manage/Lease (3)
--------- --------
Total 1999 Openings 197 217
========= ========
(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.
(c) Near an existing or proposed Holiday facility.
(1) The Company holds a 66.67% interest in a joint venture with
an independent third party.
(2) The Company holds a 50.0% interest in a joint venture with an
independent third party.
(3) The Company will provide management services for a period of
two years commencing on the date that the first resident
occupies one of the units in the community. The Company will
receive a management fee based on a percentage of gross
revenues over the term of the agreement. Commencing on the
earlier date to occur (a) two years after commencement of the
management agreement of (b) the first month in which the
community is cash flow even, the Company will lease the
community from the independent third party under an operating
lease agreement.
In addition to those Development Communities under construction,
the Company has 10 Development Communities under development, which are
communities where activities such as site surveys, preparation or
architectural plans or initiation of zoning changes have commenced (but
construction has not commenced). These communities are expected to open
during 1999.
19
The Company's executive offices are located in Seattle, Washington,
where the Company leases approximately 26,500 square feet of space. The
agreement includes a lease term of 10 years with two five-year renewal
options.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security
holders during the fourth quarter of its fiscal year ended December 31,
1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information about the
executive officers of the Company. There are no family relationships
between any of the directors or executive officers of the Company.
Name Age Position
- --------------------- --- ------------------------------------------------
Daniel R. Baty 53 Chairman of the Board and Chief Executive
Officer
Raymond R. Brandstrom 45 President, Chief Operating Officer and Director
Gary D. Witte 53 Vice President, Operations
Frank A. Ruffo, Jr. 55 Vice President
Kelly J. Price 29 Vice President, Finance, Chief Financial
Officer, Principal Accounting Officer and
Secretary
Michelle A. Bickford 30 Vice President, New Business Development
Sarah J. Curtis 35 Vice President, Sales and Marketing
Daniel R. Baty, one of the Company's founders, has served as its
Chief Executive Officer and as a director since inception in 1993 and
became Chairman of the Board in April 1995. Mr. Baty has served as the
chairman of the board of Holiday since 1987 and as its chief executive
officer from 1991 through September 1997. Since 1984, Mr. Baty has
served as chairman of the board of Columbia-Pacific Group Inc.
("Columbia Pacific") and, since 1986, chairman of the board of Columbia
Pacific Management, Inc. ("Columbia Management"), both of which
companies are wholly owned by Mr. Baty and engaged in developing
independent-living facilities and providing consulting services
regarding that market.
Raymond R. Brandstrom, one of the Company's founders, has served as
its President and Chief Operating Officer and as a director since its
inception in 1993. From May 1992 to October 1996, Mr. Brandstrom served
as President of Columbia Pacific and Columbia Management. 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 still table wines.
Frank A. Ruffo, Jr., one of the Company's founders, has served as
its Vice President since its inception in 1993. From August 1992 until
he joined the Company, Mr. Ruffo was employed by Columbia Management in
special servicing related to securitized pools of mortgages.
Gary D. Witte, joined the Company as Vice President, Operations in
November 1996. From 1985 to June 1996, he was Vice President of
Operations, Southern Region of Hillhaven/Vencor Corporation. Mr. Witte
held a variety of operating positions at that company for 20 years.
Kelly J. Price, C.P.A., has served as the Company's Vice President
since February 1997, as Chief Financial Officer and Secretary since
September 1995 and as Principal Accounting Officer since February 1998.
Prior to that, from January 1995 he was Director of Finance. From May
1994 until joining the Company, Mr. Price was employed at Deloitte &
Touche LLP Management Consulting, where he was a senior consultant in
the real estate, healthcare and manufacturing industries. Prior to that
he was employed by Deloitte & Touche LLP from September 1991.
Michelle A. Bickford, has served as Vice President, New Business
Development since January 1997, prior to which she served as Director of
Acquisitions since July 1993. From 1990 to July 1993, Ms. Bickford was
a Senior Accountant at National Medical Enterprises, Inc., a publicly
held hospital company.
20
Sarah J. Curtis, jointed the Company as Vice President of Sales and
Marketing in March 1997. Prior to that, from March 1996 she was
National Director of Sales for Beverly Enterprises, Inc. From July 1991
until February 1996 Ms. Curtis was Regional Director of Sales and
Marketing of Hillhaven/Vencor Corporation.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock
Exchange, Inc. ("AMEX") under the symbol "ESC". The Common Stock has
been listed on the AMEX since November 21, 1995, the date of the
Company's initial public offering.
The following table sets forth, for the periods indicated, the
high and low closing prices for the Common Stock as reported on AMEX.
High Low
------- --------
1996
First Quarter............................ $21.750 $11.6250
Second Quarter........................... $20.875 $17.6250
Third Quarter............................ $18.000 $14.0000
Fourth Quarter........................... $16.000 $10.0000
1997
First Quarter............................ $13.500 $11.1250
Second Quarter........................... $16.250 $11.5000
Third Quarter............................ $15.500 $13.8750
Fourth Quarter........................... $16.250 $11.8750
1998
First Quarter (through March 20, 1998)... $13.500 $10.6875
As of March 27, 1998, the number of record holders of the Company's
Common Stock was 175.
The Company has never declared or paid any dividends on its Common
Stock, and expects to retain any future earnings to finance the
operation and expansion of its business. Future dividend payments will
depend on the results or operations, financial condition, capital
expenditure plans and other obligations of the Company and will be at
the sole discretion of the Company's Board of Directors. Certain of the
Company's existing leases and lending arrangements contain provisions
that restrict the Company's ability to pay dividends, and it is
anticipated that the terms of future leases and the debt financings may
contain similar restrictions. Therefore, the Company does not
anticipate paying any cash dividends on its Common Stock in the
foreseeable future.
21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been
derived from the audited consolidated financial statements of the
Company and subsidiaries for the period from July 28, 1993 (inception)
through December 31, 1993 and the years ended December 31, 1994, 1995,
1996 and 1997. The data set forth below should be read in conjunction
with the consolidated financial statements and related notes thereto
included elsewhere in the Form 10-K and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Period from
July 28, 1993
(inception)
Through Year ended December 31,
December 31, ---------------------------------------------
1993 1994 1995 1996 1997
-------------- --------- ---------- ---------- ----------
(in thousands, except per share and operating data)
Consolidated Statements of
Operations Data:
Total operating revenues.......... $ 323 $ 4,409 $ 21,277 $ 68,926 $117,772
Total operating expenses.......... 290 4,761 22,149 74,053 139,323
-------------- --------- ---------- ---------- ----------
Income (loss) from operations..... 33 (352) (872) (5,127) (21,551)
-------------- --------- ---------- ---------- ----------
Net other expense................. (63) (1,080) (6,815) (3,075) (6,660)
Extraordinary loss on
extinguishment of debt.......... - - (1,267) - -
-------------- --------- ---------- ---------- ----------
Net loss....................... (30) (1,432) (8,954) $ (8,202) $(28,211)
============== ========= ========== ========== ==========
Preferred stock dividends......... - - - - 425
-------------- --------- ---------- ---------- ----------
Net loss to common shareholders $ (30) $(1,432) $ (8,954) $ (8,202) $(28,636)
============== ========= ========== ========== ==========
Loss per common share before
extraordinary item -
basic and diluted............... $ (0.95) $ (0.75) $ (2.60)
Extraordinary loss per common
share -
basic and diluted............... $ (0.16) $ - $ -
Net loss per common share -
basic and diluted............... $ (1.11) $ (0.75) $ (2.60)
Weighted average number of common
shares outstanding (1) -
basic and diluted............... 8,062 11,000 11,000
========== ========== ==========
Consolidated Operating Data:
Communities operated (2)........ 1 6 22 69 99
Number of units (2)............. 79 494 1,857 5,807 8,624
December 31,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents.............. $ 26 $ 220 $ 9,507 $ 23,039 $ 17,537
Working capital (deficit).............. (1,489) (2,762) 4,091 9,757 12,074
Total assets........................... 3,542 24,493 115,635 158,038 228,573
Long-term debt, less current portion... 2,014 22,684 66,814 60,260 108,117
Minority interests..................... - 77 2,229 1,918 1,176
Shareholders equity (deficit).......... (30) (1,462) 34,895 26,188 1,207
(1) The weighted average shares outstanding were retroactively
adjusted for the 9,200-for-1 split on April 14,1995.
(2) Information is as of the end of the period and excludes
the Operating Communities and units therein that are
managed by others.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its organization in July 1993, the Company has achieved
significant growth in revenues, primarily due to the acquisition
existing and development of new residential communities. The Company
believes that it is one of the largest providers of assisted-living
services in the United States. The Company's revenues are derived
primarily from rents and service fees charged to its residents. For
1995, 1996 and 1997, the Company generated total operating revenues of
$21.3 million, $68.9 million and $117.8 million, respectively. As of
December 31, 1997, the Company's accumulated deficit was $47.3 million
and its total shareholders' equity was $1.2 million. For 1995, 1996 and
1997, the Company generated losses of $9.0 million, $8.2 million and
$28.6 million, respectively. As discussed below, the Company's losses
result from a number of factors, including the opening in 1996 and 1997
a number of newly developed and acquired communities that incur
operating losses during an initial 12 to 24 months rent-up phase,
occupancy percentages in the Company's stabilized communities that have
not risen as quickly as the Company had anticipated and that in some
cases has declined, financing costs arising from sale/leaseback
transactions and mortgage financing and refinancing transactions at
proportionately higher levels of debt, increased administrative and
corporate expenses resulting from a restructuring of the Company's
operations and marketing required by rapid growth, and the costs and
expenses of the Company's attempt to acquire ARV Assisted Living, Inc.
("ARV").
The Company's operating strategy is to increase operating margins
at each acquired or newly developed community, whether leased or owned,
primarily by increasing occupancy levels, encouraging residents to
remain at the Company's communities longer by offering them a range of
service options, increasing revenues through modifications in rate
structures, where appropriate, and identifying opportunities to create
operating efficiencies and reduce costs.
As of March 20, 1998, the Company held ownership, leasehold or
management interests in 101 residential communities (the "Operating
Communities") consisting of approximately 8,800 units with the capacity
for 10,200 residents, located in 26 states. Of the 101 Operating
Communities, 11 and 20 newly developed communities were opened during
1996 and 1997, respectively. Additionally, the Company completed
construction on an expansion to an existing community during 1997.
Subsequent to December 31, 1997, the Company entered into an agreement
with an affiliate to provide management services for an independent-
living community located in Ohio. The Company owns, has a leasehold
interest in, management interest in or has acquired an option to
purchase development sites for 26 new assisted-living communities (the
"Development Communities"). Sixteen of the Development Communities are
currently under construction, 14 of which are scheduled to open during
1998. The Company leases 77 of its residential communities, typically
from a financial institution such as a Real Estate Investment Trust
("REIT"), owns 18 communities, manages or provides administrative
services for five communities and has a partnership interest in one
community. Additionally, the Company holds a minority interest in Alert
Care Corporation ("Alert"), an Ontario, Canada based owner and operator
of 22 assisted-living communities consisting of approximately 1,250
units with a capacity of approximately 1,350 residents. See "-Strategic
Relationships - Alert Relationship". Assuming completion of the
Development Communities scheduled to open throughout 1998 and including
the minority interest in Alert, the Company will own, lease, have an
ownership interest in or manage 137 properties in 28 states and Canada,
containing an aggregate of approximately 11,450 units with capacity of
over 13,100 residents. There can be no assurance, however, that the
Development Communities will be completed on schedule and will not be
affected by construction delays, the effects of government regulation or
other factors beyond the Company's control." The Company's management
of assisted-living communities owned or leased by others has not been
material to the Company's business or revenue. See "Description of
Business Growth Strategy -Management Agreements". See "Factors
Affecting Future Results and Forward Looking Statements -Emphasis on
Acquisitions; Difficulties of Integrating Acquisitions", "-Ability to
Develop Additional Assisted-Living Communities", and "-Need for
Additional Capital.
23
The following table sets forth a summary of the Company's property
interests.
As of December 31,
------------------------------------------------------------------------
1994 1995 1996 1997
---------------- ---------------- ----------------- -----------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------- ------ --------- ------ --------- ------- --------- -------
Owned 6 494 14 1,496 15 1,485 19 2,099
Leased 1 91 9 662 53 4,165 76 6,124
Managed - - - - 1 83 4 327
Joint Venture/Partnership - - 1 22 2 162 1 140
--------- ------ --------- ------ --------- ------- --------- -------
Sub Total 7 585 24 2,180 71 5,895 100 8,690
Annual Growth - % - % 243% 273% 196% 170% 41% 47%
Pending Acquisitions 3 461 13 895 8 1,028 - -
New Developments 9 720 26 2,112 27 2,296 26 2,483
Minority Interest - - - - 17 959 22 1,248
--------- ------ --------- ------ --------- ------- --------- -------
Total 19 1,766 63 5,187 123 10,178 148 12,421
--------- ------ --------- ------ --------- ------- --------- -------
Annual Growth - % - % 232% 194% 95% 96% 20% 22%
When used in this discussion, the words "believes," "anticipates,"
"intends" and similar expressions are intended to identify forward-
looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from
those projected. See "Factors Affecting Future Results and Regarding
Forward-Looking Statements" under "Item 1. Description of Business"
elsewhere in this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements that may
be made to reflect recent events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain
items of the Company's Consolidated Statements of Operations as a
percentage of total revenues and the percentage change of the dollar
amounts from year to year.
Year to Year
Percentage of Revenues Percentage
Years ended December 31, Increase (Decrease)
1995 1996 1997 1995-1996 1996-1997
------ ------- ------- --------- ---------
Revenues............................... 100 % 100 % 100 % 224 % 71 %
Expenses:
Community operations.............. 75 71 70 208 69
General and administrative........ 12 9 9 134 76
Depreciation and amortization..... 12 4 6 15 131
Rent.............................. 5 23 29 1316 115
Other............................. - - 4 - N/A
------ ------- ------- --------- ---------
Total operating expenses..... 104 107 118 234 88
------ ------- ------- --------- ---------
Loss from operations......... (4) (7) (18) 488 320
------ ------- ------- --------- ---------
Other expense:
Interest expense, net............. 27 4 6 (46) 141
Write-down of note receivable..... 5 - - N/A -
Other, net........................ 1 - (1) N/A N/A
Extraordinary loss on
extinguishment of debt.......... 6 - - N/A -
------ ------- ------- --------- ---------
Net loss..................... (43)% (11)% (23)% (8)% 244 %
====== ======= ======= ========= =========
24
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Total operating revenues for 1997 were $117.8 million,
representing a $48.8 million, or 71%, increase over revenues of $68.9
million for 1996. The increase resulted from the opening of new
developments and the related fill-up of units and the acquisition of
communities during 1997. The Company ended with 71 and 100 communities
representing approximately 5,900 and 8,700 units as of December 31, 1996
and 1997, respectively, an increase of 41%. For 1997, there was a
decline in average occupancy to 71% from 74% for 1996, primarily
attributable to the opening of 20 new communities during 1997. The
impact on revenue from the decline in occupancy was offset by an
increase in the rate per occupied unit.
COMMUNITY OPERATIONS. Expenses for community operations for 1997
were $82.8 million, representing a $33.9 million, or 69%, increase over
$48.9 million for 1996, primarily due to the Company's opening of new
developments and the acquisition of communities during 1997. As a
percentage of total operating revenues, expenses for community
operations decreased to 70% for 1997, from 71% for 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
for 1997 were $10.8 million, representing an increase of $4.7 million,
or 76%, from $6.2 million for 1996. As a percentage of total operating
revenues, general and administrative expenses remained unchanged at 9%
for 1996 and 1997 while the number of employees located at the corporate
office was 83 and 90 at December 31, 1996 and 1997, respectively. The
dollar increase in general and administrative expenses was attributable
to salaries and associated costs relating to additional employment in
conjunction with new business, increased accounting costs and higher
travel and other costs relating to the Company's larger number of
communities. General and administrative costs are expected to continue
to increase in line with revenues and community operations at least
through 1998 as the Company acquires additional existing communities and
develops new communities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for
1997 was $6.6 million, or 6%, of total operating revenues, compared to
$2.9 million or 4%, of total operating revenues, for 1996. The increase
was due to a combination of an increase in pre-opening amortization
expense from the opening of 20 developments in 1997 and the addition of
four owned communities, net of communities sold in sale/leaseback
transactions in 1997. The Company owned 19%, or 19 of its 100
communities representing approximately 2,100 units at December 31, 1997
compared to 21%, or 15 of its 71 communities representing approximately
1,500 units at December 31, 1996.
RENT. Rent expense for 1997 was $34.6 million, representing an
increase of $18.5 million, or 115%, from rent expense of $16.1 million
for 1996. As a percentage of total operating revenues, rent expense
increased to 29% for 1997, from 23% for 1996. The dollar increases were
due to additional lease financing or sale/leaseback transactions. The
Company leased 76%, or 76 out of 100 of its residential communities
representing approximately 6,100 units as of December 31, 1997 compared
to 75%, or 53 out of 71 communities representing approximately 4,200
units as of December 31, 1996. The increase in rent expense as a
percentage of revenue is attributable to the opening of newly developed
communities, in their fill-up stage, operated by the Company under lease
agreements. The Company expects an occupancy fill-up period of 12 to
24 months for a newly developed community. As the fill-up of newly
developed communities continues, rent expense as a percentage of revenue
is expected to decrease.
OTHER. The Company incurred other expense of $4.4 million for 1997
which represents charges related to the termination of the Company's
tender offer for ARV and changes in the Company's operating structure.
In 1997, the Company wrote-off certain capitalized pre-opening and
marketing expenses related to newly opened developed communities prior
to July 1997. This write-off was a result of changes in senior
operating personnel and the Company's marketing approach.
