<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- ------------------------------------------------------------
FORM 10-Q
- ------------------------------------------------------------
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT 1934
For the quarterly period ended March 31, 1998.
( ) 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 QUARTER ENDED MARCH 31, 1998
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)
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), and (2) has been subject to
such filing requirements for the past 90 days.
(X) Yes ( ) No
As of May 11, 1998, there were 10,483,050 shares of the
Registrant's Common Stock, par value $.0001, outstanding.
<PAGE>
EMERITUS CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements: Page No.
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1998
unaudited)....................................... 1
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1997 and
1998(unaudited).................................. 2
Condensed Consolidated Statements of
Comprehensive Operations for the Three Months
Ended March 31, 1997 and 1998 (unaudited)........ 3
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and
1998(unaudited).................................. 4
Notes to Condensed Consolidated Financial
Statements (unaudited) .......................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 8
Part II. Other Information
Item 1. Legal Proceedings................................ 17
Item 6. Exhibits......................................... 18
Signatures....................................... 19
Note: Items 2-5 of Part II are omitted because they are
not applicable
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1997 and March 31, 1998
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
March 31,
December 31, 1998
1997 (unaudited)
------------ -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................... $ 17,537 $ 10,464
Short-term investments........................ 17,235 9,800
Trade accounts receivable, net................ 2,338 2,761
Prepaid expenses and other current assets..... 5,481 4,662
Property held for sale........................ 8,202 37,463
------------ -----------
Total current assets.................. 50,793 65,150
------------ -----------
Property and equipment, net..................... 145,831 116,390
Property held for development................... 2,754 3,414
Notes receivable from and investments in
Affiliates.................................... 6,422 7,610
Restricted deposits, less current portion....... 10,273 10,904
Other assets, net............................... 12,500 11,553
------------ -----------
Total assets.......................... $228,573 $215,021
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term borrowings......................... $ - $ 5,000
Current portion of long-term debt............. 12,815 36,764
Margin loan on short-term investments......... 9,165 4,232
Trade accounts payable........................ 2,541 3,072
Accrued employee compensation and benefits.... 3,713 3,766
Other current liabilities..................... 10,485 10,556
------------ -----------
Total current liabilities............. 38,719 63,390
------------ -----------
Deferred rent................................... 8,474 8,885
Deferred gain on sale of communities............ 12,314 13,072
Deferred income................................. 114 123
Convertible debentures.......................... 32,000 32,000
Long-term debt, less current portion............ 108,117 88,149
Security deposits and other long-term
Liabilities................................... 1,452 708
------------ -----------
Total liabilities..................... 201,190 206,327
------------ -----------
Minority interests.............................. 1,176 994
Redeemable preferred stock...................... 25,000 25,000
Shareholders' Equity (Deficit):
Common stock, $.0001 par value. Authorized
40,000,000 shares; issued and outstanding
10,974,650 and 10,483,050 shares at December
31, 1997 and March 31, 1998, respectively.... 1 1
Additional paid-in capital..................... 44,449 39,044
Accumulated other comprehensive income......... 4,011 1,208
Accumulated deficit............................ (47,254) (57,553)
------------ -----------
Total shareholders' equity (deficit).. 1,207 (17,300)
------------ -----------
Total liabilities and shareholders' $228,573 $215,021
equity (deficit)...................
============ ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
1
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1998
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Revenues:
Community revenue......................... $20,983 $ 34,143
Other service fees........................ 3,506 598
Management fees........................... 13 61
--------- ---------
Total operating revenues.......... 24,502 34,802
--------- ---------
Expenses:
Community operations...................... 16,947 25,709
General and administrative................ 2,207 3,201
Depreciation and amortization............. 1,075 1,568
Rent...................................... 6,863 10,299
--------- ---------
Total operating expenses.......... 27,092 40,777
--------- ---------
Loss from operations.............. (2,590) (5,975)
--------- ---------
Other income (expense):
Interest expense, net..................... (822) (2,778)
Other, net................................ (160) 329
--------- ---------
Net other expense................. (982) (2,449)
--------- ---------
Loss before cumulative effect of
change in accounting principle.. (3,572) (8,424)
Cumulative effect of change in accounting
principle................................. - (1,320)
--------- ---------
Net loss ......................... $(3,572) $ (9,744)
========= =========
Preferred stock dividends................... - 555
--------- ---------
Net loss to common shareholders... $(3,572) $(10,299)
========= =========
Loss per common share - basic and diluted:
Loss before cumulative effect of change in
accounting principle.................... $ (0.32) $ (0.84)
Cumulative effect of change in accounting
principle............................... $ - $ (0.13)
--------- ---------
Loss per common share..................... $ (0.32) $ (0.97)
========= =========
Weighted average number of common shares
outstanding -
basic and diluted....................... 11,000 10,633
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
2
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
OPERATIONS
Three Months Ended March 31, 1997 and 1998
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net loss...................................... $(3,572) $ (9,744)
Other comprehensive income (loss):
Foreign currency translation adjustments... - 2
Unrealized gains (losses) on investment
securities:
Unrealized holding gains (losses)
arising during the period........... 102 (2,355)
Reclassification adjustment for gains
included in net loss................ - (450)
--------- ---------
Total other comprehensive income
(loss)........................... 102 (2,803)
--------- ---------
Comprehensive loss............................ $(3,470) $(12,547)
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
3
<PAGE>
EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1997 and 1998
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net cash used in operating activities (including
changes in all operating assets and
liabilities).................................. $ (1,427) $ (8,664)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment......... (7,692) (4,145)
Acquisition of property held for development.. (2,321) (442)
Proceeds from sale of property and equipment.. - 3,985
Purchase of investment securities............. (344) -
Sale of investment securities................. 75 5,530
Construction advances - leased communities.... 5,092 4,624
Construction expenditures - leased
communities................................. (12,043) (4,754)
Advances to and investments in affiliates..... (1,228) (87)
Acquisition of business and partnership
interests................................... (678) (1,312)
--------- ---------
Net cash provided by (used in)
Investing activities................ (19,139) 3,399
--------- ---------
Cash flows from financing activities:
Increase in restricted deposits............... (298) (449)
Proceeds from short-term borrowings........... 1,957 5,149
Repayment of short-term borrowings............ - (5,532)
Proceeds from long-term borrowings............ 7,386 4,894
Repayment of long-term borrowings............. (4,244) (1,004)
Increase in lease acquisition and deferred
financing costs............................. - 538
Repurchase of common stock.................... - (5,406)
--------- ---------
Net cash provided by (used in)
financing activities................ 4,801 (1,810)
--------- ---------
Effect of exchange rate changes on cash......... - 2
--------- ---------
Net decrease in cash.................. (15,765) (7,073)
Cash at the beginning of the period............. 23,039 17,537
--------- ---------
Cash at the end of the period................... $ 7,274 $ 10,464
========= =========
Supplemental disclosure of cash flow information
-- cash paid during the period for interest... $ 1,372 $ 2,101
========= =========
Noncash investing and financing activities
-- acquisition of a community:
Assets acquired............................... $ 4,200 $ -
Liabilities assumed........................... 3,850 -
Transfer of property held for development to
property and equipment........................ 6,998 -
Transfer of property and equipment to property
held for sale................................. 25,249 32,188
Vehicle acquisitions through debt financing..... 323 90
Land acquisition through forgiveness of note
receivable.................................... - 218
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
4
<PAGE>
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim financial information furnished
herein, in the opinion of management, reflects all
adjustments which are necessary to state fairly the
consolidated financial position, results of operations, and
cash flows of Emeritus Corporation, ("the Company") as of
March 31, 1998 and for the three months ended March 31, 1997
and 1998. The Company presumes that users of the interim
financial information herein have read or have access to the
Company's 1997 audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the 1997 Form 10-K
filed March 30, 1998 by the Company under the Securities Act
of 1934, and that the adequacy of additional disclosure
needed for a fair presentation, except in regard to material
contingencies, may be determined in that context.
Accordingly, footnote and other disclosures which would
substantially duplicate the disclosures contained in Form 10-
K have been omitted. The financial information herein is
not necessarily representative of a full year's operations.
Certain reclassifications of the 1997 amounts have been
made to conform to the 1998 presentation.
2. ACQUISITIONS
During the year ended December 31, 1997, the Company
completed four acquisitions of assisted-living and
independent-living 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 acquisition. No
goodwill or 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 acquisitions. Summary information concerning
the acquisitions is as follows:
<TABLE>
<CAPTION>
Total
Communities acquired Acquisition date purchase price Units
- -------------------------- ----------------- -------------- ---------
(in thousands)
<S> <C> <C> <C>
Villa Del Rey............. March 1997 $ 4,252 84
La Casa Communities (1)... May 1997 33,062 473
-------------- ---------
$37,314 557
============== =========
(1) Consists of three long-term care communities
located in Florida.
</TABLE>
The foregoing purchases have generally been financed
through borrowings.
During the year ended December 31, 1997, the Company
completed an acquisition of three communities through lease
financing transactions with a Real Estate Investment Trust
(REIT), pursuant to which the REIT 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.
<TABLE>
<CAPTION>
Lease Initial Renewal Annual
Communities leased Acquisition date Lease Term Options Rent Units
- ----------------------- ----------------- ----------- --------------- ---------- -----
<S> <C> <C> <C> <C> <C>
Texas Communities (1).. April 1997 15 years Three five-year $2,174,328 411
(1) Consists of 3 long-term-care communities located
in Texas.
</TABLE>
5
<PAGE>
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
The Company has a letter of intent with a REIT relating
to sale/leaseback financing of $100 million for newly
purchased facilities and a similar arrangement with the REIT
for an additional $100 million financing for newly purchased
facilities. At March 31, 1998, approximately $54.3 million
of such financing remains available to the Company.
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.
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, 1997, after
including the impact of certain adjustments such as
depreciation on assets acquired and interest expense on
acquisition financing.
<TABLE>
<CAPTION>
Three months ended March 31, 1997
--------------------------------------
(In thousands, except per share data)
<S> <C>
Revenue........................... $28,584
Net loss to common shareholders... (4,090)
Pro forma net loss per common
share - basic and diluted....... $ (0.38)
</TABLE>
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.
3. PROPERTY HELD FOR SALE
At March 31, 1998, the Company has commitments to sell
six existing communities and an office park to an
independent third party and two existing communities to a
related party ("Properties Held for Sale" or "Properties").
Of the $37.5 million in Properties Held for Sale, $10.1
million, securing $8.5 million of related long-term debt,
are scheduled to be sold to an independent third party with
no continuing involvement by the Company. The remaining
$27.4 million in Properties, securing $20.5 million of
related long-term debt, are scheduled to be sold to a
related party with the Company retaining a 20% interest in
one community and providing management services for both
communities.
6
<PAGE>
EMERITUS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
4. NEW ACCOUNTING STANDARDS
In April 1997, the Accounting Standards Executive
Committee issued SOP 98-5, Reporting on the Costs of Start-
Up Activities. This statement provides guidance on
financial reporting for start-up costs and organization
costs and requires such costs to be expensed as incurred.
The Company elected early adoption of this statement
effective January 1, 1998 and has reported a charge of
$1,320,000 for the cumulative effect of this change in
accounting principle.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS
130), Reporting Comprehensive Income. This statement
establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The purpose of
reporting comprehensive income is to report a measure of all
changes in equity of an enterprise that result from
recognized transactions and other economic events of the
period other than transactions with owners in their capacity
as owners. The Company adopted SFAS 130 effective January 1,
1998.
5. LOSS PER SHARE
Loss per common share on a dilutive basis has been
calculated without consideration of 1,991,445 and 3,918,822
common shares at March 31, 1997 and 1998, respectively, related
to outstanding options, warrants, convertible debentures and
convertible preferred stock because the inclusion of such
common stock equivalents would be anti-dilutive.
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 and development of 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 the three months
ended March 31, 1997 and 1998, the Company generated total
operating revenues of $24.5 million and $34.8 million,
respectively. As of March 31, 1998, the Company's
accumulated deficit was $57.6 million and its total
shareholders' deficit was $17.3 million. For the three
months ended March 31, 1997 and 1998, the Company generated
losses of $3.6 million and $8.4 million (excluding a charge
related to the cumulative effect of a change in accounting
principle in 1998), respectively. As discussed below, the
Company's losses result from a number of factors, including
the opening in 1997 of 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 have declined, financing costs arising from
sale/leaseback transactions and mortgage financing and
refinancing transactions at proportionately higher levels of
debt, and increased administrative and corporate expenses
resulting from a restructuring of the Company's operations
and marketing required by rapid growth.
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 May 11, 1998, the Company held ownership,
leasehold or management interests in 104 residential
communities (the "Operating Communities") consisting of
approximately 9,100 units with the capacity for 10,600
residents, located in 27 states. Of the 104 Operating
Communities, 20 and three newly developed communities were
opened during 1997 and 1998, respectively. The Company
owns, has a leasehold interest in, management interest in or
has acquired an option to purchase development sites for 22
new assisted-living communities (the "Development
Communities"). Thirteen of the Development Communities are
currently under construction, 11 of which are scheduled to
open during 1998. The Company leases 78 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 three
communities. Additionally, the Company holds a minority
interest in Alert Care Corporation ("Alert"), an Ontario,
Canada based owner and operator of 21 assisted-living
communities consisting of approximately 1,200 units with a
capacity of approximately 1,300 residents. 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 136 properties in 28 states and
Canada, containing an aggregate of approximately 11,400
units with capacity of over 12,900 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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The following table sets forth a summary of the
Company's property interests.
<TABLE>
<CAPTION>
As of March 31,
------------------------------------------------------------------------
1995 1996 1997 1998
---------------- ---------------- ----------------- -----------------
Buildings Units Buildings Units Buildings Units Buildings Units
--------- ------ --------- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned 8 652 12 1,067 16 1,569 18 2,028
Leased 1 91 28 2,171 58 4,563 78 6,278
Managed - - - - 1 83 5 419
Joint Venture/Partnership - - 1 22 2 162 3 412
--------- ------ --------- ------ --------- ------- --------- -------
Sub Total 9 743 41 3,260 77 6,377 104 9,137
Annual Growth - % - % 356% 339% 88% 96% 35% 43%
Pending Acquisitions 16 1,531 28 2,194 14 1,406 - -
New Developments 25 2,038 30 2,436 34 3,060 22 2,082
Minority Interest - - - - 17 959 21 1,163
--------- ------ --------- ------ --------- ------- --------- -------
Total 50 4,312 99 7,890 142 11,802 147 12,382
--------- ------ --------- ------ --------- ------- --------- -------
Annual Growth - % - % 98% 83% 43% 50% 4% 5%
</TABLE>
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" in the Company's
Annual Report on Form 10-K for the year ended December 31,
1997. 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 periods
indicated, certain items of the Company's Condensed
Consolidated Statements of Operations as a percentage of
total revenues and the percentage change of the dollar
amounts from period to period.
<TABLE>
<CAPTION>
Percentage of Revenues Period to Period
March 31, Percentage
---------------------- Increase (Decrease)
1997 1998 1997-1998
---------- ---------- -------------------
<S> <C> <C> <C>
Revenues........................... 100 % 100 % 42 %
Expenses:
Community operations............ 69 74 52
General and administrative...... 9 9 45
Depreciation and amortization... 4 5 46
Rent............................ 28 30 50
---------- ----------
Total operating expenses..... 110 118 51
---------- ----------
Loss from operations......... (10) (18) 131
---------- ----------
Other expense:
Interest expense, net........... 3 8 238
Other, net...................... 1 (1) (306)
---------- ----------
Net loss before cumulative
effect of change in
accounting principle....... (14) (25) 136
Cumulative effect of change in
accounting principle............. - 4 N/A
---------- ----------
Net loss..................... (14)% (29)% 173 %
========== ==========
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1997
REVENUES. Total operating revenues for the three
months ended March 31, 1998 were $34.8 million, representing
a $10.3 million, or 42%, increase over operating revenues of
$24.5 million for the comparable period in 1997. The
increase resulted from the opening of new developments and
the related fill-up of units and the acquisition of
communities subsequent to the first quarter 1997. The
Company ended with 77 and 103 communities representing
approximately 6,400 and 9,000 units as of March 31, 1997 and
1998, respectively, an increase of 34%. For 1998, there was
a decline in average occupancy to 69% from 73% for 1997,
primarily attributable to the opening of 18 newly developed
communities after March 31, 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 the three months ended March 31, 1998 were
$25.7 million, representing an $8.8 million, or 52% increase
over $16.9 million for the comparable period in 1997,
primarily due to the Company's opening of new developments
and the acquisition of communities subsequent to the first
quarter 1997. The increase can also be attributed to an
increase in the allowance for doubtful accounts and the
adoption of Statement of Position (SOP) 98-5 which requires
that costs of start-up activities and organization costs be
expensed as incurred. The adoption of SOP 98-5 on January
1, 1998, resulted in the Company expensing approximately
$291,000 in start-up costs incurred in the first quarter of
1998 on new developments and are included in community
expenses. All future costs associated with newly developed
communities will be expensed as incurred and included in
community operations rather than capitalized and amortized
over a period of one-year. As a percentage of total
operating revenues, expenses for community operations
increased to 74% for the three months ended March 31, 1998,
from 69% for the comparable period in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative
expenses for the three months ended March 31, 1998 were $3.2
million, representing an increase of $994,000, or 45% from
$2.2 million for the comparable period in 1997. As a
percentage of total operating revenues, general and
administrative expenses remained unchanged at 9% for the
three months ended March 31, 1998 and 1997 while the number
of employees located at the corporate office was 96 and 98
at March 31, 1997 and 1998, respectively. The 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 continues to develop new communities.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization for the three months ended March 31, 1998 was
$1.6 million, or 5% of total operating revenues, compared to
$1.1 million or 4% of total operating revenues, for the
comparable period in 1997. The increase was primarily due
to the Company's opening of new developments and the
acquisition of communities owned by the Company, net of
communities sold in sale/leaseback transactions subsequent
to the first quarter 1997. The Company owned 17%, or 18 of
its 103 communities representing approximately 2,000 units
at March 31, 1 998 compared to 21%, or 16 of its 77
communities representing approximately 1,600 units at March
31, 1997.
RENT. Rent expense for the three months ended March
31, 1998 was $10.3 million, representing an increase of $3.4
million, or 50% from rent expense of $6.9 million for the
comparable period in 1997. As a percentage of total
operating revenues, rent expense increased to 30% for the
three months ended March 31, 1998, from 28% for the
comparable period in 1997. The dollar increases were due to
additional lease financing or sale/leaseback transactions.
The Company leased 76%, or 78 of its 103 of its residential
communities representing approximately 6,300 units as of
March 31, 1998 compared to 75%, or 58 of its 77 communities
representing approximately 4,600 units as of March 31, 1997.
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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
INTEREST EXPENSE, NET. Interest expense, net, for the
three months ended March 31, 1998 was $2.8 million compared
to $822,000 for the comparable period in 1997, increasing as
a percentage of total operating revenues to 8% for the three
months ended March 31, 1998 from 3% for the comparable
period in 1997. The increase was primarily due to the
acquisition of communities through mortgage financing
bearing interest at rates between 8.4% and 18% subsequent to
the first quarter 1997 and the opening of developments owned
by the Company, all partially offset by sale/leaseback
refinancings.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.
The Company incurred a cumulative effect of a change in
accounting principle of $1.3 million relating to the early
adoption of SOP 98-5 which requires that costs of start-up
activities and organization costs be expensed as incurred.
The Company does not expect this statement to materially
impact total operating expenses. However, previously
capitalized and amortized start-up costs will be expensed to
community operations as incurred.
SAME COMMUNITY COMPARISON
The Company operated 59 communities ("Same Community")
on a comparable basis during both the three months ended
March 31, 1997 and 1998. The Same Communities represented
67% of the Company's total revenue for the first quarter of
1998. Net operating margins increased by $875,000 to 35% on
revenue of $23.2 million as compared to 33% on revenue of
$21.8 million for the three months ended March 31, 1997.
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 reported a pre-tax income, before corporate
overhead, of $760,000, representing an increase of $1.1
million from a pre-tax loss, before corporate overhead, of
$294,000 to the comparable period last year. In addition,
average revenue per occupied unit increased approximately
7%, from $1,938 to $2,077, during the first quarter 1997 and
1998, respectively, while Same Community average occupancy
declined slightly to 82% during the three months ended March
31, 1998 compared to 83% for the comparable period last
year. Included among the 59 Same Communities, were 11
communities newly developed in 1996. These communities
reported an average occupancy of 40% and 64%, net operating
margin of 6% and 26% on revenue of $1.9 million and $3.0
million and pre-tax net loss, before corporate overhead, of
$1.4 million and $603,000 for the three months ended March
31, 1997 and 1998, respectively.
The following table sets forth a comparison of Same
Community results of operations before corporate overhead
for the three months ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31,
(In thousands)
Dollar Percentage
1997 1998 Change Change
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Revenue........................... $21,798 $23,193 $1,395 6 %
Community operating expense....... 14,612 15,132 520 4
--------- --------- -------- ----------
Community operating income... 7,186 8,061 875 12
--------- --------- -------- ----------
Depreciation and amortization..... 752 524 (228) (30)
Rent.............................. 5,917 6,244 327 6
--------- --------- -------- ----------
Operating income............. 517 1,293 776 (150)
--------- --------- -------- ----------
Interest expense, net............. (811) (533) (278) (34)
--------- --------- -------- ----------
Pre-tax income (loss)........ $ (294) $ 760 $1,054 359 %
========= ========= ======== ==========
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Three months ended
March 31,
--------------------
1997 1998
--------- ---------
OTHER SAME COMMUNITY INFORMATION:
Communities......................... 59 59
Total units......................... 4,528 4,528
Average occupancy................... 83% 82%
Revenue per average occupied unit... $1,938 $2,077
</TABLE>
The 50 Same Communities included in the quarters ending
December 31, 1997 and March 31, 1998 reported revenue of
$20.0 million and $20.2 million, community operating
expenses of $13.7 million and $13.8 million and pre-tax
loss, before corporate overhead, of $15,000 and $7,000 for
such quarters, respectively, while average occupancy
increased to 80% in the first quarter of 1998 compared to
79% in the fourth quarter of 1997.
STABILIZED (GROUP ONE) AND START-UP/REPOSITIONED (GROUP TWO)
COMMUNITY COMPARISON
For the three months ended March 31, 1998, the Company
had 55 communities that had achieved average occupancy of at
least 90% during one quarter ("Group One Communities") and
48 communities that had average occupancy of less than 90%,
which includes 40 newly opened developments and/or
communities with significant ongoing repositioning and/or
refurbishment activity ("Group Two Communities").
The following tables set forth a comparison of Group
One and Group Two Community results of operations for the
three months ended March 31, 1998.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
(In thousands)
Start-Up/
Stabilized Repositioned
Communities Communities
(Group One) (Group Two) Overhead Total
------------ ------------- -------- -----------
<S> <C> <C> <C> <C>
Revenue........................... $23,924 $10,853 $ 25 $34,802
Community operating expense....... 15,510 10,199 - 25,709
------------ ------------- -------- -----------
Community operating income..... 8,414 654 25 9,093
------------ ------------- -------- -----------
General and administrative........ - - 3,201 3,201
Depreciation and amortization..... 534 880 154 1,568
Rent.............................. 6,047 4,132 120 10,299
------------ ------------- -------- -----------
Operating income (loss)........ 1,833 (4,358) (3,450) (5,975)
------------ ------------- -------- -----------
Interest income (expense), net.... (884) (1,544) (350) (2,778)
Other income (expense)............ (1) 66 264 329
------------ ------------- -------- -----------
Pre-tax income (loss) before
cumulative effect of change
in accounting principle...... $ 948 $(5,836) $(3,536) $(8,424)
============ ============= ======== ===========
Other Group One and Group Two
Information:
Communities..................... 55 48 103
Total units..................... 4,538 4,427 8,965
Average Occupancy............... 88% 49% 69%
Revenue per average occupied
unit.......................... $ 1,993 $ 1,772 $ 1,920
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Group One Communities ended the first quarter of 1998
with an average occupancy of 88% compared to 93% for the
first quarter of 1997 while net operating margins increased
by $1.4 million to 35% on revenue of $23.9 million for the
three months ended March 31, 1998 as compared to 37% on
revenue of $19.0 million for the three months ended March
31, 1997. Group One Community pre-tax income, before
corporate overhead and before cumulative effect of change in
accounting principle, decreased by 29% to $948,000 compared
to the comparable period last year. The total number of
Group One Communities increased by 10 in the first quarter
of 1998 compared to the first quarter of 1997 due to a
combination of acquisitions and communities achieving an
occupancy of at least 90% during one quarter.
Group Two Communities ended the first quarter of 1998
with an average occupancy of 49% compared to 47% for the
first quarter of 1997 while net operating margins increased
by $109,000 to 6% on revenue of $10.9 million compared to
10% on revenue of $5.5 million for the three months ended
March 31, 1997. Group Two Community pre-tax loss, before
corporate overhead, increased by 127% to $5.8 million
compared to the comparable period last year. The total
number of Group Two Communities had a net increase of 17
compared to the first quarter of 1997 due primarily to the
opening of new developments.
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 March 31, 1997
and 1998.
<TABLE>
<CAPTION>
Stabilized Communities (Group One)
Three Months Ended March 31,
(In thousands)
Dollar Percentage
1997 1998 Change Change
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Revenue........................... $18,954 $23,924 $4,970 26 %
Community operating expense....... 11,949 15,510 3,561 30
--------- --------- -------- ----------
Community operating income..... 7,005 8,414 1,409 20
--------- --------- -------- ----------
Depreciation and amortization..... 430 534 104 24
Rent.............................. 4,796 6,047 1,251 26
--------- --------- -------- ----------
Operating income............... 1,779 1,833 54 3
--------- --------- -------- ----------
Interest expense, net............. (501) (884) 383 76
Other income, net................. 53 (1) (54) (102)
--------- --------- -------- ----------
Pre-tax income (loss) before
cumulative effect of change
in accounting principle...... $ 1,331 $ 948 $ (383) (29)%
========= ========= ======== ==========
OTHER GROUP ONE INFORMATION:
Communities.................... 45 55
Total units.................... 3,414 4,538
Average occupancy.............. 93% 88%
Revenue per occupied unit.. ... $ 1,984 $ 1,993
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
<TABLE>
<CAPTION>
Start-Up/Repositioned Communities (Group
Two)
Three Months Ended March 31,
(In thousands)
Dollar Percentage
1997 1998 Change Change
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Revenue........................... $ 5,543 $10,853 $ 5,310 96 %
Community operating expense....... 4,998 10,199 5,201 104
--------- --------- -------- ----------
Community operating income..... 545 654 109 20
--------- --------- -------- ----------
Depreciation and amortization..... 574 880 306 53
Rent.............................. 1,961 4,132 2,171 111
--------- --------- -------- ----------
Operating loss................. (1,990) (4,358) (2,368) (119)
--------- --------- -------- ----------
Interest expense, net............. (597) (1,544) (947) (159)
Other income (expense), net....... 15 66 51 340
--------- --------- -------- ----------
Pre-tax loss before
cumulative effect of change
in accounting principle...... $(2,572) $(5,836) $(3,264) (127)%
========= ========= ======== ==========
OTHER GROUP TWO INFORMATION:
Communities.................... 31 48
Total units.................... 2,879 4,427
Average occupancy.............. 47% 49%
Revenue per occupied unit.. ... $ 1,504 $ 1,772
</TABLE>
Group One Communities for the three months ended March
31, 1998 and December 31, 1997, consisted of 55 and 54
communities, respectively. Average Occupancy declined
slightly to 88% for the first quarter 1998 compared to 89%
for the fourth quarter 1997. Revenue increased $686,000, or
3%, to $23.9 million for the three months ended March 31,
1998 from $23.2 million for the three months ended December
31, 1997. Community operating expenses for the first
quarter 1998 increased $474,000, or 3%, to $15.5 million for
the three months ended March 31, 1998 from $15.0 million for
the three months ended December 31, 1997. Pre-tax income
before corporate overhead and before cumulative effect of
change in accounting principle decreased $15,000, or 2% to
$948,000 for the three months ended March 31, 1998 from
$963,000 million for the three months ended December 31,
1997.
Group Two Communities for the three months ended March
31, 1998 and December 31, 1997, consisted of 48 communities
and 46 communities, respectively, representing 34 and 32
newly developed communities, respectively. Average
Occupancy increased to 49% for the first quarter 1998
compared to 45% for the fourth quarter 1997. Revenue
increased $1.3 million, or 14%, to $10.9 million for the
three months ended March 31, 1998 from $9.5 million for the
three months ended December 31, 1997. Community operating
expenses for the first quarter 1998 were $10.2 million,
representing an increase of $1.4 million, or 15%, over $8.8
million for the fourth quarter 1997. Pre-tax loss before
corporate overhead and before cumulative effect of change in
accounting principle decreased $1.1 million, or 16%, to $5.8
million for the three months ended March 31, 1998 from $7.0
million for the three months ended December 31, 1997.
The changes between fourth quarter 1997 and first
quarter 1998 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 $6.7 million in revenue for
the three months ended March 31, 1998 compared to $5.5
million for the three months ended December 31, 1997, $6.5
million in community operating expenses for the first
quarter 1998 compared to $5.6 million for the fourth quarter
1997 and pre-tax loss before corporate overhead and before
cumulative effect of change in accounting principle of $4.9
million for the first quarter 1998 compared to pre-tax loss
before corporate overhead and before cumulative effect of
change in accounting principle of $6.1 million for the
fourth quarter 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998.