INTEREST EXPENSE. Interest expense for 1997 was $8.4 million
compared to $4.3 million for 1996, increasing as a percentage of total
operating revenue to 7% for 1997 from 6% for 1996. The increase was
primarily due to the acquisition of four communities through mortgage
financing bearing interest at rates between 8% and 18%, construction
financings bearing interest at fixed rates between 9.0% and 9.25% and
the opening of four developments owned by the Company, all partially
offset by sale/leaseback refinancings, as well as, interest costs
related to the Company's investment in ARV common stock.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUES. Total operating revenues for 1996 were $68.9 million,
representing a $47.6 million, or 224%, increase over revenues of $21.3
million for 1995. The increase resulted from the opening of new
developments and the related fill-up of units and the acquisition of
communities during 1996. The Company ended with 24 and 71 communities
representing approximately 2,200 and 5,900 units as of December 31, 1995
and 1996, respectively, an increase of 196%.
25
COMMUNITY OPERATIONS. Expenses for community operations for 1996
were $48.9 million, representing a $33.0 million, or 208%, increase over
$15.9 million for 1995, primarily due to the Company's opening of new
developments and the acquisition of communities during 1996. As a
percentage of total operating revenues, expenses for community
operations decreased to 71% for 1996, from 75% for 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
for 1996 were $6.2 million, representing an increase of $3.5 million, or
134%, from $2.6 million for 1995. As a percentage of total operating
revenues, general and administrative expenses decreased to 9% for 1996
from 12% for 1995 while the number of employees located at the corporate
office was 43 and 83 at December 31, 1995 and 1996, respectively. The
dollar increase in general and administrative expenses was attributable
to salaries and associated costs relating to additional employment in
conjunction with new business, increased accounting costs and higher
travel and other costs relating to the Company's larger number of
communities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization 1996
was $2.9 million, or 4% of total operating revenues, compared to $2.5
million or 12%, of total operating revenues, for 1995. The increase was
due to the opening of new developments and the acquisition of eight
communities owned by the Company, net of communities sold in
sale/leaseback transactions in 1996. The Company owned 21%, or 15 of
its 71 communities representing approximately 1,500 units at December
31, 1996 compared to 58%, or 14 of its 24 communities representing
approximately 1,500 units at December 31, 1995.
RENT. Rent expense for 1996 was $16.1 million, representing an
increase of $15.0 million, or 1316%, from rent expense of $1.1 million
for 1995. As a percentage of total operating revenues, rent expense
increased to 23% 1996, from 5% 1995. The dollar and percentage increases
were due to the Company entering into lease financing or sale/leaseback
transactions with respect to 75%, or 53 out of 71 of its residential
communities representing approximately 4,200 units as of December 31,
1996 compared to 38%, or nine out of 24 communities representing
approximately 700 units as of December 31, 1995.
INTEREST EXPENSE. Interest expense for 1996 was $4.3 million
compared to $4.2 million for 1995, decreasing as a percentage of total
operating revenues from 20% for 1995 to 6% for 1996. The decrease was
due to the repayment of existing mortgage debt with lower rate
convertible debenture proceeds and refinancing of mortgage indebtedness
through sale/leaseback transactions.
WRITE-DOWN OF NOTE RECEIVABLE FROM AFFILIATE. In 1994 and 1995,
the Company made aggregate loans of $1,133,000 to a corporation that
owned three assisted-living communities. In connection with the loan,
the Company received 49.0% of the outstanding stock of the corporation
and a pledge of the remaining 51.0%. The holder of the first mortgages
initiated foreclosure proceedings in October 1995 and the Company no
longer has an interest in the communities or the corporation and the
note receivable was written-off in 1995.
LOSS ON EXTINGUISHMENT OF DEBT. On April 17, 1995, the Company
issued 4,158,000 shares of Series A Preferred Stock and $25.9 million
principal amount of Subordinated Secured Promissory Notes to a group of
investors. In connection with this transaction, the Company incurred
$979,000 of deferred financing costs. Upon completion of the initial
public offering November 1995, the Series A Preferred Stock was
converted to Common Stock, the Notes were repaid in full, and the
deferred financing costs were written off, resulting in an extraordinary
loss. Additionally, the Company completed refinancings during 1995 on
three communities, resulting in an extraordinary loss of approximately
$288,000 relating to the write-off of deferred financing costs.
SAME COMMUNITY COMPARISON
The Company operated 50 communities ("Same Community") on a
comparable basis during both the three months ended December 31, 1996
and 1997. The Same Communities represented 61% of the Company's total
revenue for the quarter. Net operating margins increased by $849,000 to
31% on revenue of $20.0 million as compared to 28% on revenue of $19.3
million for the three months ended December 31, 1996. The increase in
revenue can be attributed to monthly rate increases and greater services
offered at the communities, partially offset by a decline in average
occupancy. Same Community pre-tax loss, before corporate overhead,
decreased by $878,000 from $893,000 to $15,000 compared to the
comparable period last year. In addition, average revenue per occupied
unit increased approximately 5%, from $2,012 to $2,105, during the
fourth quarter 1996 and 1997, respectively, while Same Community average
occupancy declined slightly to 79% during the three months ended
December 31, 1997 compared to 80% for the comparable period last year.
Included among the 50 Same Communities, were nine communities newly
developed in 1996. These communities reported an average occupancy of
38% and 62%, net operating margin of 1% and 18% on revenue of $1.5
million and $2.6 million and pre-tax net loss of $1.2 million and
$795,000 for the three months ended December 31, 1996 and 1997,
respectively.
26
The following table sets forth a comparison of Same Community
results of operations before corporate overhead for the three months
ended December 31, 1996 and 1997.
Three Months Ended December 31,
(In thousands)
Dollar Percentage
1996 1997 Change Change
--------- --------- -------- ----------
Revenue........................... $19,252 $19,987 $735 4 %
Community operating expense....... 13,833 13,719 (114) (1)
--------- --------- -------- ----------
Community operating income... 5,419 6,268 849 16
--------- --------- -------- ----------
Depreciation and amortization..... 663 583 (80) (12)
Rent.............................. 5,097 5,318 221 4
--------- --------- -------- ----------
Operating income............. (341) 367 708 (208)
--------- --------- -------- ----------
Interest income (expense), net.... (691) (643) 48 (7)
Other income, net................. 139 261 122 88
--------- --------- -------- ----------
Pre-tax income (loss)........ $ (893) $ (15) $878 (98)%
========= ========= ======== ==========
Three months ended
December 31,
--------------------
1996 1997
--------- ---------
Other Same Community Information:
Communities....................... 50 50
Total units....................... 3,985 3,985
Average occupancy................. 80% 79%
Revenue per average occupied unit. $2,012 $2,105
The 39 Same Communities included in the quarters ending September
30, 1997 and December 31, 1997 reported revenue of 16.6 million and
$16.5 million, community operating expenses of $11.3 million and $11.2
million and pre-tax income of $371,000 and $503,000 for such quarters,
respectively, while average occupancy remained unchanged at 82% for the
two quarters.
STABILIZED (GROUP ONE) AND START-UP/REPOSITIONED (GROUP TWO) COMMUNITY
COMPARISON
For the three months ended December 31, 1997, the Company had 54
communities that had achieved average occupancy of at least 90% during
one quarter ("Group One Communities") and 46 communities that had
average occupancy of less than 90%, which includes 38 newly opened
developments and/or communities with significant ongoing repositioning
and/or refurbishment activity ("Group Two Communities").
27
The following table sets forth a comparison of Group One and Group
Two Community results of operations for the three months ended December
31, 1997.
Three Months Ended December 31, 1997
(In thousands)
Start-Up/
Stabilized Repositioned
Communities Communities
(Group One) (Group Two) Overhead Total
------------- ------------- -------- ---------
Revenue........................... $23,238 $ 9,549 $ 16 $ 32,803
Community operating expense....... 15,036 8,842 - 23,878
------------- ------------- -------- ---------
Community operating income... 8,202 707 16 8,925
------------- ------------- -------- ---------
General and administrative........ - - 3,109 3,109
Depreciation and amortization..... 490 1,565 131 2,186
Rent.............................. 5,931 4,127 120 10,178
Other............................. - - 4,426 4,426
------------- ------------- -------- ---------
Operating income (loss)...... 1,781 (4,985) (7,770) (10,794)
------------- ------------- -------- ---------
Interest income (expense), net.... (945) (1,330) (379) (2,654)
Other income (expense), net....... 127 (655) 782 254
------------- ------------- -------- ---------
Pre-tax income (loss)........ $ 963 $(6,970) $(7,367) $(13,374)
============= ============= ======== =========
Other Group One and Group Two
Information:
Communities..................... 54 46 100
Total units..................... 4,460 4,230 8,690
Average Occupancy............... 89% 45% 68%
Revenue per average occupied
unit.......................... $ 1,954 $ 1,721 $ 1,881
Group One Communities ended the fourth quarter of 1997 with an
average occupancy of 89% compared to 93% for the fourth quarter of 1996
while net operating margins increased by $3.3 million to 35% on revenue
of $23.2 million for the three months ended December 31, 1997 as
compared to 33% on revenue of $15.2 million for the three months ended
December 31, 1996. Group One Community pre-tax income, before corporate
overhead, increased by 56% to $963,000 compared to the comparable period
last year. The total number of Group One Communities increased by 18 in
the fourth quarter of 1997 compared to the fourth quarter of 1996 due to
a combination of acquisitions and communities achieving an occupancy of
at least 90% during one quarter.
Group Two Communities ended the fourth quarter of 1997 with an
average occupancy of 45% compared to 56% for the fourth quarter of 1996
while net operating margins decreased by $733,000 to 7% on revenue of
$9.5 million as compared to 19% on revenue of $7.6 million for the three
months ended December 31, 1996. Group Two Community pre-tax loss, before
corporate overhead, increased by 203% to $7.0 million compared to the
comparable period last year. The total number of Group Two Communities
had a net increase of 11 compared to the fourth quarter of 1996 due
primarily to the opening of new developments.
28
The following tables set forth a comparison of Group One and Group
Two Community results of operations before corporate overhead for the
three months ended December 31, 1996 and 1997.
Stabilized Communities (Group One)
Three Months Ended December 31,
(In thousands)
Dollar Percentage
1996 1997 Change Change
--------- --------- -------- ----------
Revenue........................... $15,182 $ 23,238 $8,056 53 %
Community operating expense....... 10,235 15,036 4,801 47
--------- --------- -------- ----------
Community operating income... 4,947 8,202 3,255 66
--------- --------- -------- ----------
Depreciation and amortization..... 350 490 140 40
Rent.............................. 3,586 5,931 2,345 65
--------- --------- -------- ----------
Operating income............. 1,011 1,781 770 76
--------- --------- -------- ----------
Interest income (expense), net.... (393) (945) (552) 140
Other income, net................. - 127 127 100
--------- --------- -------- ----------
Pre-tax income............... $ 618 $ 963 $ 345 56 %
========= ========= ======== ==========
Other Group One Information:
Communities.................... 36 54
Total units.................... 2,675 4,460
Average occupancy.............. 93% 89%
Revenue per occupied unit...... $ 2,034 $ 1,954
Start-Up/Repositioned Communities (Group Two)
Three Months Ended December 31,
(In thousands)
Dollar Percentage
1996 1997 Change Change
--------- --------- ---------- -----------
Revenue........................... $ 7,598 $ 9,549 $ 1,951 26 %
Community operating expense....... 6,158 8,842 2,684 44
--------- --------- ---------- -----------
Community operating income... 1,440 707 (733) 49
--------- --------- ---------- -----------
Depreciation and amortization..... 484 1,565 1,081 223
Rent.............................. 2,560 4,127 1,567 61
--------- --------- ---------- -----------
Operating loss............... (1,604) (4,985) (3,381) 211
--------- --------- ---------- -----------
Interest income (expense), net.... (560) (1,330) (770) 138
Other income (expense), net....... (136) (655) (519) 382
--------- --------- ---------- -----------
Pre-tax loss................. $(2,300) $(6,970) $(4,670) 203 %
========= ========= ========== ===========
Other Group Two Information:
Communities.................... 35 46
Total units.................... 3,219 4,230
Average occupancy.............. 56% 45%
Revenue per occupied unit...... $ 1,580 $ 1,721
Group One Communities for the three months ended December 31, 1997
and September 30, 1997, consisted of 54 and 52 communities,
respectively. Average Occupancy declined slightly to 89% for the fourth
quarter 1997 compared to 90% for the third quarter 1997. Revenue
increased $886,000, or 4%, to $23.2 million for the three months ended
December 31, 1997 from $22.4 million for the three months ended
September 30, 1997. Community operating expenses for the forth quarter
1997 increased $866,000, or 6%, to $15.0 million for the three months
ended December 31, 1997 from $14.2 million for the three months ended
September 30, 1997. Pre-tax income decreased $431,000, or 31% to
$963,000 for the three months ended December 31, 1997 from $1.4 million
for the three months ended September 30, 1997.
29
Group Two Communities for the three months ended December 31, 1997
and September 30, 1997, consisted of 46 communities and 44 communities,
respectively, representing 32 and 29 newly developed communities,
respectively. Average Occupancy declined slightly to 45% for the fourth
quarter 1997 compared to 48% for the third quarter 1997. Revenue
increased $381,000, or 4%, to $9.5 million for the three months ended
December 31, 1997 from $9.2 million for the three months ended September
30, 1997. Community operating expenses for the fourth quarter 1997 were
$8.8 million, representing an increase of $399,000, or 5%, over $8.4
million for the third quarter 1997. Pre-tax loss increased $152,000, or
2%, to $7.0 million for the three months ended December 31, 1997 from
$6.8 million for the three months ended September 30, 1997.
The changes between third quarter 1997 and fourth quarter 1997
Group Two Communities are primarily a result of newly opened
developments. The Company expects an occupancy fill-up period of 12 to
24 months for a newly developed community to show positive operating
results. Newly developed communities generated $5.5 million in revenue
for the three months ended December 31, 1997 compared to $3.9 million
for the three months ended September 30, 1997, $5.6 million in community
operating expenses for the fourth quarter 1997 compared to $4.4 million
for the third quarter 1997 and pre-tax loss of $6.1 million for the
fourth quarter 1997 compared to pre-tax loss of $4.5 million for the
third quarter 1997. The increase in pre-tax loss between quarters can
be attributed to the charge for the change in the Company's operating
structure. See "Results of Operations - Comparison of the Years Ended
December 31, 1997 and 1996 - Other" above.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997. For 1997, net cash
used in operating activities was $17.7 million, primarily due to losses
incurred on newly acquired and developed communities. The Company
obtained $28.7 million in proceeds from the sale of communities in
sale/leaseback financing transactions and repaid related mortgage
indebtedness of $12.3 million as well as $16.7 million of unrelated
mortgage indebtedness which includes refinancing $5.6 million in long-
term debt on two assisted-living communities and repaying $2.2 million
in long-term debt on one assisted-living community. The Company
obtained $1.7 million in proceeds from the sale of land. The Company
also incurred additional long-term debt of $44.6 million, obtained $25.0
million in net proceeds from the sale of redeemable preferred stock and
purchased additional property and equipment and property held for
development of $40.2 million. As a result of these acquisition and
financing transactions the Company decreased its cash position by
approximately $5.5 million. As of December 31, 1997, the Company had
working capital of $12.1 million.
CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996. For 1996, net
cash used in operating activities was $5.4 million, primarily due to
losses incurred on newly acquired communities. The Company obtained
$73.3 million in proceeds from the sale of communities in sale/leaseback
financing transactions and repaid related mortgage debt of $52.8 million
as well as $17.2 million of unrelated mortgage debt. The Company also
incurred additional long-term debt of $64.4 million, including $30.7
million, net proceeds from the private placement of convertible
subordinated debentures, and purchased additional property and equipment
and property held for development of $66.7 million. As of December 31,
1996, the Company had working capital of $9.8 million.
CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995. For the year
ended December 31, 1995, net cash used in operating activities was $4.8
million, primarily due to losses incurred on newly acquired
communities. The Company used $ 78.4 million to acquire property and
equipment and property held for development and obtained $11.6 million
in proceeds from the sale of communities in sale/leaseback financing
transactions. The Company obtained $84.1 million in net cash from
financing activities including its initial public offering and net
proceeds from long and short-term borrowings.
The Company is committed under construction contracts with respect
to certain development projects. Total construction commitments for
owned developments at December 31, 1997, were $34.8 million, of which
$25.2 million had been incurred. At December 31, 1997, $9.5 million in
construction financing commitments remained in place which bear interest
at rates ranging between prime plus 0.75% and 1.25% and are due through
January 2003.
In October 1997, NorthStar Capital Partners LLC ("NorthStar"), a
private investment group with financial backing from a Union Bank of
Switzerland Securities affiliate and Quantum Realty Partners, a fund
advised by Soros Fund Management LLC, invested $25.0 million in the
Company through the purchase of 25,000 shares of Series A Convertible
Exchangeable Redeemable Preferred Stock (the "Series A Preferred
Stock"), representing approximately 10% ownership in the Company. Each
share of Series A Preferred Stock is convertible into that number of
shares of the Company's Common Stock equal to the liquidation value of a
share of Series A Preferred Stock ($1,000) divided by the conversion
price of $18.20 per share. Currently the Series A Preferred Stock is
convertible into an aggregate of 1,373,626 shares of Common Stock. The
Series A Preferred Stock is also exchangeable into convertible debt at
the option of the Company. The conversion price is subject to adjustment
30
in the event of stock dividends, stock subdivisions and combinations,
and extraordinary distributions. The Series A Preferred Stock has a
mandatory redemption date of October 24, 2004.
In December 1997, the Company purchased 25,600 shares of its common
stock at an aggregate cost of $341,000. Subsequently, in January 1998,
the Company's Board of Directors authorized a treasury stock purchase
program to acquire up to an additional 500,000 shares of the Company's
common stock from time to time on the open market. As of March 20,
1998, the Company has purchased 517,200 shares of its common stock at an
aggregate cost of $5.7.
In March 1998, the Company entered into a commitment with German
American Capital Corporation ("GACC"), a wholly owned subsidiary of Deutsche
Bank North America. The commitment terms include a three year loan not to
exceed $77.9 million with a 30-day LIBOR rate plus 2.95%. The Company plans
to use the proceeds to refinance up to ten of its Operating Communities.
The Company has been, and expects to continue to be, dependent on
third-party financing for its acquisition and development programs.
There can be no assurance that financing for the Company's acquisition
and development programs will be available to the Company on acceptable
terms. Moreover, to the extent the Company acquires communities that do
not generate positive cash flow, the Company may be required to seek
additional capital or borrowings for working capital and liquidity
purposes.
YEAR 2000
Concerns surrounding the Year 2000 are the result of computer
programs being written using two digits rather than four to define the
applicable year. Thus programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather then the year 2000
resulting in a major system failure or miscalculations. The Company has
conducted a comprehensive review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Company
presently believes that, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as
so modified and converted and there will be no substantial impact on the
financial statements. However, if such modifications and conversions
are not completed timely, the Year 2000 issue may have a material impact
on the operations of the Company.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the Company.
Inflation could, however, affect the Company's future revenues and
operating income due to the Company's dependence on its senior resident
population, most of whom rely on relatively fixed incomes to pay for the
Company's services. As a result, the Company's ability to increase
revenues in proportion to increased operating expenses may be limited.
The Company typically does not rely to a significant extent on
governmental reimbursement programs. In pricing its services, the
Company attempts to anticipate inflation levels, but there can be no
assurance that the Company will be able to respond to inflationary
pressures in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and the report of Independent Auditors are
listed at Item 14 and are included beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the caption "Executive Officers of the
Registrant" in Part I of this Form 10-K and under the captions "Election
of Directors -Nominees for Election" and "Compliance with Section 16(a)
of the Exchange Act of 1934" in the Company's Proxy Statement relating
to its 1998 annual meeting of shareholders (the "Proxy Statement") is
hereby incorporated by reference.
31
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Executive Compensation" and
"Election of Directors -Director Compensation" in the Company's Proxy
Statement is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Certain Transactions" in the
Company's Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of the report:
(1) FINANCIAL STATEMENTS. The following financial statements of the
Registrant and the Report of Independent Public Accountants therein
are filed as part of this Report on Form 10-K:
Page
Independent Auditors' Reports............................. F-2
Consolidated Balance Sheets............................... F-4
Consolidated Statements of Operations..................... F-5
Consolidated Statements of Cash Flows..................... F-6
Consolidated Statements of Shareholders' Equity (Deficit). F-8
Notes to Consolidated Financial Statements................ F-9
(2) FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and Qualifying
Accounts (contained on page F-24) Other financial statement schedules
have been omitted because the information required to be set forth
therein is not applicable, is immaterial or is shown in the
consolidated financial statements or notes thereto.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the
Registrant during the quarter ended December 31, 1997.
(c) EXHIBITS: The following exhibits are filed as a part of, or
incorporated by reference into, this Report on Form 10-K:
Exhibit Description Reference
- ---- ----------------------------------------------------------- ------
3.1 Restated Articles of Incorporation of registrant (Exhibit (2)
3.1).
3.2 Amended and Restated Bylaws of the registrant (Exhibit (1)
3.2).
4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006 (2)
(Exhibit 4.1).
4.2 Indenture dated February 15, 1996 between the registrant
and 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 (12)
Shareholders Agreement) dated October 24, 1997 between the
registrant ("Seller") and Merit Partners, LLC ("Purchaser")
(Exhibit 4.1).
10.1 1995 Stock Incentive Plan (Exhibit 10.1). (1)
10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2). (2)
10.3 Form of Indemnification Agreement for officers and (1)
directors of the registrant (Exhibit 10.3).
10.4 Noncompetition Agreements entered into between the
registrant and each of the following individuals:
10.4. Daniel R. Baty (Exhibit 10.4.1), Raymond R.
1 Brandstrom (Exhibit 10.4.2) and Frank A. Ruffo (2)
(Exhibit 10.4.3).
10.5 Shareholders Agreement dated as of April 17, 1995, and as
amended September 27, 1995, among the registrant, its (1)
Founders and certain Investors, as defined therein (Exhibit
10.5).
10.6 Form of Stock Purchase Agreement dated July 31, 1995,
entered into between Daniel R. Baty and each of Michelle A. (1)
Bickford, Jean T. Fukuda, James S. Keller, George T. Lenes
and Kelly J. Price (Exhibit 10.6).
10.7 Series A Preferred Stock and Note Purchase Agreement dated
as of April 17, 1995 among the registrant and the investors (1)
listed on Schedule I thereto (Exhibit 10.7).
32
10.8 La Villita in Phoenix, Arizona
10.8. Promissory Note dated April 22, 1997 in the amount of
1 $3,500,000 between U.S. Bank of Washington ("Lender") (9)
and Emeritus Properties VI, Inc. ("Borrower")
(Exhibit 10.2.1).
10.8. First Addendum to Promissory Note between Lender and (9)
2 Borrower (Exhibit 10.2.2).
10.8. Second Addendum to Promissory Note between Lender and (9)
3 Borrower (Exhibit 10.2.3).
10.8. Construction Deed of Trust dated April 22, 1997
4 between Emeritus Properties VI, Inc. ("Trustor"), (9)
U.S. Bank of Washington ("Lender " and "Beneficiary")
and United States National Bank of Oregon ("Trustee")
(Exhibit 10.2.4).
10.8. Addendum to Construction Deed of Trust between (9)
5 Trustor, Lender and Trustee (Exhibit 10.2.5).
10.8. Guaranty dated April 22, 1997 between Daniel R. Baty
6 ("Guarantor") U.S. Bank of Washington ("Lender") and (9)
Emeritus Properties VI, Inc. ("Borrower") (Exhibit
10.2.6).
10.9 Scottsdale Royale in Scottsdale, Arizona, Villa Ocotillo in
Scottsdale, Arizona and Madison Glen in Clearwater,
Florida. The following agreements are representative of
those executed in connection with these properties:
10.9. Loan Agreement dated December 31, 1996 in the amount
1 of $12,275,000 by the registrant ("Borrower") and (5)
Lender (Exhibit 10.9.1).
10.9. Promissory Note dated December 31, 1996 in the amount
2 of $6,775,000 between the registrant to Bank United (5)
(the "Lender") with respect to Madison Glen (Exhibit
10.9.2).
10.9. Promissory Note dated December 31, 1996 in the amount
3 of $5,500,000 between the registrant to Bank United
(the "Lender") with respect to Scottsdale Royale and (5)
Villa Ocotillo (Exhibit 10.9.3).
10.9. Deed of Trust, Security Agreement, Assignment of
4 Leases and Rents, and Fixture Filing (Financial
Statement) dated as of December 31, 1996, by the
registrant, as Trustor and debtor, to Chicago Title (5)
Insurance Company, as Trustee, for the benefit of the
Lender, Beneficiary and secured party with respect to
Scottsdale Royale and Villa Ocotillo (Exhibit
10.9.4).
10.9. Mortgage and Security Agreement between the
5 registrant ("Mortgagor") and Bank United (5)
("Mortgagee") with respect to Madison Glen (Exhibit
10.9.5).
10.1 Rosewood Court in Fullerton, California
0
10.10 Lease Agreement dated March 29, 1996 between the
.1 registrant ("Lessee") and Health Care Property (3)
Investors, Inc. ("Lessor") (Exhibit 10.1.1).
10.10 First Amendment Lease Agreement dated April 25, 1996
.2 by and between the registrant ("Lessee") and Health (3)
Care Property Investors, Inc. ("Lessor") (Exhibit
10.1.2).
10.1 The Arbor at Olive Grove in Phoenix, Arizona
1
10.11 Lease Agreement dated as of December 27, 1995 between
.1 the registrant and Health Care Property Investors, (2)
Inc. (Exhibit 10.12.1).
10.11 First Amended Lease Agreement dated as of February
.2 19, 1996 by and between the registrant and Health (2)
Care Property Investors, Inc. (Exhibit 10.12.2).
10.1 Renton Villa in Renton, Washington
2
10.12 Lease Agreement dated as of December 27, 1995 between
.1 the registrant and Health Care Property Investor, (2)
Inc. (Exhibit 10.13.1).
10.12 First Amended Lease Agreement dated as of February
.2 19, 1996 by and between the registrant and Health (2)
Care Property Investors, Inc. (Exhibit 10.13.2).
10.1 Seabrook, in Everett, Washington
3
10.13 Lease Agreement dated as of December 27, 1995 between
.1 the registrant and Health Care Property Investor, (2)
Inc. (Exhibit 10.14.1).
10.13 First Amended Lease Agreement dated as of February
.2 19, 1996 by and between the registrant and Health (2)
Care Property Investors, Inc. (Exhibit 10.14.2).
10.1 Laurel Lake Estates in Voorhees, New Jersey
4
10.14 Lease Agreement dated as of December 27, 1995 between
.1 the registrant and Health Care Property Investor, (2)
Inc. (Exhibit 10.15.1).
10.14 First Amended Lease Agreement dated as of February
.2 19, 1996 by and between the registrant and Health (2)
Care Property Investors, Inc. (Exhibit 10.15.2).
10.1 Florida Communities.
5
10.15 Lease Agreement dated March 15, 1996 between
.1 Meditrust Acquisition Corporation I ("Lessor") and
Emeritus Properties I, Inc., ("Lessee") with respect (2)
to Beneva Park Club (Exhibit 10.16.1).
10.15 Lease Agreement dated March 15, 1996 between
.2 Meditrust Acquisition Corporation I ("Lessor") and
Emeritus Properties I, Inc., ("Lessee") with respect (2)
to Central Park Club (Exhibit 10.16.2).
10.15 Lease Agreement dated March 15, 1996 between
.3 Meditrust Acquisition Corporation I ("Lessor") and
Emeritus Properties I, Inc., ("Lessee") with respect (2)
to College Park Club (Exhibit 10.16.3).
10.15 Lease Agreement dated March 15, 1996 between
.4 Meditrust Acquisition Corporation I ("Lessor") and
ESC I, G.P., Inc. ("Lessee") with respect to Park (2)
Club of Brandon (Exhibit 10.16.4).
33
10.15 Lease Agreement dated March 15, 1996 between
.5 Meditrust Acquisition Corporation I ("Lessor") and
Emeritus Properties I, Inc., ("Lessee") with respect (2)
to Park Club of Fort Myers (Exhibit 10.16.5).
10.15 Lease Agreement dated March 15, 1996 between
.6 Meditrust Acquisition Corporation I ("Lessor") and
Emeritus Properties I, Inc., ("Lessee") with respect (2)
to Park Club of Oakbridge (Exhibit 10.16.6).
10.1 Summer Wind in Boise, Idaho
6
10.16 Lease Agreement dated as of August 31, 1995 between
.1 AHP of Washington, Inc. and the registrant (Exhibit (1)
10.18.1).
10.16 First Amended Lease Agreement dated as of December
.2 31, 1996 by and between the registrant and AHP of (5)
Washington, Inc. (Exhibit 10.16.2).
10.1 Silver Pines (formerly Willowbrook) in Cedar Rapids, Iowa
7
10.17 Purchase and Sale Agreement (including Real Estate
.1 Contract) dated January 4, 1995 between Jabo, Ltd. (1)
("Jabo") and the registrant (Exhibit 10.19.1).
10.17 Assignment and Assumption Agreement with respect to
.2 facility leases dated as of January 17, 1995 by and (1)
between Jabo, as Assignor, and the registrant, as
Assignee (Exhibit 10.19.2).
10.1 The Palisades in El Paso, Texas, Amber Oaks in San Antonio,
8 Texas and Redwood Springs in San Marcos, Texas. The
following agreements are representative of those executed
in connection with these properties.
10.18 Lease Agreement dated April 1, 1997 between ESC III,
.1 L.P. D/B/A Texas-ESC III, L.P. ("Lessee") and Texas (6)
HCP Holding , L.P. ("Lessor") (Exhibit 10.4.1).
10.18 First Amendment to Lease Agreement dated April 1,
.2 1997 between Lessee and Texas HCP Holding , L.P. (6)
Lessor (Exhibit 10.4.2).
10.18 Guaranty dated April 1, 1997 by the registrant
.3 ("Guarantor") in favor of Texas HCP Holding , L.P. (6)
(Exhibit 10.4.3)
10.18 Assignment Agreement dated April 1, 1997 between the
.4 registrant ("Assignor") and Texas HCP Holding , L.P. (6)
("Assignee") (Exhibit 10.4.4).
10.1 Carriage Hill Retirement in Bedford, Virginia
9
10.19 Lease Agreement dated August 31, 1994 between the
.1 registrant, as Tenant, and Carriage Hill Retirement (1)
of Virginia, Ltd. as Landlord (Exhibit 10.23.1).
10.19 Supplemental Lease Agreement dated September 2, 1994 (1)
.2 (Exhibit 10.23.2).
10.2 Green Meadows Communities
0
10.20 Consent to Assignment of and First Amendment to Asset
.1 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 (1)
"Partnerships"), together with Asset Purchase
Agreement dated July 27, 1995 among The Standish Care
Company and the Partnerships (Exhibit 10.24.1).
10.20 Lease Agreement dated October 19, 1995 between the
.2 registrant and HCPI Trust with respect to Green (1)
Meadows - Allentown (Exhibit 10.24.2).
10.20 Lease Agreement dated October 16, 1995 between the
.3 registrant and HCPI Trust with respect to Green (1)
Meadows - Dover (Exhibit 10.24.3).
10.20 Lease Agreement dated October 19, 1995 between the
.4 registrant and HCPI Trust with respect to Green (1)
Meadows - Latrobe (Exhibit 10.24.4).
10.20 Lease Agreement dated October 19, 1995 between the
.5 registrant and HCPI Trust with respect to Green (1)
Meadows - Painted Post (Exhibit 10.24.5).
10.20 Agreement to Provide Administrative Services to an
.6 Adult Home dated October 23, 1995 between the (1)
registrant and P. Jules Patt and Pamela J. Patt
(Exhibit 10.24.6).
10.20 Assignment Agreement dated October 19, 1995 between
.7 the registrant, HCPI Trust and Health Care Property (1)
Investors, Inc. (Exhibit 10.24.8).
10.20 Assignment and Assumption Agreement dated August 31,
.8 1995 between the registrant and The Standish Care (1)
Company (Exhibit 10.24.9).
10.20 Guaranty dated October 19, 1995 by Daniel R. Baty in
.9 favor of Health Care Property Investors, Inc., and (1)
HCPI Trust (Exhibit 10.24.10).
10.20 Guaranty dated October 19, 1995 by the registrant in
.10 favor of Health Care Property Investors, Inc. (1)
(Exhibit 10.24.11).
10.20 First Amended Lease Agreement dated as of December
.11 13, 1995 by and between the registrant and HCPI, (5)
Trust with respect to Green Meadows - Allentown
(Exhibit 20.12).
10.20 Second Amended Lease Agreement dated as of February
.12 13, 1996 by and between the registrant and HCPI, (5)
Trust with respect to Green Meadows - Allentown
(Exhibit 10.20.13).
10.20 First Amended Lease Agreement dated as of December
.13 13, 1995 by and between the registrant and Health
Care Property Investors, Inc., with respect to Green (5)
Meadows - Dover (Exhibit 10.20.14).
10.20 Second Amended Lease Agreement dated as of February
.14 13, 1996 by and between the registrant and Health
Care Property Investors, Inc., with respect to Green (5)
Meadows - Dover (Exhibit 10.20.15).
10.20 First Amended Lease Agreement dated as of December
.15 13, 1995 by and between the registrant and HCPI, (5)
Trust with respect to Green Meadows - Latrobe
(Exhibit 10.20.16).
34
10.20 Second Amended Lease Agreement dated as of February
.16 13, 1996 by and between the registrant and HCPI, (5)
Trust with respect to Green Meadows - Latrobe
(Exhibit 10.20.17).
10.20 First Amended Lease Agreement dated as of December
.17 13, 1995 by and between the registrant and Health
Care Property Investors, Inc., with respect to Green (5)
Meadows - Painted Post (Exhibit 10.20.18).
10.20 Second Amended Lease Agreement dated as of June 24,
.18 1996 by and between the registrant and Health Care
Property Investors, Inc., with respect to Green (5)
Meadows - Painted Post (Exhibit 10.20.19).
10.20 Second Amendment to Agreement to provide
.19 Administrative Services to an Adult Home dated (10)
January 1, 1997 between Painted Post Partners and the
registrant (Exhibit 10.2).
10.2 Carolina Communities
1
10.21 Lease Agreement dated January 26, 1996 between the
.1 registrant and HCPI Trust with respect to Countryside (2)
Facility (Exhibit 10.23.1).
10.21 Lease Agreement dated January 26, 1996 between the
.2 registrant and Health Care Property Investors with (2)
respect to Heritage Health Center Facility (Exhibit
10.23.2).
10.21 Management Services Agreement between the registrant
.3 and Sunrise Healthcare Corporation ("Manger") dated (13)
December 1997.
10.21 Promissory Note dated as of January 26, 1996 in the
.4 amount of $3,991,190 from Heritage Hills Retirement,
Inc. ("Borrower") to Health Care Property Investors, (2)
Inc. ("Lender") (Exhibit 10.23.4).
10.21 Loan Agreement dated January 26, 1996 between the
.5 Borrower and the Lender (Exhibit 10.23.5). (2)
10.21 Guaranty dated January 26, 1996 by the registrant in (2)
.6 favor of the Borrower (Exhibit 10.23.6).
10.21 Deed of Trust with Assignment of Rents, Security
.7 Agreement and Fixture Filing dated as of January 26,
1996 by and among Heritage Hills Retirement, Inc.
("Grantor"), Chicago Title Insurance Company (2)
("Trustee") and Health Care Property Investor, Inc.
("Beneficiary") (Exhibit 10.23.7).
10.21 Lease Agreement dated as of January 26, 1996 between
.8 the registrant and Health Care Property Investor, (2)
Inc. with respect to Heritage Lodge Facility (Exhibit
10.23.8).
10.21 Lease Agreement dated as of January 26, 1996 between
.9 the registrant and Health Care Property Investor, (2)
Inc. with respect to Pine Park Facility (Exhibit
10.23.9).