For the three months ended March 31, 1998, net cash used in
operating activities was $8.7 million, primarily due to
losses incurred on newly developed communities. The Company
obtained $4.0 million in proceeds from the sale of a
community in a sale/leaseback financing transaction and
used $4.6 million to acquire property and equipment and
property held for development. The Company obtained $5.5
million from the sale of investment securities, which was
used to repay short-term borrowings. The Company obtained
$4.9 million and repaid $1.0 million in long-term debt and
obtained $5.1 million in short-term borrowings. As a result
of these transactions during the first quarter of 1998, the
Company decreased its cash position by approximately $7.1
million. As of March 31, 1998, the Company had working
capital of $1.8 million compared to a working capital of
$12.1 million as of December 31, 1997.
At March 31, 1998, the Company has commitments to sell
six existing communities and an office park to an
independent third party and two existing communities to a
related party ("Properties Held for Sale" or "Properties").
Of the $37.5 million in Properties Held for Sale, $10.1
million securing $8.5 million of related long-term debt are
scheduled to be sold to an independent third party with no
continuing involvement by the Company. The remaining $27.4
million in Properties securing $20.5 million of related long-
term debt are scheduled to be sold to a related party with
the Company retaining a 20% interest in one community and
providing management services for both communities.
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1997.
For the three months ended March 31, 1997, net cash used in
operating activities was $1.4 million, primarily due to
losses incurred on newly acquired and developed communities.
The Company obtained $7.4 million and repaid $4.2 million in
long-term debt, including refinancing $1.8 million and
repaying $2.1 million in long-term debt on two assisted-
living communities located in Arizona and obtained $2.0
million in short-term borrowings. The Company purchased
additional property and equipment and property held for
development of $10.0 million.
On April 29, 1998, the Company finalized a $74.5
million refinancing of ten existing assisted-living
communities with Deutsche Bank North America ("Deutsche").
The initial closing totaled $56.3 million relating to eight
of the communities. The final $18.2 million closing is
expected to occur during the second quarter 1998. The three
year loan at the LIBOR rate plus 2.95% (8.6% at April 29,
1998) is secured by the individual properties.
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
treasury stock purchase program to acquire up to an
additional 500,000 shares of the Company's common stock from
time to time in the open market. In April 1998, the
Company's Board of Directors authorized an additional
500,000 shares of the Company's common stock to be purchased
from time to time in the open market. As of May 8, 1998,
the Company has purchased and retired 517,200 shares of its
common stock at an aggregate cost of $5.7 million.
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. In part, the Company's future capital needs depend
on arranging sale/leaseback financing for existing assisted-
living communities that have achieved stabilized occupancy
rates, resident mix and operating margins after initial
development or repositioning. There can be no assurance
that the Company will generate sufficient cash flow during
such time to fund its working capital, rent, debt service
requirements or growth. In such event, the Company would
have to seek additional financing through debt or equity
offerings, bank borrowings or other sources.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
IMPACT OF INFLATION
To date, inflation has not had a significant impact on
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.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 24, 1998, the Company commenced a lawsuit
against ARV Assisted Living Inc. ("ARV") in Superior Court
of the State of California for the County of Orange alleging
that share purchases on January 16, 1998 by Prometheus
Assisted Living LLC ("Prometheus") triggered the so-called
flip-in feature of ARV's poison pill.
The effect of the flip-in feature having been triggered
by Prometheus is to require ARV to distribute to all
shareholders (other than Prometheus) as of that date
certificates for one Right per share. The Company believes
that each Right would be exercisable for approximately 9.56
shares at a purchase price of $7.32 per share. The Rights
are exercisable until August 8, 2007 and are transferable
separate from the ARV common stock.
In connection with Prometheus' initial investment in
ARV in July 1997, ARV adopted a Rights Agreement (commonly
referred to as a poison pill) which provides that the flip-
in feature is triggered if Prometheus acquires "beneficial
ownership" of 50% or more of ARV's outstanding common stock.
The flip-in is a defensive feature intended to discourage
accumulation of control of stock in excess of a specified
level by allowing all shareholders other than the acquiror
to purchase additional common stock at a 50% discount to the
average closing market price of ARV's stock for the 30
trading days prior to the flip-in being triggered.
In a Schedule 13D filing on January 20, 1998,
Prometheus disclosed that on January 16th it had acquired
additional shares of ARV common stock, increasing
Prometheus' direct share ownership to 45% of the outstanding
ARV common stock. Previous Schedule 13D filings by
Prometheus disclose that Prometheus also then beneficially
owned another 9% of ARV's common stock as a result of the
Stockholders' Voting Agreement dated October 29, 1997,
between Prometheus and certain management stockholders of
ARV (collectively, the "Management Stockholders"). Under
the Stockholders' Voting Agreement, each Management
Stockholder agreed with Prometheus to vote its shares of ARV
common stock in support of Prometheus' nominees to ARV's
Board of Directors.
The Company' complaint alleges that the Stockholders'
Voting Agreement increases Prometheus' beneficial ownership
from its 45% direct ownership to 54%, thereby triggering the
flip-in feature of the poison pill. For purposes of
determining Prometheus' beneficial ownership, the Rights
Agreement treats Prometheus as beneficially owning shares
held by "any other person with which Prometheus has any
agreement, arrangement or understanding whether or not in
writing, for the purpose of acquiring, holding, voting or
disposing of any securities of ARV."
The Company' complaint seeks the following injunctive
and declaratory relief: (i) an order directing ARV to
distribute Right Certificates to all holders of common stock
of ARV (other than Prometheus) as of January 16, 1998; and
(ii) an order declaring that a "Trigger Event" (as defined
in the Rights Agreement) occurred on January 16, 1998 when
Prometheus acquired beneficial ownership of more than 50% of
ARV's common stock.
Prometheus is an investment vehicle controlled by
Lazard Freres Real Estate Investors L.L.C. ("Lazard").
Lazard's activities consist principally of acting as general
partner of several real estate investment partnerships
affiliated with Lazard Freres & Co. LLC.
17
<PAGE>
Items 2-5 are not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
10.1 Aurora Bay Agreements
10.1 Lubbock Group, Ltd. Amended and Restated Limited
.1 Partnership Agreement
10.1 Operating Agreement of Aurora Bay Investments, L.L.C.
.2 dated January 6, 1998 between Craig W. Spaulding,
Erwin Investors I, L.L.C. and Thilo Best.
10.2 La Villita in Scottsdale Arizona, Madison Glen in
Clearwater Florida, Barrington Place in Lecanto, Florida,
Lodge at Mainlands in Pinnellas Park, Florida, Elm Grove
Estates in Hutchinson, Kansas, Springtree in Sunrise,
Florida and Mainlands Office Park. The following agreement
is representative of that executed in connection with these
properties.
10.2 Purchase and Sale Agreement dated April 16, 1998
.1 between Emeritus Properties I, Inc. and Bayside Health
Group LLC.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
ended March 31, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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: May 15, 1998
EMERITUS CORPORATION
(Registrant)
/s/ Kelly J. Price
--------------------------
Kelly J. Price, Vice President, Finance, Chief
Financial Officer and Principal Accounting Officer
19
<PAGE>
THE PARTNERSHIP INTERESTS ISSUED UNDER THIS DOCUMENT
HAVE NOT .BEEN REGISTERED UNDER ANY FEDERAL OR STATE
SECURITIES LAW, INCLUDING THE SECURITIES ACT OF 1933,
AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR THE OPINION
OF COUNSEL TO THE PARTNERSHIP THAT SUCH REGISTRATION IS
NOT REQUIRED.
LUBBOCK GROUP, LTD.
(FORMERLY SOUTH BAY ADVISORS LIMITED
PARTNERSHIP)
AMENDED AND RESTATED LIMITED PARTNERSHIP
AGREEMENT
ARTICLE I
FORMATION AS A TEXAS LIMITED PARTNERSHIP
This Limited Partnership (Partnership) is created
under the Texas Revised Limited
Partnership Act, Article 6132a-1, Vernon's Texas
Revised Civil Statutes (T.R.L.P.A.). This
Limited Partnership will become effective upon the
filing and acceptance of the Certificate
by the Texas Secretary of State.
ARTICLE II
PARTNERSHIP NAME
The name of the Partnership shall be LUBBOCK
GROUP, LTD.
ARTICLE III
REGISTERED AGENT AND ADDRESS
The registered agent for the Limited Partnership,
its registered street address (at which its agent will
be located for the service of process), and the street
address of the Partnership's principal office in the
United States is:
Craig W. Spaulding
5720 LBJ Freeway
Suite 450, Lock Box 16
Dallas, Texas 75240-6339
The registered agent is an individual whose
business office is the same as the Partnership's
registered office.
ARTICLE IV
NATURE OF BUSINESS
The purpose and nature of the Partnership is to
acquire, by purchase in its own name, certain lands
in the City of Lubbock, Lubbock County, Texas, and
described in Exhibit "A" attached hereto and
incorporated herein by reference for all purposes
(hereinafter the "Property"), to hold for resale, to
develop all or portions of such real estate with or
without improvements, to construct improvements on
all or portions of such real estate to the extent
the General Partner deems advisable, to own,
operate, manage, or lease all or portions
<PAGE>
thereof to others, to sell or otherwise dispose of
any part or all of the Property, and to do all
things necessary or convenient for the development
of such improvements and the ownership, operation,
and eventual disposition of all or any part of the
Properly and all personal property related thereto.
In view of the exclusive and limited purposes
of the Partnership, no Partner shall have any
obligation to make other real estate opportunities
not involving We Property available to the
Partnership or to any of its Partners. Any Partner
may engage in and/or possess interests in other
business ventures of every nature and description,
independently or with others, including, but not
limited to, the ownership, financing, leasing,
operation, management, syndication, brokerage, and
development of real property; and neither the
Partnership nor any Partner shall have any rights by
virtue of this Agreement or the existence of this
Partnership in and to said independent ventures or
to the income or profits derived therefrom. The fact
that a Partner, an officer, director, or shareholder
of a Partner, a member of a limited liability
company, a member of a Partner's family, or an
associate of a Partner is employed by, or owns or is
otherwise directly or indirectly interested in or
connected with any person, firm, or corporation
employed or retained by the Partnership to render or
perform management, mortgage placement, financing,
brokerage, development, management, or other
services, or from whom the Partnership may buy
merchandise or other property, borrow money, manage
financing, or place securities, or to or from whom
the Partnership shall lease real property, shall not
prohibit the General Partners from executing a lease
with or employing such person, firm, corporation, or
limited liability company or from otherwise dealing
with him or it, and neither the Partnership nor any
of the Partners as such shall have any rights in or
to any income or profits derived therefrom.
ARTICLE V
PRINCIPAL OFFICE
The address of the principal office in the
United States where the records of the Partnership
are to be maintained is:
5720 LBJ Freeway
Suite 450, Lock Box 16
Dallas, Texas 75240-6339
The records maintained, and to be maintained, at
this office are those prescribed by Section 1.07 of the
T.R.L.P.A.
ARTICLE VI
GENERAL PARTNER
The Partnership shall have one General Partner.
The name, the mailing address, and the street address
of the General Partner is:
Aurora Bay I, L.L.C.
5720 LBJ Freeway
Suite 450, Lock Box 16
Dallas, Texas 75240-6339
Reference to "General Partner," used in the
singular, will also include the plural as to any time
there is more than one General Partner. Reference to
"Partner" shall mean either the General Partner or a
Limited Partner, and reference to "Partners" shall mean
all Partners, including General
2
<PAGE>
and Limited Partners.
ARTICLE VII
INITIAL CONTRIBUTIONS OF CAPITAL
.a. Capital Requirement. General Partner. The
General Partner will be required to make a capital
contribution to the Partnership of not less than
$10.00 (called "General Partner's Capital
Contribution"). The General Partner's Capital
Contribution and capital account will be
maintained separately from another capital account
which he, she or it may have as a Limited Partner.
At all times during the term of this
Partnership, the General Partner shall make
capital contributions to the Partnership in an
amount sufficient to ensure that the General
Partner's contribution to Capital will equal one
percent (1%) or more of the total capital
contributions of all Partners.
b. Capital Requirement, Limited Partner. Each
Limited Partner who is to be a Limited Partner
upon the inception of this Partnership is required
to make a capital contribution to the Partnership
of not less than $990.00 (called "Limited
Partner's Capital Contribution"). A Limited
Partner's Capital Contribution and capital account
will be maintained separately from any other
capital account which he, she or it may have as a
General Partner.
c. Initial Partners. The initial General and
Limited Partners, their initial contributions to
the capital of the Partnership, and their
percentages of interest, are set out on the
attached Exhibit "A" which is incorporated herein
by reference.
d. Additional Contributions to the Capital of
the Partnership. The Partners, both General and
Limited, may make additional contributions of
capital to the Partnership. Since an additional
contribution of capital, if unequal, will affect
the percentages of ownership and distributions of
the Partners, additional capital contributions
will be subject to the requirements of this
Section 7(d). Contributions of additional capital
by a Limited Partner will be subject to the
consent of and acceptance thereof by the General
Partner. Additional contributions by a General
Partner will be subject to the consent and
approval of the Limited Partners, and will require
a vote of at least 70 percent in interest of the
Limited Partners. The required consent and
approval must be in writing.
The General Partner will have the authority
to ask (but not require)
the Limited Partners to contribute additional
capital when: (1) additional capital is
reasonably needed to pay existing or anticipated
expenses of operation and
administration; debt service for any amounts
borrowed by the Partnership; insurance
and tax payments; the cost of acquiring,
maintaining and selling property of the
Partnership; and, (2) the calls for capital are
not discriminatory, that is, when all Limited
Partners are permitted to contribute capital to
the extent of each Limited Partner's percentage
interest in the Partnership. A Limited Partner
will not be obligated to contribute additional
capital. The percentage interest of those who have
made contributions will be increased and the
percentage interest of those who did not make a
full contribution will be decreased in accordance
with overall Partnership Capital Contributions.
ARTICLE VIII
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LIMITED PARTNERS, VOTING, LIMITED LIABILITY
The percentage interest of each Limited Partner
for voting purposes will be determined by dividing the
balance of a Limited Partner's capital account by the
total of all of the capital accounts of the Limited
Partners. A Limited Partner's percentage interest will
be determinative of the measure of a Limited Partner's
vote as to matters on which a Limited Partner is
entitled to vote or which requires a Limited Partners'
consent. For the
purpose of voting, there will be a total of 100 Limited
Partner votes (which is equal to 100 percent of the
total participating Limited Partner interests as
measured by their respective capital accounts) and each
one percent interest will equal one vote. For example,
a Limited Partner with a percentage interest of ten
percent will have ten votes out of 100 votes on any
given matter. A I Limited Partner with a percentage
interest of 12.5 percent will have 12.5 votes out of
100 votes. The term "majority in interest" will mean
that 51 votes out of 100 votes will be determinative of
a given matter. The term "70 percent in interest of the
Limited Partners" will mean that at least 70 votes of
the total 100 votes will be determinative of a given
matter.
Except as may be otherwise provided by the
T.R.L.P.A.; a Limited Partner will not be liable for
the obligations of the Partnership. A Limited Partner
(except for a Limited Partner who is also a General
Partner) will not be permitted to participate in the
management and control of the business of the
Partnership. A Limited Partner, however, may act
individually or in a capacity permitted by the safe-
harbor provisions of the T.R.L.P.A.
ARTICLE IX
TAXATION AS A PARTNERSHIP
The Partnership will constitute a partnership for
federal income tax purposes, and the General Partner
will report all items of income, gain, loss, deduction
and credit as a Partnership. The General Partner will
have the authority to determine the taxable year of the
Partnership and the form in which its accounts are to
be kept. The General Partner is to see to the
preparation of all necessary tax reports and other
information required by the Internal Revenue Service
and a report for income tax purposes to each Partner of
his, her or its distributive share of items of income,
gain, loss, deduction and credit.
ARTICLE X
CAPITAL ACCOUNTS
a. A Capital Account shall be established and
maintained for each Partner in accordance with the
rules of IRS Regulations 1.704-1(b)(2)(iv). Each
Partner's Capital Account (i) shall be increased
by (A) the amount of money contributed by that
Partner to the Partnership, (B) the Net Agreed
Value of property contributed by that Partner to
the Partnership, and (C) allocations to that
Partner of Partnership income and gain (or items
thereof) computed in accordance with paragraph (b)
of this Article X, including income and gain
exempt from tax, and (ii) shall be decreased by
(A) the amount of money distributed to that
Partner by the Partnership, (B) the Net Agreed
Value of property distributed to that Partner by
the Partnership, and (C) allocations of
Partnership loss and deduction (or items thereof),
computed in accordance with paragraph (b) of this
Article X. A Partner that has more than one class
of Interests shall have a single Capital Account
that reflects all its Partnership Interests,
regardless of the class of Units of Partnership
Interests owned by that Partner and regardless of
the time or manner in which those Partnership
Interests were acquired.
b. For purposes of computing the amount of
any item of income, gain, loss, or
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deduction to be reflected in the Partners' Capital
Accounts, the determination, recognition, and
classification of any such item shall be the same
as its determination, recognition, and
classification for federal income tax purposes
(including, without limitation, any method of
depreciation, cost recovery, or amortization used
for that purpose), provided, that:
(i) All fees and other expenses incurred
by the Partnership to promote the sale of (or
to sell) Partnership Interests that can
neither be deducted nor amortized under
Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be
treated as an item of deduction at the time
such fees and other expenses are incurred and
shall be allocated among the Partners
pursuant to the provisions of Article XII
hereof.
(ii) Except as otherwise provided in
IRS Regulations 1.704- 1(b)(2)(iv)(m), the
computation of all items of income, gain,
loss, and deduction shall be made without
regard to any election under Section 754
of the Code which may be made by the
Partnership and, as to those items
described in Section 705(a)(1)(B) or
705(a)(2)(B) of the Code, without regard
to the fact such items are not included in
gross income or are neither currently
deductible nor capitalized for federal
income tax purposes.
(iii) Any income, gain, or loss
attributable to the taxable disposition of
any Partnership property shall be
determined as if the adjusted basis of
such property as of such date of
disposition were equal in amount to the
Partnership's Carrying Value with respect
to such property as of such date.
(iv) In accordance with the
requirements of Section 704(b) of the Code,
any deductions for depreciation, cost
recovery, or amortization attributable to
any Contributed Property shall be determined
as if the adjusted basis of such property on
the date it was acquired by the Partnership
were equal to the Agreed Value of such
property. Upon an adjustment pursuant to IRS
Regulations 1.704-1(b)(2)(iv)(f) to the
Carrying Value of any Partnership property
subject to depreciation, cost recovery, or
amortization, of any further deductions for
such depreciation, cost recovery, or
amortization attributable to such property
shall be determined (A) as if the adjusted
basis of such property were equal to the
Carrying Value of such property immediately
following such adjustment and (B) using a
rate of depreciation cost recovery or
amortization derived from the same method
and useful life (or, if applicable, the re
useful life) as is applied for federal
income tax purposes; provided, however, that
if the asset has a zero adjusted basis for
federal income tax purposes, depreciation,
cost recovery, or amortization deductions
shall be determined using a reasonable
method that the General Partner may adopt.
(v) If the Partnership's adjusted
basis in depreciable or cost recovery
property is reduced for federal income tax
purposes pursuant to Section 48(q)(1) or
49(q)(3) of the Code, the amount of such
reduction shall, solely for purposes
hereof be deemed to be an additional
depreciation or cost recovery deduction in
the year such property is placed in
service and shall be allocated among the
Partners pursuant to paragraph a of
Article XII hereof.. Any restoration of
such basis pursuant to Section 48(q)(2) of
the Code shall, to the extent possible, be
allocated in the year of
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such restoration as an item of income
pursuant to paragraph a. of Article XII
hereof.
c. A transferee of a Partnership Interest
shall succeed to a pro rata portion of the Capital
Account of We transferor relating to the
Partnership Interest so transferred; provided,
however, that if the transfer causes a termination
of the Partnership under Section 708(b)(1)(B) of
the Code, the Partnership's properties shall be
deemed to have been distributed in liquidation of
the Partnership to We Partners (including any
transferee of a Partnership Interest that is a
party to the transfer causing such termination)
pursuant to Article XV and recontributed by such
Partners in reconstitution of the Partnership. Any
such deemed distribution shall be treated as an
actual distribution for purposes of this Article
X. In such event, the Carrying Values of the
Partnership properties shall be adjusted
immediately prior to such deemed distribution
pursuant to IRS Regulations 1.704-1(b)(2)(iv)(f),
and such Carrying Values shall then constitute the
Agreed Values of such properties upon such deemed
contribution to the reconstituted Partnership. The
Capital Accounts of such reconstituted Partnership
shall be maintained in accordance with the
principles of this Article X.
ARTICLE XI
BOOKS AND RECORDS, ACCOUNTING, STATEMENTS AND TAX
MATTERS
a. Books and Records. At all times during the
duration of the Partnership, the General Partner
shall keep accurate books of the Partnership's
accounts, including all of its income,
expenditures, assets, and liabilities. These books
shall be open to examination by any Partner at any
reasonable time.
b. Annual Accounting Period. All books and
records of the Partnership shall be kept on the
basis of an annual accounting period ending
December 31 of each year, except for the final
accounting period which shall end on the date of
termination of the Partnership. All references
herein to the "fiscal year of the Partnership" are
to the annual accounting period described in the
preceding sentence, whether the same shall consist
of twelve months or less.
c. General Partner's Report to Partners. 'The
General Partner shall send, at Partnership
expense, to each Partner the following:
(i) Within seventy-five (75) days after
the end of each fiscal year of the
Partnership, such information as shall be
necessary for the preparation by such Partner
of such Partner's federal income tax return
which shall include a computation of the
distributions to such Partner and the
allocation to such Partner of profits or
losses as the case may be; and
(ii) Within forty-five (45) days after
the end of each fiscal quarter of the
Partnership, a quarterly report, which shall
include:
(1) A balance sheet;
(2) A statement of income and
expenses;
(3) A statement of changes in
Partner's capital; and
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(4) A statement of the balances in
the Capital Accounts of the
Partners.
d. Tax Matters Partner. Should there be
any controversy with the Internal Revenue
Service or any other taxing authority
involving the Partnership, the General
Partner may expend such funds as it deems
necessary and advisable in the interest of
the Partnership to resolve such controversy
satisfactorily, including, without being
limited thereto, attorneys' and accounting
fees. The General Partner is hereby
designated as the "Tax Matters Partner" as
referred to in Section 6231(a)(7)(A) of the
Code and is specially authorized to exercise
all of the rights and powers now or hereafter
granted to the Tax Matters Partner under the
Code.
Any cost incurred in the audit by any
governmental authority of the income tax
returns of a Partner (as opposed to the
Partnership) shall not be a Partnership
expense. The General Partner shall consult
with and keep the Partners advised with
respect to (i) any income tax audit of a
Partnership income tax return, and (ii) any
elections made by the Partnership for
federal, state, or local income tax purposes.
e. Tax Returns. The General Partner
shall, at Partnership expense, cause the
Partnership to prepare and file a United
States Partnership Return of Income and all
other tax returns required to be filed by the
Partnership for each fiscal year of the
Partnership.
f. Tax Elections. The General Partner
shall be permitted in its discretion to
determine whether the Partnership should make
an election pursuant to Section 754 of the
Code to adjust the basis of the assets of the
Partnership. Each of the Partners shall, upon
request, supply any information necessary to
properly give effect to such election. In
addition, the General Partner, in its sole
discretion, shall be authorized to cause the
Partnership to make and revoke any other
elections for federal income tax purposes as
it deems appropriate, necessary, or
advisable.
ARTICLE XII
ALLOCATIONS AND DISTRIBUTIONS
a. Allocations. Except as otherwise
provided herein, all items of income, gain,
loss, deduction, and credit of the Partnership
shall be allocated among the Partners in
accordance with their Percentage Interests.
b. Special Allocations. The following
special allocations shall be made in the
following order:
(i) Partnership Minimum Gain Chargeback.
Notwithstanding the other provisions of this
paragraph b, except as provided in IRS
Regulations 1.704-2(f)(2) through (5), if
there is a net decrease in Partnership
Minimum Gain during any Partnership taxable
period, each Partner shall be allocated items
of Partnership income and gain for such
period (and, if necessary subsequent periods)
in the manner and in the amounts provided in
IRS Regulations 1.704-2(f)(6) and 1.704-
2(g)(2) and 1.704-2(j)(2)(i), or any
successor provisions. For
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purposes of this paragraph b, each Partner's
Adjusted Capital Account balance shall be
determined, and the allocation of income or
gain required hereunder shall be effected,
prior to the application of any other
allocations pursuant to this paragraph b with
respect to such taxable period (other than an
allocation pursuant to paragraphs b(v) and
(vi) of this Article XII).
(ii) Chargeback of Minimum Gain
Attributable to Partner Nonrecourse Debt.
Notwithstanding the other provisions of this
paragraph b of this Article XII (other than
paragraph b (i) hereof), except as provided
in IRS Regulations 1.704-2(i)(4), if there is
a net decrease in Minimum Gain Attributable
to Partner Nonrecourse Debt during any
Partnership taxable period, any Partner with
share of Minimum Gain Attributable to Partner
Nonrecourse Debt at the beginning of such
taxable period shall be allocated items of
Partnership income and gain for such period
(and, if necessary, subsequent periods) in
the manner and in the amounts provided in IRS
Regulations 1.704-2(i)(4) and 1.704-
2(j)(2)(ii), or any successor provisions. For
purposes of this paragraph b, each Partner's
Adjusted Capital Account balance shall be
determined, and the allocation of income or
gain required hereunder shall be effected,
prior to the application of any other
allocations pursuant to this paragraph b with
respect to such taxable period (other than an
allocation pursuant to paragraphs b(v) and
(vi) of this Article XII.
(iii) Qualified Income Offset. In the
event any Partner unexpectedly receives
adjustments, allocations, or distributions
described in IRS Regulations 1.704-
1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5),
or 1.704-1(b)(2)(ii)(d)(6), items of
Partnership income and gain shall be
specifically allocated to such Partner in an
amount and manner sufficient to eliminate, to
the extent required by the IRS Regulations
promulgated under Section 704(b) of the Code,
the deficit balance, if any, in its Adjusted
Capital Account created by such adjustments,
allocations or distributions as quickly as
possible unless such deficit balance is
otherwise eliminated pursuant to paragraphs
b(i) and (ii) of this Article XII.
(iv) Gross Income Allocations. In the
event any Partner has a deficit balance in
its Adjusted Capital Account at the end of
any Partnership taxable period, such Partner
shall be specially allocated items of
Partnership gross income and gain in the
amount of such excess as quickly as possible;
provided, that an allocation pursuant to this
paragraph b(iv) of this Article XII shall be
made only if and to the extent that such
Partner would have a deficit balance in its
Adjusted Capital Account after all other
allocations provided in this Article XII have
been tentatively made as if this paragraph
b(iv) was not in this Agreement.
(v) Nonrecourse Deductions. Nonrecourse
Deductions for any taxable period shall be
allocated to the Partners in accordance with
their Percentage Interests. If the General
Partner determines in its good faith
discretion that the Partnership's Nonrecourse
Deductions must be allocated in a different
ratio to satisfy the safe harbor requirements
of the IRS Regulations promulgated under
Section 704(b) of the Code, the General
Partner is authorized, upon notice to the
Partners, to revise the prescribed ratio to
the numerically closest ratio which does
satisfy such requirements.
(vi) Partner Nonrecourse Deductions.
Partner Nonrecourse Deductions for any
taxable period shall be allocated 100% to the
Partner that bears the
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Economic Risk of Loss for such Partnership
Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in
accordance with ITS Regulations 1.704-2(i).
If more than one Partner bears the Economic
Risk of Loss with respect to a Partner
Nonrecourse Debt, such Partner Nonrecourse
Deductions attributable thereto shall be
allocated between or among such Partners in
accordance with the ratios in which they
share such Economic Risk of Loss.
(vii) Curative Allocations. The
allocations set forth in paragraph b of this
Article XII (the "Special Allocations") are
intended to comply with certain requirements
of the Code and the IRS Regulations
promulgated thereunder. It is the intent of
the Partners that, to the extent possible,
all Special Allocations will be offset either
with other Special Allocations or with
special allocations of other items of
Partnership income, gain, loss, or deduction,
pursuant to this paragraph b(vii). Therefore,
notwithstanding any other provision of this
Article XII (other than the Special
Allocations), the General Partner shall make
such offsetting special allocations in
whatever manner it deems appropriate so that,
after such offsetting allocations are made,
each Partner's Capital Account balance is, to
the extent possible, equal to the Capital
Account balance such Partner would have had
if the Special Allocations were not a pat of
this Agreement and all Partnership items were
allocated pursuant to paragraph a. of this
Article XII.
c. Allocations for Tax Purposes.
(i) Except as otherwise provided herein,
for federal income tax purposes, each item of
income, gain, loss, and deduction which is
recognized by the Partnership, for federal
income tax purposes, shall be allocated among
the Partners in the same manner as its
correlative item of "book" income , gain,
loss, or deduction is allocated pursuant to
paragraphs a. and b. of this Article XII.