10.21 Lease Agreement dated January 26, 1996 between the
.10 registrant and HCPI Trust with respect to Skylyn (2)
Facility (Exhibit 10.23.10).
10.21 Lease Agreement dated January 26, 1996 between the
.11 registrant and HCPI Trust with respect to Summit (2)
Place Facility (Exhibit 10.23.11).
10.21 Amendment to Deed of Trust dated April 25, 1996
.12 between Heritage Hills Retirement, Inc. ("Grantor"), (5)
and Health Care Property Investors, Inc.
("Beneficiary") (Exhibit 10.21.12).
10.21 First Amendment to Lease Agreement dated March 29,
.13 1996 between registrant and Health Care Property (5)
Investors, Inc. with respect to Heritage Health
Center (Exhibit 10.21.13).
10.2 Letter of Intent dated January 31, 1996 between the
3 registrant and Meditrust Acquisition Corporation I relating (2)
to developments (Exhibit 10.33).
10.2 Letter of Intent dated January 31, 1996 between the
4 registrant and Meditrust Acquisition Corporation I relating (2)
to acquisitions (Exhibit 10.34).
10.2 Letter of Intent dated August 13, 1996 between the
4 registrant and Meditrust Acquisition Corporation I relating (5)
to acquisitions (Exhibit 10.24).
10.2 Letter of Intent dated August 13, 1996 between the
5 registrant and Meditust Acquisition Corporation I relating (5)
to developments (Exhibit 10.24).
10.2 Juniper Meadows in Lewiston, Idaho
6
10.26 Agreement to Purchase Construction Loan dated January
.1 30, 1997 between RMI Capital Management Co. (5)
("Construction Lender") and the registrant (Exhibit
10.26.1).
10.26 Construction Loan Agreement between RMI Capital
.2 Management Co. ("Lender") and Emeritus Properties II, (5)
Inc. ("Borrower") (Exhibit 10.26.2).
10.26 Promissory Note dated January 30, 1997 in the amount
.3 of $5,080,082.39 between RMI Capital Management Co. (5)
("Holder") and Emeritus Properties II, Inc. ("Maker")
(Exhibit 10.26.3).
10.26 Deed of Trust, Assignment of Rents, Security
.4 Agreement and Financing Statement dated January 30,
1997 between Emeritus Properties II, Inc. ("Borrower" (5)
or "Grantor"), Alliance Title & Escrow Corp.
("Trustee") and RMI Capital Management Co. (Exhibit
10.26.4).
10.2 Assignment, Assumption and Consent Agreement dated as of
7 April 17, 1995 Between the registrant and Columbia-Pacific (1)
Group, Inc. (Exhibit 10.32).
10.2 Convertible Debenture Agreement dated as of June 10, 1994
8 among The Standish Care Company and the individuals on (1)
Schedule I attached thereto (Exhibit 10.33).
10.2 Registration Rights Agreement dated June 10, 1994 among The
9 Standish Care Company and Columbia-Pacific Group (Exhibit (1)
10.34).
10.3 Warrant to Purchase Common Stock of The Standish Care (1)
0 Company (Exhibit 10.35)
35
10.3 Development Property in Fairfield, California
1
10.31 Loan Agreement in the amount of $12,800,000 dated
.1 January 10, 1997, between Fairfield Retirement
Center, LLC ("Borrower") and the Finova Capital (5)
Corporation ("Lender") (Exhibit 10.31.1).
10.31 Promissory Note dated January 10, 1997 in the amount
.2 of $12,800,000 between Fairfield Retirement Center,
LLC ("Borrower") and Finova Capital Corporation (5)
("Lender") (Exhibit 10.31.2).
10.31 Deed of Trust, Security Agreement, Assignment of
.3 Leases and Rents and Fixture Filing dated January 10,
1997 between Fairfield Retirement Center, LLC (5)
("Trustor"), Chicago Title Company ("Trustee") and
Finova Capital Corporation ("Beneficiary") (Exhibit
10.31.3).
10.31 Guaranty Agreement dated January 10, 1997 between the
.4 registrant ("Guarantor") and Finova Capital (5)
Corporation ("Lender") (Exhibit 10.31.4).
10.3 Courtyard at the Willows in Puyallup, Washington
2
10.32 Loan Agreement dated January 30, 1997, between
.1 Emeritus Properties III, Inc. ("Maker") and Ocwen (5)
Federal Bank FSB ("Payee") (Exhibit 10.32.1).
10.32 Promissory Note dated January 30, 1997 in the amount
.2 of $6,465,000 between Emeritus Properties III, Inc. (5)
("Maker") and Ocwen Federal Bank, FSB ("Payee")
(Exhibit 10.32.2).
10.32 Deed of Trust, Security Agreement, Assignment of
.3 Leases and Rents and Fixture Filing dated January 30,
1997 between Emeritus Properties III, Inc. (5)
("Borrower"), Chicago Title Insurance Company
("Trustee") and Ocwen Federal Bank, FSB ("Lender")
(Exhibit 10.32.3).
10.32 Deed of Trust, Security Agreement, Financing
.4 Statement and Assignment of Resident Agreements and
Rents dated January 30, 1997 between Emeritus
Properties III, Inc. ("Grantor"), Chicago Title (6)
Insurance Company ("Trustee") and Ocwen Federal Bank
FSB ("Beneficiary") (Exhibit 10.5.1).
10.32 Agreement for Amendment of Documents dated January
.5 30, 1997 between Emeritus Properties III, Inc., (6)
("Borrower") and OCWEN Federal Bank FSB, ("Lender")
(Exhibit 10.5.2).
10.3 Kirkland Lodge at Lakeside in Kirkland, Washington, Park
3 Place in Casper, Wyoming, The Hearthstone in Moses Lake,
Washington and Meadowbrook Retirement in Ontario, Oregon.
The following agreement is representative of that executed
in connection with these properties.
10.33 Lease Agreement dated May 1, 1997 and May 23, 1997
.1 between Emeritus Properties I, Inc., ("Lessee") and (9)
Meditrust Acquisition Corporation I ("Lessor")
(Exhibit 10.1.1).
10.3 The Pines at Tewksbury in Tewksbury, Massachusetts
4
10.34 Lease Agreement dated March 15, 1996 between
.1 Meditrust Acquisition Corporation I ("Lessor") and
Emeritus Properties I, Inc., ("Lessee") with respect (2)
to Tewksbury (Exhibit 10.37.1).
10.3 Garrison Creek Lodge in Walla Walla, Washington, Cambria in
5 El Paso Texas, and Sherwood Place in Odessa, Texas. The
following agreements are representative of those executed
in connection with these properties:
10.35 Lease Agreement dated July, August and September 1996
.1 between the registrant ("Lessee") and American Health (4)
Properties, Inc. ("Lessor") (Exhibit 10.3.1).
10.35 First Amendment to Lease Agreement dated December 31,
.2 1996 between the registrant ("Lessee") and AHP of (5)
Washington, Inc., ("Lessor") (Exhibit 10.35.2).
10.3 Cobblestone at Fairmont in Manassas, Virginia
6
10.36 Loan Agreement effective as of October 26, 1995
.1 between the registrant and Health Care REIT, Inc. (1)
(Exhibit 10.42.1).
10.36 Deed of Trust, Security Agreement, Assignment of
.2 Leases and Rents and Fixture Filing dated as of (1)
October 26, 1995 by the registrant to Health Care
REIT, Inc. (Exhibit 10.42.2).
10.36 Note dated October 26, 1995 from the registrant to (1)
.3 Health Care REIT, Inc. (Exhibit 10.42.3).
10.36 Unconditional and Continuing Guaranty dated as of
.4 October 26, 1995 by Daniel R. Baty in favor of Health (1)
Care REIT, Inc. (Exhibit 10.42.4).
10.3 Rosewood Court in Fullerton, California, The Arbor at Olive
7 Grove in Phoenix, Arizona, Renton Villa in Renton,
Washington, Seabrook in Everett, Washington and Laurel Lake
Estates in Voorhees, New Jersey. The following agreements
are representative of those executed in connection with
these properties:
10.37 Second Amended Lease Agreement dated as of December
.1 30, 1996 by and between the registrant and Health (5)
Care Property Investors, Inc. (Exhibit 10.37.1).
10.3 Eastman Estates in Longview, Texas
8
10.38 Lease Agreement dated September 30, 1997 between
.1 Meditrust Acquisition Corporation I ("Lessor") and (12)
ESC I, L.P. ("Lessee") (Exhibit 10.3.1).
10.3 Meadowlands Terrace in Waco, Texas
9
10.39 Loan Agreement dated September 30, 1997 between
.1 Meditrust Mortgage Investments, Inc. ("Lender") and (12)
ESC I, L.P. ("Borrower") (Exhibit 10.4.1).
10.39 Promissory Note dated September 30, 1997 in the
.2 amount of $4,288,000 between Meditrust Mortgage (12)
Investments, Inc. ("Lender") and ESC I, L.P.
("Borrower") (Exhibit 10.4.2).
10.4 Cooper George Partners Limited Partnership
0
36
10.40 Agreement of Cooper George Partners Limited
.1 Partnership dated August 7, 1995 between Emeritus
Real Estate IV, L.L.C. ("General Partner") and Bella (2)
Torre De Pisa Limited Partnership ("Limited
Partner") (Exhibit 10.43.1).
10.40 Construction Loan Agreement dated December 12, 1995
.2 between Cooper George Partners Limited Partnership ("
Borrower") and Intervest-Mortgage Investment Company (2)
("Lender") (Exhibit 10.43.2).
10.40 Promissory Note dated December 1995 between Cooper
.3 George Partners Limited Partnership ("Maker") and the (2)
Lender (Exhibit 10.43.3).
10.40 Guaranty dated December 1995 by Daniel R. Baty and
.4 Pamela D. Baty ("Guarantor") in favor of the Lender (2)
(Exhibit 10.43.4).
10.40 Deed of Trust, Assignment of Rents and Security
.5 Agreement dated December 1995 between Cooper George
Partners Limited Partnership ("Grantor"), First
American Title Insurance Company ("Trustee") and (2)
Intervest-Mortgage Investment Company ("Beneficiary")
(Exhibit 10.43.5).
10.4 Registration Rights Agreement dated February 8, 1996 with
1 respect to the registrant's 6.25% Convertible Subordinated (2)
Debentures due 2006 (Exhibit 10.44).
10.4 Registration Rights Agreement dated February 8, 1996 with
2 respect to the registrant's 6.25% Convertible Subordinated (2)
Debentures due 2006 (Exhibit 10.45).
10.4 Development Properties in Beaumont, Texas, Midland, Texas,
3 Lubbock, Texas, Amarillo, Texas, Clarksville, Tennessee,
Wichita Falls in Wichita Falls, Texas and San Angelo in San
Angelo, Texas. The following agreements are representative
of those executed in connection with these properties:
10.43 Lease Agreement dated April and July 1996 between ESC
.1 I, L.P. ("Lessee") and Meditrust Acquisition (3)
Corporation I ("Lessor") (Exhibit 10.2.1).
10.43 Leasehold Improvement Agreement dated April 15, 1996
.2 between Meditrust Acquisition Corporation I (3)
("Lessor") and ESC I, L.P. ("Lessee") (Exhibit
10.2.2).
10.4 Barrington Place in LeCanto, Florida and Springtree in
4 Sunrise, Florida. The following agreement is
representative of those executed in connection with these
properties:
10.44 Lease Agreement dated May 1, 1996 between Emeritus
.1 Properties I, Inc. ("Lessee") and Meditrust (3)
Acquisition Corporation I ("Lessor") (Exhibit
10.3.1).
10.4 Laurel Place in San Bernardino, California
5
10.45 Purchase and Sale Agreement dated January 24, 1996
.1 between Western Biologics Inc., ("Seller"), Nancy F.
Feinstein and Jay L. Feinstein ("Seller") and the (3)
registrant ("Purchaser") (Exhibit 10.4.1).
10.4 Lakewood Inn in Coeur d'Alene, Idaho, Evergreen Lodge in
6 Federal Way, Washington, Greenville in Greenville, South
Carolina, Grand Terrace in Grand Terrace, California, Ridge
Wind In Chubbock, Idaho and Ocean Shores in Ocean Shores,
Washington. The following agreement is representative of
those executed in connection with these properties:
10.46 Lease Agreement dated April and June 1996 between
.1 Emeritus Properties I, Inc. ("Lessee") and Meditrust (3)
Acquisition Corporation I ("Lessor") (Exhibit
10.5.1).
10.4 Lakewood Inn in Coeur d'Alene, Idaho, Greenville in
7 Greenville, South Carolina and Ocean Shores in Ocean
Shores, Washington. The following agreement is
representative of those executed in connection with these
properties:
10.47 Leasehold Improvement Agreement dated April and June
.1 1996 between Meditrust Acquisition Corporation I (3)
("Lessor") and Emeritus Properties I ("Lessee")
(Exhibit 10.6.1).
10.4 Development Property in Bozeman, Montana
8
10.48 Agreement to Purchase Construction Loan dated May 30,
.1 1996 between RMI Capital Management Co. (3)
("Construction Lender") and Emeritus Corporation
(Exhibit 10.7.1).
10.48 Construction Loan Agreement between RMI Capital
.2 Management Co. ("Lender") and Emeritus Properties II, (3)
Inc. ("Borrower") (Exhibit 10.7.2).
10.48 Promissory Note dated May 30, 1996 in the amount of
.3 $4,695,000 between RMI Capital Management Co. (3)
("Holder") and Emeritus Properties II, Inc. ("Maker")
(Exhibit 10.7.3).
10.48 Security Agreement dated May 30, 1996 between
.4 Emeritus Properties II, Inc. ("Debtor") and RMI (3)
Capital Management Co. ("Secured Party") (Exhibit
10.7.4).
10.48 Deed of Trust, Assignment of Rents, Security
.5 Agreement and Financing Statement dated May 30, 1996
between Emeritus Properties II, Inc. ("Borrower" or
"Grantor"), American Land Title Company ("Trustee") (3)
and RMI Capital Management Co. ("Beneficiary" or
"Lender") (Exhibit 10.7.5).
10.48 Guaranty Agreement dated May 30, 1996 between
.6 Emeritus Corporation ("Guarantor") and RMI Capital (3)
Management Co. ("Lender") (Exhibit 10.7.6).
10.4 Office Lease Agreement dated April 29, 1996 between Martin
9 Selig ("Lessor") and the registrant ("Lessee") (Exhibit (3)
10.8).
10.5 The Lodge at Mainlands in Pinellas Park, Florida, Colonial
0 Park Club in Sarasota, Florida, Fairhaven Estates in
Bellingham, Washington, Highland Hills in Pocatello, Idaho
and Anderson Place in Anderson, South Carolina. The
following agreements are representative of those executed
in connection with these properties:
10.50 Lease Agreement dated August and October 1996 between
.1 Emeritus Properties I, Inc. ("Lessee") and Meditrust (4)
Acquisition Corporation I ("Lessor") (Exhibit
10.1.1).
10.5 Colonial Park Club in Sarasota, Florida.
1
10.51 Leasehold Improvement Agreement dated August 21, 1996
.1 between Emeritus Properties I, Inc. ("Lessee") and (4)
Meditrust Acquisition Corporation I ("Lessor")
(Exhibit 10.2.1).
37
10.5 Colonie Manor in Latham, New York, Bassett Manor in
2 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:
10.52 Lease Agreement dated September 1, 1996 between
.1 Philip Wegman ("Landlord") and Painted Post Partners (4)
("Tenant") (Exhibit 10.4.1).
10.52 Agreement to Provide Administrative Services to an
.2 Adult Home dated September 2, 1996 between the (4)
registrant and Painted Post Partners ("Operator")
(Exhibit 10.4.2).
10.52 First Amendment to Agreement to Provide
.3 Administrative Services to an Adult Home dated (10)
January 1, 1997 between Painted Post Partners and the
registrant (Exhibit 10.1).
10.5 Columbia House Communities.
3
10.53 Management Services Agreement between the Registrant
.1 ("Manager") and Columbia House, LLC ("Lessee") dated (4)
November 1, 1996 with respect to Camlu Retirement
(Exhibit 10.6.1).
10.53 Management Services Agreement dated January 1, 19998
.2 between the registrant ("Manager") and Columbia House (13)
LLC ("Lessee") with respect to York Care.
10.53 Commercial Lease Agreement dated January 13, 1997
.3 between Albert M. Lynch ("Landlord") and Columbia (6)
House, LLC ("Tenant") with respect to York Care
(Exhibit 10.3.2).
10.53 Management Services Agreement dated June 1, 1997
.4 between the registrant ("Manager") and Columbia House (9)
LLC ("Owner") with respect to Autumn Ridge (Exhibit
10.3.1).
10.53 Agreement to Provide Accounting and Administrative
.5 Services dated October 1, 1997 between Acorn Service
Corporation ("Administrator") and Vancouver Housing, (12)
L.L.C., ("Manager") with respect to Van Vista and
Columbia House (Exhibit 10.6.1).
10.53 Assignment and First Amendment to Agreement to
.6 Provide Management Services dated September 1, 1997
between the registrant, Columbia House, L.L.C., Acorn (13)
Service Corporation and Camlu Coeur d'Alene, L.L.C.
with respect to Camlu.
10.53 Assignment and First Amendment to Agreement to
.7 Provide Management Services dated September 1, 1997
between the registrant, Columbia House, L.L.C., Acorn (13)
Service Corporation and Autumn Ridge Herculaneum,
L.L.C. with respect to Autumn Ridge.
10.53 Management Services Agreement dated January 1, 1998
.8 between the registrant ("Manager") and Columbia House (13)
LLC ("Owner") with respect to Park Lane.
10.5 Development Property in Ogden, Utah
4
10.54 Lease Agreement dated April 30, 1997 between Emeritus
.1 Properties I, Inc., ("Lessee") and Meditrust (9)
Acquisition Corporation I ("Lessor") (Exhibit
10.4.1).
10.54 Leasehold Improvement Agreement dated April 30, 1997
.2 between Emeritus Properties I, Inc., ("Lessee") and (9)
Meditrust Acquisition Corporation I ("Lessor")
(Exhibit 10.4.2).