(ii) In an attempt to eliminate Book-
Tax. Disparities attributable to a
Contributed Property or Adjusted Property,
each item of income, gain, loss,
depreciation, depletion, and cost recovery
deduction which is recognized by the
Partnership, for federal income tax purposes,
shall be allocated for federal income tax
purposes among the Partners as follows:
(a) (A) In the case of a
Contributed Property, such items
attributable thereto shall be allocated
among the Partners in the manner
provided under Section 704(c) of the
Code that takes into account the
variation between the Agreed Value of
such property and its adjusted basis at
the time of contribution; and (B) except
as otherwise provided in paragraph
c(ii)(c) of this Article XII hereof any
item of Residual Gain or Residual Loss
attributable to a Contributed Property
shall be allocated among the Partners in
the same manner as its correlative item
of 'book" gain or loss is allocated
pursuant to this Article XII.
(b) (A) In the case of an Adjusted
Property, such items shall (a) first, be
allocated among the Partners in a manner
consistent with the principles of
Section 704(c) of the Code to take into
account the Unrealized Gain or
Unrealized Loss attributable to such
property and the allocations thereof
pursuant to IRS Regulations 1.704-
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1(b)(2)(iv)(f), and (b) second, the
event such property was originally a
Contributed Property, be allocated among
the Partners in a manner consistent with
paragraph c(ii)(a)(A) hereof; and (B)
except as otherwise provided in
paragraph c(ii)(c) hereof any item of
Residual Gain or Residual Loss
attributable to an Adjusted Property
shall be allocated among the Partners in
the same manner as its correlative item
of "book" gain or loss is allocated
pursuant to Article XII hereof
(c) Any items of income, gain,
loss, or deduction otherwise allocable
under paragraph c(ii)(A)(2) or c(ii)(B)
hereof shall be subject to allocation by
the General Partner in a manner designed
to eliminate, to the maximum extent
possible, Book-Tax Disparities in a
Contributed Property or Adjusted
Property otherwise resulting from the
application of the "ceiling" limitation
(under Section 704(c) of the Code or
Section 704(c) principles) to the
allocations provided under paragraphs
c(ii)(a)(A) or c(ii)(b)(A) of this
Article XII.
(iii) Any gain allocated to the Partners
upon the sale or other taxable disposition of
any Partnership asset shall, to the extent
possible, after taking into account other
required allocations of gain pursuant to this
paragraph c of this Article XII, be
characterized as Recapture Income in the same
proportions and to the same extent as such
Partners have been allocated any deductions
directly or indirectly giving rise to the
treatment of such gains as Recapture Income.
(iv) All items of income, gain, loss,
deduction, and credit recognized by the
Partnership for federal income tax purposes
and allocated to the Partners in accordance
with the provisions hereof shall be
determined without regard to any election
under Section 754 of the Code which may be
made by the Partnership; provided, however,
that such allocations, once made, shall be
adjusted as necessary or appropriate to take
into account those adjustments permitted or
required by Sections 734 and 743 of the Code.
(v) Each item of income, gain, expense,
loss, deduction, or credit allocable to any
Partnership Interest which may have been
transferred during any year shall, if
permitted by law, be allocated during such
year, in proportion to the number of calendar
days for which each such holder was
recognized as the owner of the Partnership
Interest during such year, without regard to
the results of Partnership operations during
the period in which such holders were
recognized as the owner thereof and without
regard to the date, amount, or recipient of
any distributions which may have been made
with respect to such Partnership Interest.
d. Cash Distributions. At such times and in
such amounts as the General Partner determines
appropriate, all Cash Available for Distribution
shall be distributed among the Partners in
proportion to their Percentage Interests. As long
as there are any amounts due and owing to Emeritus
under the Emeritus Corporation Loan or Emeritus is
a member of Aurora Bay Investments, LLC, the
General Partner shall cause the Partnership to
make quarterly distributions of Cash Available for
Distribution, no later than 45 days after the end
of each calendar quarter. In computing Cash
Available for Distribution, the General Partner
may set aside reasonable amounts as reserves for
capital expenditures, replacements, contingent or
unforeseen liability, or other obligations of the
Partnership; but the amounts of such reserves
shall be reassessed at the end of each quarter to
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determine whether such balances are adequate in
amount, should be increased or decreased, and if
decreased the excess reserves will be available
for distribution to the Members. Moreover, Cash
Available for Distribution may not be used by the
Partnership to make investments in any assets or
project other than the Project, without the prior
consent of Emeritus. It is the intent of the
parties to make periodic distributions of Cash
Available for Distribution if and when such excess
cash is available and not to hold such funds to
build up reserves beyond reasonable amounts or to
make investments in new projects.
ARTICLE XIII
LOANS FROM A PARTNER
If any Partner shall advance funds or make any
other payment to or on behalf of the Partnership, other
than a permitted capital contribution, to cover
operating costs or capital expenses, such advance or
payment will be deemed to be a loan to the Partnership
which will bear interest as agreed upon by the Partner
advancing such loan and the Partnership. The Limited
Partner plans to make loans to the Partnership as
contemplated by the Credit Agreement.
ARTICLE XIV
PARTNERSHIP TERM
The term for which the Partnership shall exist
shall be from the date of the filing of a Certificate
of I Limited Partnership, as provided by the Texas
Uniform I Limited Partnership Act, until December 31,
2027, unless sooner terminated by:
a. The written agreement of the Partners;
b. The disposition of all of the Property and
all personal property owned by the Partnership;
provided, however, that if such sale involves the
receipt by the Partnership of purchase money
obligations, then, in such event, the Partnership
shall not dissolve, except with the consent of all
Partners, prior to the collection or other
disposition of such purchase money obligations;
c. The removal or resignation of the General
Partner unless within sixty (60) days after any
such event the Limited Partners shall elect and
appoint a successor General Partner or
d. The filing for record in the office of the
Secretary of State of the State of Texas of a
fully-executed copy by all then remaining Partners
of a Certificate of Cancellation of the
Certificate of I Limited Partnership.
For so long as the Partnership shall exist, each
Partner waives the right to compel a dissolution of the
Partnership or to compel a partition of the property of
the Partnership. No Partner will have an ownership
interest in the property of the I Limited Partnership.
ARTICLE XV
DISTRIBUTIONS UPON TERMINATION AND DISSOLUTION
Upon termination and dissolution of the
Partnership, the General Partner will proceed to wind
up the affairs of the Partnership. The liabilities and
obligations to creditors and all expenses
11
incurred in its liquidation and dissolution will be
paid and will have first priority in winding up. The
General Partner may retain from available cash and
other assets of the Partnership sufficient reserves for
anticipated and contingent liabilities. Undistributed
cash, and other property valued at its fair market
value on the date of distribution, will be distributed
to the Partners in the following order:
a. Distributions will first be made to
repay any loans to the Partnership by a
Partner, including the amount of any deferred
payment obligation to a Partner or a Partner's
personal representative as the result of a buy-
out by the Partnership of a Partner's interest.
b. Distributions will then be made to the
Partners, both General and
Limited, in an amount equal to the credit
balances in their capital accounts so that
the capital account of each Partner shall be
brought to zero. For the purpose of determining
distributions in liquidation, a negative
capital account balance will be considered to
be a loan from the Partnership to a Partner.
c. The balance, if any, will be made to We
Partners in an amount equal to each Partner's
percentage interest in the Partnership as
determined immediately prior to the
distribution of the credit balances of the
Partners' capital accounts.
Except as limited by the T.R.L.P.A., the
General Partner in making, or in preparing to make, a
partial or final distribution may prepare an
accounting and may require, as a condition to
payment, a written and acknowledged statement from
each distributee that the accounting has been
thoroughly examined and accepted as correct; a
discharge of the General Partner; a release from any
loss, liability, claim or question concerning the
exercise . of due care, shall, and prudence of the
General Partner in the management, investment,
retention, and distribution of property during the
General Partner's term of service, except for any
undisclosed error or omission having basis in fraud
or bad faith; and an indemnity of the General
Partner, to include the payment of attorney's fees,
from any asserted claim of any taxing agency,
governmental authority, or other claimant. Any
Partner having a question or potential claim may
require an audit of the Partnership as an expense of
administration. Failure to require the audit prior to
acceptance of the General Partner's report, or the
acceptance of payment, will operate as a final
release and discharge of the General Partner except
as to any error or omission having a basis in fraud
or bad faith.
The General Partner, in making or preparing to
make a partial or final distribution will have the
authority to (1) partition any asset or class of
assets and deliver divided and segregated interests
to Partners; (2) sell any asset or class of assets
(whether or not susceptible to partition in kind),
and deliver to the Partners a divided interest in
the proceeds of sale and/or divided or undivided
interests in any note and security arrangement taken
as part of the purchase price; and/or (3) deliver
undivided interests in an asset or class of assets
to the Partners subject to any indebtedness which
may be secured by the property.
The Partnership may continue beyond its
scheduled termination date for a time reasonably
necessary to conclude the administration of the
Partnership, pay expenses of termination and to
distribute the Partnership property to those
entitled thereto.
ARTICLE XVI
MANAGEMENT, SERVICE OF A GENERAL PARTNER
a. Election or Replacement of a General
Partner. The Limited Partners will have the right
to remove an existing General Partner and elect
another to serve in his or her or its place, or to
add another as a General Partner or appoint new
Successor General Partners as
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permitted by the T.R.L.P.A At no time will more
than three General Partners be permitted.
i. Redemption or Conversion of a General
Partners Interest as a General Partner: The
Partnership will have the option to redeem the
interest of a General Partner who ceases to
serve for any reason, or to convert that
Partner's General Partnership interest to that
of a Limited Partner. If the Partnership
elects to redeem that interest, the redemption
amount will be the greater of (1) the General
Partner's capital account, less the value
attributable thereto of Partnership debt of
which the General Partner, as a General
Partner, is relieved, or (Z) the fair market
value of the General Partner's interest. The
redemption amount, which may be paid in cash
or in other property of the Partnership of
equivalent value, must be paid to the General
Partner within 90 days from the date his, her
or its successor files an amendment to the
Certificate of Lifted Partnership in the form
and manner required by law. Unless the
Partnership and the transferee agree
otherwise, the fair market value of a General
Partner's interest is to be determined by the
written appraisal of a person or firm
qualified to value this type of business or
partnership interest. 'The appraiser selected
by the Partnership must be a member of the
American Society of Appraisers, (P.O. Box
17265, Washington; D.C. 20041) and qualified
to perform business appraisals. The
Partnership and the transferee may waive an
appraisal, and agree to matters of value and
payment which deviate from these requirements.
ii. Amendment to the Certificate of
Limited Partnership: In the event a General
Partner is unwilling or unable to sign a
required amendment to the Certificate of
Limited Partnership as evidence of the
withdrawal, substitution or addition of a
General Partner, the amended certificate may
be signed by: (1) the remaining General
Partner or Partners, if more than one General
Partner is then serving, and any successor
elected by the Limited Partners or as
otherwise designated by this Agreement; or,
(2) if but one General Partner was serving,
and such General Partner ceases to serve for
any reason, by the new General Partner or
Partners, as substitute or successor, and at
least 70 percent in interest of the Limited
Partners. Each General Partner serving or to
serve in the capacity of a General Partner
does hereby appoint his, her or its
successor, (or if there is more than one
General Partner serving at the time of a
General Partner shall refuse or be unable to
act, the remaining General Partner or
Partners) as his, her or its attorney-in-
fact, to sign the amended certificate of his,
her or its behalf In the event T.R.L.P.A.,
Section 8.01 should require dissolution of
the Partnership due to the death, disability,
resignation, removal of a General Partner, or
other event of withdrawal, it is agreed that
the Partnership shall be reconstituted and
will continue as provided by T.R.L.P.A.,
Section 8.03 without further act of the
Partners other than the election of a new
General Partner or Partners if no General
Partner remains following the event requiring
dissolution.
b. Authority of a General Partner Acting
alone, Other Matters Pertaining to the General
Partner. The General Partner or Partners will
have the responsibility for the day to day
management of the business of the Partnership. The
General Partner's authority and capacity will be
the same as that of the chief executive officer of
a corporation. In addition to the authority given
to a General Partner by this agreement and by law,
the General Partner will have the specific
authority to do the following:
i. Transfers by a General Partner Except
as limited by this Agreement of Partnership,
the General Partner or Partners will have the
authority at any
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<PAGE>
time and from time to time to sell, exchange,
lease and/or transfer legal and equitable
title to the Partnership property upon such
terms and conditions, and for such
consideration, as the General Partner or
Partners consider reasonable. The execution
of any document of conveyance or lease by the
General Partner will be sufficient to
transfer complete legal and equitable title
to the interest conveyed without the joinder,
ratification, or consent of the Partners. No
purchaser, tenant, transferee or obligor will
have any obligation whatever to see to the
application of payments made to the General
Partner.
ii. Retention of Properly Contributed to
the Partnership: A General Partner will have
the authority to retain, without liability,
any and all property in the form which it is
received by a General Partner without regard
to its productivity or the proportion that
any one asset or class of assets may bear to
the whole. A General Partner will not have
liability nor responsibility for loss of
income from or depreciation in the value of
the property which was retained in the form
which the General Partner received it.
iii. Employment of Consultants and Other
Professionals: A General Partner will have
the authority to employ such consultants and
professional help as the General Partner
considers necessary to assist in the prudent
management, acquisition, leasing and transfer
of the Partnership property and to obtain
such policies of insurance as the General
Partner considers reasonably necessary to
protect the Partnership property from loss or
liability.
iv. Legal Title to Partnership Assets: A
General Partner will be permitted to register
or take title to Partnership assets in the
name of the Partnership or as Trustee, with
or without disclosing the identity of his or
her principal, or to permit the registration
of securities in "street name" under a
custodial arrangement with an established
securities brokerage firm trust department or
other custodian.
v. Limitation on a General Partners
Liability: Insofar as Texas law will permit,
a General Partner who succeeds another will
be responsible only for the property and
records delivered by or otherwise acquired
from the preceding General Partner, and may
accept as correct the accounting of the
preceding General Partner without duty to
audit the accounting or to inquire further
into the administration of the predecessors
and without liability for a predecessor's
errors and omissions.
vi. Affidavit of Authority: Any person
dealing with the Partnership may rely upon
the affidavit of a General Partner or
Partners which states:
On my (our) oath, and under the penalties of
perjury, I (we) sweat that I (we) am (are)
the duly elected and authorized General
Partner(s) of LUBBOCK GROUP, LTD. I (we)
certify that I (we) have not been removed as
General Partner(s) and have the authority to
act for, and bind, LUBBOCK GROUP, LTD. in the
transaction of the business for which this
affidavit is given as affirmation of my (our)
authority.
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<PAGE>
___________________________
Signature Line
Sworn and subscribed before me, the
undersigned authority, by _____________this
__________ day of ____________, 19____.
__________________________
Notary Public, State of Texas
vii. Compensation: A General Partner
will be entitled to a reasonable annual
compensation for services rendered to the
Partnership, reasonable compensation to be
measured by the time required in the
administration of the Partnership, the value
of property under the General Partner's
administration, and the responsibilities
assumed in the discharge of the duties of
office. The General Partner will also be
entitled to a reimbursement for or direct
payment of all reasonable and necessary
business expenses incurred in the
administration of the Partnership. The
Limited Partners may, by affirmative action,
vote to establish, increase or reduce a
General Partner's compensation based upon the
General Partner's performance and dedication
of time to the business of the Partnership.
Payments to the General Partner for services
rendered to the Partnership will not be a
return on invested capital, but will be paid
as compensation for services rendered.
Payments to the Partnership by reason of
personal services rendered by the General
Partner for or on behalf of the Partnership
are to be allocated and distributed to the
General Partner.
viii. Bond: No one serving as General
Partner will be required to furnish a
fiduciary bond or other security as a
prerequisite to his, her, or its service.
ARTICLE XVII
RESTRICTIONS ON PARTICIPATION BY AND AUTHORITY OF
LIMITED PARTNERS
No Partner, other than a General Partner, may
participate in the management and operation of the
Partnership's business and its investment
activities, or bind the Partnership to any
obligation or liability whatsoever. A Limited
Partner may not lawfully transfer legal or
beneficial title to property of the Partnership
unless, supported by an affidavit of fact, the
Limited Partner acts pursuant to the limited
authority prescribed by T.R.L.P.A., Section 8.04
(winding up of the Partnership in the absence of a
qualified General Partner). A General Partner who is
also a Limited Partner will act for the Partnership
in his, her, or its capacity as General Partner
alone.
ARTICLE XVIII
RESTRICTIONS UPON OWNERSHIP AND TRANSFER OF OWNERSHIP
The ownership and transferability of interests
in the Partnership, both General and Limited, are
substantially restricted. Neither record title nor
beneficial ownership of a
15
<PAGE>
Limited Partnership interest shall be transferred or
encumbered without the consent of the Partners and
compliance with the provisions of the T.R.L.P.A.
This Partnership is formed by a closely-held group
who know and trust one another, who will have
surrendered control (in the case of a Limited
Partner) or assumed sole event responsibility and
risk (in the case of a General Partner) based upon
their trust of one another, and with the commitment
to one another that a Partner will not transfer or
encumber his or her ownership interest without the
consent of the re Partners. Capital is also material
to the business and investment objectives of the
Partnership and its federal tax status. An
unauthorized transfer of a Partner's interest could
create a substantial hardship to the Partnership,
jeopardize its capital base, and adversely affect
its tax structure. These restrictions upon ownership
and transfer (especially an interest conveyed
voluntarily to someone unknown to the remaining
Partners, or involuntarily as in a divorce
proceeding or to a judgment creditor), and the
rights given to the Partnership which follow are not
intended as penalty, but as a method to protect and
preserve existing relationships based upon trust and
the Partnership's capital and its financial ability
to continue.
The ownership and transfer of a Limited
Partnership interest is further subject to the
following disclosure and condition:
THE LIMITED PARTNERSHIP INTERESTS OF LUBBOCK
GROUP, LTD. HAVE NOT, NOR WILL BE, REGISTERED
OR QUALIFIED UNDER FEDERAL OR STATE
SECURITIES LAWS. THE LIMITED PARTNERSHIP
INTERESTS OF LUBBOCK GROUP, LTD. MAY NOT BE
OFFERED FOR SALE, SOLD, PLEDGED, OR OTHERWISE
TRANSFERRED UNLESS SO REGISTERED OR
QUALIFIED, OR UNLESS AN EXEMPTION FROM
REGISTRATION OR QUALIFICATION EXISTS. THE
AVAILABILITY OF ANY EXEMPTION FROM
REGISTRATION OR QUALIFICATION MUST BE
ESTABLISHED BY AN OPINION OF COUNSEL FOR THE
OWNER THEREOF, WHICH OPINION AND COUNSEL MUST
BE REASONABLY SATISFACTORY TO LUBBOCK GROUP,
LTD.
The Partnership will not be required to recognize
the interest of any transferee who has obtained a
purported interest as the result of a transfer of
ownership which is not an authorized transfer. The
transferee will not be admitted to the Partnership as a
substitute Limited Partner and the transferee will have
only the rights of an assignee unless all Partners
consent to the transferee becoming a Limited Partner.
If the ownership of a Partnership interest is in doubt,
or if there is reasonable doubt as to who is entitled
to a distribution of the income realized from a
Partnership interest, the Partnership may accumulate
the income until this issue is finally determined and
resolved. Accumulated income will be credited to the
capital account of the Partner whose interest is in
question.
If any person or agency should acquire the
interest of a Limited Partner as the result of an order
of a court of competent jurisdiction which the
Partnership is required to recognize, or if a Limited
Partner makes an unauthorized transfer of a Partnership
interest which the Partnership is required to
recognize, the interest of the transferee may then be
acquired by the Partnership upon the following terms
and conditions:
a. The Partnership will have the option to
acquire the interest by giving written notice to
the transferee of its intent to purchase within 90
days from the date it is finally determined that
the Partnership is required to recognize the
transfer.
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<PAGE>
b. The Partnership will have 180 days to
purchase the interest, said 180 days to be
measured from the first day of the month following
the month in which it delivers notice exercising
its option to purchase. The valuation date for the
Partnership interest will be the first day of the
month following the month in which notice is
delivered.
c. Unless the Limited Partnership and the
transferee agree otherwise, the fair market value
of a Limited Partners' interest is to be
determined by written appraisal of a person or
firm qualified to value this type of business or
Partnership interest. The appraiser selected by
the Partnership must be a member of the American
Society of Appraisers (P.O. Box 17265, Washington,
DC 20041) and qualified to perform business
appraisals.
d. Closing of the sale will occur at the
business office of the Partnership (as designated
in this Agreement) at 10 o'clock AM on the first
Tuesday of the month following the month in which
the valuation report is accepted by the transferee
(called the "closing date"). The transferee must
accept or reject the valuation report within 30
days from the date it is delivered. If not
rejected in writing within the required period,
the report will be accepted as written. If
rejected, closing of the sale will be postponed
until the first Tuesday of the month following the
month in which the valuation of the Partnership
interest is resolved. The transferee will be
considered a nonvoting owner of the Partnership
interest, and entitled to all items of income,
deduction, gain or loss from the Limited
Partnership interest, plus any additions or
subtractions therefrom until closing.
e. In order to reduce the burden upon the
resources of the Partnership, the Partnership will
have the option, to be exercised in writing
delivered at closing, to pay its purchase money
obligation in 15 equal annual installments (or the
remaining term of the Partnership if less than 15
years) with interest thereon at market rates,
adjusted annually as of the first of each calendar
year at the option of the General Partner then
serving. 'The term "market rates" will mean the
rate per annum equal to the lesser of (1) the Wall
Street Journal prime rate as quoted in the money
rates section of the Wall Street Journal which is
also the base rate on corporate loans at large
United States money center commercial banks as its
prime commercial or similar reference interest
rate, with adjustments to be made on the same date
as any change in the rate, and (2) the maximum
rate permitted by applicable law. If Internal
Revenue Code Sections 483 or 1274A apply to this
transaction, the rate of interest of the purchase
money obligation will be fixed at the rate of
interest then required by law. The first
installment of principal, with interest due
thereon, will be due and payable on the first day
of the calendar year following closing, and
subsequent annual installments, with interest due
thereon, will be due and payable, in order, on the
first day of each calendar year which follows
until the entire amount of the obligation,
principal and interest, is fully paid. The
Partnership will have the right to prepare all or
any part of the purchase money obligation at any
time without premium or penalty.
f. The General Partner may assign the
Partnership's option to purchase to one or more of
the re Limited Partners (this with the affirmative
consent of no less than 70 percent of the re
Limited Partners, excluding the interest of the
Limited Partner or transferee whose interest is to
be acquired), and when done, any rights or
obligations imposed upon the Partnership will
instead become, by substitution, the rights and
obligations of the Limited Partners who are
assignees.
g. Neither the transferee of any unauthorized
transfer or the Limited Partner causing the
transfer will have the right to vote during the
prescribed option period or, if
17
<PAGE>
the option to purchase is timely exercised,
until the sale is actually closed.
ARTICLE XIX
ADDITION OF A LIMITED PARTNER
A new Limited Partner may be admitted only with
the written consent of all Partners.
ARTICLE XX
RESTRICTIONS ON WITHDRAWAL
Neither a General Partner nor a Limited Partner
may withdraw from the Partnership before the end of the
term. If a General Partner breaches this agreement not
to withdraw, the Partnership may recover from that
General Partner any damages the Partnership suffers on
account of that withdrawal (including, without
limitation, the cost of securing from another source
the services provided by the withdrawing General
Partner) and may offset those damages against any
payment otherwise due the withdrawing General Partner.
ARTICLE XXI
COUNTERPARTS, POWER OF ATTORNEY
The execution and acceptance of this Agreement and
Certificate of limited Partnership may be evidenced by
a separate certificate signed by a Limited Partner
acknowledging that a true and correct copy of this
Agreement has been received, reviewed in its entirety,
and accepted. Each Limited Partner, in accepting this
Agreement, makes, constitutes and appoints the General
Partner, with full power of substitution, as his, her
or its attorney-in-fact and personal representative to
sign, execute, certify, acknowledge, file and record
all appropriate instruments amending this Agreement and
the Certificate of Limited Partnership on behalf of the
Limited Partner. In particular, the General Partner as
attorney-in-fact may sign, acknowledge, certify, file
and record on behalf of each Limited Partner such
instruments, agreements, and documents which: (1)
reflect the exercise by the General Partner of any of
the powers granted to him under this Agreement; (2)
reflect any amendments made to this Agreement; (3)
reflect the admission or withdrawal of a General or
Limited Partner; and (4) may otherwise be required of
the Partnership or a Partner by Texas law, federal law,
or the law of any other applicable jurisdiction. The
power of attorney herein given by each Limited Partner
is a durable power of attorney and will survive the
disability or incapacity of the principal.
ARTICLE XXII
NOTICE
Any notice required or permitted in this Agreement
will be effective if written and hand delivered to the
intended recipient or if placed in the United States
Mail marked "Certified Mail, Return Receipt Requested"
with postage prepaid. Notice will be deemed as
delivered to the intended recipient if addressed to the
intended recipient at his or her last known mailing
address, and the receipt is returned as having been
delivered or is marked "Refused", "Addressee Unknown",
"Unable to Forward", or other similar designation or
notation. In this regard, it will be the affirmative
duty of each Partner to provide the General Partner at
all times with a current address for the delivery of
notice and to notify the General Partner of any change
of address.
If this Agreement does not specifically prescribe
a time for performance or notice, the required time
will be 30 days. Notice of the exercise of any point or
right, notice of default or noncompliance, and any
other notice required by this Agreement or by law must
be in writing.
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<PAGE>
ARTICLE XXIII
GLOSSARY OF TERMS
The following terms, when used in this
Agreement, shall have the respective meanings
assigned to them in this Article unless the context
otherwise requires:
"Act" means The Texas Revised Limited
Partnership Act, Article 6132a-1 of the Revised
Civil Statutes of the State of Texas, as amended
(or the corresponding provisions of any
successor statute).
"Adjusted Capital Account" means the
capital account maintained for each Partner as of
the end of each taxable year of the Partnership
(a) increased by any amounts which such Partner is
obligated to restore under the standards set by
IRS Regulations 1.704-1(b)(2)(ii)(c) [or is deemed
obligated to restore under IRS Regulations 1.704-
2(g)(1) and 1.704-2(i)(5)) and (b) decreased by
(i) the amount of all losses and deductions that,
as of the end of such taxable year, are reasonably
expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and
706(d) of the Code and IRS Regulations 1.751-
1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such taxable
year, are reasonably expected to be made to such
Partner in subsequent years in accordance with the
terms of this Agreement or otherwise to the extent
they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to
occur during (or prior to) the year in which such
distributions are reasonably expected to be made
(other than increases pursuant to a minimum gain
chargeback pursuant to paragraph b(i) or b(ii) of
Article XII hereof). The foregoing definition of
Adjusted Capital Account is intended to comply
with the provisions of IRS Regulations 1.704-
1(b)(2)(ii)(d) and shall be interpreted
consistently therewith.
"Adjusted Property" means any property
the Carrying Value of which has been adjusted
pursuant to IRS Regulations 1.704-1(b)(2)(iv)(f).
Once an Adjusted Property is deemed distributed
by, and recontributed to, the Partnership for
federal income tax purposes upon a termination
thereof pursuant to Section 708 of the Code, such
property shall thereafter constitute a Contributed
Property until the Carrying Value of such property
is further adjusted pursuant to IRS Regulations
1.704- 1(b)(2)(iv)(f).
"Agreed Value" of any Contributed
Property means the fair market value of such
property or other consideration at the time of
contribution as determined by the General Partner
using such reasonable method of valuation as it
may adopt. The General Partner shall, in its
reasonable discretion, use such method as it deems
reasonable and appropriate to allocate the
aggregate Agreed Value of Contributed Properties
contributed to the Partnership in a single or
integrated transaction among such properties on a
basis proportional to their fair market values.
"Book-Tax Disparity" means, with respect
to any item of Contributed Property or Adjusted
Property, as of the date of any determination, the
difference between the Carrying Value of such
Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax
purposes as of such date. A Partner's share of the
Partnership's Book-Tax Disparities in all of its
Contributed Property and Adjusted Property will be
reflected by the difference between such Partner's
Capital Account balance as maintained pursuant to
Section 5.10 of this Agreement and the
hypothetical balance of such Partner's Capital
Account computed as if it had been maintained
strictly in accordance with federal income tax
accounting principles.
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<PAGE>
"Capital Account" means, with respect to
any Partner, that Capital Account determined and
maintained in accordance with the rules of IRS
Regulations 1.704- 1(b)(2)(iv).
"Capital Contribution" means any
contribution by a Partner to the capital of the
Partnership and includes initial Capital
Contributions and Additional Contributions.
"Carrying Value" means (a) with respect
to a Contributed Property, the Agreed Value of
such property reduced (but not below zero) by all
depreciation, amortization, and cost recovery
deductions charged to the Partners' Capital
Accounts and (b) with respect to any other
Partnership property, the adjusted basis of such
property for federal income tax purposes, all as
of the time of determination. The Carrying Value
of any property shall be adjusted from time to
time in accordance with IRS Regulations 1.704-
1(b)(2)(iv)(f), and to reflect changes, additions,
or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership
properties.
"Code" means the Internal Revenue Code
of 1986, as amended (or any corresponding
provisions of successor statute).
"Contributed Property" means each
property or other asset, but excluding cash,
contributed to the Partnership (or deemed
contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of
the Code). Once the Carrying Value of a
Contributed Property is adjusted pursuant to IRS
Regulations 1.704-1(b)(2)(iv)(f) hereof such
property shall no longer constitute a Contributed
Property for purposes of paragraph c(ii) of
Article XII hereof but shall be deemed an Adjusted
Property for such purposes.
"Economic Risk of Loss" shall have the
meaning set forth in IRS Regulations 1.752-2(a).
"Minimum Gain Attributable to Partner
Nonrecourse Debt" means that amount determined in
accordance with the principles of IRS Regulations
1.704-2(i)(3)
"Net Agreed Value" means (a) in the case
of any Contributed Property, the Agreed Value of
such property reduced by any liabilities either
assumed by the Partnership upon such contribution
or to which such property is subject when
contributed and (b) in the case of any property
distributed to a Partner by the Partnership, the
Partnership's Carrying Value of such property at
the time such property is distributed, reduced by
any indebtedness either assumed by such Partner
upon such distribution or to which such property
is subject at the time of distribution as
determined under Section 752 of the Code.
"Nonrecourse Built-in Gain" means, with
respect to any Contributed Properties or Adjusted
Properties that are subject to a mortgage or
negative pledge securing a Nonrecourse Liability,
the amount of any taxable gain that would be
allocated to the Partners pursuant to paragraphs
c(ii)(a)(A), c(ii)(b)(A) or c(ii)(c) of Article
XII hereof if such properties were disposed of in
a taxable transaction in full satisfaction of such
liability and for no other consideration.
"Nonrecourse Deductions" means any and
all items of loss, deduction,
20
<PAGE>
or expenditures (described in Section 705(a)(2)(B)
of the Code) that, in accordance with the
principles of IRS Regulations 1.704-2(b)(1), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" shall have the
meaning set forth in IRS Regulations 1.704-
2(b)(3).
"Partner" means those persons or
entities that execute a counterpart of this
Agreement and those persons or entities that are
hereafter admitted as a General or Limited Partner
under the terms hereof.
"Partner Nonrecourse Debt" shall have
the meaning set forth in IRS Regulations 1.704-
2(b)(4).
"Partner Nonrecourse Deductions" means
any and au items of loss, deduction, or
expenditure (described in Section 705(a)(2)(B) of
the Code) that, in accordance with the principles
of IRS Regulations 1.704-2(i)(2), are attributable
to a Partner Nonrecourse Debt.
"Partnership Interest" or "Interest"
means all of the ownership interests and rights of
a Partner in the Partnership, including his (i)
right to a distributive share of the profits and
losses of the Partnership, (ii) right to a
distributive share of the assets of the
Partnership, (iii) rights to allocations,
information, and to consent or approve, and (iv)
if a general partner, right to participate in the
management of the affairs of the Partnership.
"Partnership Minimum Gain" means that
amount determined in accordance with the
principles of IRS Regulations 1.704.2(d).
"Percentage Interest" means, with
respect to any Partner, a fraction (expressed as a
percentage), the numerator of which is the
aggregate number of Units of Partnership Interest
owned by such Partner and the denominator of which
is the total number of all then issued and
outstanding Units of Partnership Interest.
"Unrealized Gain" attributable to any
item of Partnership property means, as of any date
of determination, the excess, if any, of (a) the
fair market value of such property as of such
date, over (b) the Carrying Value of such property
as of such date [prior to any adjustment to be
made pursuant to IRS Regulations 1.704-
1(b)(2)(iv)(f)] as of such date. In determining
such Unrealized Gain, the aggregate cash amount
and fair market value of all Partnership assets
(including cash or cash equivalents) shall be
determined by the General Partner using such
reasonable method of valuation as it may adopt.
The General Partner shall allocate such aggregate
value among the assets of the Partnership (in such
manner as it determines in its reasonable
discretion) to arrive at a fair market value for
individual properties.
"Unrealized Loss" attributable to any
item of Partnership property means, as of any date
of determination, the excess, if any, of (a) the
Carrying Value of such property as of such date
[prior to any adjustment to be made pursuant to
IRS Regulations 1.704-1(b)(2)(iv)(f)] as of such
date, over (b) the fair market value of such
property as of such date. In determining such
Unrealized Loss, the aggregate cash amount and
fair market value of all Partnership assets
(including cash or cash equivalents) shall
21
<PAGE>
be determined by the General Partner using such
reasonable method of valuation as it may adopt.
The General Partner shall allocate such aggregate
value among the assets of the Partnership (in such
manner as it determines in its reasonable
discretion) to arrive at a fair market value for
individual properties.
ARTICLE XXIV
NOTICES
a. Any notices or communications required or
permitted to be delivered hereunder must be in writing
and shall be deemed to be delivered (i) upon receipt if
delivered personally or (ii) upon deposit in the United
States Mail, certified, return receipt requested,
postage prepaid, addressed to Seller or Buyer, as the
case may be, or (iii) upon receipt of a facsimile
transmission, at the following addresses and/or
facsimile numbers:
General Partner:
Aurora Bay I, L.L.C.
5720 LBJ Freeway
Suite 450,
Lock Box 16
Dallas, Texas 75240
Phone: 972-458-0025
Fax #: 972-458-2233
With a copy to: Craig W. Spaulding
5720 LBJ Freeway
Suite 450, Lock Box
16
Dallas, Texas 75240
Phone: 972-458-0025
Fax #: 972-458-2233
and: Jerry Erwin
9817 N. E. 54th
Street
Vancouver, Washington
98662 Phone: 360-254-
9442
Fax #: 360-254-1770
ARTICLE XXV
AMENDMENTS
This agreement may be amended only by a written
instrument signed by all of the Partners.
ARTICLE XXVI
CONCLUSION
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<PAGE>
This document is a contract which will be
binding upon, and inure to the benefit of, each of
the contracting parties, their heirs, personal
representatives, successors, and assigns. The use of
pronouns, masculine or feminine, will be construed in
context and may include an individual, no matter his
or her gender, or an entity (e.g., a corporation,
trust, Limited Partnership, General Partnership). The
venue of any action brought to construe this
contract, for specific performance of any contractual
obligation or other cause directly related to this
contract, will be Dallas County, Texas. The date of
this agreement, for purposes of identification, is
the 6th day of January, 1998.
Acceptance and Approval by
General Partner:
AURORA BAY I, L.L.C., a
Washington
Limited liability company
By: /s/ Craig W. Spaulding
-----------------------
- ------------------------------
Craig W. Spaulding, Manager
By: /s/ Jerry Erwin
-----------------------
- ------------------------------
Jerry Erwin, Manager
23
<PAGE>
THE LIMITED LIABILITY COMPANY CREATED BY THIS AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR UNDER THE STATE BLUE SKY STATUTES
IN THE VARIOUS STATES WHERE THE INTEREST(S) MAY BE
OFFERED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT OR THE APPLICABLE
STATE BLUE SKY STATUTES OR SATISFACTORY ASSURANCE TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. IN
ADDITION THE SALE OR TRANSFER OF ANY INTEREST(S) IN THE
COMPANY MUST BE MADE IN ACCORDANCE WITH THE PROVISIONS
OF THIS AGREEMENT. IN VIEW OF THESE RESTRICTIONS, THE
PURCHASER OF ANY INTEREST(S) IN THE COMPANY MUST BE
PREPARED TO BEAR THE ECONOMIC RISK OF THE INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME.
OPERATING AGREEMENT OF AURORA BAY INVESTMENTS, L.L.C.
January 6,1998
This Operating Agreement (the "Agreement") is made
and entered into as of the 6th day of January, 1998, by
and among CRAIG W. SPAULDING ("Spaulding"), ERWIN
INVESTORS I, L.L.C., a Washington limited liability
company ("Erwin L.L.C."), and THILO BEST ("Best") as
the initial members ("Members"). The parties agree to
operate as a. limited liability company under the laws
of the state of Washington, as follows:
The parties hereto agree as follows:
l. Definitions. The following terms used in the
Agreement shall have the meanings specified below:
1.1 "Act" means the Washington Limited
Liability Company Act, as amended from time to
time.
1.2 "Additional Member" means a Member who
has been admitted to all rights of membership
pursuant to Section 14.5 below.
1.3 "Adjusted Contribution Amount" with
respect to each Member means the Capital
Contributions pursuant to Sections 7.1 and 7.4
below.
1.4 "Affiliate" means, with respect to the
second person (as defined in this paragraph) (i)
any person (the "first person") who directly or
indirectly controls a second person, or owns or
controls 10% or more of the outstanding securities
of the second person; (ii) any officer, director,
partner, or member of the immediate family of the
second person; and (iii) if the second person is
an officer, director, or partner, any company for
which the second person acts in that capacity.
Control includes the terms "controlled by" and
"under common control with" and means the
possession, direct or indirect, of the power to
direct or cause the direction of the management
and policies of a person, whether through the
ownership of voting securities, by contract or
otherwise.
1.5 "Agreement" means this Operating
Agreement of the Aurora Bay Investments, L.L.C.,
as it may be amended from time to time.
1.6 "Assignee" means a person who has
acquired a Member's interest in whole
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or part and has not become a Substitute Member.
1.7 "Capital Account" means the account
maintained for each Member in accordance with
Section 7.5. In the case of a transfer of an
interest, the transferee shall succeed to the
Capital Account of the transferor or, in the case
of a partial transfer, a proportionate share
thereof
1.8 "Capital Contribution" means the total
amount of money and the fair market value of all
property contributed to the Company by each Member
pursuant to the terms of the Agreement. Capital
Contribution shall also include any amounts paid.
directly by a Member to any creditor of the
Company in respect of any guarantee or similar
obligation undertaken by such Member in connection
with the Company's operations. Any reference to
the Capital Contribution of a Member shall include
the Capital Contribution made by a predecessor
holder of the interest of such Member.
1.9 "Capital Transaction" includes any of the
following events, whether they occur in the
Company or in any of the Subsidiaries:
(a) Sale or other disposition of all or
any part of the entity's property;
(b) Financing or refinancing of all or
any part of the entity's property;
(c) Condemnation of all or any part of
the entity's property;
(d) Payments from insurance on account
of a casualty to any of the entity's property
other than payment for insurance on account
of business or rental interruption;
(e) Payments from title insurance on
account of a defect in title to the entity's
property or with respect to any other claim
under a title policy in favor of the entity;
or
(f) Similar items o! transactions, the
proceeds of which, under generally accepted
accounting principles, are deemed
attributable to capital.
1.10 "Cash Available for Distribution" means
all cash receipts of the Company in excess of
amounts reasonably required for payment of
operating expenses, repayment of current
liabilities, repayment of such amounts of Company
indebtedness as the Managers shall determine
necessary or advisable, and the establishment of
and additions to such cash reserves as the
Managers shall deem necessary or advisable,
including, but not limited to, reserves for
capital expenditures, replacements, contingent or
unforeseen liabilities, Project Loans to
Subsidiaries, or other obligations of the Company.
The following amounts shall be excluded from
Cash Available for Distribution:
(a) Cash at the time of the admission of
Emeritus as a Member. Such amount shall be
considered a reserve to be retained by the
Company for future investment or other needs.
(b) Proceeds from any Capital
Transaction received by the Company, whether
such proceeds are attributable to a Capital
Transaction occurring at the
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Company or are attributable to a Capital
Transaction occurring at a Subsidiary, the
proceeds of which are distributed to the
Company by virtue of its Interest in the
Subsidiary.
(c) Proceeds from the sale by the
Company of its assets or distributions
received from a Subsidiary from the sale of
the Subsidiary's assets.
1.11 "Code" means the United States Internal
Revenue Code of 1986, as amended. References to
specific Code Sections or Treasury Regulations
shall be deemed to refer to such Code Sections or
Treasury Regulations as they may be amended from
time to time or to any successor Code Sections or
Treasury Regulations if the Code Section or
Treasury Regulation referred to is repealed.
1.12 "Company" means the Aurora Bay
Investments, L.L.C. governed by the Agreement.
1.13 "Company Property" means all the real
and personal property owned by the Company.
1.14 "Credit Agreement" means that certain
Credit Agreement dated as of January 7,1998, by
and between the Company and Emeritus Corporation.
1.15 "Deemed Capital Account" means a
Member's Capital Account as calculated from time
to time, adjusted by (i) adding thereto the sum of
(A) the amount of such Member's Mandatory
Obligation, if any, and (B) each Member's share of
Minimum Gain (determined after a decreases
therein for such year) and
(ii) subtracting therefrom (A) allocations of
losses and deductions which are reasonably
expected to be made as of the end of the
taxable year to the Members pursuant to Code
Section 704(e)(2), Code Section 706(d) and
Treasury Regulation Section 1.751-1(b)(2)(ii),
and (B) distributions which at the end of the
taxable year are reasonably expected to be made
to the Member to the extent that said
distributions exceed offsetting increases to
the Member's Capital Account (including
allocations of the Qualified Income Offset
pursuant to Section 8.5 but excluding
allocations of Minimum Gain Charge back
pursuant to Section 8.4) that are reasonably
expected to occur during (or prior to) the
taxable years in which such distributions are
reasonably expected to be made.
1.16 "Emeritus" means Emeritus Corporation, a
Washington corporation.
1.17 "Emeritus Corporation Loan" means a loan
from Emeritus Corporation to the Company, to be
made to the Company pursuant to the Credit
Agreement, in an amount up to $5,000,000.00, with
an option in favor of Emeritus Corporation to
convert the loan to a Company Interest with a
Percentage Interest of forty-eight percent (48%).
1.18 "Interest" or "Company Interest" means
the ownership interest of a Member in the Company
at any particular time, including the right of
such Member to any and all benefits to which such
Member may be entitled as provided in the
Agreement and in the Act, together with the
obligations of such Member to comply with all the
terms and provisions of the Agreement and the Act.
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1.19 "Manager(s)" means those Member(s) and
other persons who are appointed in accordance with
this Agreement to exercise the authority of
Manager under this Agreement and the Act. If at
any time a Member who is a Manager ceases to be a
Member for any reason, that Member shall
simultaneously cease to be a Manager. If at any
time Erwin Investors I, L.L.C. ceases to be a
Member for any reason, Jerry Erwin shall
simultaneously cease to be a Manager. The Managers
of the Company as of the date of this Agreement
are Craig W. Spaulding and Jerry Erwin.
1.20 "Manager Loan" means a loan made to the
Company by a Manager or an Affiliate of a Manager.
121 "Mandatory Obligation" means the sum of
(i) the amount of a Member's re contribution
obligation (including the amount of any Capital
Account deficit such Member is obligated to
restore upon liquidation) provided that such
contribution must be made in all events within
ninety (90) days of liquidation of the Member's
interest as determined under Treasury Regulation
Section 1.704- 1(b)(2)(ii)(g) and (ii) the
additional amount, if any, such Member would be
obligated to contribute as of year end to retire`
recourse indebtedness of the Company if the
Company were to liquidate as of such date and
dispose of all of its assets at book value.
1.22 "Member(s)" means those persons who
execute a counterpart of this Agreement and those
persons who are hereafter admitted as members
under Section 14.4 below.
1.23 "Minimum Gain" means the amount
determined by computing, with respect to each non-
recourse liability of the Company, the amount of
gain, if any, that would be realized by the Company
if it disposed of the Company Property subject to
such non-recourse liability in full satisfaction
thereof in a taxable transaction and then by
aggregating the amounts so determined. Such gain
shall be determined in accordance with Treasury
Regulation Section 1.704-2(d). Each Member's share
of Minimum Gain at the end of any taxable year of
the Company shall be determined in accordance with
Treasury Regulation Section 1.704-2(g)(1).
1.24 "Net Income" or "Net Loss" means taxable
income or loss (including items requiring separate
computation under Section 702 of the Code) of the
Company as determined using the method of
accounting chosen by the Managers and used by the
Company for federal income tax purposes, adjusted
in accordance with Treasury Regulation Section
1.704-1(b)(2)(iv)(g), for any property with
differing tax and book values, to take into
account depreciation, depletion, amortization, and
gain or loss as computed for book purposes.
1.25 "Percentage Interest" means the percent
interest of each Member as set forth on Appendix A
1.26 "Project" means any senior housing
facility owned and developed by a Subsidiary of
the Company.
1.27 "Project Loan" means, with respect to
each of the Projects, the loan or loans made by
the Company to a Subsidiary owning such Project,
funded out of the proceeds of the Emeritus
Corporation Loan, and income and other funds
available to the Company.
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1.28 "Senior Debt" means the construction and
short-term permanent financing arranged by the
Company to construct and develop the Project as
described in Section 7.7 hereof, including Take-
out Commitments.
1.29 "Subsidiary" means an entity (whether a
corporation, limited liability company,
partnership, or limited partnership) owned in
whole or in part by the Company and controlled by
the Company.
1.30 "Subsidiary Loan" means a loan made by
the Company to a Subsidiary from proceeds of loans
made to the Company by the Managers.
1.31 "Substitute Member" means an Assignee
who has been admitted to all of the rights of
membership pursuant to Section 14.4 below.
2. Formation. The Members hereby agree to
operate the Company under the terms and conditions
set forth herein, Except as otherwise provided
herein, the rights and liabilities of the Members
shall be governed by the Act.
2.1 Defects as to Formality. A failure to
observe any formalities or requirements of this
Agreement, the certificate of formation for the
Company, or the Act shall not be grounds for
imposing personal liability on the Members or
Managers for liabilities of the Company.
2.2 No Partnership Intended for Non-tax
Purpose. The Members have formed the Company
under the Act and expressly do not intend hereby
to form a partnership under either the
Washington Uniform Partnership Act or the
Washington Uniform I Limited Partnership Act or
a corporation under the Washington Business
Corporation Act. The Members do not intend to be
partners one to another or partners as to any
third party. The Members hereto agree and
acknowledge that the Company is to be treated as
a partnership for federal income tax purposes.
2.3 Rights of Creditors and Third Parties.
This Agreement is entered into among the Company
and the Members for the exclusive benefit of the
Company, its Members, their successors, and
assigns. The Agreement is expressly not intended
for the benefit of any creditor of the Company
or any other person. Except, and only to the
extent provided by applicable statute, no such
creditor or third party shall have any rights
under the Agreement or any agreement between the
Company and any Member with respect to any
Contribution or otherwise.
..
2.4 Title to Property. All Company Property
shall be owned by the Company as an entity, and
no Member shall have any ownership interest in
such Property in the Member's individual name or
right. Each Member's interest in the Company
shall be personal property for all purposes.
Except as otherwise provided in this Agreement,
the Company shall hold all Company Property in
the name of the Company and not in the name or
names of any Member or Members.
2.5 Payments of Individual Obligations The
Company's credit and assets shall be used solely
for the benefit of the Company, and no asset of
the Company shall be transferred or encumbered
for, or in payment of, any individual obligation
of any Member unless otherwise provided for
herein.
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3. Name. The name of the Company shall be AURORA
BAY INVESTMENTS, L.L.C. The Managers may from time to
time change the name of the Company or adopt such trade
or fictitious names as they may determine to be
appropriate.
4. Office: Agent for Service of Process. The
principal office of the Company shall be at 520 Pike
Street, Seattle, Washington 98101. The Company may
maintain such other offices at such other places as the
Managers may determine to be appropriate. The agent for
service of process for the Company shall be CT
Corporation System at the above address.
5. Purposes. The primary purpose and general
character of the business of the Company is to own
and/or control Subsidiaries that own, develop, operate,
and acquire senior housing facilities, and to engage in
any lawful act or activity for which a limited
liability company may be organized under the laws of
the State of Washington, incident, necessary,
advisable, or desirable to carry out the purpose of the
Company.
6. Term. The term of the Company commenced upon
the filing of the certificate of formation for the
Company in the office of the Washington Secretary of
State on December 17,1997, and shall continue until
January 1, 2027, unless sooner dissolved, wound up, and
terminated in accordance with the provisions of this
Agreement and the Act.
7. Percentage Interests and Capital Contributions.
7.1 . The Members made initial Capital
Contributions to the Company in the amounts set
forth on Appendix A for the Percentage Interests
in the Company as shown on Appendix A
7.2 No Interest on Capital. No Member shall
be entitled to receive interest on such Members
Capital Contributions or such Member's Capital
Account.
7.3 No Withdrawal of Capital. Except as
otherwise provided in this Agreement, no Member
shall have the right to withdraw or demand a
return of any or all of such Member's Capital
Contribution, It is the intent of the Members that
no distribution (or any part of any distribution)
made to any Member pursuant to Section 10 hereof
shall be deemed a return or withdrawal of Capital
Contributions, even if such distribution
represents (in full or in part) a distribution of
revenue offset by depreciation or any other noncash
item accounted for as an expense, loss, or
deduction from, or offset to, the Company's income
and that no Member shall be obligated to pay any
such amount to or for the account of the Company
or any creditor of the Company. However, if any
court of competent jurisdiction holds that,
notwithstanding the provisions of this Agreement,
any Member is obligated to make any such payment,
such obligation shall be the obligation of such
Member and not of any other Member, including
Managers.
7.4 Additional Capital
(a) Except as otherwise provided for
herein or mutually agreed upon by the
Members, no Member shall be obligated to make
aa additional capital contribution to the
Company.
(b) Under the terms of the Emeritus
Corporation Loan, the Company is entitled to
use the proceeds thereof to make Project
Loans to a Subsidiary to supplement a Senior
Debt for the acquisition and development of a
Project. In
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the event additional capital is needed, with
respect to any Project acquired and developed
by the Subsidiary, in excess of the Senior
Debt, funds available from the Emeritus
Corporation Loan, and cash on hand, for
construction cost overruns in the
construction and development of a Project by
a Subsidiary and/or the operating costs of a
Subsidiary, including, without limitation,
interest due upon debt and all other expenses
not capitalized, the Company shall provide
such funds in the form of a Project Loan from
income and other funds available to it and
evidenced by a Project Promissory Note in the
form attached as Exhibit "D" to the Credit
Agreement. In the event the Company is unable
to provide such necessary funds, the
Managers, at the Managers' election, or
Affiliates thereof (the "Lending Manager"),
may loan funds to the Company ("Manager
Loans") for the purpose of making Subsidiary
Loans to a Subsidiary, in such amounts as the
.Managers or their Affiliates determine, up
to amounts sufficient to pay such costs of
the Subsidiary. The Manager Loans shall bear
interest at a rate equal to the lesser of
nine percent (9%) per annum or, if such funds
are borrowed by the Lending Manager, the
Lending Manager's cost of such funds. Prior
to maturity, the principal and accrued
interest on the Manager Loans shall be paid
in quarterly installments to the extent the
Company has available cash on hand to pay the
same. The term "available cash on hand" shall
mean, for purposes of this paragraph,
available cash from all sources less amounts
next becoming due under the Senior Debt and
the Emeritus Corporation Loan, together with
current costs and expenses of operation of
the Company. Each Loan and Subsidiary Loan
shall be evidenced by a promissory note.
Interest shall be payable on the Subsidiary
Loans quarterly to the extent the Subsidiary
has available cash on hand to pay the same.
All amounts owing under the Manager Loans and
the Subsidiary Loans shall in any event
become due and payable on January 15, 2003.
The Manager Loans shall be an obligation of
the Company and shall be repaid prior to any
distributions to the Members. All sums
outstanding on each Project Loan on the date
Emeritus exercises its right to convert the
Emeritus Corporation Loan to a Company
Interest shall be considered as additional
contributed capital by the Company to the
Subsidiary owing such Project Loan.
(c) Pursuant to the terms of the Credit
Agreement and the Convertible Promissory Note
to be executed by the Company in favor of
Emeritus; Emeritus shall have the option,
exercisable at any time in its sole
discretion, to convert the Emeritus
Corporation Loan into an equity interest in
the Company and to become a Member of the
Company. The procedures for exercising such
conversion rights are set forth in the
Convertible Promissory Note. If Emeritus so
exercises its conversion rights, it shall
become a Member of the Company, shall have
credited against its Capital Account the
outstanding principal balance, together with
accrued but unpaid interest, on the Emeritus
Corporation Loan, plus any other amounts due
thereunder and shall thereafter be entitled
to participate in cash distributions from the
Company as provided for in this Agreement, be
allocated profits, gains, losses, deductions
and credits, and items thereof as stipulated
in Section 8 and have such voting and other
rights as are set forth in this Agreement.
Moreover, upon conversion, Emeritus will be
assigned a 48% Percentage Interest in the
Company, and the then existing Percentage
Interests of the other Members will be
proportionately reduced and the Manager will
prepare and include in the Company's books
and records a revised Appendix A showing the
Percentage Interests of all Members,
including Emeritus. By the execution of this
Agreement, each of the Managers and each of
existing Members hereby consents to and
approves Emeritus's admission as a
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new Member of the Company upon Emeritus's
exercise of its conversion rights under the
Convertible Promissory Note, and such
admission will be effective upon receipt of
written notice of Emeritus's exercise of the
option to convert such debt into an equity
interest in the Company.
(d) If Emeritus becomes a Member upon
the conversion of the Emeritus Corporation
Loan as permitted by Section 7.4(c) and if at
the time of such conversion, the Company has
not yet borrowed in full the amounts that
could have been borrowed from Emeritus under
the Credit Agreement, Emeritus shall make,
from time to time, additional capital
contributions to the Company [beyond the
capital contribution made upon the conversion
as stated in Section 7.4(c)), in an amount up
to the unutilized portion of the credit
facility under the Credit Agreement, if and
when the Company requests that such funds be
made available to it to finance project loans
to be made to its Subsidiaries; provided,
however, that the amount, timing, and
obligation to make such additional capital
contributions by Emeritus shall be subject to
the terms and conditions of the Credit
:Agreement as though such Credit Agreement
were still in full force and effect and its
terms incorporated in reference in their
entirety into this Agreement. Such capital
contributions, if and- when made to the
Company, shall be credited against the
Capital Account of Emeritus.
7.5 Capital Accounts. The Company shall
establish and maintain a Capital Account for each
Member in accordance with Treasury Regulations
issued under Section 704. The initial Capital
Account balance for each Member shall be the
amount of initial Capital Contributions made by
each Member under Section 7.1 above. The Capital
Account of each Member shall be increased to
reflect (i) such Member's cash contributions, (ii)
the fair market value of property contributed by
such Member (net of liabilities securing such
contributed property that the Company is
considered to assume or take subject to Code
Section 752), (iii) such Member's share of Net
Income (including all gain as calculated pursuant
to Section 1001 of the Code) of the Company and
(iv) such Member's share of income and gain exempt
from tax. The Capital Account of each Member shall
be reduced to reflect (a) the amount of money and
the fair market value of property distributed to
such Member (net of liabilities securing such
distributed property that the Member is considered
to assume or take subject to under Section 752),
(b) such Member's share of non-capitalized
expenditures not deductible by the Company in
computing its taxable income as determined under
Code Section 705(a)(2)(B), (c) such Member's share
of Net Loss of the Company and (d) such Member's
share of amounts paid or incurred to organize the
Company or to promote the sale of Company
Interests to the extent that an election under
Code Section 709(b) has not properly been made for
such amounts. The Managers shall determine the
fair market value of all properly which is
distributed in land, and the Capital Accounts of
the Members shall be adjusted as though the
property had been sold for its fair market value
and the gain or loss attributable to such sale
allocated among the Members in accordance with
Section 8, as applicable. In the event of a
contribution of property with a fair market value
which is not equal to its adjusted basis (as
determined for federal income tax purposes), a
revaluation of the Members' Capital Accounts upon
the admission of new members to the Company, or in
other appropriate situations as permitted by
Treasury Regulations issued under Code Section
704, the Company shall separately maintain "tax"
Capital Accounts solely for purposes of taking
into account the variation between the adjusted
tax basis and book value of Company Property in
tax allocations to the Members consistent with the
principles of Code Section 704(c) in accordance
with the rules prescribed in Treasury Regulations
promulgated under Code Section 704.
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7.6 Default. In the event any Member shall
fail to contribute any cash or property when due
hereunder, such Member shall remain liable
therefor to the Company, which may institute pr in
any court of competent jurisdiction in connection
with which such Member shall pay the costs of such
collection, including reasonable attorneys' fees.
Any compromise or settlement with a Member failing
to contribute cash or property due hereunder may
be approved by a majority by Percentage Interest
of the other Members.
7.7 Financing. The Company shall arrange a
Senior Debt financing for the development and
lease-up of each Project developed by the Company
in accordance with the development budget
submitted to and approved by the Managers. Each
Subsidiary is hereby granted the specific
authority to enter into the Senior Debt and to
execute and grant such mortgages, deeds of trust,
assignments, pledges, notes, instruments, and
other documents that the Managers determine are
necessary or convenient for purposes of obtaining
each Senior Debt. Subject to the funding of the
Emeritus Corporation Loan, the Company shall lend
up to the sum of $750,000.00 to each of its
Subsidiaries for the purpose of defraying all of
its costs for the acquisition, development, and
operation of a Project in excess of a Senior Debt.
Each Project Loan shall be evidenced by a
promissory note, in the form attached hereto as
Exhibit "1". and contain such other conditions,
covenants, and warranties by the Subsidiary as are
required by the Managers and the provisions of the
Senior Debt, subject to the approval of Emeritus.
8. Allocations.
8.1 Allocations of Net Income.
(a) Allocation of Net Income Other than
Gain Attributable to a Capital Transaction.