10.5 Vickery Towers in Dallas, Texas
5
10.55 Promissory Note dated November 26, 1996 in the amount
.1 of $17,000,000 between ESC II, L.P. ("Maker") and (5)
GMAC Commercial Mortgage Corporation ("Payee")
(Exhibit 10.55.1).
10.55 Construction Loan Agreement dated November 26, 1996
.2 by ESC II, L.P., (Borrower) and GMAC Commercial (5)
Mortgage Corporation ("Lender") (Exhibit 10.55.2).
10.55 Deed of Trust, Mortgage and Security Agreement dated
.3 as of November 26, 1996 by ESC II, L.P. ("Grantor") (5)
to Andrew D. Rocker, Trustee (Exhibit 10.55.3).
10.55 Guaranty Agreement dated November 26, 1996 between
.4 Emeritus Corporation ("Guarantor") and GMAC (5)
Commercial Mortgage Corporation ("Creditor") (Exhibit
10.55.4).
10.5 Concorde in Las Vegas, Nevada
6
10.56 Purchase and Sale Agreement dated July 9, 1996
.1 between the registrant ("Purchaser") and Sunday (5)
Estates, Inc. ("Seller") (Exhibit 10.56.1).
10.56 First Amendment to Purchase and Sale Agreement dated
.2 July 11, 1996 between the registrant the Seller (5)
(Exhibit 10.56.2).
10.56 Promissory Note dated November 18, 1996 in the amount
.3 of $4,000,000 between the registrant ("Maker") and (5)
Sunday Estates, Inc. ("Payee") (Exhibit 10.56.3).
10.56 All-Inclusive Deed of Trust and Assignment of Rents
.4 dated November 18, 1996 between the registrant
("Trustor"), Fidelity National Title Agency of (5)
Nevada, Inc. ("Trustor") and Sunday Estates, Inc.,
("Beneficiary") (Exhibit 10.56.4).
10.56 Addendum to All-Inclusive Deed of Trust and
.5 Assignment of Rents dated November 18, 1996 between (5)
the Trustor and the ("Beneficiary") (Exhibit
10.56.5).
10.5 Development Properties in Hutchinson, Kansas and Ridgeland,
7 Mississippi. The following agreements are representative of
those executed in connection with these properties:
38
10.57 Lease Agreement dated March 1996 between Emeritus
.1 Properties I, Inc. ("Lessee") and Meditrust (5)
Acquisition Corporation I ("Lessor") (Exhibit
10.57.1).
10.57 Leasehold Improvement Agreement dated March 1996
.2 between Meditrust Acquisition Corporation I (5)
("Lessor") and Emeritus Properties I, Inc. (Exhibit
10.57.2).
10.5 Development Properties in Auburn and Chelmsford,
8 Massachusetts, Louisville, Kentucky and Rocky Hill,
Connecticut. The following agreements are representative
of those executed in connection with these properties:
10.58 Lease Agreement dated February 1996 between the
.1 registrant ("Lessee") and LM Auburn Assisted Living
LLC, and LM Louisville Assisted Living LLC, (5)
("Landlords") with respect to the development
properties in Auburn and Louisville (Exhibit
10.58.1).
10.58 Amended and Restated Lease Agreement dated February
.2 26, 1996 between the registrant ("Lessee") and LM
Rocky Hill Assisted Living Limited Partnership, (5)
("Landlord") with respect to the development property
in Rocky Hill (Exhibit 10.58.2).
10.58 Lease Agreement dated October 10, 1996 between the
.3 registrant ("Lessee") and LM Chelmsford Assisted (5)
Living LLC, ("Landlord") with respect to the
development property in Chelmsford (Exhibit 10.58.3).
10.58 Promissory Note in the amount of $1,255,000 dated
.4 December 1996 between the registrant ("Lender") and (5)
LM Auburn Assisted Living LLC, ("Borrower") with
respect to the development property in Auburn
(Exhibit 10.58.4).
10.58 Promissory Note in the amount of $1,450,000 dated
.5 January 1997 between the registrant ("Lender") and LM
Louisville Assisted Living LLC, ("Borrower") with (5)
respect to the development property in Louisville
(Exhibit 10.58.5).
10.58 Promissory Note in the amount of $1,275,000 dated
.6 January 1997 between the registrant ("Lender") and LM
Rocky Hill Assisted Living Limited Liability (5)
Partnership, ("Borrower") with respect to the
development property in Rocky Hill (Exhibit 10.58.6).
10.58 Promissory Note in the amount of $300,000 dated
.7 January 1997 between the registrant ("Lender") and LM
Chelmsford Assisted Living LLC, ("Borrower") with (5)
respect to the development property in Chelmsford
(Exhibit 10.58.7).
10.5 Beneva Park Club, Central Park Village, College Park Club,
9 Park Club Brandon, Park Club Fort Myers and Park Club
Oakbridge, The Pines at Tewksbury and The Terrace. The
following documents are representative of those executed in
connection with these properties:
10.59 First Amendment to Facility Lease dated December 31,
.1 1996 between Meditrust Acquisition Corporation I (5)
("Lessor") and Emeritus Properties I, Inc. ("Lessee")
(Exhibit 10.59.1).
10.59 Amended and Restated Memorandum of Lease dated
.2 December 31, 1996 between Meditrust Acquisition (5)
Corporation I ("Lessor") and Emeritus Properties I,
Inc. ("Lessee") (Exhibit 10.59.2).
10.6 Evergreen Lodge in Federal Way, Washington
0
10.60 First Amendment to Facility Lease dated December 31,
.1 1996 between Meditrust Acquisition Corporation I (5)
("Lessor") and Emeritus Properties I, Inc. ("Lessee")
(Exhibit 10.60.1).
10.60 Amended and Restated Memorandum of Lease dated
.2 December 31, 1996 between Meditrust Acquisition
Corporation I ("Lessor") and Emeritus Properties I, (5)
Inc. ("Lessee") (Exhibit 10.60.2).
10.6 Development Properties in Cheyenne, Wyoming and Auburn,
1 California. The following agreements are representative of
those executed in connection with these properties.
10.61 Management Agreement dated May 30, 1997 between
.1 Willard Holdings, Inc., ("Owner") and the registrant (9)
("Manager") (Exhibit 10.5.1).
10.61 Lease Agreement dated May 30, 1997 between Willard
.2 Holdings, Inc., ("Lessor") and the registrant (9)
("Lessee") (Exhibit 10.5.2).
10.6 Senior Management Employment Agreements entered into
2 between the registrant and each of the following
individuals:
10.62 Michelle A. Bickford (Exhibit 10.6.1), Frank A. Ruffo
.1 (Exhibit 10.6.2), Kelly J. Price (Exhibit 10.6.3),
Gary D. Witte (Exhibit 10.6.4), Sarah J. Curtis (9)
(Exhibit 10.6.4) and Raymond R. Brandstrom (Exhibit
10.6.5).
10.6 La Casa Grande in New Port Richey, Florida, River Oaks in
3 Englewood, Florida, and Stanford Centre in Altamonte
Springs, Florida. The following agreements are
representative of those executed in connection with these
properties.
10.63 Stock Purchase Agreement dated September 30, 1996
.1 between Wayne Voegele, Jerome Lang, Ronald Carlson,
Thomas Stanford, Frank McMillan, Lonnie Carlson, and (7)
Carla Holweger ("Seller") and the registrant
("Purchaser") with respect to La Casa Grande (Exhibit
10.1).
10.63 First Amendment to Stock Purchase Agreement dated
.2 January 31, 1997 between the Seller and the (7)
registrant with respect to La Case Grande (Exhibit
10.2).
10.63 Stock Purchase Agreement dated September 30, 1996
.3 between the Seller and the registrant with respect (7)
to River Oaks (Exhibit 10.3).
10.63 First Amendment to Stock Purchase Agreement dated
.4 January 31, 1997 between the Seller and the (7)
registrant with respect to River Oaks (Exhibit 10.4).
10.63 Stock Purchase Agreement dated September 30, 1996
.5 between the Seller and the registrant with respect (7)
to Stanford Centre (Exhibit 10.5).
10.63 First Amendment to Stock Purchase Agreement dated
.6 January 31, 1997 between the Seller and the (7)
registrant with respect to Stanford Centre (Exhibit
10.6).
39
10.63 Term Loan Agreement dated May 1, 1997 in the amount
.7 of $26,000,000 between Emeritus Properties V, Inc., (8)
("Borrower") and Fleet National Bank ("Lender")
(Exhibit 10.7).
10.63 Promissory note dated May 1, 1997 in the amount of
.8 $26,000,000 between Emeritus Properties V, Inc., (8)
("Borrower") and Fleet National Bank ("Lender")
(Exhibit 10.8).
10.63 Promissory Note dated May 1, 1997 in the amount of
.9 $7,000,000 between Emeritus Properties V, Inc., (8)
("Borrower") and High Yield Partners LLC, ("Lender")
(Exhibit 10.9).
10.63 Credit Agreement dated May 1, 1997 between Emeritus
.10 Properties V, Inc. and High Yield Partners LLC (8)
(Exhibit 10.10).
10.63 Guaranty dated May 1, 1997 between the registrant
.11 ("Guarantor") Emeritus Properties V, Inc., ("Debtor") (8)
and High Yield Partners LLC ("Lender") (Exhibit
10.11).
10.63 Mortgage Deed and Security Agreement entered into
.12 between the registrant ("Mortgagor") and Fleet (13)
national Bank ("Lender").
10.6 Painted Post Partnership
4
10.64 Painted Post Partners Partnership Agreement dated (1)
.1 October 1, 1995 (Exhibit 10.24.7).
10.64 First Amendment to Painted Post Partners Partnership
.2 Agreement dated October 22, 1996 between Daniel R. (5)
Baty and Raymond R. Brandstrom (Exhibit 10.20.20).
10.64 Indemnity Agreement dated November 3, 1996 between
.3 the registrant and Painted Post Partners (Exhibit (10)
10.3).
10.64 First Amendment to Indemnity Agreement dated January
.4 1, 1997 between the registrant and Painted Post (10)
Partners (Exhibit 10.4).
10.64 Undertaking and Indemnity Agreement dated October 23,
.5 1995 between the registrant, P. Jules Patt and Pamela (10)
J. Patt and Painted Post Partnership (Exhibit 10.5).
10.64 First Amendment to Undertaking and Indemnity
.6 Agreement dated January 1, 1997 between Painted post (10)
Partners and the registrant (Exhibit 10.6).
10.64 First Amendment to Non-Competition Agreement between
.7 the registrant and Daniel R. Baty (Exhibit 10.1.1) (11)
and Raymond R. Brandstrom (Exhibit 10.1.2).
10.6 Ridgeland Court in Ridgeland, Mississippi
5
10.65 Master Agreement and Subordination Agreement dated
.1 September 5, 1997 between the registrant, Emeritus
Properties I, Inc., and Mississippi Baptist health (12)
Systems, Inc. (Exhibit 10.1.1).
10.65 License Agreement dated September 5, 1997 between the
.2 registrant and its subsidiary and affiliated (12)
corporations and Mississippi Baptist health Systems,
Inc. (Exhibit 10.1.2).
10.65 Economic Interest Assignment Agreement and
.3 Subordination Agreement dated September 5, 1997
between the registrant, Emeritus Properties I, Inc., (12)
and Mississippi Baptist Health Systems, Inc. (Exhibit
10.1.3).
10.6 Development Property in Urbana, Illinois.
6
10.66 Lease Agreement dated September 10, 1997 between ALCO
.1 IV, L.L.C. ("Lessor") and the registrant ("Lessee") (12)
(Exhibit 10.2.1).
10.66 Management Agreement dated September 10, 1997 between
.2 the registrant ("Manager" and ALCO IV, L.L.C. (12)
("Owner") (Exhibit 10.2.2).
10.6 Development Properties in Middleburg Heights, Ohio and
7 Newark, Delaware. The following agreements are
representative of those executed in connection with these
properties.
10.67 Lease Agreement dated September, 1997 between
.1 Emeritus Properties I, Inc., ("Lessee") and Meditrust (12)
Acquisition Corporation I, ("Lessor") (Exhibit
10.5.1).
10.67 Leasehold Improvement Agreement dated September, 1997
.2 between Emeritus Properties I, Inc., ("Lessee") and (12)
Meditrust Acquisition Corporation I, ("Lessor")
(Exhibit 10.5.2).
10.6 Settlement Agreement dated April 25, 1997 by and between
8 the registrant and Carematrix Corporation (formerly The (13)
Standish Care Company).
10.6 Amendment to Office Lease Agreement dated September 6, 1996
9 between Martin Selig ("Lessor") and the registrant. (13)
10.7 Villa Del Rey in Escondido, California
0
10.70 Purchase and Sale Agreement dated December 19, 1996
.1 between the registrant ("Purchaser") and Northwest (6)
Retirement ("Seller") (Exhibit 10.1.1).
10.70 Restated Promissory Note dated February 26, 1997 in
.2 the amount of $3,030,773.40 between the registrant (6)
("Borrower") and Redlands Federal Bank ("Lender")
(Exhibit 10.1.2).
10.70 Agreement for Modification of Loan Documents dated
.3 February 26, 1997 between the registrant and Redlands (6)
Federal Savings Bank (Exhibit 10.1.3).
10.70 Loan Assumption Agreement dated February 26, 1997
.4 between the registrant and Redlands Federal Savings (6)
Bank (Exhibit 10.1.4).
10.70 Amended and Restated Deed of Trust dated February 26,
.5 1997 between the registrant ("Borrower") and Redlands
Financial Services, Inc. ("Trustee") and Redlands (6)
Federal Bank ("Lender") (Exhibit 10.1.5).
10.70 All-Inclusive Promissory Note dated March 25, 1997 in
.6 the amount of $749,512.17 between the registrant and (6)
Northwest Retirement ("Payee") (Exhibit 10.1.6).
40
10.70 All-Inclusive Deed of Trust dated March 26, 1997
.7 between the registrant ("Trustor"), Chicago Title
Insurance Company ("Trustee") and Northwest (6)
Retirement ("Beneficiary") (Exhibit 10.1.7).
10.7 Development Property in Paso Robles, California
1
10.71 Agreement of TDC/Emeritus Paso Robles Associates
.1 dated June 1, 1995 between the registrant and TDC (6)
Convalescent, Inc. (Exhibit 10.2.1).
10.71 Loan Agreement in the amount of $6,000,000 dated
.2 February 15, 1997 between Finova Capital Corporation
("Lender") and TDC/Emeritus Paso Robles Associates (6)
("Borrower") (Exhibit 10.2.2).
10.71 Promissory Note dated February 28, 1997 in the amount
.3 of $6,000,000 between Finova Capital Corporation
("Lender") and TDC/Emeritus Paso Robles Associates (6)
("Borrower") (Exhibit 10.2.3).
10.71 Deed of Trust, Security Agreement, Assignment of
.4 Leases and Rents and Fixture Filing dated February
18, 1997 between TDC/Emeritus Paso Robles Associates (6)
("Trustor"), Chicago Title Company ("Trustee") and
Finova Capital Corporation ("Beneficiary") (Exhibit
10.2.4).
10.71 Guaranty between TDC Convalescent, Inc. ("Guarantor")
.5 and Finova Capital Corporation (Exhibit 10.2.5). (6)
10.71 Guaranty between the registrant ("Guarantor") and
.6 Finova Capital Corporation (Exhibit 10.2.6). (6)
10.7 Development Property in Staunton, Virginia
2
10.72 Purchase and Sale Agreement dated February 5, 1997
.1 between Greencastle Retirement Partners, L.L.C. (13)
("Purchaser") and Gail G. Brown ("Seller").
10.72 Assignment and Assumption of Purchase and Sale
.2 Agreement dated February 12, 1997 between Greencastle (13)
Retirement Partners, L.L.C. and the registrant.
10.7 Development Property in Jamestown New York
3
10.73 Purchase Agreement dated December 12, 1996 between
.1 June Fagerstrom ("Seller") and Wegman Family LLC (13)
("Buyer").
10.73 Assignment and Assumption Agreement dated December
.2 30, 1997 between Wegman Family LLC ("Assignor") and (13)
Painted Post Partners ("Assignee").
10.7 Development Property in Danville, Illinois
4
10.74 Purchase and Sale Agreement dated October 14, 1997
.1 between South Bay Partners, Inc. ("Purchaser") and (13)
Elks Lodge No. 332, BPOE ("Seller").
10.74 Assignment and Assumption of Purchase and Sale
.2 Agreement dated October 21, 1997 between South Bay (13)
Partners, Inc. and the registrant.
10.7 Development Property in Biloxi, Mississippi
5
10.75 Management Agreement dated December 18, 1997 between
.1 the registrant ("Manager") and ALCO VII, L.L.C. (13)
("Owner").
10.7 Sanyo Electric Co., Ltd.
6
10.76 Agreement entered into on May 30, 1996 between the
.1 registrant and Sanyo Electric Co., Ltd. for the
interest in jointly entering the development, (13)
construction and /or operation of the Senior Housing
Business in Japan.
10.76 Joint Venture Agreement entered into on July 9, 1997,
.2 between the registrant and Sanyo Electric Co., Ltd. (13)
10.7 Development Property in North Phoenix, Arizona.
7
10.77 Leasehold Improvement Agreement dated December 30,
.1 1997 between Emeritus Properties I, Inc., ("Lessee") (13)
and Meditrust Acquisition Corporation I, ("Lessor").
10.7 Lakeridge Place in Wichita Falls, Texas, Meadowlands
8 Terrace in Waco, Texas, Saddleridge Lodge in Midland, Texas
and Sherwood Place in Odessa, Texas. The following
agreements are representative of those executed in
connection with these properties.
10.78 Management and Consulting Agreement dated February 1,
.1 1997 between ESC I, L.P., and XL Management Company (13)
L.L.C.
10.7 Aurora Bay Agreements
9
10.79 Convertible Promissory Note dated January 7, 1998
.1 between Aurora Bay Investments, LLC and the (13)
registrant.