After giving effect to the special
allocations pursuant to Sections 83, 8.4, and
85, Net Income other than Net Income
attributable to a Capital Transaction shall
be allocated among the Members in the
following order of priority:
(i) First, among the Members in
proportion to, and to the extent of the
excess, if any, of (i) the cumulative
Net Losses allocated to such Members
pursuant to Section 8.2(a)(iii) for all
prior periods, over (ii) the cumulative
Net Income allocated to such Members
pursuant to this Section 8.1(a)(i) for
the current and all prior periods;
provided, however, that in the event
Emeritus is admitted as a Member of the
Company, thereafter this paragraph shall
apply solely to cumulative Net Losses
and cumulative Net Income allocated to
all Members (including Emeritus) after
Emeritus's admission to the Company as a
Member.
(ii) Second, among the Members in
proportion to, and to the extent of the
excess, if any, of (i) the cumulative
Net Losses allocated to such Members
pursuant to Section 82(a)(ii) for all
prior periods, over (ii) the cumulative
Net Income allocated to such Members
pursuant to this Section 8.1(a)(ii) for
the current and all prior periods; and
(iii) Thereafter, among the Members
in proportion to their respective
Percentage Interests.
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(b) Allocations of Net Income
Attributable to a Capital Transaction. After
giving effect to the special allocations
pursuant to Sections 83, 8.4, and 8.5, Net
Income attributable to a Capital Transaction
shall be allocated among the Members in the
following order of priority:
(i) First, in the event that one or
more of the Members have a negative
Capital Account balance at the time of
the allocation, among the Members in
proportion to the negative balances
until such Capital Account balances are
brought to zero;
(ii) Second, to Emeritus until the
excess, if any, of the (i) cumulative
Net Losses allocated to Emeritus
pursuant to Section 8.1(a) and 82(b) for
the current and all prior periods over
(ii) the cumulative Net Income allocated
to Emeritus pursuant to Sections 8.1(a)
and 8.1(b) for the current and all prior
periods;
(iii) Third, to the Members other
than Emeritus (the "Other Members"), in
proportion and to the extent of an
amount equal to the excess, if any, of
(i) their negative Capital Accounts at
the time Emeritus became a Member
(stated as a positive number) over (ii)
the amount of Net Income allocated to
those Other Members under Section
8.1(b)(i) for the current and all prior
periods; and
(iv) Thereafter, among the Members
in proportion to their respective
Percentage Interests.
The Company shall close the books of the
Company as of the date of any Capital
Transaction and compute, as of that date, the
Net Income or the Net Loss attributable to such
Capital Transaction, as well as the Net Income
or the Net Loss of the Company from the end of
the last fiscal year or the date of the last
closing of the Company's book pursuant to this
paragraph, whichever date is later, through and
including the date of the Capital Transaction.
8.2 Allocation of Net Loss
(a) Allocation of Net Loss Other than
Net Loss Attributable to a Capital
Transaction. After giving effect to the
special allocations set forth in Sections 83,
8.4, and 8S, Net Loss other than Net Loss
attributable to a Capital Transaction shall
be allocated among the Members in the
following order of priority:
(i) First, among the Members in
proportion to, and to the extent of the
excess, if any, of (i) the cumulative
Net Income allocated to such Members
pursuant to Section 8.1(a)(iii) for all
prior periods, over (ii) the cumulative
Net Losses allocated to such Members
pursuant to this Section 82(a)(i) for
the current and all prior periods;
provided, however, that in the event
Emeritus is admitted as a Member of the
Company, thereafter this paragraph shall
apply solely to cumulative Net Losses
and cumulative Net Income allocated to
all Members (including Emeritus) after
Emeritus's admission to the Company as a
Member;
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(ii) Second, to the Members in
proportion to their total capital
contributions, until their Capital
Account balances are equal to zero; and,
(iii) Thereafter, among the Members
in proportion to their respective
Percentage Interests.
(b) Allocation of Net Loss Attributable
to a Capital Transaction. After giving effect
to the special allocations set forth in
Sections 8.3, 8.4, and 8.5, Net Loss
attributable to a Capital Transaction shall
be allocated among the Members in the
following order of priority:
(i) First, among the Members in
proportion to, and to the extent of the
excess, if any, of (i) the cumulative
Net Income attributable to Capital
Transactions allocated to such Members
pursuant to Section 8.1(b)(iii) for all
prior periods, over (ii) the cumulative
Net Losses attributable to Capital
Transactions allocated to such Members
pursuant to this Section 82(b)(i) for
the current and all prior periods;
(ii) Second, to the Members in
proportion to their total Capital
Contributions, until their Capital
Account balances are equal to zero;
(iii) Third, in the event Emeritus
is admitted as a Member of the Company,
to Emeritus until Emeritus's Capital
Account balance is equal to zero; and
(iv) Thereafter, among the Members
in proportion to their respective
Percentage Interests.
8.3 Limitation on Net Loss Allocations.
Notwithstanding anything contained in this Section
8, no Member shall be allocated Net Loss to the
extent such allocation would cause a negative
balance in such Member's Deemed Capital Account as
of the end of the taxable year to which such
allocation relates.
8.4 Minimum Gain Chargeback If there is a net
decrease in Minimum Gain during a taxable year of
the Company, then notwithstanding any other
provision of this Section 8 or Section 16.3, each
Member must be allocated items of income and gain
for such year and succeeding taxable years to the
extent necessary (the
"Minimum Gain Chargeback"), in proportion to, and
to the extent of an amount required under Treasury
Regulation Section 1.704-2(f).
8.5 Qualified Income Offset. If at the end of
any taxable year and after operation of Section
8.4, any Member shall have a negative balance in
such Member's Deemed Capital Account, then
notwithstanding anything contained in this Section
8, there shall be reallocated to each Member with
a negative balance in such Member's Deemed Capital
Account (determined after the allocation of
income, gain, or loss under this Section 8 for
such year), each item of Company gross income
(unreduced by any deductions) and gain in
proportion to such negative balances until the
Deemed Capital Account for each such Member is
increased to zero.
8.6 Curative Allocations. The allocations set
forth in Sections 8.3, 8.4, and 8.5
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(the "Regulatory Allocations") are intended to
comply with certain requirements of the Treasury
Regulations issued pursuant to Code Section
704(b). It is the intent of the Members that, to
the extent possible, all Regulatory Allocations
shall be offset either with other Regulatory
Allocations or with special allocations of other
items of Company income, gain, loss, or deduction
pursuant to this Section 8.6. Therefore,
notwithstanding any other provision of this
Section 8 (other than the Regulatory Allocations),
the Managers shall make such offsetting special
allocations of Company income, gain, loss, or
deduction in whatever manner they determine
appropriate so that, after such offsetting
allocations are made, each Member's Capital
Account balance is, to the extent possible, equal
to the Capital Account balance such Member would
have had if the Regulatory Allocations were not
part of the Agreement and all Company items were
allocated pursuant to Sections 8.1 and 82.
8.7 Modification of Company Allocations. It
is the intent of the Members that each Member's
distributive share of income, gain, loss,
deduction, or credit (or items thereof) shall be
determined and allocated in accordance with this
Section 8 to the fullest extent permitted by
Section 704(b) of the Code. In order to preserve
and protect the determinations and allocations
provided for in this Section 8, the Managers shall
be, and hereby are, authorized and directed to
allocate income, gain, loss, deduction, or credit
(or items thereof) arising in any year differently
from the manner otherwise provided for in this
Section 8 if and to the extent that, allocation of
income, gain, loss, deduction, or credit (or items
thereof) arising in any year different from the
manner otherwise provided for in this Section 8 if
and to the extent that, allocation of income,
gain, loss, deduction, or credit (or items
thereof) in the manner provided for in this
Section 8 would cause the determination and
allocation of each Member's distributive share of
income, gain, loss, deduction, or credit (or items
thereof) not to be permitted by Section 704(b) of
the Code and Treasury Regulations promulgated
thereunder. Any allocation made pursuant to this
Section 8.7 shall be made only after the Managers
have secured an opinion of counsel that such
modification is the minimum modification required
to comply with Code Section 704(b) and shall be
deemed to be a complete substitute for any
allocation otherwise provided for in this Section
8, and no amendment of this Agreement or approval
of any Member shall be required. The Members shall
be given notice of the modification within thirty
(30) days of the effective date thereof such
notice to include the text of the modification and
a statement of the circumstances requiring the
modification to be made.
8.8 Deficit Capital Accounts at Liquidation.
It is understood and agreed that one purpose of
the provisions of this Section 8 is to insure that
none of the Members has a deficit Capital Account
balance after liquidation and to insure that all
allocations under this Section 8 will be respected
by the Internal Revenue Service.
The Members and the Company neither intend nor
expect that any Member will have a deficit Capital
Account balance after liquidation; and,
notwithstanding anything to the contrary in this
Agreement, the provisions of this Agreement shall
be construed and interpreted to give effect to
such intention. However, if following a
liquidation of a Member's interest as determined
under Treasury Regulation Section 1.704-
1(b)92)(ii)(g), a Member has a deficit balance in
such Member's Capital Account after the allocation
of Net Income pursuant to this Section 8 and
Section 16.3 and all other adjustments have been
made to such Member's Capital Account for Company
operations and liquidation, no Member shall have
any obligation to restore such deficit balance.
9. Company Expenses. In addition to the costs to
be reimbursed to the Managers pursuant
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to the provisions of Section 11.8 hereof but subject to
the limitations set forth therein, the Company shall
pay, and the Managers shall be reimbursed for, all
costs and expenses of the Company, which may include,
but are not limited to:
(a) All organizational expenses incurred
in the formation of the Company and the
selling of interests in the Company;
(b) All costs of personnel employed by
the Company;
(c) All costs reasonably related to the
conduct of the Company's day-to-day business
affairs, including, but without limitation,
the cost of supplies, utilities, taxes,
licenses, fees, and services contracted from
third Parties;
(d) All costs of borrowed money, taxes,
and assessments on Company Property and other
taxes applicable to the Company;
(e) Legal, audit, accounting, brokerage,
and other fees;
(f) Printing and other expenses and
taxes incurred in connection with the
issuance, distribution, transfer,
registration, and recording of documents
evidencing ownership of an interest in the
Company or in connection with the business of
the Company;
(g) Fees and expenses paid to
contractors, mortgage bankers, brokers and
services, leasing agents, consultants, onsite
managers, real estate brokers, insurance
brokers, and other agents, including
affiliates of the Managers;
(h) Expenses in connection with the
acquisition, preparation, design, planning,
construction, development, disposition,
replacement, alteration, repair, remodeling,
refurbishment, leasing, financing, and
refinancing and operation of Company Properly
(including the costs and expenses of legal
and accounting fees, insurance premiums, real
estate brokerage, leasing commissions, and
maintenance of such properly);
(i) The cost of insurance obtained in
connection with the business of the Company;
(j) Expenses of revising, amending,
converting, modifying, or terminating the
Company;
(k) Expenses in connection with
distributions made by the Company to, and
communications and bookkeeping and clerical
work necessary in maintaining relations with,
Members;
(1) Expenses in connection with
preparing and reports required to be
furnished to Members for investment, tax
reporting, or other purposes that the
Managers deem appropriate;
(m) Costs incurred in connection with
any litigation, including any examinations or
audits by regulatory agencies; and
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(n) Costs of preparation and
dissemination of informational material and
documentation relating to potential sale,
refinancing, or other disposition of Company
properties.
10. Distributions.
10.1 Distributions of Cash Available for
Distribution. At such times and in such amounts
as the Managers in their discretion determine
appropriate subject to all restrictions concerning
distributions contained herein and in the Emeritus
Corporation Loan, Cash Available for Distribution
shall be distributed to the Members in proportion
to their respective Percentage Interests.
10.2 Distributions of Net proceeds
Attributable to Capital Transactions. Except in
connection with a Capital Transaction resulting in
a dissolution of the Company (thereby triggering
the application of Section 162(b)], in the event
the Company receives any net proceeds from any
Capital Transaction, whether such net proceeds are
attributable to a Capital Transaction occurring at
the Company or attributable to a Capital
Transaction occurring at a Subsidiary, the
proceeds of which are distributed to or otherwise
paid to the Company, such net proceeds shall be
distributed in the following order of priority:
(a) If Emeritus has not become a Member
but the Emeritus Corporation Loan has not
been fully repaid, then such net proceeds
shall be applied toward the repayment of any
and all amounts due under the Emeritus
Corporation Loan, unless Emeritus consents in
writing to permit part or all of such net
proceeds to be used for some other purpose;
and, to the extent, if any, that part or all
of such net proceeds may be distributed to
the Members with Emeritus's consent, such
distributions shall be made to the Members in
proportion to their respective Percentage
Interests.
(b) If Emeritus has become a Member,
then the net proceeds from the Capital
Transaction shall be distributed as follows:
(i) First, to the Members other
than Emeritus (the "Other Members") in
an amount sufficient to permit such
Other Members to cover their Estimated
Tax Liability (as defined below) with
respect to the Capital Transaction
giving rise to the net proceeds
available for distribution. For purposes
of this Section, the Member's Estimated
Tax Liability is equal to (a) the excess
of (i) the taxable income recognized by
the Company attributable to such Capital
Transaction allocated to the Member over
(ii) the cumulative amount of taxable
losses from whatever source recognized
by the Company and allocated to such
Member and not previously offset by
other allocations of taxable income to
such Member, multiplied by (b) the
highest U.S. federal statutory marginal
ordinary or capital (as the case may be)
income tax rate then applicable for
individuals;
(ii) Second, to Emeritus until the
cumulative amount distributed to
Emeritus under this Section 102(b)(ii),
with respect to this and all prior
Capital Transactions, is equal to
Emeritus's total Capital Contributions
to the Company;
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(iii) Third, to Emeritus until the
cumulative amount distributed to
Emeritus under this Section 102(b)(iii),
with respect to this and all prior
Capital Transactions, is equal to the
excess of (A) the cumulative amount
distributed to the Other Members under
Section 102(b)(i) divided by such Other
Members' aggregate Percentage Interests
over (B) the cumulative amount
distributed to such Other Members under
Section 102(b)(i);
(iv) Fourth, to the Other Members
until the cumulative amount distributed
to such Other Members under this Section
10.2(b)(iv), with respect to this and
all prior Capital Transactions, is equal
to their respective Capital
Contributions to the Company; and
(v) Thereafter, among the Members
in proportion to their respective
Percentage Interests.
10.3 If Emeritus becomes a Member of the
Company, the Managers shall cause the Company to
make quarterly distributions of Cash Available for
Distribution, no later than 45 days after the end
of each calendar quarter. In computing Cash
Available for Distribution, the Managers may set
aside reasonable amounts as reserves for capital
expenditures, replacements, contingent or
unforeseen liability, or other obligations of the
Company; but the amounts of such reserves shall be
reassessed at the end of each quarter to determine
whether such balances are adequate in amount,
should be increased or decreased, and if
decreased, the excess reserves will be available
for distribution to the Members. Moreover, Cash
Available for Distribution may not be used by the
Company to make investments in new Projects
without the prior consent of Emeritus. It is the
intent of the Parties to make periodic
distributions of Cash Available for Distribution
if and when such excess cash is available and not
to hold such funds to build up reserves beyond
reasonable amounts or to make investments in new
Projects.
11. Powers, Rights, and Obligations of
Managers
11.1 General Authority and Powers of
Managers. Except as provided in Section 11.7
and elsewhere in the Agreement, the Managers
shall have the exclusive right and power to
manage, operate, and control the Company and to
do all things and make all decisions necessary
or appropriate to carry on the business and
affairs of the Company. All decisions required
to be made by the Managers shall require the
approval of all Managers, except as the
Managers shall otherwise agree. In the event
the Managers shall be unable to agree upon any
matter described in this Section 11.1, then the
Managers shall provide written notice of the
proposed action to all Members, and the
decision of Members holding a majority of the
Percentage Interests in the Company shall be
binding upon the Managers. The authority of the
Managers shall include, but shall not be
limited to, the following:
(a) To spend the capital and revenues
of the Company;
(b) To manage, sell, develop,
improve, operate, and dispose of any
Company properties and assets, including
to act on behalf of the Company with
respect to any partnership or joint
venture in which the Company participates;
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<PAGE>
(c) To employ persons, firms, and/or
corporations for the operation and
management of the Company's business and
for the operation and development of the
properties and assets of the Company,
including, but not limited to, sales
agents, management agents, architects,
engineers, contractors, attorneys, and
accountants;
(d) To acquire, lease, and sell
personal and/or real property, hire and
fire employees, and to do all other acts
necessary, appropriate, or helpful for the
operation of the Company business;
(e) To execute, acknowledge, and deliver
any and all instruments to effectuate any of
the foregoing powers and any other powers
granted the Managers under the laws of the
state of Washington or other provisions of
this Agreement;
(f) To enter into and to execute
agreements for employment or services, as
well as any other agreements and all other
instruments the Managers deem necessary or
appropriate to operate the Company's business
and to operate and dispose of Company
properties and assets or to effectively and
properly perform its duties or exercise its
powers hereunder;
(g) To borrow money on a secured or
unsecured basis from individuals, banks, and
other lending institutions to finance its
Subsidiaries in the construction of a Project
or refinance Company assets, to meet other
Company obligations, provide Company working
capital and for any other Company purpose,
and to execute promissory notes, mortgages,
deeds of trust, and assignments of Company
Property and assets, and such other security
instruments as a lender of funds may require,
to secure repayment of such borrowings;
provided, that no individual, entity, bank,
or other lending institution to which the
Managers apply for a loan shall be required
to inquire as to the purpose for which such
loan is sought, and as between the Company
and such individual, entity, bank, or other
lending institution, it shall be conclusively
presumed that the proceeds of such loan are
to be, and will be, used for purposes
authorized under the terms of this Agreement;
(h) To enter into such agreements and
contracts and to give such receipts,
releases, and discharges, with respect to the
business of the Company, as the Managers deem
advisable or appropriate;
(i) To purchase, at the expense of the
Company, such liability and other insurance
as the Managers, in their sole discretion,
deem advisable to protect the Company's
assets and business; however, the Managers
shall not be liable to the Company or the
other Members for failure to purchase any
insurance; and
(j) To sue and be sued, complain,
defend, settle, and/or compromise with
respect to any claim in favor of or against
the Company, in the name and on behalf of the
Company.
(k) To lend money to the Company to pay
Company operating costs, including, without
limitation, all start-up costs, upon such
terms and conditions as the Manager shall
reasonably determine.
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11.2 Time Devoted to Company, Other Ventures.
The Managers shall devote so much of their time to
the business of the Company as in their judgment
the conduct of the Company's business reasonably
requires. The Managers and the other Members may
engage in business ventures and activities of any
nature and description independently or with
others, whether or not in competition with the
business of the Company, and shall have no
obligation to disclose business opportunities
available to them, and neither the Company nor any
of the other Members shall have any rights in and
to such independent ventures and activities or the
income or profits derived therefrom by reason of
their acquisition of interests in the Company.
This Section 11.2 is intended to modify any
provisions or obligations of the Act to the
contrary, and each of the Members and the Company
hereby waives and releases any claims they may
have under the Act with respect to any such
activities or ventures of the Managers or other
Members.
11.3 Liability of Managers to Members and
Company. In carrying out its duties and exercising
the powers hereunder, the Managers shall exercise
reasonable skill, care, and business judgment. A
Manager shall not be liable to the Company or the
Members for any act or omission performed or
omitted by it in good faith pursuant to the
authority granted to it by this Agreement as a
Manager or Tax Matters Partner (as defined in the
Code) unless such act or omission constitutes
negligence or willful misconduct by such Manager.
11.4 Indemnification. The Company shall
indemnify and hold harmless the Managers from any
loss or damage, including attorneys' fees actually
and reasonably incurred by it, by reason of any
act or omission performed or omitted by it on
behalf of the Company or in furtherance of the
Company's interests or as Tax Matters Partner;
however, such indemnification or agreement to hold
harmless shall be recoverable only out of the
assets of the Company and not from the Members.
The foregoing indemnity shall not extend to acts
or omissions adjudged to constitute gross
negligence or willful misconduct by such Manager.
11.5 Fiduciary Responsibility. The Managers
shall have a fiduciary responsibility for the
safekeeping and use of all funds and assets of the
Company, and all such funds and assets shall be
used in accordance with the terms of this
Agreement.
11.6 Contract with the Managers.
(a) Without limitation upon the other
powers set forth herein, the Managers are
expressly authorized for, in the name and on
behalf of the Company to:
(i) Cause the Company to reimburse
the Managers and Members for expenses
incurred on behalf of the Company in
accordance with Section 11.8;
(ii) Loan monies to Subsidiaries of
the Company in connection with the
development, construction, and
operations of the Projects as
contemplated and permitted by paragraph
7.4(b) above;
(iii) Engage South Bay Partners,
Inc., an Affiliate of Craig W.
Spaulding, to provide certain
development services to each of the
Subsidiaries developing a Project
pursuant to the terms and conditions
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<PAGE>
of a Development Services Agreement, the
form and substance of which is set forth
in Exhibit "2" attached hereto;
(iv) Engage Jerry Erwin Associates,
Inc., an Affiliate of Jerry Erwin, to
manage each of the Projects pursuant to
the terms and conditions or a Property
Management Agreement, the form and
substance of which is set forth in
Exhibit "3" attached hereto.
(b) The Company may not enter into any
other agreement, contract, or arrangement
with a Manager, Member, or an Affiliate
thereof or provide for an amendment to any of
the preauthorized transactions, pursuant to
which such person may profit or benefit,
unless and until each of the following
conditions is satisfied:
(i) Such agreement, contract, or
arrangement or amendment is embodied in
a written contract that describes the
goods to be provided, the services to be
rendered or the property to be sold,
transferred, assigned, or conveyed, and
all compensation, payments,
remuneration, or other consideration to
be paid;
(ii) Such agreement, contract, or
arrangement is promptly disclosed and
its terms summarized in the reports to
the Members and to Emeritus;
(iii) Such agreement, contract, or
arrangement is approved or ratified by a
majority vote of the Member (excluding
for this purpose the Interests held by
the interested Member) and by Emeritus;
and
(iv) Once approved, such agreement,
contract, or arrangement may not be
amended, modified, or supplemented
without the prior approval of a majority
of the Members (excluding for this
purpose the Interests held by the
interested Member) and by Emeritus.
(c) The duty of the Managers to the
Company and to the Members with respect to
the administration, enforcement, and
termination of agreements described in
Sections 11.6(a) through 11.6(d) shall be to
act in good faith and in a commercially
reasonable manner as established by
applicable usages of trade.
(d) The foregoing provisions are
specifically included herein for the benefit
of the Company and all the Members to enable
the Company to operate efficiently and
expeditiously, consistent with the standard
set forth, and the Members hereby waive and
release any claims they may have under the
Act for any contracts of agreements entered
into by the Managers which are consistent
with the provisions of this Section 11.6.
11.7 Restrictions on Authority of Managers.
The Company will not take any of the
acts enumerated below or cause or permit any
of its Subsidiaries to take similar acts,
unless proposed by the Managers and approved
by Emeritus or unless requested by Emeritus
and approved by Emeritus and Members holding
a majority of the outstanding
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Interests, with or without the concurrence of
the Managers:
(i) The sale, exchange, or other
disposition of entity assets having a
fair market value of $50,000.00 or more;
(ii) The sale, exchange, or other
disposition of any real estate
assets;
(iii) The incurrence of any
indebtedness by the entity, whether
secured or unsecured, recourse or non-
recourse, in an amount of $100,000.00 or
more (standing authorization may be
given for certain accounts receivable
financing or a permanent line of credit
for the benefit of the entity);
(iv) Any decision to expand or
broaden the scope of the entity's
business beyond that specifically
authorized in the entity's
organizational documents;
(v) Any expenditures for capital
improvements or assets in excess of
$50,000.00;
(vi) The approval of an annual
budget for the entity, with the Managers
being authorized to expend funds
consistent with the annual budget as
long as such expenditures do not exceed
5% of the budgeted amounts;
(vii) Decisions regarding any
claims made by or against the entity,
including, but not limited to, decisions
regarding the prosecution, settlement,
or other disposition of such claims;
(viii) The response to any
governmental investigation, inquiry,
action, or the like affecting the
business and affairs of the entity;
(ix) Entering into a joint venture,
partnership, limited partnership, or
other business arrangement with any
third party to conduct the entity's
business;
(x) The admission of any new Member
to the entity (except to the extent that
such admission is expressly authorized
under this Agreement);
(xi) Any encumbrance, mortgage,
pledge, or granting of a security
interest or lien in any real or personal
property owned or to be owned by the
entity, except to the extent such
security interest or lien is granted to
secure entity financing permitted by the
terms of the Credit Agreement;
(xii) 'The execution of any
guaranty by the entity of another's
obligations;
(xiii) The dissolution and winding
up of the Company;
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(xiv) Approval of the withdrawal of
a Manager;
(xv) Appointment of a new Manager;
(xvi) Continuation of the Company
in accordance with Section 16.1(d);
(xvii) The acquisition of any real
property;
(xviii) Developing a Project other
than an Alzheimer's facility;
(xix) The engagement of the Manager
or any Affiliate thereof to enter into a
transaction with, or to provide goods,
materials, or services to the entity
(except to the extent that such
transaction is expressly permitted by
the terms of this Agreement or the
written contracts contemplated hereby);
and
(xx) The issuance of any equity
securities by the Company or its
Subsidiaries.
11.8 Reimbursement and Compensation. Except
as otherwise provided herein, the Managers will be
entitled to be reimbursed for direct payment of
all reasonable and necessary business expenses
incurred in the administration of the Company.
Notwithstanding anything in this Agreement to the
contrary, the Company shall not pay nor reimburse
either of the Managers for:
(a) any compensation, salary or salary-
related expenses, or other remuneration,
however designated, paid to, or incurred by
Craig W, Spaulding, Jerry Erwin, or Thilo
Best, in rendering any services to and on
behalf of the Company under this Agreement.
(b) the Manager's overhead, such as
rent or depreciation, utilities, and capital
expenditures, or any other indirect costs
incurred by the Manager in maintaining its
corporate offices;
(c) any services rendered by the
Manager or its Affiliates pursuant to a
separate agreement between such persons and
the Company, providing separately for
payment for such services; or
(d) any compensation, salary or salary-
related expenses, or other remuneration,
however designated, paid to, or incurred by,
the employees of the Manager or any
Affiliate thereof in rendering services to
or on behalf of the Company (exclusive of
services covered by subparagraph (c) above,
which are to be handled as provided for
therein) or any goods, services, or products
not purchased for the exclusive use of the
Company, except to the extent that such
arrangements are disclosed to Emeritus in
advance and approved by it.
12. Status of Members
12.1 No Participation in Management. Except
as specifically provided in Section 11.7 above, no
Member shall take part in the conduct or control
of the
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Company's business or the management of the
Company or have any right or authority to act for
or on the behalf of, or otherwise bind, the
Company (except a Member who may also be a Manager
and then only in such Member's capacity as a
Manager within the scope of such Member's
authority hereunder).
12.2 Limitation of Liability. No Member
shall have, solely by virtue of such Member's
status as a Member in the Company, any personal
liability whatever, whether to the Company, to any
Members or to the creditors of the Company, for
the debts or obligations of the Company or any of
its losses beyond the amount committed by such
Member to the capital of the Company, except as
otherwise required by the Act.
12.3 Death or Incapacity of Non-Manager
Member. The death, incompetence, withdrawal,
expulsion, bankruptcy, or dissolution of a Member,
or the occurrence of any other event which
terminates the continued membership of a Member in
the Company, shall not cause a dissolution of the
Company. Upon the occurrence of such event, the
rights of such Member to share in the Net Income
and Net Loss of the Company to receive
distributions from the Company, an to assign an
interest in the Company pursuant to Section 14.3
below shall, on the happening of such an event,
devolve upon such Member's executor,
administrator, guardian, conservator, or other
legal representative or successor as the case may
be, subject to the terms and conditions of this
Agreement, and the Company shall continue as a
limited liability company. However, in any such
event, such legal representative or successor, or
any assignee of such legal representative or
successor, shall be admitted to the Company as a
Member only in accordance with and pursuant to all
of the terms and conditions of Section 14.4
hereof.
12.4 Emeritus's Right Upon Death of a Manger
or Other Similar Events.
(a) Upon the death, incompetence,
withdrawal, expulsion, bankruptcy, or
dissolution of Craig W. Spaulding or Jerry
Erwin, each of whom serves as a Manager of
the Company (the "Withdrawal Event"),
Emeritus and the remaining Manager shall
designate a new person to serve as a
replacement Manager, entitled to exercise all
rights vested in a Manager under the terms of
this Agreement. The person so designated
shall have comparable skills, experience, and
expertise as the Manager ceasing to function
due to the Withdrawal Event (the "Withdrawing
Manager"). The admission of such replacement
Manager shall be done in a way that has no
dilutive effect upon Emeritus's Interest in
the Company, and no compensation shall be
paid to such person for agreeing to serve as
a replacement Manager out of the Company's
assets; and any Interest such person acquires
in the Company shall be out of the Interest
of the Withdrawing Manager or the other
Manager, upon such basis as the replacement
Manager, the other Manager, and the
Withdrawing Manager shall then determine. If
no replacement Manager is designated within
ninety (90) days after the Withdrawal Event,
Emeritus shall have the option granted to it
under Section 12.4(b).
(b) If Emeritus and the remaining
Manager are not able to select a mutually-
acceptable replacement Manager with the
skills, expertise, and background required by
Section 12.4(a), within ninety (90) days of
the Withdrawal Event, Emeritus shall have the
right, but not the obligation, to acquire the
Interest of the Withdrawing Manager (for this
purpose, if the Withdrawal Event is triggered
by Jerry Erwin, it refers to the Interest
held by Erwin L.L.C.) (the "Withdrawing
Member's Interest"), free and clear of all
liens,
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encumbrances, or adverse claims, at the
purchase price set forth in this paragraph.