10.79 Notice and Agreement Emeritus Corporation Loan to
.2 Aurora Bay Investments, LLC dated January 7, 1998. (13)
10.79 Credit Agreement dated January 7, 1998 between the
.3 registrants and Aurora Bay Investments, LLC. (13)
10.79 Project Promissory Note dated January 7, 1998 between
.4 Lubbock Group, Ltd. and Aurora Bay Investments, LLC. (13)
10.79 Project Pledge and Security Agreement dated January
.5 7, 1998 between Aurora Investments, LLC and Aurora (13)
Bay I, LLC for the benefit of the registrant.
10.79 Guarantor Pledge and Security Agreement dated January
.6 7, 1998 between Thilo Best, Erwin Investors I, LLC (13)
and Craig Spaulding for the benefit of the
registrant.
10.79 Guaranty dated January 7, 1998 between Thilo Best,
.7 Erwin Investors I, LLC. And Craig Spaulding for the (13)
benefit of the registrant.
10.79 Operating Agreement of Aurora Bay I, LLC. Dated
.8 January 6, 1998 entered into between Aurora Bay (13)
Investment, LLC and Erwin Investors I, LLC.
41
10.79 Development Services Agreement dated January 9, 1998
.9 between Lubbock Group, Ltd. and South Bay Partners, (13)
Inc. with respect to the development property in
Lubbock, Texas.
21.1 Subsidiaries of the registrant. (13)
23.1 Consent of KPMG Peat Marwick, LLP. (13)
27.1 Financial Data Schedule. (13)
(1) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-1 (File No. 33-97508)
declared effective on November 21, 1995.
(2) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 29,
1996.
(3) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on
August 14, 1996.
(4) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1996.
(5) Incorporated by reference to the indicated exhibit filed with the
Company's Annual Report on Form 10-K (File No. 1-14012) on March 31,
1997.
(6) Incorporated by reference to the indicated exhibit filed with the
Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May
15, 1997.
(7) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K (File No. 1-14012) on May 16,
1997.
(8) Incorporated by reference to the indicated exhibit filed with the
Company's Current Report on Form 8-K Amendment No. 1 (File No. 1-
14012) on July 14, 1997.
(9) Incorporated by reference to the indicated exhibit filed with the
Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on
August 14, 1997.
(10) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 2 (File
No. 333-20805) on August 14, 1997.
(11) Incorporated by reference to the indicated exhibit filed with the
Company's Registration Statement on Form S-3 Amendment No. 3 (File
No. 333-20805) on October 29, 1997.
(12) Incorporated by reference to the indicated exhibit filed with the
Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on
November 14, 1997.
(13) Filed herewith.
42
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 27, 1998
EMERITUS CORPORATION
(Registrant)
/s/ Daniel R. Baty
--------------------------------
Daniel R. Baty, Chief Executive Officer and Director
/s/ Raymond R. Brandstrom
--------------------------------
Raymond R. Brandstrom, Chief Operating Officer and Director
/s/ Kelly J. Price
--------------------------------
Kelly J. Price, Chief Financial Officer, Vice President, Finance
and Principal Accounting Officer
/s/ Tom A. Alberg
--------------------------------
Tom A. Alberg, Director
/s/ Patrick Carter
--------------------------------
Patrick Carter, Director
/s/ William E. Colson
--------------------------------
William E. Colson, Director
/s/ David Hamamoto
--------------------------------
David Hamamoto, Director
/s/ Motoharu Iue
--------------------------------
Motoharu Iue, Director
Index to Consolidated Financial Statements
Page No.
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997..... F-4
Consolidated Statements of Operations for the years ended F-5
December 31, 1995, 1996 and 1997.................................
Consolidated Statements of Cash Flows for the years ended F-6
December 31, 1995, 1996 and 1997.................................
Consolidated Statements of Shareholders' Equity (Deficit) for the F-8
years ended December 31, 1995, 1996 and 1997.....................
Notes to Consolidated Financial Statements....................... F-9
Schedule II - Valuation and Qualifying Accounts.................. F-24
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Emeritus Corporation:
We have audited the accompanying consolidated balance sheets of
Emeritus Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Emeritus Corporation and subsidiaries as of December 31, 1997 and
1996 and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick, LLP
Seattle, Washington
February 27, 1998, except for Note 10
as to which the date is March 13, 1998
F-2
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Shareholders
Emeritus Corporation
Under date of February 27, 1998, except for note 10 as to which the date
is March 13, 1998, we reported on the consolidated balance sheets of
Emeritus Corporation and subsidiaries as of December 31, 1997 and 1996
and the related consolidated statements of operations, shareholders'
equity (deficit), and cash flows for each of the years in the three year
period ended December 31, 1997, as contained in the 1997 annual report
on Form 10-K. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related
consolidated financial statement schedule of valuation and qualifying
accounts. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion on this consolidated financial statement schedule
based on our audits.
In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respect, the
information set forth therein.
/s/ KPMG Peat Marwick, LLP
Seattle, Washington
February 27, 1998
F-3
EMERITUS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
December 31,
--------------------
1996 1997
--------- ---------
Current assets:
Cash and cash equivalents......................... $ 23,039 $ 17,537
Short-term investments............................ 2,152 17,235
Current portion of restricted deposits............ 934 550
Trade accounts receivable, net.................... 1,713 2,191
Other receivables................................. 1,292 1,362
Prepaid expenses and other current assets......... 3,269 3,716
Property held for sale............................ - 8,202
--------- ---------
Total current assets...................... 32,399 50,793
Property and equipment, net......................... 99,590 145,831
Property held for development....................... 6,356 2,754
Notes receivable from and investments in affiliates. 2,464 6,422
Restricted deposits, less current portion........... 6,875 10,273
Lease acquisition costs, net........................ 8,127 8,677
Other assets, net................................... 2,227 3,823
--------- ---------
Total assets.............................. $158,038 $228,573
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................. $ 5,816 $ 12,815
Margin loan on short-term investments............. - 9,165
Trade accounts payable............................ 4,707 2,541
Construction advances - leased communities........ 6,387 -
Accrued employee compensation and benefits........ 3,071 3,987
Other accrued expenses............................ 1,898 9,064
Other current liabilities......................... 763 1,147
--------- ---------
Total current liabilities................. 22,642 38,719
Deferred rent....................................... 3,662 8,474
Deferred gains on sale of communities............... 9,433 12,314
Deferred income..................................... 843 114
Convertible debentures.............................. 32,000 32,000
Long-term debt, less current portion................ 60,260 108,117
Security deposits and other long-term liabilities... 1,092 1,452
--------- ---------
Total liabilities......................... 129,932 201,190
--------- ---------
Minority interests.................................. 1,918 1,176
Redeemable preferred stock.......................... - 25,000
Shareholders' equity:
Common stock, $.0001 par value. Authorized
40,000,000 shares; issued and outstanding
11,000,000 and 10,974,650 shares at December 31,
1996 and 1997, respectively...................... 1 1
Additional paid-in capital......................... 44,787 44,449
Unrealized gain on investment securities........... 18 4,015
Foreign currency translation adjustment............ - (4)
Accumulated deficit................................ (18,618) (47,254)
--------- ---------
Total shareholders' equity................ 26,188 1,207
Commitments, contingencies and subsequent events....
--------- ---------
Total liabilities and shareholders' equity $158,038 $228,573
========= =========
See accompanying Notes to Consolidated Financial Statements.
F-4
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Revenues:
Community revenue....................... $20,814 $67,243 $114,299
Other service fees...................... 456 1,494 3,370
Management fees......................... 7 189 103
--------- --------- ---------
Total operating revenues........ 21,277 68,926 117,772
--------- --------- ---------
Expenses:
Community operations.................... 15,864 48,900 82,783
General and administrative.............. 2,630 6,158 10,819
Depreciation and amortization........... 2,517 2,881 6,644
Rent.................................... 1,138 16,114 34,651
Other................................... - - 4,426
--------- --------- ---------
Total operating expenses........ 22,149 74,053 139,323
--------- --------- ---------
Loss from operations............ (872) (5,127) (21,551)
--------- --------- ---------
Other income (expense):
Interest income......................... 355 1,236 1,157
Interest expense on debt payable to
affiliates........................... (1,802) - -
Other interest expense.................. (4,187) (4,259) (8,427)
Write-down of note receivable from
affiliate............................ (1,002) - -
Other, net.............................. (179) (52) 610
--------- --------- ---------
Net other expense............... (6,815) (3,075) (6,660)
--------- --------- ---------
Loss before extraordinary item.. (7,687) (8,202) (28,211)
--------- --------- ---------
Extraordinary loss on extinguishment of
debt................................. (1,267) - -
--------- --------- ---------
Net loss........................ (8,954) (8,202) (28,211)
========= ========= =========
Preferred stock dividends................. - - 425
--------- --------- ---------
Net loss to common shareholders. $(8,954) $ (8,202) $(28,636)
========= ========= =========
Loss per common share before extraordinary
item -
basic and diluted....................... $ (0.95) $ (0.75) $ (2.60)
Extraordinary loss per common share -
basic and diluted....................... $ (0.16) $ - $ -
Net loss per common share -
basic and diluted....................... $ (1.11) $ (0.75) $ (2.60)
Weighted average number of common shares
outstanding -
basic and diluted....................... 8,062 11,000 11,000
========= ========= =========
See accompanying Notes to Consolidated Financial Statements.
F-5
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
---------------------------
1995 1996 1997
-------- -------- --------
Cash flows from operating activities:
Net loss..................................... $(8,954) $(8,202) $(28,211)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 2,800 3,641 7,759
Amortization of deferred gains and income. - (1,254) (1,887)
Other..................................... 143 (237) 242
Changes in operating assets and
liabilities:
Trade accounts receivable............ (166) (1,615) (699)
Other receivables.................... (876) (416) 533
Prepaid expenses and other current
assets............................ (877) (2,493) (947)
Other assets......................... (3,398) (420) -
Trade accounts payable............... 3,433 458 (2,166)
Accrued employee compensation and
benefits.......................... 849 2,034 853
Other accrued expenses............... 1,330 (61) 1,368
Other current liabilities............ 256 392 384
Security deposits and other long-term
liabilities....................... 670 274 293
Deferred rent........................ - 2,467 4,812
-------- -------- --------
Net cash used in operating
activities..................... (4,790) (5,432) (17,666)
-------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment........ (62,987) (36,650) (17,471)
Acquisition of property held for development. (15,418) (30,069) (22,743)
Proceeds from sale of property and equipment. 11,554 73,290 28,675
Purchase of investment securities............ (2,425) (54) (13,285)
Proceeds from the sale of investment
securities................................. - 670 3,207
Construction advances - leased communities... - 43,411 25,139
Construction expenditures - leased
communities................................ - (37,024) (31,101)
Advances to and investments in affiliates.... (139) (2,626) (4,188)
Repayments of advances by affiliates......... - 800 -
Acquisition of businesses and partnership
interests.................................. (604) (4,339) -
-------- -------- --------
Net cash provided by (used in)
investing activities............ (70,019) 7,409 (31,767)
-------- -------- --------
See accompanying Notes to Consolidated Financial Statements.
F-6
EMERITUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(In thousands)
Years Ended December 31,
---------------------------
1995 1996 1997
-------- -------- --------
Cash flows from financing activities:
Increase in restricted deposits.............. (1,025) (6,247) (3,014)
Proceeds from (repayment of) short-term
borrowings, net............................ 6,272 (520) 9,165
Proceeds from long-term borrowings........... 78,886 64,356 44,597
Repayment of long-term borrowings............ (44,276) (69,977) (29,023)
Increase in lease acquisition and deferred
financing costs............................ (672) (6,554) (2,452)
Proceeds from sale of common stock........... 43,831 - -
Proceeds from sale of redeemable preferred
stock...................................... 1,080 - 25,000
Proceeds from issuance of convertible
debentures................................. - 30,620 -
Repurchase of common stock................... - - (341)
Other........................................ - (123) 3
-------- -------- --------
Net cash provided by financing
activities...................... 84,096 11,555 43,935
Effect of exchange rate changes on cash........ - - (4)
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents............ 9,287 13,532 (5,502)
Cash and cash equivalents at beginning of year. 220 9,507 23,039
-------- -------- --------
Cash and cash equivalents at end of year....... $ 9,507 $23,039 $17,537
======== ======== ========
Supplemental disclosure of cash flow
information cash paid during the year for
interest..................................... $ 5,468 $ 3,300 $ 9,444
======== ======== ========
Noncash investing and financing activities:
Acquisition of business and majority interest
in a partnership:
Assets acquired........................... $ 5,025 $11,215 $37,347
Liabilities assumed....................... 2,800 7,042 36,997
Transfer of property held for development to
property and equipment...................... 4,200 22,500 26,345
Transfer of property and equipment to property
held for sale............................... - - 8,202
Vehicles acquired through debt financing...... - - 2,375
See accompanying Notes to Consolidated Financial Statements.
F-7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
Unrealized
Preferred stock Common stock gain (loss) Foreign
------------------- ------------------- Additional on currency
Number Number paid-in investment translation Accumulated
Of shares Amount of shares Amount capital securities adjustment deficit
----------- ------ ----------- ------ ---------- ----------- ----------- -----------
Balances at
December 31, 1994 - $ - 3,542,000 $ - $ - $ - $ - $ (1,462)
Sale of preferred
stock............ 4,158,000 - - - 1,080 - - -
Conversion of
preferred stock
to common stock.. (4,158,000) - 4,158,000 - - - - -
Sale of common
stock, net of
issue costs of
$5,670........... - - 3,300,000 1 43,830 - - -
Unrealized gain on
investment
securities....... - - - - - 400 - -
Net loss for the
year ended
December 31, 1995 - - - - - - - (8,954)
----------- ------ ----------- ------ ---------- ----------- ----------- -----------
Balances at - - 11,000,000 1 44,910 400 - (10,416)
December 31, 1995
Common stock issue
costs............ - - - - (123) - - -
Unrealized loss on
investment
securities....... - - - - - (382) - -
Net loss for the
year ended
December 31, 1996 - - - - - - - (8,202)
----------- ------ ----------- ------ ---------- ----------- ----------- -----------
Balances at
December 31, 1996 - - 11,000,000 1 44,787 18 - (18,618)
Unrealized gain on
investment
securities....... - - - - - 3,997 - -
Foreign currency
translation
adjustment....... - - - - - - (4) -
Repurchase of
common stock..... - - (25,600) - (341) - - -
Stock options
exercised........ - - 250 - 3 - - -
Preferred stock
dividend declared - - - - - - - (425)
Net loss for the
year ended
December 31, 1997 - - - - - - - (28,211)
----------- ------ ----------- ------ ---------- ----------- ----------- -----------
Balances at
December 31, 1997 - $ 10,974,650 $ 1 $44,449 $4,015 $ (4) $(47,254)
=========== ====== =========== ====== ========== =========== =========== ===========
Total
shareholders'
equity (deficit)
------------------
Balances at
December 31, 1994 $ (1,462)
Sale of preferred
stock............ 1,080
Conversion of
preferred stock
to common stock.. -
Sale of common
stock, net of
issue costs of
$5,670........... 43,831
Unrealized gain on
investment
securities....... 400
Net loss for the
year ended
December 31, 1995 (8,954)
----------
Balance at
December 31, 1995 34,895
Common stock, issue
costs............ (123)
Unrealized loss on
investment
securities....... (382)
Net loss for the
year ended
December 31, 1996 (8,202)
----------
Balances at
December 31, 1996 26,188
Unrealized gain on
investment
securities....... 3,997
Foreign currency
translation
adjustment....... (4)
Repurchase of
common stock..... (341)
Stock options
exercised........ 3
Preferred stock
dividend declared (425)
Net loss for the
year ended
December 31, 1997 (28,211)
----------
Balances at
December 31, 1997 $ 1,207
==========
See accompanying Notes to Consolidated Financial Statements.
F-8
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Emeritus Corporation (conducting business as Emeritus
Assisted Living) (the "Company") is a long-term-care
services company focused on operating residential-style
assisted-living communities throughout the United States.
The Company was incorporated on July 28, 1993.
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 a partnership have been
consolidated where the Company maintains effective control
over the partnership's assets and operations, not
withstanding a lack of technical majority ownership of the
partnership. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Resident units are rented on a month-to-month basis and
rent is recognized in the month the unit is occupied.
Service fees paid by residents for assisted-living and other
related services and management fees are recognized in the
period services are rendered.
CASH AND CASH EQUIVALENTS
All short-term investments with a maturity at date of
purchase of three months or less are considered to be cash
equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the
assets as follows: buildings and improvements, 25 to 40
years; furniture, equipment and vehicles, 5 to 7 years;
leasehold improvements, over the lesser of the estimated
useful life or the lease term.
For long-lived assets, including property and
equipment, the Company evaluates the carrying value of the
assets by comparing the estimated future cash flows
generated from the use of the assets and their eventual
disposition with the assets' reported net book values. The
carrying values of assets are evaluated for impairment when
events or changes in circumstances occur which may indicate
the carrying amount of the assets may not be recoverable.
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
separate component of shareholders' equity.
Investments in 20% to 50% owned affiliates are
accounted for under the equity method. Investments in less
than 20% owned entities are accounted for under the cost
method.
INTANGIBLE ASSETS
Intangible assets, which are included in other assets,
are composed of deferred financing and community pre-opening
costs. Deferred financing costs are amortized using a
method which approximates the effective interest method over
the term of the related debt. Community pre-opening costs,
which consist of costs related to opening a facility, are
amortized using the straight-line method over one-year.
F-9
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
INCOME TAXES
Deferred income taxes are provided based on the
estimated future tax effects of 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 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.
LEASING ACTIVITIES
Lease acquisition costs represent legal and other
costs, incurred in conjunction with the negotiation of
leases. These costs are capitalized and amortized using the
straight-line method over the lives of the associated
leases.
Deferred rent primarily represents lease incentives
which are deferred and amortized using the straight-line
method over the lives of the associated leases.
DEFERRED GAINS ON SALE OF COMMUNITIES
Deferred gains on sale of communities represents gains
on sale/leaseback transactions which are deferred and
amortized using the straight-line method over the lives of
the associated leases. The Company has no continuing
involvement in communities which it has sold and leased back
outside of operating the communities.