Emeritus may exercise this right by giving
the Withdrawing Member or his heirs or legal
representatives written notice of its intent
to purchase such Interest no later than three
(3) months after notice of the Withdrawal
Event and by tendering to Withdrawing Member
or his heirs or legal representative in cash
the entire purchase price for such Interest
no later than thirty (30) days after the
determination of the amount payable with
respect to such Interest. The purchase price
for the Withdrawing Member's Interest shall
equal the amount that the Withdrawing Member
would have received, at the time of the
Withdrawal Event, assuming that the Company
had then been dissolved, all of its assets
sold at their fair market value, all of its
liabilities paid in full (including the
withholding of reasonable amounts as cash
reserves to cover known or foreseeable
contingencies), and the liquidation
distributions made among the Members
(including the Withdrawing Member) as
required by the terms of this Agreement. For
purposes of this computation, the fair market
value of the Company's equity investment in
each of the Subsidiaries will be the amounts
that would have been distributed to the
Company, assuming that the Subsidiary had
then been dissolved as of the date of the
Withdrawal Event, all of its assets sold at
their fair market value, all of its
liabilities paid in full (including the
withholding of reasonable amounts as cash
reserves to cover known or foreseeable
contingencies), and the liquidation
distributions made among the Subsidiary's
equity holders as required by the terms of
the Subsidiary's organizational documents.
Moreover, in determining the fair market
value of each Project owned by the Company's
Subsidiaries, such assets will be deemed to
have the following values: (i) if such
Subsidiary owns a Project as to which
certificates of occupancy have not yet been
issued, the value of such assets shall be
their cost, determined in accordance with
generally accepted accounting principles; and
(ii) as to any other Project owned by a
Subsidiary for which certificates of
occupancy have been issued, such Project's
fair market value shall be determined through
agreement between Emeritus and the other
Members, but in the event that such parties
cannot reach agreement within thirty (30)
days after a request from any party to
determine such value, such value shall be
determined, as quickly as is reasonably
practicable, by an appraiser mutually
agreeable to the parties (or in the absence
of an agreement among them, an appraiser
designated by the Company's independent
public accountants). The appraised value of
any asset determined by an appraiser
appointed pursuant to the terms of this
paragraph shall be conclusive and binding on
the parties and the expenses of such
appraisal shall be shared equally by the
Members.
12.5 Recourse of Members. Each Member shall
look solely to the assets of the Company for all
distributions with respect to the Company and such
Member's Capital Contribution thereto and share of
Net Income and Net Loss thereof and shall have no
recourse therefor, upon dissolution or otherwise,
against any Manager or any other Member.
12.6 No Right to Proper r. No Member,
regardless of the nature of such Member's
contributions to the capital of the Company, shall
have any right to demand or receive any
distribution from the Company in any form other
than cash, upon dissolution or otherwise.
13. Books and Records, Accounting, Reports and
Statements, and Tax Matters
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13.1 Books and Records. The Managers shall,
at the expense of the Company, keep and maintain,
or cause to be kept and maintained, the books and
records of the Company on the same method of
accounting as utilized for federal income tax
purposes.
13.2 Annual Accounting Period. All books and
records of the Company shall be kept on the basis
of an annual accounting period ending December 31
of each year, except for the final accounting
period which shall end on the date of termination
of the Company. All references herein to the
"fiscal year of the Company" are to the annual
accounting period described in the preceding
sentence, whether the same shall consist of twelve
months or less.
13.3 Manager's Reports to Members. The
Managers shall send, at Company expense, to each
Member the following:
(a) Within seventy-five (75) days after
the end of each fiscal year of the Company,
such information as shall be necessary for
the preparation by such Member of such
Member's federal income tax return which
shall include a computation of the
distributions to such Member and the
allocation to such Member of profits or
losses as the case may be; and
(b) Within forty-five (45) days after
the end of each fiscal quarter of the
Company, a quarterly report, which shall
include:
(i) A balance sheet;
(ii) A statement of income and
expenses;
(iii) A statement of changes in
Member's capital; and
(iv) A statement of the
balances in the Capital Accounts of the
Members.
13.4 Right to Examine Records. Members shall
be entitled, upon written request directed to the
Company, to review and copy at such Members'
expense the records of the Company at all
reasonable times and at the location where such
records are kept by the Company.
13.5 Tax Matters Partner. Should there be any
controversy with the Internal Revenue Service or
any other taxing authority involving the Company,
the Managers may expend such funds as they deem
necessary and advisable in the interest of the
Company to resolve such controversy
satisfactorily, including, without being limited
thereto, attorneys' and accounting fees. Craig W.
Spaulding is hereby designated as the "Tax Matters
Partner" as referred to in Section 6231(a)(7)(A)
of the Code and is specially authorized to
exercise all of the rights and powers now or
hereafter granted to the Tax Matters Partner under
the Code.
Any cost incurred in the audit by any
governmental authority of the income tax returns
of a Member (as opposed to the company) shall not
be a Company expense. The Managers agree to
consult with and keep the Members advised with
respect to (i) any income tax audit of a Company
income tax return, and (ii) any elections made by
the Company for federal, state, or local income
tax purposes.
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13.6 Tax Returns. The Managers shall, at
Company expense, cause the Company to prepare and
file a United States Partnership Return of Income
and all other tax returns required to be filed by
the Company for each fiscal year of the Company.
13.7 Tax Elections. The Managers shall be
permitted in their discretion to determine whether
the Company should make an election pursuant to
Section 754 of the Code to adjust the basis of the
assets of the Company. Each of the Members shall,
upon request, supply any information necessary to
properly give effect to any such election. In
addition, the Managers, in their sole discretion,
shall be authorized to cause the Company to make
and revoke any other elections for federal income
tax purposes as they deem appropriate, necessary,
or advisable.
14. Transfers of Company Interests; Withdrawal
and Admission of Members
14.1 General Provision. No Member may
voluntarily or involuntarily, directly or
indirectly, sell, transfer, assign, pledge, or
otherwise dispose of or mortgage, pledge,
hypothecate, or otherwise encumber, or permit or
suffer, any encumbrance of all or any part of such
Member's interest in the Company, except as
provided in this Section 14. Any other purported
sale, transfer, assignment, pledge, or encumbrance
shall be null and void and of no force or effect
whatsoever. Notwithstanding anything in this
Agreement to the contrary, each of the Members is
authorized to grant to Emeritus a first priority
and exclusive security interest in such Member's
Interest in the Company to secure the Company's
performance under the Credit Agreement and related
documents: In addition, if Emeritus becomes a
Member of the Company, it may assign part or all
of any Interest it acquires to Daniel R. Baty or
any of his Affiliates, and any such transfer shall
be effective at such time as the Company receives
written notice thereof.
14.2 Withdrawal of Member. A Member shall
have no power to withdraw voluntarily from the
Company, except that a Member may withdraw upon
written approval of a majority of the non-
withdrawing Members voting by Percentage
Interests, which approval shall include the terms
for redemption by the Company of the Interest of
such Member.
14.3 Transfer by Members.
(a) A Member's Company Interest may be
transferred in each of the following
instances:
(i) In the event of the death of
Best, his Company Interest may be
transferred by bequest or by operation
of law of intestate succession.
(ii) In the event of the death of
Spaulding and a replacement Manager is
agreed upon pursuant to Section 12.4(a)
above, his Company Interest may be
transferred by bequest or by operation
of law of intestate succession.
(iii) In the event Emeritus becomes
a Member of the Company, it may assign
part or all of its Company Interest to
Daniel R. Baty or any of his Affiliates
as provided in Section 14.1 above.
Any transfer made under this Section
14.3(a) must comply with the
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<PAGE>
provisions of Section 14.3(b)(ii), (iii),
and (d) and Section 14.4(a)(ii), (iii),
(iv), and (b) hereof.
(b) Subject to any restrictions on
transferability required by law or contained
elsewhere in this Agreement, a Member may
transfer such Member's entire interest in
the Company upon satisfaction of the
following conditions:
(i) The transfer shall be approved
in writing by the Managers and
Emeritus, which approvals may be
granted or denied in their sole
discretion.
(ii) The transferor and transferee
shall have executed and acknowledged
such reasonable and customary
instruments as the Managers may deem
necessary or desirable to effect such
transfer; and
(iii) The transfer does not
violate any applicable law or
governmental rule or regulation,
including, without limitation, any
federal or state securities laws.
(c) At the time of a transfer of any
Member's interest, whether or not such
transfer is made in accordance with this
Section 14.3, all the rights possessed as a
Member in connection with the transferred
interest, which rights otherwise would be
held either by the transferor or the
transferee, shall terminate against the
Company unless the transferee is admitted to
the Company as a Substitute Member pursuant
to the provisions of Section 14.4 hereof;
provided, however, that if the transfer is
made in accordance with this Section 14.3,
such transferee shall be entitled to receive
distributions to which his transferor would
otherwise be entitled from and after the
effective date of such transfer, which date
shall be specified by the Managers and shall
be no later than the last day of the calendar
month following the first calendar month
during which the Managers have received
notice of the transfer and all conditions
precedent to such transfer provided for in
this Agreement have been satisfied. The
Company and the Managers shall be entitled to
treat the transferor as the recognized owner
of such interests until such effective date
and shall incur no liability for
distributions made in good faith to the
transferor prior to the effective date.
(d) Notwithstanding any other provision
of this Agreement, a Member may not transfer
such Member's interest in any case if such a
transfer, when aggregated with all other
transfers within a twelve (12) month period,
would cause the termination of the Company as
a partnership for federal income tax purposes
pursuant to Section 708 of the Code, unless
such transfer has been previously approved by
the Managers.
14.4 Admission of Transferees as Members
(a) No transferee of a Member
shall be admitted as a Member unless all of
the following conditions have been
satisfied:
(i) The transfer complies with
Section 14.3;
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<PAGE>
(ii) The prospective transferee
has executed an instrument, in form
and substance satisfactory to the
Managers, accepting and agreeing to be
bound by all the terms and conditions
of this Agreement, including the power
of attorney set forth in Section 17
hereof and has paid all expenses of
the Company in effecting the transfer;
(iii) All requirements of the Act
regarding the admission of a
transferee Member have been complied
with by the transferee, the
transferring Member, and the Company;
and
(iv) Such transfer is effective
in compliance with all applicable
state and federal securities laws.
(b) In the event of a transfer
complying with all the requirements of
Section 14.3 hereof and the transferee
being admitted as a Member pursuant to this
Section 14.4, the Managers, for themselves
and for each Member pursuant to the Power
of Attorney granted by each Member, shall
execute an amendment to this Agreement and
file any necessary amendments to the
certificate of formation for the Company.
Unless named in this Agreement, as amended
from time to time, no person shall be
considered a Member.
14.5 Admission of Additional Members.
Additional Members of the Company may be admitted
as follows:
(a) If a proposed additional Member
desires to purchase an Interest from the
Company, such purchase may be made and the
admission of the additional Member shall
become effective only if approved by
unanimous vote of the existing Members and
Emeritus and compliance with the provisions
of this Section 14.5;
(b) Emeritus will be admitted, without
requiring additional consents or approvals of
the Members or the Managers or the taking of
any other action, as an additional Member at
such time as Emeritus exercises its option to
convert the Emeritus Corporation Loan into an
equity interest in the Company as permitted
by Section 7.4(c). There are no additional
conditions to Emeritus's admission to the
Company. The Company will, however, cause an
amendment to this Agreement to be promptly
prepared to evidence Emeritus's decision to
convert its debt into an equity interest in
the Company. Emeritus's rights as a new
Member are, however, not contingent upon the
Company's preparing such an amendment. In
addition, Emeritus shall have the right to be
admitted as a new Member, without any further
consent or approval and without the taking of
any additional action by any of the Members
or the Managers, if it succeeds to the rights
of one or more of the Members' Interests in
the Company by virtue of action taken by
Emeritus under the Pledge and Security
Agreements, pursuant to which such Interests
are pledge to Emeritus by the Member.
(c) All additional Members [other than
Emeritus under Section 14.5(b)] must comply
with the requirements relating to the
admission of transferees of Members set forth
in Section 14.4(a)(ii), (iii), and (iv)
hereof.
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<PAGE>
14.6 Put/Call Option.
(a) Put/Call Offering Notice. Emeritus
on the one hand or the other Members on the
other hand (the "Initiating Members") may, at
any time after Emeritus's admission to the
Company as a Member, elect by giving notice
(the Put/Call Offering Notice") to the other
Members (the
"Responding Members") to exercise the
Put/Call mechanism provided under this
Section 14.6, whereupon the provisions of
this Section 14.6 shall apply. The Put/Call
Offering Notice shall constitute the
Initiating Members' offer to sell it or their
own Interest in the Company to the Responding
Members or to purchase the Responding
Members' Interest in the Company. For
purposes of this Section 14.6, decisions by
the other Members (exclusive of Emeritus)
(the "Other Members") must be unanimous to be
effective. If the Other Members are obligated
to purchase the Interest of Emeritus under
this Section, such Interest when purchased
shall be allocated among them in proportion
to their then existing Interests in the
Company, unless they otherwise agree to a
different sharing arrangement.
(b) Purchase Price. The Initiating
Members shall specify in their offering
notice the cash purchase price at which the
Initiating Members would be willing to
purchase, in an all-cash transaction, all
of the assets of the Company, assuming such
assets were free of debt.
(c) Exercise of Put,/Call. Upon
receipt of the Put/Call Offering Notice,
the Responding Members shall then be
obligated either:
(i) To sell to the Initiating
Members for cash its or their Interest
in the Company at a price equal to the
amount the Responding Members would
have been entitled to receive upon
dissolution of the Company pursuant to
the terms of this Agreement if the
Company had sold all of its assets for
cash to a third party at the price set
forth in the Put/Call Offering Notice,
subject to adjustment as provided in
Section 14.6(e)(ii), had discharged in
full all of the Company's liabilities,
had withheld a reasonable amount as a
cash reserve to cover known or
foreseeable contingencies, and had
distributed the balance among all
Members in accordance with the
liquidation provisions of this
Agreement; or
(ii) To purchase the Interest of
the Initiating Members for cash at a
price equal to the amount the Initiating
Members would have been entitled to
receive upon dissolution of the Company
pursuant to the terms of this Agreement
if the Company had sold all of its
assets for cash to a third party at the
price set forth in the Put/Call Offering
Notice, subject to adjustment as
provided in Section 14.6(e)(ii), had
discharged in full all of the Company's
liabilities, had withheld a reasonable
amount as a cash reserve to cover known
or foreseeable contingencies, and had
distributed the balance among all
Members in accordance with the
liquidation provisions of this
Agreement.
The Responding Members shall notify
the Initiating Members of its or their
election within ninety (90) days after the
date of receipt of the Put/Call Offering
Notice. Failure to give notice within such
ninety (90) day
27
<PAGE>
period shall be deemed the Responding
Members' election to sell its or their
Interest in the Company. The decision of
the Responding Members must be unanimous;
but in the absence of a unanimous decision
by the Responding Members, they will be
deemed to have unanimously decided to sell
their Interest to the Initiating Members.
(iii) If, following an election by
the Responding, Members to purchase
under Section 14.6(c)(ii), the
Responding Members shall fail to
consummate the purchase of the
Initiating Members' entire Interest in
accordance with Section 14.6(e), then
the Responding Members shall sell to the
Initiating Members pursuant to Section
14.6(c)(i), provided that the purchase
price paid to the Responding Members
shall be reduced by an amount equal to
ten percent (10%) of the price the
Responding Members were to pay the
Initiating Members pursuant to Section
14.6(c)(ii). THE PARTIES HAVE AGREED
THAT THE INITIATING MEMBERS' ACTUAL
DAMAGES, IN THE EVENT OF THE FAILURE OF
THE RESPONDING MEMBERS TO CONSUMMATE THE
PURCHASE OF THE INITIATING MEMBERS'
INTEREST PURSUANT TO SECTION
14.6(C)(ii), WOULD BE EXTREMELY
DIFFICULT OR IMPRACTICABLE TO DETERMINE;
THEREFORE, BY THE EXECUTION OF THIS
AGREEMENT, THE PARTIES PLEDGE THAT THE
AMOUNT OF THE PRICE REDUCTION CALCULATED
IN ACCORDANCE WITH THIS SUBPARAGRAPH
(iii) REPRESENTS THE PARTIES' REASONABLE
ESTIMATE OF THE AMOUNT OF A DEPOSIT THAT
A THIRD PARTY WOULD REASONABLY POST IN
CONNECTION WITH THE SALE OF THE
INITIATING MEMBERS' INTEREST IN THE
COMPANY TO A THIRD PARTY; AND SUCH
AMOUNT HAS BEEN AGREED UPON, AFTER
NEGOTIATION, AS THE PARTIES' REASONABLE
ESTIMATE OF THE INITIATING MEMBERS'
DAMAGES AND AS THE INITIATING MEMBERS'
EXCLUSIVE REMEDY, TOGETHER WITH THE SALE
OF THE RESPONDING MEMBERS' INTEREST IN
THE COMPANY TO THE INITIATING MEMBERS
PURSUANT TO THIS SUBPARAGRAPH (iii)
AGAINST THE RESPONDING MEMBERS, AT LAW
OR IN EQUITY, IN THE EVENT OF THE
FAILURE OF THE RESPONDING MEMBERS TO
CONSUMMATE THE PURCHASE OF THE
INITIATING MEMBERS' INTEREST PURSUANT TO
SECTION 14.6(C)(ii).
(d) Limitation on Exercise.
Notwithstanding anything to the contrary
above, the Put/Call option described above
shall not be exercised by either Emeritus or
the Other Members unless and until Emeritus
becomes a Member of the Company.
(e) Closings.
(i) Location and Time Periods. The
closing of any sale of an Interest in
the Company pursuant to this Section
14.6 (the "Closing" shall be held at the
principal offices of the Company, unless
otherwise mutually agreed, on a mutually
acceptable date not more than ninety
(90) days (provided, however, that this
90-day period may be extended
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<PAGE>
to a period of not more than one hundred
eighty (180) days as long as the
Member(s) buying the Interest obtain a
letter of intent from a financial
institution to provide any needed
financing within the initial ninety (90)
day period and thereafter proceed to
close the purchase within the
aforementioned 180-day period] after (a)
receipt of the written notice of
election provided by Section 14.6(b),
(b) if the Responding Members fail to
make the election required by Section
14.6(b), the expiration of the time
within which the Responding Members must
so elect as provided in Section 14.6(b),
or (c) in the case of a sale to the
Initiating Members pursuant to Section
14.6(c)(iii), the last day upon which
the Responding Members had a right to
purchase the Interest of the Initiating
Members pursuant to paragraph (a) of
this Section 14.6(e).
(ii) Closing Adjustments. At the
Closing, any Closing adjustments which
are then usual and customary in King
County, Washington, shall be made
between the purchasing party and the
selling party as of the date of Closing.
'The price to be paid for the selling
Member's Interest also shall be adjusted
as follows: there shall be determined,
as of the date of the Closing, (a) the
aggregate amount of all additional
Capital Contributions made by the
selling Member(s) pursuant to Section 7,
between the date as of which the price
for such Interest was established and
the date of the Closing, and (b) the
aggregate amount of all distributions
made to the selling Member(s) during
such period pursuant to Section 10. If
the amount determined under (a) exceeds
the amount determined under (b), the
price shall be increased by an amount
equal to such excess; if the amount
determined under (b) exceeds the amount
determined under (a), the price shall be
decreased by an amount equal to such
excess. Any Member transferring its
Interest shall transfer such Interest
free and clear of any liens,
encumbrances, or any interests of any
third party and shall execute or cause
to be executed any and all documents
required to fully transfer such Interest
to the acquiring Member, including, but
not limited to, any documents necessary
to evidence such transfer and all
documents required to release any
Interest of a Member's spouse or any
other party who may claim an interest in
such Member's Company Interest. Any
monetary default by the selling Member
must be cured out of the proceeds from
such sale at the Closing. Following the
date of Closing, the selling Member
shall have no further rights to any
distributions by the Company or other
Company income, and all such rights
shall vest in the selling Member's
transferee.
(iii) As of the effective date of
any transfer permitted hereunder by a
Member of its entire Interest in the
Company, such Member's rights and
obligations hereunder shall terminate
except as to items accrued as of such
date and except as to any indemnity
obligations of such Member attributable
to acts or events occurring prior to
such date. Thereupon, except as limited
by the preceding sentence, this
Agreement shall terminate as to the
transferring Member but shall remain in
effect as to the other Member(s) and the
Company. In the event of a transfer of a
Member's entire Company Interest to the
other Member (or its designee), the
Member to whom (or to whose
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<PAGE>
designee) such Interest is transferred
shall indemnify, defend, and hold
harmless the Member so transferring its
Company Interest from and against any
and all claims, demands, losses,
liabilities, expenses, actions,
lawsuits, and other proceedings,
judgments, awards, and costs and
expenses (including, but not limited to,
reasonable attorneys' fees) incurred in,
or arising directly or indirectly, in
whole or in part, out of
operation of the business of the
Company, excluding only those
liabilities, if any, accruing prior to
the date of such transfer.
(f) Erwin's L.L.C.'s Interest in Aurora
Bay I. If, as a result of the application of
this Section 14.6, Emeritus exercises the
right to purchase the Interest of Erwin
L.L.C. in the Company, concurrent with the
exercise of such right, Emeritus shall
acquire, and Erwin L.L.C. shall transfer for
no additional consideration, any and all
right, title, and interest that Erwin L.L.C.
has in any Subsidiary of the Company, free
and clear of all liens, encumbrances, and
adverse claims. Erwin L.L.C. acknowledges
that the amount payable to it under this
Section constitutes adequate consideration
for both its interest in the Company as well
as its Interest in each of the Subsidiaries.
15. Resignation and Admission of Manager.
15.1 Resignation of Manager. A Manager shall
not be entitled to resign as Manager. Moreover, if
a Manager resigns in contradiction to this
prohibition, such resigning Manager shall be
liable to the Company for any and all damages,
liabilities, costs, and expenses incurred by the
Company or the other Members as a result of such
resignation.
152 Death or Incompetency of Manager. A
Manager shall cease to be a Manager upon the
death, incompetency, bankruptcy, or dissolution of
such Manager.
15.3 Removal of a Manager. A Manager that is
a Member may be removed as a Manager upon the
unanimous written approval of the remaining
Members. A Manager that is not a Member may be
removed as a Manager upon the unanimous written
approval of Members, provided any Member which is
owned in whole or in part by the Manager sought to
be removed shall not be entitled to vote on such
Manager's removal, and the unanimous written
approval of the remaining Members shall be
necessary and sufficient to remove such Manager.
Removal of a Manager who is a Member of the
Company, pursuant to this Section 15.3, shall not
affect such Manager's interest as a Member of the
Company, if any.
15.4 Appointment of a New or Replacement
Manager. A new or replacement Manager may be
appointed with the written approval of Members
holding a majority of the Percentage Interests of
the Company and by Emeritus, provided, however,
that at all times there must be at least one
Manager in the Company.
16. Dissolution, Winding Up, and Termination
16.1 Events Causing Dissolution. The Company
shall be dissolved and its affairs shall be wound
up upon the happening of the first to occur of any
of the following events:
(a) Expiration of the term of the
Company stated in Section 6 hereof;
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<PAGE>
(b) Entry of a decree of administrative
or judicial dissolution pursuant to the Act;
(c) The sale or other disposition of all
or substantially all of the assets of the
Company;
(d) The death, incompetence, withdrawal,
expulsion, resignation, removal, bankruptcy,
or dissolution of the last remaining Manager
of the Company, unless (i) within 12t1 days
of such occurrence, Members owning at least a
majority of Percentage Interests in the
Company, consent to the appointment of a new
Manager(s) in accordance with Section 15.4,
in which case the business of the Company
shall be carried on by the newly appointed
Manager(s);
(e) The unanimous written approval of
the Members to dissolve.
162 Winding Up.
(a) Upon dissolution of the Company for
any reason, the Managers shall commence to
wind up the affairs of the Company and to
liquidate its assets. In the event the
Company has terminated because the Company
lacks a Manager, then the remaining Members
shall appoint a new Manager solely for the
purpose of winding up the affairs of the
Company. The Managers shall have the full
right and unlimited discretion to determine
the time, manner, and terms of any sale or
sales of Company Property pursuant to such
liquidation. Pending such sales, the Managers
shall have the right to continue to operate
or otherwise deal with the assets of the
Company. A reasonable time shall be allowed
for the orderly winding up of the business of
the Company and the liquidation of its assets
and the discharge of its liabilities to
creditors so as to enable the Managers to
minimize the normal losses attendant upon a
liquidation, having due regard to the
activity and condition of the relevant
markets for the Company properties and
general financial and economic conditions.
(b) The Managers shall cause the
proceeds from the sale and liquidation of the
Company's property to be applied and
distributed in the following order:
(i) First to the payment and
discharge of all of the Company's debt
and liabilities to creditors, including
payments of any Manager Loans and other
loans to Members and their affiliates,
and all expenses of liquidation;
(ii) Second, after giving effect to
all the allocations associated with the
Company's liquidation, to Members in
proportion to their Capital Account
balances; and
(iii) Thereafter, the balance, if
any, to the Members in proportion to
their Percentage Interests.
(c) It is intended and anticipated that
the amount of cash distributed upon a
termination or dissolution of the Company
should equal the sum of the Members' Capital
Accounts after adjustments of such balance in
accordance
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with Sections 7 and 8 hereof
16.3 Certificate of Cancellation: Report;
Termination. Upon the dissolution and completion
of winding up of the Company, the Managers shall
execute and file a certificate of cancellation for
the Company. Within a reasonable time following
the completion of the liquidation of the Company's
assets, the Managers shall prepare and furnish to
each Member, at the expense of the Company, a
statement which shall set forth the assets and
liabilities of the Company as of the date of
complete liquidation and the amount of each
Member's distribution pursuant to Section 162
hereof. Upon completion of the liquidation and
distribution of all Company funds, the Company
shall terminate, and the Managers shall have the
authority to execute and file all documents
required to effectuate the termination of the
Company.
17. Special and Limited Powers of Attorney.
(a) The Managers or either of them, with
full power of substitution, shall at all
times during the existence of the Company
have a special and limited power of attorney
as the authority to act in the name and on
the behalf of each Member to make, execute,
swear to, verify, acknowledge, and file the
following documents and any other documents
deemed by the Managers to be necessary for
the business of the Company;
(b) This Agreement, any separate
certificate of formation, fictitious business
name statements, as well as any amendments to
the foregoing which under the laws of any
state are required to be filed or which the
Managers deem it advisable to file; .
(c) Any other instrument or document
which may be required to be filed by the
Company under the laws of any state or by any
governmental agency or which the Managers
deem advisable to file; and
(d) The special and limited power of
attorney granted to the Managers hereby:
(i) Is a special and limited power
of attorney coupled with an interest, is
irrevocable, shall survive the
dissolution or incompetency of the
granting Members and is limited to those
matters herein set forth;
(ii) May be exercised by either of
the Managers (or by any authorized
officer of the Manager, if not a natural
person) for each Member by referencing
the list of Members on Appendix A and
executing any instrument with a single
signature acting as attorney-in-fact for
all of them;
(iii) Shall survive a transfer by a
Member of such Member's interest in the
Company pursuant to Section 14.3 hereof
for the sole purpose of enabling the
Manager to execute, acknowledge, and
file any instrument or document
necessary or appropriate to admit a
transferee as a Member; and
32
<PAGE>
(iv) Notwithstanding the foregoing,
in the event that a Manager ceases to be
a Manager in the Company, the power of
attorney granted by this Section 17 to
such Manager shall terminate
immediately; but any such termination
shall not affect the validity of
any documents executed prior to such
termination or any other actions
previously taken pursuant to this power
of attorney or in reliance upon its
validity, all of which shall continue to
be valid and binding upon the Members in
accordance with their terms.
18. Amendments. Except as otherwise provided by
law, this Agreement may be amended in any respect by
the unanimous written approval of the Members and
Emeritus.
19. Miscellaneous.
19.1 Notices. Any notices of communications
required or permitted to be delivered hereunder
must be in writing and shall be deemed to be
delivered (i) upon receipt if delivered personally
or (ii) upon deposit in the United States Mail,
certified, return receipt requested, postage
prepaid, addressed to the Members, as the case may
be, or (iii) upon receipt of a facsimile
transmission, at the following addresses and/or
facsimile numbers: .
Erwin Investors I, L.L.C.,
Member c/o Jerry Erwin
9817 N. E. 54th Street
Vancouver, Washington 98662
Phone: 360-254-9442 Fax #: 360-
254-1770
Craig W. Spaulding, Manager
and Member 5720 LBJ Freeway
Suite 450, Lock Box 16
Dallas, Texas 75240 Phone: 972-
458-0025 Fax #: 972-458-2233
Jerry Erwin, Manager 9817 N.
E. 54th Street
Vancouver, Washington 98662
Phone: 360-254-9442 Fax #: 360-
254-1770
Thilo Best, Member
18254 Westminister Drive Lake
Oswego, Oregon 97034 Phone:
503-638-0431 Fax #: 503-638-
6672
19.2 Entire Agreement. This Agreement
constitutes the entire agreement among the parties
and supersedes any prior agreement or
understandings among them, oral or written, all of
which are hereby cancelled. This Agreement may not
be modified or amended other than pursuant to
Section 18 hereof.