COMMUNITY OPERATIONS
Community operations represent direct costs incurred to
operate the communities and include costs such as activities
for the residents, marketing, housekeeping, food service,
payroll and benefits, facility maintenance, utilities, taxes
and licenses.
STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations in
measuring compensation costs for its stock option plans.
The Company discloses pro forma net income (loss) and net
income (loss) per share as if compensation cost had been
determined consistent with Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation.
NET LOSS PER SHARE
In 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share.
This statement establishes standards for computing and
presenting earnings per share (EPS), replacing the
presentation of primary EPS with a presentation of Basic
EPS. Under this new statement, Basic EPS is computed based
on weighted average shares outstanding and excludes any
potential dilution. Diluted EPS reflects potential dilution
from the exercise or conversion of securities into common
stock or from other contracts to issue common stock and is
similar to the previously required fully diluted EPS. The
capital structure of the Company includes convertible
debentures, redeemable convertible preferred stock, as well
as stock options. The assumed conversion and exercise of
these securities have been excluded from the calculation of
Diluted EPS as their effect is anti-dilutive.
F-10
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
USE OF ESTIMATES
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
FOREIGN CURRENCY TRANSLATIONS
Foreign currency amounts attributable to foreign
operations have been translated into U.S. dollars using year-
end exchange rates for assets and liabilities, historical
rates for equity, and average annual rates for revenues and
expenses. Unrealized gains and losses arising from
fluctuations in the year-end exchange rates are recorded as
equity adjustments from foreign currency translation.
RECLASSIFICATIONS
Certain reclassifications of the 1995 and 1996 amounts
have been made to conform to the 1997 presentation.
(2) CHANGE IN ACCOUNTING ESTIMATES
Effective January 1, 1997, the Company changed the
period over which pre-opening costs on newly opened
developments are amortized from 18 months to one-year. The
impact for the year ended December 31, 1997, was to increase
amortization expense and net loss by $627,000, or $.06 per
share.
Effective January 1, 1997, the Company also changed the
estimate for the useful life of acquired buildings. The
impact for the year ended December 31, 1997, was to decrease
depreciation expense and net loss by $403,000, or $.04 per
share.
(3) RESTRICTED DEPOSITS AND CONSTRUCTION ADVANCES - LEASED
COMMUNITIES
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.
In January 1996, the Company entered into a letter of
intent with a REIT relating to sale/leaseback financing of
$100 million for newly developed facilities and, in
September 1996, the Company entered into a similar
arrangement with the REIT for an additional $100 million
financing for newly developed facilities. As part of this
arrangement, the Company manages and oversees the
development of projects owned by this REIT. Upon completion
of the projects, the Company will lease the facilities from
the REIT under operating lease agreements. Approximately
$101.0 million of such financing remains available to the
Company. At December 31, 1996, the REIT had advanced funds
in excess of amounts expended on the development projects
which have been classified as construction advances - leased
communities.
F-11
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
In thousands 1996 1997
- ---------------------------------- ------- --------
Land and improvements............. $ 7,826 $ 10,810
Buildings and improvements........ 65,367 104,199
Furniture and equipment........... 7,231 11,368
Vehicles.......................... 1,783 2,997
Leasehold improvements............ 885 2,433
------- --------
83,092 131,807
Less accumulated depreciation and
amortization................... 3,996 7,700
------- --------
79,096 124,107
Construction in progress.......... 20,494 21,724
------- --------
$99,590 $145,831
======= ========
Depreciation and amortization expense related to
property and equipment totaled $2.4 million, $2.7 million
and $4.4 million for 1995, 1996 and 1997, respectively.
(5) PROPERTY HELD FOR DEVELOPMENT
Property held for development is recorded at cost.
Interest costs capitalized on property held for development
and construction in progress was $880,000, $1.4 million and
$2.7 million for 1995, 1996 and 1997, respectively.
The Company is committed under construction contracts
with respect to certain development projects. Total
construction commitments for owned developments at December
31, 1997, were $34.8 million, of which $25.2 million had
been incurred. At December 31, 1997, $9.5 million in
construction financing commitments remained which bears
interest at rates ranging between the prime rate plus .75%
and 1.25% and will be payable through January 2003.
In addition to developments owned by the Company, the
Company has commitments with respect to developments under
construction owned by a REIT. Under these commitments, the
Company is committed to construction of the development and
the REIT is to provide $30.4 million in construction
financing, of which $9.5 million has been incurred as of
December 31, 1997. Upon completion of the developments, the
Company will enter into long-term operating leases with the
REIT where the Company will be committed to annual lease
payments based on the cost of the developments as funded by
the REIT at rates tied to the 10-year U.S. Treasury note.
(6) INVESTMENT SECURITIES
In April 1995, the Company purchased investment
securities in The Standish Care Company ("Standish") from
Columbia-Pacific Group, Inc., a company wholly-owned by a
principal shareholder of the Company. The investment
securities consisted of common stock, warrants and an
agreement to provide a $2.0 million credit facility through
the purchase of convertible debentures, of which $1,410,000
was outstanding at the time of purchase. The remaining
$590,000 was loaned to Standish prior to December 31, 1995.
The Company purchased the investment securities at the
affiliate's original cost, which exceeded fair value.
During 1996, Standish completed a merger transaction with 12
"Carematrix" corporations, changed its name and completed a
public offering. As a result of these transactions, the
convertible debentures that bear interest at 8.5%, are
convertible into Carematrix common stock at the option of
the Company at $15.00 per share. The contractual maturity
of these convertible debt securities is June 10, 1998.
F-12
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In 1996, the Company sold a portion of the Carematrix
equity securities and recognized a gain on sale of $325,000
which is included in other expenses, net. The cost basis of
the securities sold was determined on the specific
identification basis.
In 1997, the Company sold all of its remaining
Carematrix equity securities and convertible debentures and
recognized a gain of $410,000 on the transaction. This gain
is included in other income, net.
During 1997, the Company purchased common stock of ARV
Assisted Living, Inc. ("ARV") in market transactions. At
December 31, 1997 the Company held 1,077,200 shares of ARV
common stock which is recorded at fair market value. The
unrealized gain on the ARV investment securities of
$4,015,000 at December 31, 1997 is included as a component
of shareholders' equity.
Also in 1997, the Company initiated a tender offer
which was terminated in January 1998, for all of the
remaining outstanding common stock of ARV. The Company
incurred costs of $3,418,000 associated with this activity
in 1997.
Details regarding investment securities by major
security type as of December 31, are as follows:
Gross
Amortized Unrealized Fair
In thousands Cost Gains value
- ----------------------------- -------- ---------- -------
1996
Equity securities......... $ 134 $ 18 $ 152
Convertible debt
Securities.............. 2,000 - 2,000
--------- ---------- -------
$ 2,134 $ 18 $ 2,152
========= ========== ========
1997
Equity securities......... $13,220 $4,015 $17,235
========= ========== ========
(7) FINANCIAL INSTRUMENTS
The Company has financial instruments other than
investment securities consisting of cash and cash
equivalents, trade accounts receivable, notes receivable
from and investments in affiliates, short-term borrowings,
accounts payable, convertible debentures, redeemable
preferred stock and long-term debt. The fair value of the
Company's financial instruments based on their short-term
nature or current market indicators such as prevailing
interest rates approximate their carrying value with the
exception of the convertible debentures which had a fair
value of $28.3 million versus a book value of $32.0 million
at December 31, 1997.
(8) NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATED
COMPANIES
In 1994 and 1995, the Company made loans to Extended
Care Corporation ("Extended Care") of $700,000 and $433,000,
respectively. The Company received 49.0% of the
F-13
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
outstanding capital stock of Extended Care in connection
with the loans and a pledge of the remaining 51.0% as
additional security for the loans. In 1995, the Company
wrote-off the note receivable due to Extended Care's
continued losses and the Company's belief that the holder of
the first mortgages on the Extended Care communities
intended to initiate foreclosure proceedings, which would
have the effect of terminating the Company's second
mortgages and making the loans uncollectible. The holder of
the first mortgages initiated foreclosure proceedings in
October 1995, and Extended Care filed for protection from
its creditors under Chapter 11 of the Bankruptcy Code during
1996.
In 1995, the Company advanced $600,000 to a limited
liability company (the "LLC"), which operates an assisted-
living community, as a part of a financing agreement. The
advance was due in 1998 and accrued interest at 10% per
annum. Under the agreement, the Company received a 49%
ownership interest in the LLC for which no value was
assigned. The remaining 51% interest is owned by
Carematrix. As of December 31, 1996, the amount due the
Company was $410,000. As a member of the LLC, the Company
has provided a tertiary guarantee for the currently
outstanding debt of the LLC in the amount of $1.1 million.
The Company's equity in earnings of the LLC was
approximately $25,000 for 1995 and its equity in losses was
approximately $6,000 in 1996. In April 1997, the Company
and Carematrix entered into an agreement whereby the Company
transferred and relinquished its 49% interest in the LLC.
Pursuant to the agreement, Carematrix paid the Company
$410,000 plus accrued interest for all outstanding
obligations between the two parties.
During 1995, the Company became a 50% partner in a
general partnership which was formed to jointly develop an
assisted-living facility in Paso Robles, California. As of
December 31, 1996 and 1997, the Company had $750,000 in
construction commitments of which $445,000 and $750,000 had
been incurred, respectively.
In November 1996, the Company agreed to purchase up to
6,888,466 shares of convertible preferred stock of Alert
Care Corporation ("Alert"), an Ontario, Canada-based owner
and operator of assisted-living communities at prices
ranging from $0.67 to $0.74 per share (Cdn). In addition,
the Company acquired an option to purchase an additional
4,000,000 shares of convertible preferred stock at an
exercise price of $1.00 per share (Cdn), as well as an
option to purchase from Eclipse Capital Management
("Eclipse"), the majority shareholder of Alert, and certain
other shareholders of Alert, 9,050,000 currently issued and
outstanding shares of common stock of Alert and 950,000
currently issued and outstanding shares of Class A non-
voting stock of Alert both at an exercise price of $3.25 per
share (Cdn).
Each Preferred Share is convertible into one common
share or one Class A non-voting share, at the holder's
election; the Preferred Shares are immediately convertible
into Class A nonvoting shares but are not immediately
convertible into common shares and are so convertible only
after the controlling persons of Alert have transferred to
others (which could include the Company) not less than 10
million shares of common or Class A nonvoting shares (as of
December 31, 1997, there are approximately 23.8 million such
shares outstanding) and such controlling persons are
relieved of certain guarantees of indebtedness.
As of December 31, 1996, the Company had purchased and
held 2,577,692 shares of preferred stock for a total
investment of $1,331,000 (US). An additional 5,010,774
shares of preferred stock were acquired and paid for in
1997, increasing its ownership to 7,588,466 shares or
$4,111,000 (US) at December 31, 1997. As of December 31,
1997, the Company's total investment in Alert represents on
an as-converted basis approximately 24.2% of the outstanding
common and Class A non-voting shares taken together. In
January 1998, the Company purchased an additional 850,000
shares of preferred stock resulting in an ownership interest
of 8,438,466 shares or 26.2%. There was no cost in acquiring
the option to purchase additional shares from Alert and no
value to the option was recorded in the financial
statements. The investment in Alert is accounted for under
the cost method, as the Company's equity ownership consists
of non-voting preferred stock.
Alert has entered into an exclusive management
agreement to manage the Company's future assisted-living
communities in Ontario. Eclipse, through its wholly-owned
subsidiary, Eclipse Construction Inc., develops and
constructs retirement homes for Alert on a contract basis.
Under the agreement, Eclipse has entered into an exclusive
development agreement with the Company and Alert to develop
their future construction projects in Ontario. No
communities have been developed under these agreements as of
December 31, 1997.
(9) CONVERTIBLE DEBENTURES
On February 15, 1996, the Company completed a $32.0
million Private Placement Offering of 6.25% convertible
subordinated debentures (the "Debentures") due in 2006. The
Debentures, non-callable for three years, are convertible
into common stock at the rate of $22 per share, which
equates to an aggregate of approximately 1,454,545 shares of
the Company's common stock and bear interest
F-14
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
payable semiannually on January 1 and July 1 of each year,
commencing July 1, 1996. The Debentures are unsecured and
subordinated to all other indebtedness of the Company.
The holders of the Debentures are entitled, subject to
prior redemption, to convert the Debentures or portions
thereof into shares of common stock at the conversion price
set forth in the Debentures. The conversion price is
subject to adjustments in certain events.
The Debentures are subject to redemption, as a whole or
in part, at any time or from time to time commencing after
July 1, 1999 at the Company's option on at least 30 days'
and not more than 60 days' prior notice by mail. The
redemption prices (expressed as a percentage of principal
amount) are as follows for the 12-month period beginning
after July 1 of the following years:
Year Price
------------------- --------------
1999 102%
2000 101%
2001 and thereafter 100%
(10) LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
In thousands 1996 1997
- ---------------------------------------------- --------- ---------
Notes payable, interest only at rates
between 10.5% and 18%, payable monthly,
unpaid principal and interest due May 2000..$ 12,585 $ 7,000
Notes payable, interest only at the 30 day
LIBOR rate plus 2.25% (7.9% at December
31, 1997), payable monthly, unpaid
principal and interest due December 1998.... 9,269 10,220
Notes payable, interest at rates between 6.9%
and 12%, payable in monthly installments,
due through July 2009....................... 7,688 10,279
Note payable, interest only at 8.4%, payable
monthly, unpaid principal and interest due
November 1999, refinanced through
sale/leaseback transaction, see note 17..... 4,160 -
Note payable, interest at 11%, payable in
monthly installments, balance due July 2004,
refinanced with long-term debt, interest
only at the prime rate plus 1% (9.5% at
December 31, 1997), unpaid principal and
interest due May 2000....................... 2,169 -
Note payable, interest at 9.25%, payable in
monthly installments, due September 1997,
refinanced with long-term debt, interest at
the LIBOR rate plus 2.25% (7.9% at December
31, 1997), payable monthly, unpaid principle
and interest due December 1998.............. 1,837 -
Notes payable, interest at the LIBOR rate plus
2.50% (8.4% at December 31, 1997), payable
monthly, unpaid principal and interest due
April 1999.................................. - 26,000
Note payable, interest only at the LIBOR rate
plus 2.25% (8.0% at December 31, 1997),
payable monthly, unpaid principal and
interest due May 2000....................... - 3,500
Note payable interest only through September
1998 at 9.28%, principal and interest over
remaining term, unpaid principal and
interest due April 2009..................... - 4,288
F-15
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Construction loan, total commitment $17.0
million, interest only through November 1998
at the 30 day LIBOR rate plus 2.75% (8.4%
at December 31, 1997), principal and
interest payments over remaining term,
unpaid principal and interest due through
November 2001............................... 7,670 14,066
Construction loan from bank, total commitment
$7.3 million, interest only at the prime
rate plus 1.25%, payable monthly, unpaid
principal and interest due November 1997,
refinanced with long - term debt, (interest
only October 1997 through September 1998 at
9.28%, principal and interest remaining
term, unpaid principal and interest due
April 2009) and sale/leaseback transactions,
see note 17................................. 4,807 -
Construction loan from bank, total commitment
$4.8 million, interest only at the prime
rate plus 1%, payable monthly, unpaid
principal and interest due July 1998, with
an option to extend to January 1999,
refinanced through sale/leaseback
transaction, see note 17.................... 4,639 -
Construction loan from bank, total commitment
$4.9 million, interest only at the prime
rate plus 3.5% (12% at December 31, 1997),
payable monthly, unpaid principal and
interest due February 2004.................. 4,307 4,799
Construction loan, total commitment $4.7
million, interest only at 9.75%, payable
monthly, unpaid principal and interest due
May 1999.................................... 1,905 4,695
Construction loan, total commitment $12.8
million, interest only during the
construction term (completion date or 18
months after loan closing) at the prime rate
plus .75% (9.25% at December 31, 1997),
principal and interest over remaining term,
unpaid principal and interest due earlier of
90 months after loan closing or 6 years
after the completion of construction........ - 7,578
Construction loan, total commitment $6.5
million, interest only during the
construction term at the prime rate plus
1.25% (9.75% at December 31, 1997),
principal and interest at the prime rate
plus 3.25% over remaining term, unpaid
principal and interest due January 2001..... - 5,216
Construction loan, total commitment $5.1
million, interest only at 9%, payable
monthly, unpaid principal and interest due
February 2000............................... - 4,444
Other......................................... 5,040 4,452
--------- ---------
Subtotal................................. 66,076 106,537
--------- -----------
Debt with commitment to refinance with long-
term debt subsequent to year end -
notes payable, interest only at rates
between 9% and 11%, payable monthly, unpaid
principal and interest due through
December 1998 to be refinanced through long-
term debt in 1998, interest only at the 30
day LIBOR rate plus 2.95% due April 2001.... - 14,395
--------- ---------
66,076 120,932
Less current portion.......................... 5,816 12,815
--------- ---------
Long-term debt, less current portion..... $60,260 $108,117
========= =========
Substantially all long-term debt is secured by the
Company's property and equipment and/or by personal
guarantees of a principal shareholder of the Company.
Certain of the Company's indebtedness includes
restrictive provisions related to cash dividends,
investments and borrowings, and require maintenance of
specified operating ratios, levels of working capital and
F-16
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
net worth. As of December 31, 1997, the Company was in
compliance with such covenants or obtained waivers for
noncompliance .
Principal maturities of long-term debt at December 31,
1997 are as follows:
In thousands
---------------------------- --------
1998........................ $ 12,815
1999........................ 33,308
2000........................ 17,191
2001........................ 34,962
2002........................ 451
Thereafter.................. 22,205
--------
$120,932
========
(11) MARGIN LOAN ON EQUITY SECURITIES
During 1997, the Company opened a margin account to
facilitate the acquisition of marketable securities. This
account had a loan balance of $9,165,000 at December 31,
1997 secured by marketable equity securities with a market
value of $17,235,000. This loan is due upon the sale of the
securities and bears interest at 0.375% under broker call
(7.75% as of December 31, 1997).
(12) INCOME TAXES
Income taxes reported by the Company differ from the
amount computed by applying the statutory rate primarily due
to limitations on utilizing net operating losses.
The tax effect of temporary differences and
carryforwards that give rise to significant portions of
federal deferred tax assets and liabilities are comprised of
the following:
December 31,
In thousands 1996 1997
- --------------------------------------- ------- ---------
Deferred tax liabilities:
Depreciation and amortization........ $ (127) $(1,470)
Other................................ - (361)
------- ---------
Gross deferred tax liabilities... (127) (1,831)
------- ---------
Deferred tax assets:
Net operating loss carryforwards..... 1,220 10,966
Deferred gains on sale/leaseback..... 3,245 4,187
Unearned rental income............... 255 382
Vacation accrual..................... 389 349
Other................................ 418 727
------- ---------
Gross deferred tax assets........ 5,527 16,611
Less valuation allowance............... (5,400) (14,780)
------- ---------
Deferred tax assets, net............... 127 1,831
------- ---------
Net deferred tax assets.......... $ - $ -
======= =========
The net increase in the total valuation allowance was
$2,070,000, $2,800,000 and $9,380,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. The
increases were primarily due to the increase in deferred
gains on sale/leasebacks and the amount of net operating
loss carryforwards, for which management does not believe
that it is more likely than not that realization is assured.
For federal income tax purposes, the Company has net
operating loss carryforwards at December 31, 1997, available
to offset future federal taxable income, if any, of
approximately $32,252,000 expiring beginning in 2012.
F-17
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(13) RELATED-PARTY MANAGEMENT AGREEMENTS
During 1995, the Company's two most senior executive
officers, CEO and President, formed a New York general
partnership (the "Partnership") to facilitate the operation
of assisted-living communities in the state of New York,
which generally requires that natural persons be designated
as the licensed operators of assisted-living communities.
The Partnership operates ten leased communities in New York.
The Company has agreements with the Partnership and the
partners under which all of the Partnership's profits have
been assigned to the Company and the Company has indemnified
the partners against losses. In addition, the partners have
agreed to transfer their ownership interests in the
Partnership at a nominal value to Company nominees in the
event that they cease to be officers of the Company. As the
Company has a unilateral and perpetual control over the
Partnership's assets and operations, the results of
operations of the Partnership are consolidated with those of
the Company.
Columbia House I, Limited Partnership, ("Columbia
House"), which is partly owned indirectly by Mr. Baty, the
Company's Chairman and Chief Executive Officer, develops,
owns and leases low income senior housing projects. The
Company has agreements with Columbia House to provide
certain administrative support, due diligence and financial
support services to Columbia House with respect to the
acquisition, development and administration of Columbia
House communities. The agreements have terms ranging from
two to four years, with options to renew, and provide for
management fees ranging from 4% to 6% of gross operating
revenues and fixed administrative fees. Fees earned under
these agreements were $103,000 in 1997, of which $16,000 was
receivable at December 31, 1997. The Company also had
receivables of $137,000 due from Columbia House at December
31, 1997 representing advances related to various Columbia
House communities.
(14) SHAREHOLDERS' EQUITY
In April 1995, the Company authorized a 9,200-for-1
stock split of the Company's common stock and, on September
28, 1995, authorized a 3.85-for-1 stock split of the
Company's common stock and preferred stock. All share and
per share information, except par value, has been adjusted
for all years to reflect the stock splits.
On November 21, 1995, the Company completed an initial
public offering of 6,534,000 shares of its common stock at a
price of $15 per share. Of the total amount of shares sold,
3,300,000 shares were sold by the Company and 3,234,000 were
sold by existing shareholders.
In December 1997, the Company purchased 25,600 shares
of its common stock at an aggregate cost of $341,000. In
January 1998, the Company's board of directors authorized a
stock repurchase program to acquire up to an additional
500,000 shares of the Company's common stock. As of
February 25, 1998, the Company had purchased in 1997 and
1998 a total of 517,200 shares of its common stock at an
aggregate cost of $5.7 million.
1995 STOCK INCENTIVE PLAN
The Company has a 1995 stock incentive plan ("1995
Plan") which combines the features of an incentive and
nonqualified stock option plan, stock appreciation rights
and a stock award plan (including restricted stock). The
1995 Plan is a long-term incentive compensation plan and is
designed to provide a competitive and balanced incentive and
reward program for participants.
The Company has authorized 1,100,000 shares of common
stock to be reserved for grants under the 1995 Plan of which
615,100 remained available for future awards at December 31,
1997. Options generally vest over a five-year period in
cumulative increments of 20% each year beginning one year
after the date of the grant and expire not later than ten
years from the date of grant. The options are granted at an
exercise price equal to the fair market value of the common
stock on the date of the grant.
F-18
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Had compensation cost for the Company's option plan
been determined consistent with SFAS 123, the Company's pro
forma net loss and pro forma net loss per share would have
been as follows:
Year ended December 31,
In thousands,
except per share data 1995 1996 1997
- ----------------------------- -------- -------- ---------
Net loss to common
shareholders:
As reported............. $(8,954) $(8,202) $(28,636)
Pro forma............... (8,970) (8,477) (29,236)
Net loss per common share -
basic and diluted:
As reported............. $ (1.11) $ (0.75) $ (2.60)
Pro forma............... (1.11) (0.77) (2.66)
The fair value of each option grant has been estimated
on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants in
1995, 1996 and 1997: dividend yield of 0.0% for all periods;
expected volatility of 55% for 1995 and 1996 and 49.1% for
1997; risk-free interest rates of 5.53% for 1995, 5.47% to
6.39% for 1996, and 5.45% to 5.50% for 1997; and an expected
option term of 5 years, 4.5 years and 5 years for 1995, 1996
and 1997, respectively.
A summary of the activity in the Company's stock option
plans follows:
1995 1996 1997
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------------------ -------- ------------------ ---------- ------------------
Outstanding at
beginning of year - $ - 202,000 $14.38 484,900 $11.90
Granted 202,000 $14.38 363,500 $11.06 703,000 $13.43
Exercised - $ - - $ - (250) $15.25
Canceled - $ - (80,600) $14.34 (98,000) $12.32
------- ------------------ -------- ------------------ ---------- ------------------
Outstanding at end
of year 202,000 $14.38 484,900 $11.90 1,089,650 $12.86
Options exercisable
at year-end - $ - 37,950 $14.38 101,800 $12.40
Weighted-average
fair value of
options granted
during the year $ 7.69 $ 5.67 $ 6.65
F-19
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The following is a summary of stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------ ----------- ----------- --------- ----------- ---------
$ 13.38 575,500 9.89 $13.38 - -
$12.00 - 15.63 127,500 9.33 $13.70 - -
$ 10.50 261,950 8.89 $10.50 52,650 $10.50
$14.38 - 20.38 124,700 7.21 $14.52 49,150 $14.44
----------- ----------- --------- ----------- ---------
1,089,650 9.28 $12.86 101,800 $12.40
=========== =========== ========= =========== =========
(15) 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 issued and sold
25,000 shares of Series A cumulative convertible,
exchangeable, redeemable preferred stock for $25,000,000.
Cumulative dividends of 9% are payable quarterly. The
preferred stock has a mandatory redemption date of October
24, 2004 at a price equal to $1,000 per share plus any
accrued but unpaid dividends. Each share of preferred stock
may be converted, at the option of the holder, into 55
shares of common stock. The preferred stock is also
exchangeable in whole only, at the option of the Company, to
9% subordinated convertible notes due October 24, 2004. The
9% subordinated notes would contain the same conversion
rights, restrictions and other terms as the preferred stock.
The Company may redeem the preferred stock, in whole or
in part, after October 24, 2001 for $1,050 per share plus
accrued dividends, provided that the market price of common
stock is at least 130% of the conversion price for the
preferred stock. In the event of liquidation of the
Company, the holders of outstanding preferred stock shall be
entitled to receive a distribution of $1,000 per share plus
accrued dividends.
(16) LEASES
The Company leases office space and 76 assisted-living
communities . The office lease expires in 2006 and contains
two five-year renewal options. The community leases expire
from 2004 to 2017 and contain two to six five-year renewal
options.
Minimum lease payments under noncancelable operating
leases at December 31, 1997 are as follows:
In thousands
---------------------------- --------
1998........................ $ 41,747
1999........................ 41,747
2000........................ 41,747
2001........................ 41,753
2002........................ 42,110
Thereafter.................. 302,715
-----------
$511,819
===========
Rent expense under noncancelable operating leases was
$1,138,000, $16,114,000 and $34,651,000 for 1995, 1996 and
1997, respectively.
F-20
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(17) ACQUISITIONS
During 1996 and 1997, the Company completed several
acquisitions of assisted-living, independent-living and
skilled nursing communities. These acquisitions have been
accounted for as purchases and, accordingly, the assets and
liabilities of the acquired communities were recorded at
their estimated fair values at the dates of acquisitions.
No goodwill or other identifiable intangibles were recorded
with respect to any of the acquisitions. The results of
operations of the communities acquired have been included in
the Company's consolidated financial statements from the
dates of the acquisition. Summary information concerning
the acquisitions is as follows:
Total
Communities acquired Acquisition date Purchase price Units
- --------------------------------------- ----------------- -------------- ---------
(in thousands)
Heritage Hills Retirement Community.... February 1996 $ 4,338 100
The Lakewood Inn (1)................... March 1996 2,800 108
The Hearthstone (2).................... November 1996 5,200 84
Concorde............................... November 1996 8,400 116
Other 1996 Acquisitions................ Various 8,202 272
Villa Del Rey.......................... March 1997 4,252 84
La Casa Communities (3)................ May 1997 33,062 473
-------------- ---------
$66,254 1,237
============== =========
(1) Refinanced through a sale/leaseback with a REIT.
Lease includes an initial term of 13 years with
four five-year renewal options and annual base
rent of approximately $686,000. The Company has
no continuing involvement outside of operating
the community.
(2) Refinanced through a sale/leaseback with a REIT.
Lease includes an initial term of 11 years 11
months with four five-year renewal options and
annual base rent of approximately $596,000. The
Company has no continuing involvement outside of
operating the community.
(3) Consists of three long-term-care communities.
The foregoing acquisitions were generally financed
through borrowings.
During the years ended December 31, 1996 and 1997, the
Company completed several acquisitions or sale/leasebacks of
communities through lease financing transactions with
certain REITs', pursuant to which the REITs' leased such
communities to the Company under operating leases. The
results of operations of the communities acquired have been
included in the Company's consolidated financial statements
from the dates the leases commenced for those communities
not previously owned.
Lease Initial Renewal Annual
Communities leased Acquisition date Lease Term Options Rent Units
- --------------------------- ------------------ -------------- ----------------- ----------- -----
Carolina Communities (1)... February 1996 15 years Three five-year $ 4,145,607 648
Evergreen Lodge............ April 1996 13 years Four five-year 572,569 98
Rosewood Court (2)......... April 1996 14 yrs/9 mos Three five-year 393,200 71
Barrington Place........... May 1996 11 yrs/11 mos Four five-year 413,601 80
Springtree................. May 1996 11 yrs/11 mos Four five-year 1,410,353 185
The Terrace (3)............ August 1996 11 yrs/8 mos Four five-year 416,887 88
The Lodge at Mainlands..... August 1996 11 yrs/7 mos Four five-year 924,530 154
Colonial Park Club......... August 1996 11 yrs/7 mos Four five-year 770,862 90
Ridge Wind................. August 1996 11 yrs/8 mos Four five-year 458,061 80
Other 1996 Leases.......... October 1996 11 years Four five-year 1,753,006 226
New York Communities (4)... November 1996 15 years Two five-year 4,975,000 738
Texas Communities (5)...... April 1997 15 years Three five-year 2,174,328 411
----------- -----
$18,408,004 2,869
=========== =====
F-21
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(1) Consists of 10 long-term-care communities located
in North and South Carolina.
(2) Originally acquired in 1995, refinanced through a
sale/leaseback with a REIT. The Company has no
continuing involvement outside of operating the
community.
(3) Originally acquired in 1996, refinanced through a
sale/leaseback with a REIT. The Company has no
continuing involvement outside of operating the
community.
(4) Consists of 9 long-term-care communities located
in New York.
(5) Consists of 3 long-term-care communities located
in Texas.
In January 1996, the Company entered into a letter of
intent with a REIT relating to sale/leaseback financing of
$100 million for newly purchased facilities and, in
September 1996, the Company entered into a similar
arrangement with the REIT for an additional $100 million
financing for newly purchased facilities. At December 31,
1997, approximately $58.3 million of such financing remains
available to the Company.
During 1996, the Company entered into sale/leaseback
transactions with a REIT, pursuant to which the REIT
acquired four new communities developed by the Company (The
Pines at Tewksbury, Garrison Creek Lodge, Cambria and
Sherwood Place) and leased the communities back to the
Company with initial lease terms from 10 to 11 years, four
to six five-year renewal options and annual lease payments
aggregating approximately $2.2 million. Also, during 1996,
the Company entered into a sale/leaseback transaction with a
REIT pursuant to which the REIT acquired seven existing
communities (Beneva Park Club, Central Park Village, College
Park Club, Park Club Brandon, Park Club of Fort Myers and
Park Club of Oakbridge) and leased such communities back to
the Company with initial lease terms of 10 to 12 years,
three and four five-year renewal options and annual lease
payments aggregating approximately $4.2 million. The
Company has no continuing involvement outside of operating
the communities.
During 1997, the Company entered into sale/leaseback
transactions with a REIT, pursuant to which the REIT
acquired two new communities developed by the Company
(Eastman Estates and Kirkland Lodge) and three existing
communities (Meadowbrook, Park Place and The Hearthstone)
and leased the communities back to the Company with initial
lease terms from 11 years seven months to 12 years one month
and four five-year renewal options and annual lease payments
aggregating approximately $2.5 million. The Company has no
continuing involvement outside of operating the communities.
The following summary, prepared on a pro forma basis,
combines the results of operations of the acquired
businesses with those of the Company as if the acquisitions,
acquisitions through lease financings and sale/leaseback
financings had been consummated as of January 1, 1996 and
1997, after including the impact of certain adjustments such
as depreciation on assets acquired and interest expense on
acquisition financing.
December 31,
In thousands, except per share data (unaudited) 1996 1997
- ----------------------------------------------- --------- ---------
Revenues....................................... $109,830 $122,703
Net loss to common shareholders................ (10,906) (29,061)
Pro forma net loss per common
share - basic and diluted.................... $ (0.99) $ (2.64)
The unaudited pro forma results are not necessarily
indicative of what actually might have occurred if the
acquisitions had been completed as of the beginning of the
periods presented. In addition, they are not intended to be
a projection of future results of operations and do not
reflect any of the synergies that might be achieved from
combined operations.
F-22
EMERITUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(18) SUBSEQUENT EVENTS
In January 1998, the Company entered into a $5.0
million credit with Aurora Bay Investments, L.L.C. ("Aurora
Bay"), a limited liability company that acquires, develops
and operates Alzheimer's special care facilities to provide
room, board, and personal care services primarily to elderly
persons afflicted with Alzheimer's disease. Advances are
evidenced by a convertible promissory note (the "Convertible
Note"), which is due in January 2003 and accrues interest
at 9.0% per annum. The Convertible Note is convertible, at
the Company's option, into a 48% equity interest in Aurora
Bay. The conversion rights will lapse if not exercised by
the Company on or prior to the maturity date of the
Convertible Note. The arrangement allows for Aurora Bay to
borrow up to $5.0 million to develop Alzheimer's
facilities. In January 1998, the Company advanced $535,000
to Aurora Bay for the first Alzheimer development located in
Lubbock, Texas.
In February 1998, the Company entered into a joint
venture with Sanyo Electric Co. Ltd., ("Sanyo") of Osaka,
Japan, to provide assisted living services in Japan. The
joint venture, Sanyo Emeritus Corporation, has been formed
to provide a residential based health care alternative for
Japan's growing elderly population. The joint venture will
be initially capitalized with Y50 million ($384,000 U.S.),
with each company providing half the funds. The joint
venture is expected to complete its first assisted living
project in Japan by the year 2000.
Also in February 1998, the Company and XL Management
Company L.L.C., ("XL Management"), an affiliate of Holiday
Retirement Corp., an owner and operator of independent-
living communities, entered into four management agreements
whereby XL Management will provide management services
relating to four newly developed assisted-living communities
located in Texas. The agreements consist of initial terms
of two years six months and management fees based on 6% of
gross revenues payable monthly. The Company will pay a
bonus fee per community to XL Management based on occupancy;
one year after managing the communities, if occupancy is
between 75% and 89%, XL Management will receive a bonus fee
of $25,000 and if occupancy is 90% or greater the bonus fee
will be $50,000. The Company's Chairman and Chief Executive
Officer and another member of the Company's board of
directors are principal shareholders and officers of
Holiday.
Additionally, in February 1998, the Company completed a
$4.0 million sale/leaseback transaction with a REIT pursuant
to which the REIT acquired the community and leased it back
to the Company under an operating lease agreement. The
lease has an initial term of 11 years with four five-year
renewal options and annual rent of approximately $354,000.
F-23
EMERITUS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(in thousands)
Column A Column B Column C Column D Column E
- ------------------------------------------ --------- ------------- ---------- --------
Balance
at Charged to Balance
Beginning Other Costs (1) at End
Description Of Year and Expenses Deductions of Year
- ------------------------------------------ --------- ------------- ---------- --------
Year ended December 31, 1997:
Valuation accounts deducted from assets:
Allowance for doubtful receivables $127 $317 $96 $348
========= ============= ========== ========
Year ended December 31, 1996:
Valuation accounts deducted from assets:
Allowance for doubtful receivables 14 128 15 127
========= ============= ========== ========
Year ended December 31, 1995:
Valuation accounts deducted from assets:
Allowance for doubtful receivables $ - $ 14 $ - $ 14
========= ============= ========== ========
___________________
(1) Represents amounts written off
F-24