19.3 Captions; Pronouns. The paragraph and
section titles or captions contained in this
Agreement are inserted only as a matter of
convenience of reference. Such titles and captions
in no way define, limit, extend, or describe the
scope of this Agreement nor the intent of any
provision hereof. All pronouns and any variation
thereof shall be deemed to refer to the masculine,
feminine, or neuter, singular or plural, as the
identify of the person or persons may require.
33
<PAGE>
19.4 Counterparts. This Agreement may be
executed in any number of counterparts and by
different parties hereto in separate counterparts,
each of which when so executed shall be deemed to
be an original and all of which when taken
together shall constitute one and the same
agreement. Delivery of any executed counterpart of
a signature page to this Agreement by facsimile
shall be effective as delivery of an executed
original counterpart of this Agreement.
19.5 Governing Law. This Agreement shall
be governed by and construed in accordance with
the internal laws of the State of Washington.
19.6 Expiration of Emeritus's Rights. The
rights granted to Emeritus will expire and be
of no further force and effect if each of the
following conditions is satisfied: (i) Emeritus
does not exercise its right to convert the
Emeritus Corporation Loan into an equity
interest in the Company prior to the expiration
of such right under the Convertible Promissory
Note, and (ii) the Company discharges, and each
of the Members discharges, in full any and au
obligations it owes to Emeritus under the
Credit Agreement, the Convertible Promissory
Note, and any other documents executed in
connection therewith.
19.7 Members' Percentage Interest
Following Conversion by Emeritus. Provided the
Interest of each Member as provided in Appendix
A hereto has not at such time changed, upon
conversion by Emeritus of the Emeritus
Corporation Loan, the Percentage Interest of
the Members shall be as follows:
Emeritus Corporation 48%
Erwin Investors I, L.L.C. 25%
Craig W. Spaulding 25%
Thilo Best 2%
( The remainder of this page is
intentionally left blank )
34
<PAGE>
WITNESS WHEREOF the parties have executed this
Agreement as of the date first hereinabove written.
MEMBERS:
/s/ Craig W. Spaulding
- ----------------------------------------
Craig W. Spaulding
ERWIN INVESTORS I, L.L.C.
By: /s/ Jerry Erwin
- --------------------------------------
Jerry Erwin
/s/ Thilo Best
------------------------------
- ---------
Thilo Best
MANAGERS:
/s/ Craig W. Spaulding
- ----------------------------------------
Craig W. Spaulding
/s/ Jerry Erwin
- ----------------------------------------
Jerry Erwin
35
<PAGE>
THE FOLLOWING DOCUMENT IS SUBSTANTIALLY THE SAME FOR
ALL SEVEN COMMUNITIES WITH THE EXCEPTION OF THE
FOLLOWING ITEMS:
Sale Price
La Villita
$ 6,600,000
Madison Glen
7,300,000
Barrington Place
4,600,000
Lodge at Mainlands
9,500,000
Mainlands Office Park
1,000,000
Elm Grove Estates
9,600,000
Springtree
14,500,000
<PAGE>
PURCHASE AND SALE AGREEMENT
(BARRINGTON PLACE)
by and between
EMERITUS PROPERTIES I, INC.
("Seller")
and
BAYSIDE HEALTH GROUP LLC
(Purchaser")
<PAGE>
PURCHASE AND SALE AGREEMENT
(BARRINGTON PLACE)
This Purchase and Sale Agreement ("Agreement") is
made and entered into this 16th day of April, 1998 by
and between EMERITUS PROPERTIES I, INC., a Washington
corporation ("Seller"), on the one hand, and BAYSIDE
HEALTH GROUP LLC, a Washington limited liability
company, or its permitted assigns ("Purchaser"), on the
other hand.
1. Purchase and Sale
On the terms and conditions set forth herein,
Seller shall sell to Purchaser and Purchaser shall
purchase from Seller the following:
(a) Facility. The real property situated in the
State of Florida, which is more particularly described
in Exhibit "A" attached hereto (the "Real Property")
and the improvements thereon that constitute a 79 unit
assisted living facility known as Barrington Place,
2341 W. Norvell Bryant High, Lecanto, Florida 34461
(the "Facility") together with all tenements,
hereditaments, rights, privileges, interests, easements
and appurtenances now or hereafter belonging or in any
way pertaining to the Real Property and/or the
Facility.
(b) Personal Property. All equipment, furniture,
fixtures, appliances, tools, instruments, and other
tangible personal property owned by the Seller as of
the date of this Agreement or acquired by the Seller
prior to the Closing Date (as hereinafter defined), and
located on the Real Property and/or used in connection
with the operation of the Facility (the "Personal
Property"). Seller shall obtain and transfer to
Purchaser the titles to the leased motor vehicle(s)
identified on Schedule 1 attached hereto, provided that
the Purchaser shall pay to Seller at the Closing (as
hereinafter defined), in addition to the Purchase Price
(as hereinafter defined) the sum of Twenty Thousand and
no/100 Dollars ($20,000.00) for such motor vehicle(s).
(c) Inventory. All inventories of every kind and
nature whatsoever (specifically including, but not
limited to, all pharmacy supplies, medical supplies,
office supplies, other supplies and foodstuffs) owned
by Seller as of the date of this Agreement or hereafter
acquired, and relating to the Facility, except
inventory sold or consumed in the ordinary course of
business from and after the date of this Agreement
(collectively, the "Inventory"). On the Closing Date,
the Inventory will be at customary levels and
sufficient to conduct ordinary business.
(d) Intangible Personal Property. To the extent
transferable, all of Seller's rights, if any, to the
telephone numbers of the Facility and the medical
records, administrative records, manuals, and other
books and records relating directly to the operation of
the Facility and located therein, lien waivers, surety
agreements, payment and performance bonds, warranties,
guaranties, utility use agreements, covenants,
commitments, permits, certificates, approvals, and
other intangible personal property of every kind and
nature (including, without limitation, the name of the
Facility) which can be legally transferred and which
relate directly to the Facility (the "Intangible
Personal Property"), and including accounts receivable
relating to the Facility, but excluding cash and cash
equivalents; provided, however, that in no event shall
the Intangible Personal Property to be transferred by
Seller to Purchaser hereunder include any of the
proprietary systems, methods, procedures and controls
employed by Seller or any written materials, manuals or
brochures used by Seller to document the same, all of
which are to remain the property of Seller.
Hereinafter the Real Property, the Facility, the
Personal Property, the Inventory and the Intangible
Personal Property shall sometimes be collectively
referred to as "Seller's Assets." Seller acknowledges
and agrees that except as otherwise provided herein,
Purchaser is not assuming any of the liabilities of the
Seller or the Facility whether known or unknown,
contingent or fixed,
<PAGE>
which relate to the period prior to the Closing Date
(the "Non-Assumed Liabilities"). Purchaser understands
and acknowledges that Seller leases, and does not own,
the Real Property, the Facility and some or all of the
Personal Property from Meditrust Company LLC (formerly
known as Meditrust Acquisition Corporation I)
("Meditrust"), and Purchaser agrees that the execution
and delivery by Meditrust of certain documents,.
including without limitation a deed is required as a
condition to Seller's and Purchaser's obligations
hereunder. Seller agrees that it will make all
reasonable efforts, with all due diligence, to cause
Meditrust to take such action as is necessary to
consummate the transaction contemplated by this
Agreement.
2. Purchase Price
Except as otherwise provided below, the purchase
price ("Purchase Price") payable by Purchaser for
Seller's Assets shall be Four Million Six Hundred
Thousand and no/100 Dollars ($4,600,000.00) and shall
be payable as follows:
(a) Deposit. Fifty Thousand and no/100 Dollars
($50,000) upon execution of this Agreement by
Purchaser's execution and delivery to Seller of a
promissory note ("Note") in the form attached hereto as
Exhibit B. Upon Purchaser's payment to Seller of the
amount due as and when required by the terms of such
Note, such amount shall be delivered to Chicago Title
Insurance Company ("Escrow Agent"), which shall deposit
the same in an interest bearing account (the
"Deposit"). All interest earned on the Deposit shall
belong to the party entitled to the Deposit under the
terms of this Agreement.
(b) Cash Balance. The balance of the Purchase
Price of Four Million Five Hundred Fifty Thousand
no/100 Dollars ($4,550,000.00) (plus or minus any costs
and prorations for which Seller and/or Purchaser are
responsible under the terms hereof and as the same may
be adjusted to reflect an adjustment to the Purchase
Price in accordance with the terms hereof in
immediately available funds at Closing.
3. Closing
(a) The Closing Date. The Closing of the purchase
and sale under this Agreement (the "Closing") shall
take place on June 30,1998 or such later date, as soon
thereafter as possible, as Purchaser has obtained a
license to operate the Facility and all of the
conditions to closing set forth herein have been
satisfied or waived; provided, however, in no event
shall closing occur later than July 30,1998 (the
"Outside Closing Date"), it being understood and agreed
that if the conditions to closing have not been
satisfied as of July 30,1998 either party shall have
the right to exercise the termination rights set forth
in Paragraph 15. The date upon which the Closing
actually occurs is referred to herein as the Closing
Date.
(b) The Closing Process. Closing shall occur
through escrow and accordingly, at or prior to the
Closing Date, Purchaser and Seller shall deposit in
escrow with the Escrow Agent all documents and monies
necessary to close this transaction as herein provided.
Closing of escrow shall also mean and include the
recording of the deed in the county where the Facility
is located. Time is of the essence of this Agreement.
Closing shall occur in accordance with the procedures
and instructions given by Seller and Purchaser to the
Escrow Agent prior to Closing.
4. Accounts Receivable
Seller shall transfer to Purchaser, on the Closing
Date, all of Seller's right, title and interest in and
to Seller's accounts receivable relating to the
Facility, and Purchaser shall pay to Seller at the
Closing, in addition to the Purchase Price, an
additional amount equal to one-half of
2
<PAGE>
the aggregate amount of the outstanding balance as of
the Closing Date of such accounts receivable.
5. Costs and Prorations
(a) Costs and Expenses. Costs and expenses
associated with the sale of Seller's Assets to
Purchaser shall be allocated between the parties as
follows:
(i) Seller shall pay any state, county, or
local transfer tax due and payable by virtue of the
transfer to Purchaser of the Real Property and
Facility;
(ii) Seller shall pay the cost of the Title
Commitment (as defined below) and the premium
attributable to a standard coverage Owner's Title
Policy with respect to each of the Real Property and
the Facility, and Purchaser shall pay the cost of the
Lender's Title Policy, including the cost of any title
endorsements to the Lender' s Title Policy required by
Purchaser' s lender, the premium attributable to an
extended coverage Owner's Title Policy and the cost of
any title endorsements which Purchaser elects to
secure, the cost of the Litigation and Lien Search (as
defined below) and the cost of the Survey (as defined
below), in the event Purchaser elects to obtain the
same in order to secure such extended coverage title
insurance or is required to secure the same by its
lender.
(iii) Seller shall pay the cost of any
recording fees, other than any recording fees related
to any financing assumed or secured by Purchaser in
connection with the transaction provided for herein;
(iv) Purchaser and Seller shall each pay their own
attorney's fees;
(v) Purchaser and Seller shall share any
escrow fees on a 50-50 basis;
(vi) Purchaser will pay for the cost of the
Asbestos and Environmental Report (as defined in
Section 13(a)(v)), if Purchaser elects to secure the
same;
(vii) Purchaser shall pay any sales or use
tax due with respect to the sale of Seller's Assets to
Purchaser.
(b) Prorations and Adjustments. At Closing,
(i) Real and Personal Property taxes shall be
prorated as of the Closing Date, with Seller
responsible therefor for the period prior to the
Closing Date and with Purchaser responsible therefor
for the period from and after the Closing Date.
(ii) Seller shall arrange for a final
statement with respect to all utilities serving the
Real Property and the Facility as of the Closing Date
and shall pay all fees identified thereon, to the
extent applicable to periods prior to Closing, and
Purchaser shall arrange for all such utilities to be
billed in its name from and after the Closing Date and
shall pay all fees due therefor as of the Closing Date.
(iii) All revenues (including but not limited
to rent due from the tenants of the Facility) and
expenses (including but not limited to payroll and
employee benefits, and including any prepaid expenses)
related to the ownership or operation of the Seller's
Assets shall be prorated
3
<PAGE>
as of the Closing Date, with Seller responsible
therefor for the period prior to the Closing Date and
with Purchaser responsible therefor for the period from
and after the Closing Date.
6. Possession
At Closing, Seller shall deliver to Purchaser
possession of the Seller's Assets, subject only to
rights of residents of the Facility.
7. Representations and Warranties of Seller
Seller hereby warrants and represents to Purchaser
that:
(a) Authority. This Agreement is valid, binding
and enforceable against Seller in accordance with its
terms, except as such enforceability may be limited by
applicable bankruptcy laws and general principles of
equity. The execution of this Agreement and the
consummation of the transactions contemplated herein do
not result in a breach of the terms and conditions of
nor constitute a default under or violation of the
Seller' s Articles of Incorporation or Bylaws or of any
law, regulation, court order, mortgage, note, bond,
indenture, agreement, license or other instrument or
obligation to which Seller is now a party or by which
Seller or any of the assets of Seller may be bound or
affected (except that Meditrust's consent is required
for such transactions and consents may be required in
connection with the Existing Financing or the
assignment of the Operating Contracts).
(b) Necessary Action. Seller will make all
reasonable efforts, with all due diligence, to take all
action and obtain all consents prior to the Closing
necessary for it to lawfully enter into and carry out
the terms of this Agreement.
(c) Litigation. Except as otherwise described in
Exhibit "C" attached hereto, Seller has no knowledge
that there are any actions, suits, investigations or
proceedings pending or threatened by or before any
court, administrative agency or other governmental
authority or any arbitrator against or relating to the
Facility or the business being conducted thereon, or
against or relating to Seller with respect to its
ownership of the Seller's Assets. Any such actions,
suits or proceedings which are pending or threatened
with respect to the Seller's Assets and which are set
forth in "Exhibit C", would not interfere with or bring
into question the validity of the transaction
contemplated by this Agreement and are not reasonably
likely to result in a material adverse change in the
business, assets or condition of the Seller's Assets.
The transaction contemplated herein has not been
challenged by any governmental agency or any other
person, nor does Seller know or have reasonable grounds
to know, of any basis for any such actions, suits or
proceedings.
(d) Compliance with Law. Seller represents and
warrants as follows with respect to the compliance of
Seller's Assets with law:
(i) Except as set forth in Exhibit "D."
Seller has not received any written notice and Seller
has no actual knowledge that the Facility and its
operation and use are not now in compliance with all
applicable municipal, county, state and federal laws,
regulations, statutes, ordinances, standards and orders
and all administrative rulings and with all municipal,
health, building, land use and zoning laws and
regulations where the failure to comply therewith could
have a material adverse effect on the business,
property, condition (financial or otherwise) or
operation of the Facility as a licensed assisted living
facility. To the best of Seller's knowledge, (A) the
zoning applicable to the Facility is as described in
the zoning compliance letter attached
4
<PAGE>
hereto as Exhibit D-1, and (B) Seller has provided to
Purchaser copies of all information in Seller's
possession relating to the zoning applicable to the
Facility;
(ii) Except as set forth in Exhibit "D,"
Seller has not received any written notice of any
outstanding deficiencies or work orders of any
authority having jurisdiction over the Facility
requiring conformity to any applicable statute,
regulation, ordinance or by-law pertaining to assisted
living facilities which have not been fully satisfied
prior to the date hereof or which will not be fully
satisfied prior to the Closing;
(iii) Except as set forth in Exhibit "D,"
Seller has not received any written notice that there
are any claims, requirement or demand of any licensing
or certifying agency supervising or having authority
over the Facility or otherwise to rework or redesign it
or to provide additional furniture, fixtures, equipment
or inventory so as to conform to or comply with any
exiting law, code or standard which have not been fully
satisfied prior to the date hereof or which will not be
fully satisfied prior to the Closing;
(iv) Except as set forth in Exhibit "D: '
Seller has not received any notice from any
governmental body claiming a violation of any building,
zoning, environmental or other laws or ordinances; and
(v). Except as set forth in Exhibit "D"
Seller has not received any notice that the Facility
and the occupancy and operation thereof are not in
compliance with the certificate of occupancy therefor a
true and correct copy of which has been provided to
Purchaser or will be provided to Purchaser within ten
(10) days after the execution of this Agreement.
(vi) Seller has provided or within five (5)
days after the date hereof will provide to Purchaser
copies of the most recent survey reports, any waivers
of deficiencies, plans of correction, and any other
investigative reports issued with respect to the
Facility which are in Seller's possession with respect
to the Facility (collectively, "Reports"). Purchaser
has heretofore approved of all of such Reports
delivered prior to the date hereof. Within five (5)
business days after Seller' s delivery of any Reports
from and after the date hereof, Purchaser will review
and approve or disapprove the same by notice delivered
to Seller specifically referencing this Paragraph of
this Agreement. Purchaser's failure to deliver any such
notice within such time period shall be deemed approval
of such Reports. Purchaser agrees that Purchaser will
not disapprove any such Reports unless Material
Deficiencies are disclosed therein. For purposes of
this Agreement, "Material Deficiencies" means
deficiencies that (i) are required by applicable
authorities to be corrected, and (ii) would cost in
excess of $250,000 to correct either individually or in
the aggregate. In the event that Purchaser disapproves
any Reports showing Material Deficiencies, Seller will
elect, by notice delivered to Purchaser within five (5)
business days after Purchaser's delivery of such notice
to Seller, either to cure such deficiencies or to
terminate this Agreement. Seller's failure to deliver
any such notice shall be deemed to be Seller's election
to terminate this Agreement. If Seller elects to
terminate this Agreement, then the Deposit and any
accrued interest thereon shall be returned to Purchaser
and neither party shall have any further rights or
obligations under this Agreement. If Seller elects to
cure such deficiencies, Seller shall do so before
Closing hereunder and the Closing shall be extended for
such period of time as may be required for Seller to
complete such cure.
(e) Status of Seller. Seller is a Washington
corporation and is duly qualified to do business as a
foreign corporation under the laws of the State of
Florida. Seller has full power and authority to execute
and deliver this Agreement and all related documents
and subject to obtaining required consents and action
required to be taken by Meditrust as referenced herein
to carry out the transactions contemplated herein.
5
<PAGE>
(f) Title. At Closing, Seller or Meditrust will
have and will deliver to Purchaser good and marketable
fee simple title to the Real Property and the Facility
subject only to the easements, reservations and
encumbrances, if any, which are of record as of the
date hereof and which may be reflected in the Title
Policy; provided, however, that nothing herein shall be
construed as requiring Purchaser to approve any or all
of such easements, reservations and encumbrances of
record, it being understood and agreed that the same
are and shall be subject to the review and approval of
Purchaser pursuant to Paragraph 13(a)(i) and once
approved by Purchaser shall be deemed for purposes of
this Agreement to be the "Permitted Exceptions" to
Seller's title to the Real Property the Facility. None
of the Real Property, the Facility nor the Personal
Property is subject to any option or other right to
purchase in favor of any third party.
(g) The Facility. The Facility is an assisted
living facility with a total of 79 operational and
licensed units and is not certified to participate in
either the Medicare or the Medicaid Programs. On the
Closing Date, Seller or Meditrust shall assign to
Purchaser any and all warranties on all construction,
systems, walls, windows, appliances, roof and other
features and the furniture, fixtures and equipment of
the Facility. Except as otherwise specified herein,
Seller has no actual knowledge of any Material
Deficiencies in the Facility.
(h) The Personal Property. At Closing Seller or
Meditrust shall convey to Purchaser good and clear
marketable title to the Personal Property, the
Inventory and the Intangible Personal Property subject
only to the Permitted Exceptions.
(i) Condemnation. Seller has no knowledge that
there is presently any
condemnation action pending or threatened with respect
to the Facility or any part thereof.
(j) Materials and Documents. Seller has no actual
knowledge that any of the materials or documents
prepared by Seller and delivered to Purchaser in
connection with the execution and delivery of this
Purchase Agreement and Purchaser's investigations
hereunder are inaccurate or misleading in any material
respect. Seller has not intentionally withheld from
such materials or documents any written reports
relating to uncured physical defects at the Facility.
EXCEPT AS MAY BE EXPRESSLY SET FORTH IN THIS AGREEMENT
(INCLUDING WITHOUT LIMITATION PARAGRAPH 7(d)(i) AND
EXHIBIT D HEREOF), IT IS UNDERSTOOD AND AGREED THAT
SELLER IS NOT MAKING AND HAS NOT AT ANY TIME MADE ANY
REPRESENTATIONS OR WARRANTIES AS TO ZONING, OPERATING
HISTORY OR PROJECTIONS, COMPLIANCE OF OR BY THE
FACILITY OR ITS OPERATIONS WITH RESPECT THERETO OR WITH
ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY
APPLICABLE GOVERNMENTAL AUTHORITY OR BODY. THE
PROVISIONS OF THIS SECTION SHALL SURVIVE CLOSING.
(k) Employees of the Facility; Unions. None of the
employees of the Facility are members of a labor union
in connection with their employment at the Facility or
subject to any collective bargaining agreement in
connection with their employment at the Facility nor,
to the best of Seller's knowledge, are any such
employees engaged in any union organizing activities in
connection with their employment at the Facility.
Seller is not a party to any labor dispute or grievance
under any union contract with respect to the terms and
conditions of employment at the Facility.
(l) Facility Leases. Attached hereto as Exhibit
"E" is a true and correct rent roll dated as of , ___
1998 with respect to the Facility, setting forth the
name of the resident/tenant, the unit or office
occupied, the current monthly rent and the amount of
any security deposit being held by Seller from each
such tenant. Attached hereto as Exhibit "E" is a
representative form of the rental agreements currently
in effect with the residents of the Facility (the
"Facility Leases"). Seller is
6
<PAGE>
not in default of its obligations under the Facility
Leases and Seller is not aware of any default by any
other party thereto other than as set forth in Exhibit
"E." Each of the Facility Leases is in full force and
effect and none of the Facility Leases has been amended
or modified except as set forth in Exhibit "E."
(m) Operating Contracts. Within five (5) days
after the date hereof, Seller will provide to Purchaser
true and correct copies of all operating agreements in
effect with respect to Seller's operations at the
Facility (the "Operating Contracts"). Within ten days
after the date on which Seller delivers copies of the
Operating Contracts to Purchaser, Purchaser shall give
Seller written notice referencing this Paragraph and
specifying which of the Operating Contracts Purchaser
elects to assume (the "Assumed Contracts"). Purchaser's
failure to give any such notice within such time period
shall be deemed to be Purchaser's election to assume
all of the Operating Contracts. All of the Assumed
Contracts shall be assigned to, and assumed by,
Purchaser at Closing.
(n) Hazardous Materials. Except as disclosed in
the environmental report(s) relating to the Facility
which Seller has delivered or shall deliver to
Purchaser or which Purchaser otherwise shall obtain,
Seller has no actual knowledge, and Seller has not
received any written notice from a governmental or
quasi-governmental authority having jurisdiction, that
the Real Property or the Facility is in violation of
any federal, state, county or local environmental laws.
During the time in which Seller has owned the Property,
Seller has not received written notice from any
governmental or quasi governmental authority that
Seller or any tenant has, used, generated, transported,
treated, constructed, deposited, stored, disposed,
placed or located at, on, under or from the Real
Property or the Facility in violation of any federal,
state, county or local environmental laws any flammable
explosives, radioactive materials, hazardous or toxic
substances, materials or wastes, pollutants or
contaminants defined, listed or regulated by any
federal, state, county or local environmental laws, and
except as disclosed in the environmental report(s)
relating to the Facility which Seller has delivered or
shall deliver to Purchaser or which Purchaser otherwise
shall obtain, Seller has no actual knowledge of any of
the same.
8. Representations and Warranties of Purchaser
Purchaser hereby jointly and severally warrants
and represents to Seller that:
(a) Status of Purchaser. Purchaser is a limited
liability company duly organized, validly existing and
in good standing under the laws of the State of
Washington and prior to the Closing Purchaser shall be
qualified to do business in and in good standing under
the laws of the State of Florida if and to the extent
necessary for it to lawfully consummate the transaction
provided for herein.
(b) Authority. Purchaser has full power and
authority to execute and to deliver this Agreement and
all related documents, and to carry out the
transactions contemplated herein. This Agreement is
valid, binding and enforceable as against Purchaser in
accordance with its terms except as such enforceability
may be limited by applicable creditors rights laws and
general principles of equity. The execution of this
Agreement and the consummation of the transaction
contemplated herein does not result in a breach of the
terms and conditions of nor constitute a default under
or violation of Purchaser' s Certificate of Formation,
Operating Agreement or other organizational documents
or of any law, regulations, court order, mortgage,
note, bond, indenture, agreement, license or other
instrument or obligation to which Purchaser is a party
or by which Purchaser or any of the assets of Purchaser
may be bound or affected.
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<PAGE>
(c) Litigation. To the best of Purchaser's
knowledge there is no litigation, investigation or
other proceeding pending or threatened against or
relating to Purchaser, its properties or business which
is material to this Agreement, nor does Purchaser know
or have reasonable grounds to know of any basis for any
such action.
(d) Necessary Action. Purchaser will make all
reasonable efforts, with all due diligence, to take all
action and obtain all consents prior to Closing
necessary for them to lawfully enter into and carry out
the terms of this Agreement.
(e) AS IS CONDITION. PURCHASER ACKNOWLEDGES THAT
THE SELLER'S ASSETS ARE BEING SOLD IN THEIR AS IS WHERE
IS NO FAULTS CONDITION AND THAT EXCEPT AS EXPRESSLY SET
FORTH IN THIS AGREEMENT (INCLUDING WITHOUT LIMITATION
PARAGRAPH I 0(a)(iii) AND EXHIBIT J HEREOF) SELLER
MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED WITH RESPECT TO (A) THE DESIGN,
CONSTRUCTION, LOCATION, SIZE, CHARACTER, PHYSICAL
CONDITION OR STATE OF REPAIR OF THE SELLER'S ASSETS OR
ANY PORTION THEREOF; (B) THE TOPOGRAPHY, DRAINAGE OR
CONDITION OF THE SURFACE AND SUBSURFACE SOILS OF OR ON
THE REAL PROPERTY, (C) THE PRESENCE OR ABSENCE OF
HAZARDOUS WASTE OR HAZARDOUS SUBSTANCES ON OR FROM THE
REAL PROPERTY OR THE FACILITY; (D) THE MERCHANTABILITY,
HABITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF
THE SELLER'S ASSETS, (E) THE AMOUNT OF, OR THE BASIS OF
ASSESSMENT FOR, ANY TAXES LEVIED WITH RESPECT TO THE
SELLER'S ASSETS, (F) THE COMPLIANCE OF THE SELLER'S
ASSETS WITH ANY APPLICABLE GOVERNMENTAL REQUIREMENT OR
ANY OTHER REPRESENTATION OR WARRANTY NOT EXPRESSLY SET
FORTH IN THIS AGREEMENT. BY EXECUTION OF THIS
AGREEMENT, PURCHASER REPRESENTS AND WARRANTS TO SELLER
THAT PURCHASER IS AN EXPERIENCED, SOPHISTICATED
PURCHASER OF COMMERCIAL REAL ESTATE, WITH KNOWLEDGE AND
EXPERIENCE SUFFICIENT TO ENABLE IT TO EVALUATE THE
MERITS AND RISKS OF THE SALE, AND THAT IT IS
REPRESENTED BY KNOWLEDGEABLE AND EXPERIENCED LEGAL
COUNSEL OF ITS OWN CHOOSING AND AGREES THAT NEITHER
SELLER NOR ITS AGENTS OR REPRESENTATIVES HAS MADE AND
THAT PURCHASER HAS NOT RELIED UPON ANY REPRESENTATION
OR WARRANTY OF ANY KIND WHICH IS NOT EXPRESSLY SET
FORTH IN THIS PURCHASE AGREEMENT IN CONNECTION WITH THE
SALE OF THE SELLER'S ASSETS OR PURCHASER'S ACTUAL
PURCHASE THEREOF PURSUANT TO THE TERMS OF THIS
AGREEMENT, IT BEING UNDERSTOOD AND AGREED THAT ANY SUCH
PURCHASE WILL BE BASED SOLELY UPON THE REPRESENTATIONS
AND WARRANTIES OF SELLER SPECIFICALLY SET FORTH IN THIS
AGREEMENT, UPON THE RESULTS OF THE ENVIRONMENTAL REPORT
PROVIDED BY SELLER PURSUANT TO THE TERMS OF THIS
AGREEMENT AND UPON PURCHASER'S INSPECTION AND
INVESTIGATION OF THE SELLER'S ASSETS DURING THE REVIEW
PERIOD PROVIDED FOR IN THIS AGREEMENT.
9. Brokers
Seller and Purchaser each represent, covenant, and
warrant to the other that each has employed no other
broker or finder in connection with the transaction
contemplated herein, except as provided below. Seller
has employed 2 BeMa Network (the "Broker") as the
broker with respect to this transaction and will
compensate the Broker pursuant to a separate agreement
with the Broker. Seller agrees to indemnify and hold
Purchaser harmless from and against all liability,
8
<PAGE>
claims, demands, damages or costs of any kind,
including attorneys' fees, arising from or connected
with any broker's commission or finder's fee or
commission or charge claimed to be due to the Broker or
any other person arising from Seller's conduct with
respect to this transaction. Purchaser agrees to
indemnify and hold Seller harmless from and against all
liability, claims, demands, damages or costs of any
kind, including attorneys' fees, arising from or
connected with any broker's commission or finder's fee
or commission or charge claimed to be due any person
arising from Purchaser's conduct with respect to this
transaction.
10. Seller's Covenants
(a) Pre-Closing. Between the date hereof and the
Closing, Seller does hereby covenant as follows:
(i) Seller will not take any action
inconsistent with its obligations under this Agreement
or which could hinder or delay the consummation of the
transactions contemplated by this Agreement;
(ii) Seller will provide Purchaser within ten
( 10) days after execution of this Agreement with
copies of any appraisals, surveys, inspection and
testing documentation or reports, including, but not
limited to, environmental reports, structural report or
geological reports which may be in Seller's possession
with respect to the Facility and the Real Property;
provided, however, that Seller makes no representations
or warranties with respect to the truth, accuracy or
completeness of said reports; and
(iii) Seller will operate the Facility in the
ordinary course of business and in compliance with
applicable law, including maintaining the Facility's
license and its current insurance coverage in effect,
maintaining the Seller's Assets in good condition and
repair, ordinary wear and tear excepted, and
maintaining current salary levels and benefits. In
addition, Seller will cause the items listed on Exhibit
J to be repaired prior to the Closing Date;
(iv) Subject to Purchaser's indemnity
obligations set forth in Paragraph 14(b), Seller will
provide Purchaser and Purchaser's lender and their
officers, agents and employees with unlimited access to
the Facility and to the books and records of the
Facility for the purpose of conducting any and all
inspections thereof which Purchaser and/or Purchaser' s
lender deem to be necessary and appropriate in order to
assess the physical, financial and operational
condition thereof; provided, however, that such access
and inspection shall be with at least 24 hours prior
notice and during normal business hours at such time
and in such manner as the parties shall reasonably
agree upon; and provided, further, that a
representative of Seller shall have the right to
accompany Purchaser and/or Purchaser's lender and their
officers, agents and employees on any inspections which
may be conducted; and
(v) Seller will file all returns, reports and
filings of any kind or nature which are required to be
filed by Seller between the date hereof and the Closing
Date and will timely pay all taxes or other obligations
which are due and payable with respect to Seller's
Assets between the date hereof and the Closing Date
where the failure to file such reports could reasonably
be expected to result in a lien on the Seller's Assets
either before or after Closing.
(vi) Seller will promptly notify Purchaser of
any materially adverse changes affecting the validity
or accuracy of its representations and warranties of
which it becomes aware prior to the Closing.
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<PAGE>
(b) Closing. At the Closing, Seller agrees that it will
or will cause Meditrust to:
(i) Execute and deliver to Purchaser a deed
with respect to the Facility, in the form attached
hereto as Exhibit "G" (or such other form as shall be
reasonably satisfactory to Purchaser and Seller), and a
Bill of Sale with respect to the Facility, in the form
attached hereto as Exhibit "H" (or such other form as
shall be reasonably satisfactory to Purchaser and
Seller);
(ii) Deliver to Purchaser a certificate dated
as of the date of Closing certifying to the matters
referenced in Paragraphs 13(a)(vii) and (viii) hereof;
(iii) Execute an assignment and assumption
agreement with respect to the Facility Leases (the
"Lease Assignment Agreement");
(iv) Execute an assignment and assumption
agreement with respect to the Assumed Contracts (the
"Contract Assignment Agreement"); and
(v) Pay for any of the costs and expenses
identified in Paragraph 5 for which it
is responsible.
(c) Post-Closing.
(i) After the Closing, Seller agrees that it
will take such actions and properly execute and deliver
to Purchaser such further instruments of assignment,
conveyance and transfer as, in the reasonable opinion
of counsel for Purchaser, may be necessary to assure,
complete and evidence the full and effective transfer
and conveyance of Seller's Assets.
(ii) Seller agrees that for a period of three
(3) years immediately following the Closing (the "Non-
Competition Period"), Seller shall not purchase, build,
own, lease, manage or operate any assisted living
facility within a five (5) mile radius from the
Facility (the "Covered Territory"), except for any
assisted living facility presently owned, leased,
managed or operated or being developed by Seller within
the Covered Territory, a list of which shall be
provided by Seller to Purchaser within five (5) days
after the date hereof. In addition, during the Non-
Competition Period, Seller agrees not to solicit or
induce any of the Facility employees or independent
contractors to terminate their employment or
contractual relationships with Purchaser.
(iii) Purchaser shall preserve the books and
records Purchaser obtains from Seller pursuant to this
Agreement, and Purchaser shall provide Seller with
access during normal business hours to any books or
records which Seller may need to file, defend or
otherwise deal with tax returns, securities filings or
other filings filed prior to or subsequent to the
Closing Date which in any way relate to the period
prior to the Closing Date.
11. Purchaser's Covenants
(a) Pre-Closing. Between the date hereof and the
Closing, except as contemplated by this Agreement or
with the consent of Seller, Purchaser agrees that:
(i) Purchaser will not take any action
inconsistent with its obligations under this Agreement
or which could hinder or delay the consummation of the
transaction contemplated by this Agreement; and
(ii) Purchaser will make all reasonable
efforts, with all due diligence, to obtain
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<PAGE>
all. consents, approvals and licenses necessary to
permit the consummation of the transaction contemplated
by this Agreement and/or necessary to permit Purchaser
to own and to operate the Facility as of the Closing
Date.
(b) Closing. At the Closing, Purchaser agrees that
it will:
(i) Pay the balance of the cash portion of
the Purchase Price due at Closing;
(ii) Deliver to Seller a certificate dated as
of the date of Closing certifying to the matters
referenced in Paragraph 13(b)(i) and (ii) hereof;
(iii) Pay for any of the costs and expenses
specified in Paragraph 5 for which it
is responsible;
(iv) Execute and deliver the Contract
Assignment Agreement;
(v) Execute and deliver the Lease
Assignment Agreement.
(c) Post-Closing.
(i) After Closing Purchaser agrees that it
will take such actions and properly execute and deliver
to Seller such further instruments of assignment,
conveyance and transfer as, in the reasonable opinion
of counsel for Seller, may be necessary to assure,
complete and evidence the full and effective transfer
and conveyance of Seller's Assets.
(ii) Purchaser agrees that during the Non-
Competition Period, Purchaser shall not solicit or
induce any of the employees or independent contractors
of Seller or its affiliates to terminate their
employment or contractual relationships with Seller
(provided, however, that this paragraph shall not apply
to any of the Assumed Contracts, all of which shall be
permitted to be assumed by Purchaser).
12. Mutual Covenants
Following the execution of this Agreement,
Purchaser and Seller agree:
(a) If any event should occur which would prevent
fulfillment of the conditions to the obligations of any
party hereto to consummate the transaction contemplated
by this Agreement, to use its or their reasonable
efforts to cure the same as expeditiously as possible.
(b) To cooperate fully with each other in
preparing, filing, prosecuting, and taking any other
actions which are or may be reasonable and necessary to
obtain the consent of any governmental instrumentality
or any third party or to accomplish the transaction
contemplated by this Agreement.
(c) To effect in a timely fashion all prorations
contemplated in this Agreement.
13. Conditions Precedent to Closing
(a) Purchaser's Conditions. Purchaser's obligation
to purchase Seller's Assets hereunder is subject to the
following conditions, any one or all of which may be
waived by Purchaser:
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<PAGE>
(i) Title and Survey Review. Prior to 5:00
P.M. (Pacific Time) on the twenty first (21st) calendar
day following the date hereof (the "Approval Date"),
(A) Seller shall cause to be delivered to Purchaser a
title commitment (the "Facility Title Commitment")
issued by Chicago Title Insurance Company (the "Title
Company") for an Owner's Policy of Title Insurance
covering the Real Property and the Facility (the "Title
Commitment") and (B) if and to the extent Purchaser
elects to obtain the same, Purchaser shall order at its
own cost and expense (i) a litigation, bankruptcy,
judgment and security interest search in the name of
Seller and the Facility, (the "Litigation and Lien
Search") and (ii) an ALTA survey of the Real Property
and the Facility, certified to Purchaser, the Title
Company and Purchaser's lender, meeting the survey
requirements set forth in Exhibit "I" and otherwise
satisfactory to cause the Title Commitment to be issued
without survey exception (the "Survey"). Seller shall
also cause to be provided and delivered to Purchaser
legible copies of all documents referred to in the
Title Commitment (the
"Exception Documents"). Purchaser shall have ten (10)
business days after its confirmed receipt of the Title
Commitment and the Exception Documents (the "Title
Review Period") to approve or disapprove in writing the
Title Commitment and, if Purchaser elects to obtain the
same, the Survey and the results of the Litigation and
Lien Search. The failure of Purchaser to disapprove the
Title Commitment and, if Purchaser elects to obtain the
same, the Survey and/or the Litigation or Lien Search
results within the Title Review Period shall be deemed
approval by Purchaser of such items. If Purchaser
disapproves any such items or documents, Seller shall
have five (5) business days from the date of such
disapproval in which to advise Purchaser whether or not
it is prepared to cure the same prior to Closing and in
the event Seller fails or refuses to do so within said
five (5) business day period, Purchaser shall have two
(2) business days thereafter in which to advise Seller
in writing of its election either to waive the matters
to which it has objected and which Seller is not
prepared to cure or to terminate this Agreement and to
demand the return of its Deposit and the accrued
interest thereon. The title and survey objections
approved or deemed approved by Purchaser pursuant to
this Paragraph 13(a)(i) shall hereinafter be referred
to as the "Permitted Exceptions."
(ii) Physical Condition. [INTENTIONALLY
OMITTED]
(ii) Asbestos and Environmental Report. On or
prior to the Approval Date, Purchaser shall have the
right, at its sole cost and expense, to obtain from a
duly licensed environmental inspection company approved
by Purchaser a report with respect to each of the
Facility indicating (A) the presence (or absence) of
asbestos in the Facility, the level thereof, whether it
is friable or non-friable, if it is friable the
recommended steps to correct the problem and the
anticipated cost thereof and (B) a Phase I EPA
Assessment (collectively the "Asbestos and
Environmental Reports"). Purchaser shall have until the
tenth (10th) business day after the Approval Date (the
"Environmental Review Period") to approve or disapprove
the Asbestos and Environmental Report in Purchaser's
sole and absolute discretion. Should Purchaser
disapprove the Asbestos and Environmental Report, it
shall notify Seller in writing of such disapproval and
the reasons therefor at or prior to the expiration of
the Environmental Review Period (the
"Environmental Notice"). The failure of Purchaser to
indicate disapproval on or prior to the expiration of
the Environmental Review Period shall be deemed
approval. If Seller advises Purchaser within ten (10)
days after its receipt of Purchaser's Environmental
Notice that Seller is unwilling or unable to remedy all
such objections prior to the Closing Date, Purchaser
shall have two (2) business days thereafter in which to
advise Seller in writing of its election either to
waive the matters which Purchaser has disapproved and
which Seller is unwilling or unable to remedy or to
terminate this Agreement and to demand the return of
its Deposit and the accrued interest thereon.
(iv) Title Insurance. As of the Closing Date,
the Title Company shall issue with respect to the Real
Property and the Facility an owner's policy of title
insurance to Purchaser in the
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<PAGE>
aggregate in the full amount of the purchase price (the
"Owner's Title Policy"), which shall reflect only the
Permitted Exceptions.
(v) Regulatory Approval; Licensing. At or
prior to Closing, Purchaser shall have received all
consents, approvals, licenses and certificates as may
be necessary for Purchaser lawfully to own and operate
the Facility as operated by Seller with 79 licensed
units.
(vi) No Defaults. At Closing Seller shall not
be in default, where said default cannot be cured by
Closing, under any mortgage, contract, lease or other
agreement affecting or relating to the Seller's Assets.
(vii) Seller's Performance. At Closing Seller
shall have performed all of its obligations under this
Agreement that are to be performed prior to or at
Closing to the extent the same have not been waived by
Purchaser in accordance with the terms hereof.
(viii) Seller's Representations and
Warranties. At Closing Seller's representations and
warranties contained in this Agreement or in any
certificate or document delivered in connection with
this Agreement or the transactions contemplated herein
shall be true at and as of the date of Closing as
though such representations and warranties were then
again made (subject to such changes as shall occur in
the ordinary course of business from the date hereof
through the Closing Date, to the extent such changes
are permitted under this Agreement).
(b) Seller's Conditions. Seller's obligation to
sell Seller's Assets hereunder is subject to the
fulfillment of each of the following conditions, any
one or all of which may be waived by Seller in writing:
(i) Purchaser's Representations and
Warranties. At Closing, Purchaser's representations and
warranties contained in this Agreement or in any
certificate or document delivered in connection with
this Agreement or the transactions contemplated herein
shall be true in all material respects at and as of the
date of Closing as though such representations and
warranties were then again made (subject to such
changes as shall occur in the ordinary course of
business from the date hereof through the Closing Date,
to the extent such changes are permitted under this
Agreement).
(ii) Purchaser's Performance. At Closing,
Purchaser shall have performed its obligations under
this Agreement that are to be performed prior to or at
Closing to the extent the same have not been waived by
Seller in accordance with the terms hereof.
(iii) Approvals. Seller shall have received
all consents, approvals, certifications and licenses as
may be necessary for the transfer of Seller's Assets to
Purchaser.
14. Indemnification.
(a) Seller's Indemnification. Seller shall
indemnify and hold Purchaser harmless from and against:
(i) Except as otherwise provided in this
Agreement, any and all obligations relating to the
ownership of Seller's Assets and the operation of the
Facility which exist at the Closing Date;
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<PAGE>
(ii) Any and all damage, loss or liability
arising from and after the Closing Date under any of
the Operating Contracts other than the Assumed
Contracts;
(iii) Any and all damage, loss, or liability
resulting from any misrepresentation of a material
fact, breach of warranty or nonfulfillment of any
agreement on the part of Seller under this Agreement or
from any misrepresentation in any certificate furnished
or to be furnished by Seller to Purchaser hereunder;
and
(iv) Any and all actions, suits, proceedings,
demands, assessments, judgments, reasonable costs, and
other reasonable expenses, including, but not limited
to, reasonable attorney's fees, incident to any of the
foregoing.
For purposes of Paragraph 14(a), an obligation shall be
deemed to "exist" as of the Closing Date if it relates
to events which occurred prior to the Closing Date even
if it is not asserted until after the Closing Date.
(b) Purchaser's Indemnification. Purchaser shall
indemnify and hold Seller harmless from and against:
(i) Except as otherwise provided in this
Agreement, any and all obligations relating to the
ownership of the Seller's Assets and the operation of
the Facility from and after the Closing Date,
including, but not limited to any obligations under any
of the Operating Contracts which Purchaser elects to
assume at Closing;
(ii) Any and all damage, loss or liability
resulting from (A) any misrepresentation of a material
fact, breach of warranty or nonfulfillment of any
agreement o n the part of Purchaser under this
agreement or from any misrepresentation in any
certificate furnished or to be furnished by Purchaser
to Seller hereunder, or (B) the exercise by Purchaser
or its lender of Purchaser's rights under Paragraph
10(a)(iv) above; and
(iii) Any and all actions, suits, proceedings,
demands, assessments, judgments, reasonable costs and
other reasonable expenses, including, but not limited
to, reasonable attorney's fees, incident to any of the
foregoing.
15. Termination
(a) Grounds for Termination. This Agreement may be
terminated and the transaction contemplated herein
abandoned at any time prior to Closing:
(i) By mutual written agreement of the
parties;
(ii) By Seller, if any of the conditions set
forth in Paragraph 13(b) shall have become incapable of
fulfillment prior to the Outside Closing Date, or such
earlier date as may be specifically provided for the
performance thereof (as the same may be extended)
through no fault of Seller and the same shall not have
been waived by Seller;
(iii) By Purchaser, if any of the conditions
set forth in Paragraph 13 (a) shall have become
incapable of fulfillment prior to the Outside Closing
Date, or such earlier date as may be specifically
provided for the performance thereof (as the same may
be extended) through no fault of Purchaser and the same
shall not have been waived by Purchaser;
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<PAGE>
(iv) By either Seller or Purchaser in the
event of a material breach by the other party of its
obligations hereunder;
(v) By either Seller or Purchaser if the
Closing has not occurred by the Closing Date specified
in Paragraph 3 as the same may be extended in
accordance with the terms of this Agreement;
(vi) By either Purchaser or Seller, in the
event that prior to the Closing Date a material portion
of the Seller's Assets shall have been damaged or
destroyed by fire or other casualty, or shall have been
taken or condemned by any public or quasi-public
authority under the power of eminent domain; or
(vii) By Seller, if Purchaser shall fail to
pay or perform any of its obligations under the Note as
and when due in accordance with the terms hereof,
provided that no such termination shall affect Seller's
right to enforce the Note and collect all amounts for
which Purchaser is obligated thereunder.
Neither Seller nor Purchaser may claim termination
of this Agreement or pursue any other remedy referred
to in this Agreement on account of a breach of a
condition, covenant or warranty by the other, without
first giving such other party written notice of such
breach and not less than ten ( 10) days within which to
cure such breach. The Closing shall be postponed to the
first day of the next calendar month if necessary to
afford such opportunity to cure. In any event, unless
the parties hereto agree otherwise, postponement of
closing to the first day of the next calendar month
shall be granted only once. Notwithstanding the
foregoing or anything to the contrary herein, no such
notice or opportunity to cure shall be required with
respect to any failure by Purchaser to pay or perform
its obligations under the Note as and when due
thereunder, and any such failure immediately shall
constitute a default by Purchaser under this Agreement
entitling Seller to all of the rights and remedies
specified herein and in the Note.
(b) Seller's Remedies. In the event of the
termination of this Agreement by Seller as provided in
this Agreement, neither party shall have any further
rights or remedies hereunder, other than Purchaser's
right to secure the return of the Deposit and any
accrued interest thereon, except that in the event of a
material breach by Purchaser of its obligations
hereunder, Seller shall be entitled at Seller's
election either (i) to terminate this Agreement and
retain Purchaser's Deposit and collect from Purchaser
an additional One Hundred Thousand Dollars
($100,000.00), for a total of One Hundred Fifty
Thousand Dollars ($ I 50,000.00), plus any and all
costs and expenses of enforcement hereof, as liquidated
damages, the parties acknowledging and agreeing that
the amount of damages which Seller may incur as a
result of Purchaser's breach may be difficult or
impossible to ascertain and that such liquidated
damages amount is a reasonable and fair estimate
thereof, or (ii) to seek specific performance of
Purchaser's obligations hereunder.
(c) Purchaser's Remedies. In the event of the
termination of this Agreement by Purchaser as provided
in this Agreement, neither party shall have any further
rights or remedies hereunder, other than Purchaser's
right to secure the return of the Deposit and any
accrued interest thereon, except that in the event of a
material breach by Seller of its obligations hereunder,
Purchaser shall be entitled at Purchaser's election
either (i) to terminate this Agreement and receive a
refund of the Deposit and collect from Seller the sum
of One Hundred Fifty Thousand Dollars ($ 150,000.00),
plus any and all costs and expenses of enforcement
hereof, as liquidated damages, the parties
acknowledging and agreeing that the amount of damages
which Purchaser may incur as a result of Seller' s
breach may be difficult or impossible to ascertain and
that such liquidated damages amount is a reasonable
and. fair estimate thereof, or (ii) seek specific
performance of Seller's obligations hereunder.
Notwithstanding the foregoing, if Purchaser terminates
this Agreement
15
<PAGE>
pursuant to Paragraph 15(a)(iii) above due to Seller's
failure to obtain Meditrust's consent to the
transactions contemplated by this Agreement, Seller
shall reimburse Purchaser for all reasonable expenses
reasonably incurred by Purchaser for the purpose of
consummating the transaction contemplated by this
Agreement, within thirty (30) days after Purchaser
provides to Seller such documentation relating to any
such expenses as may reasonably be required by Seller.
Purchaser's demand for such payment and all such
documentation shall be delivered to Seller within one
year after the date hereof, as a condition to Seller's
obligation to reimburse Purchaser.
16. Operational Issues
(a) At the Closing, Seller shall deliver to
Purchaser (i) a schedule which reflects all earned
vacation and sick pay due to and/or coming due to the
Facility employees for periods prior to the Closing
Date (the "Benefits Schedule"), and (ii) an amount
equal to fifty percent (50"%) of the earned vacation
and sick pay reflected on the Benefits Schedule (or
Purchaser shall receive a credit therefor against the
Purchase Price due at Closing). Purchaser agrees to pay
the amounts reflected on the Benefits Schedule to the
Facility employees as and when due in accordance with
Seller's personnel policies prior to the Closing Date
and Purchaser's personnel policies from and after the
Closing Date, it being understood and agreed that the
Facility employee are and shall be the employees of
Purchaser from and after the Closing Date.
(b) Purchaser shall retain as Purchaser's
employees at the Facility substantially all of the
Facility employees who, as of the Closing Date and have
been employed on average for 20 hours or more per week.
Such employees whose employment is continued shall be
referred to as the "Retained Employees." Any such
continued employment of a Retained Employee by
Purchaser shall be on terms which require said Retained
Employee to perform comparable services, in a
comparable position and at substantially the same base
salary as such Retained Employee enjoyed with the
Seller prior to Closing. The Retained Employees who
elect to accept continued employment with Purchaser
shall hereinafter be referred to as the "Hired
Employees" and as to each of the Hired Employees,
Purchaser shall recognize each such Hired Employees
original hire date and shall continue to employ each
such Hired Employee for a period of no less than ninety
(90) days following the Closing Date unless the
employment of such Hired Employee is terminated in
accordance with Purchaser's personnel policies or as a
result of such Hired Employee's resignation. Seller and
Purchaser acknowledge and agree that the provisions of
this paragraph are designed solely to ensure that
Seller is not required to give notice to the Facility
employees of the "closure" thereof under the Worker
Adjustment and Retraining Notification Act (the "WARN
Act") or under any comparable state law. Accordingly,
Purchaser agrees to indemnify, defend and hold harmless
Seller from any liability which it may incur under the
WARN Act or under comparable state law in the event of
a violation by Purchaser of its obligations thereunder,
including a violation which results from allegations
that Purchaser constructively terminated the Facility
employees as a result of the terms and conditions of
employment offered by Purchaser; provided, however,
that nothing herein shall be construed as imposing any
obligation on Purchaser to indemnify, defend or hold
harmless Seller from any liability which it may incur
under the WARN Act as a result of the acts or omissions
of Seller prior to the Closing Date, including any
liability which may result from the aggregation of the
acts of Seller prior to the Closing Date and the acts
of Purchaser after the Closing Date, it being
understood and agreed that Purchaser shall only be
liable for its own acts or omissions after the Closing
Date. Nothing in Section shall, however, create any
rights in favor of any person not a party hereto,
including the Facility employees, or constitute an
employment agreement or condition of employment for any
employee of Seller or any affiliate of Seller who is a
Retained Employee or a Hired Employee, and nothing in
this Section shall apply to the termination of the
employment of any Retained Employee who is terminated
for cause.
16
<PAGE>
(c) At Closing, Seller shall provide Purchaser
with an accounting of all resident security deposits
being held by Seller as of the Closing Date (the
"Resident Deposits"). Such accounting shall set forth
the names of the residents or prospective residents for
whom such funds are held, the amounts held on behalf of
each resident or prospective resident and the Seller's
warranty that the accounting is true, correct and
complete.
(d) On the Closing Date, Seller shall transfer
the Resident Deposits to the bank
account designated by the Purchaser, and Purchaser
shall acknowledge in writing to Seller receipt of and
expressly assume all Seller's financial and custodial
obligations with respect thereto, it being the intent
and purpose of this provision that, at Closing, Seller
will be relieved of all fiduciary and custodial
obligations, and that Purchaser will assume all such
obligations and be directly accountable to the
residents and prospective residents of the Facility,
with respect thereto.
(e) Notwithstanding the foregoing, Seller will
indemnify and hold Purchaser harmless from all
liabilities, claims and demands in the event the amount
of the Resident Deposits transferred to the Purchaser's
bank account as provided in this Paragraph 16 did not
represent the full amount of such Resident Deposits
then or thereafter shown to have been delivered to
Seller by the current residents or prospective
residents of the Facility.
17. Notices
Any notice, request or other communication to be
given by any party hereunder shall be in writing and
shall be sent by registered or certified mail, postage
prepaid, by overnight courier guaranteeing overnight
delivery or by facsimile transmission, to the following
address:
To Seller: Emeritus Properties I,
Inc.
3131 Elliott Avenue, Suite
500
Seattle, WA 98121
Facsimile: 206-301-4500
with a copy to: James L.
Spencer
The Nathanson Group
PLLC
1411 Fourth Avenue,
Suite 905
Seattle, WA 98101
Facsimile: 206-623-1738
To Purchaser: Ray Peirce, President
Bayside Health Group LLC
2008 Sullivan Drive NW
Gig Harbor, WA 98335
Facsimile: 206-858-5392
with a copy to:
Notice shall be deemed given three (3) business
days after deposit in the mail, on the next day if sent
by overnight courier and on receipt if sent by
facsimile.
18. Sole Agreement
17
<PAGE>
This Agreement may not be amended or modified in
any respect whatsoever except by instrument in writing
signed by the parties hereto. This Agreement
constitutes the entire. agreement between the parties
hereto and supersedes all prior negotiations,
discussions;. writings and agreements between them.
19. Successors
The terms of this Agreement shall be binding upon
and inure to the benefit of and be enforceable by and
against the heirs, successors and assigns of the
parties hereto; provided, however, that Purchaser shall
not have the right to assign its rights and obligations
hereunder without the prior consent of Seller (which
consent will not be unreasonably withheld), except to a
person or entity controlling, controlled by or under
common control with the Purchaser.
20. Captions
The captions of this agreement are for convenience
of reference only and shall not define or limit any of
the terms or provisions hereof.
21. Survival
The representations and warranties of Seller and
Purchaser set forth herein shall survive the Closing
for a period of one year after the Closing.
22. Governing Law: Jurisdiction and Venue
THE PARTIES AGREE THAT, TO THE MAXIMUM EXTENT
PERMITTED BY LAW, THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS AND
DECISIONS OF THE STATE OF WASHINGTON (WITHOUT REGARD
FOR ITS CONFLICTS OF LAW PRINCIPLES). SELLER AND
PURCHASER HEREBY AGREE THAT ALL ACTIONS OR PROCEEDINGS
ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT
SHALL BE LITIGATED IN ANY STATE OR FEDERAL COURT HAVING
JURISDICTION LOCATED IN THE CITY OF SEATTLE, STATE OF
WASHINGTON, UNLESS SUCH ACTIONS OR PROCEEDINGS ARE
REQUIRED BY LAW TO BE BROUGHT ELSEWHERE. PURCHASER
HEREBY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR PROCEEDING RELATING
TO THIS AGREEMENT, AND PURCHASER WAIVES ANY CLAIM THAT
ANY SUCH COURT IS AN INCONVENIENT FORUM OR AN IMPROPER
FORUM BASED ON LACK OF VENUE.
23. Severability
Should any one or more of the provisions of this
Agreement be determined to be invalid, unlawful or
unenforceable in any respect, the validity, legality or
enforceability of the remaining provisions hereof shall
not in any way be affected or impaired thereby.
24. Counterparts
This Agreement may be executed in any number of
counterparts, each of which shall be an original; but
such counterparts shall together constitute but one and
the same instrument.
18
<PAGE>
25. Confidentiality
In the event the transaction contemplated by this
Agreement fails to close for any reason, Purchaser and
Seller agree to keep confidential any proprietary
information disclosed to them by the other party during
the course of this transaction.
26. Internal Revenue Service Reporting
Prior to the Closing, Seller shall furnish
Purchaser and to the Escrow Agent Sellers affidavit,
under penalty of perjury, which shall include Seller's
United States taxpayer identification number, stating
that Seller is not a foreign person under Section 1445
of the Internal Revenue Code and the Regulations
thereunder.
27. Construction
Each party acknowledges and agrees that it has
participated in the drafting and the
negotiation of this Agreement and has been represented
by counsel during the course thereof. Accordingly, in
the event of a dispute with respect to the
interpretation or enforcement of the terms hereof, no
provision shall be construed so as to favor or disfavor
either party hereto.
28. Attorneys' Fees
In the event of litigation or other proceedings
involving the parties to this Agreement to enforce any
provision of this Agreement, to enforce any remedy
available upon default under this Agreement, or seeking
a declaration of the rights of either party under this
Agreement, the prevailing party shall be entitled to
recover from the other such reasonable attorneys' fees
and costs as may be actually incurred, including its
costs and fees on appeal.
29. Waiver of Jury Trial
EACH OF THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY
AND : INTENTIONALLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY
LEGAL ACTION BROUGHT ON OR WITH RESPECT TO THIS
AGREEMENT, INCLUDING TO ENFORCE OR DEFEND ANY RIGHTS
HEREUNDER AND AGREES THAT ANY SUCH ACTION SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY.
30. Calculation of Time Periods
Unless otherwise specified, in computing any
period of time described herein, the day of the act or
event on which the designated period of time begins to
run shall not be included and the last day of the
period so. computed shall be included, unless such last
day is a Saturday, Sunday or legal holiday, in which
event the period shall run until the next day which is
not a Saturday, Sunday or a legal holiday.
31. Expenses
Except as otherwise specifically provided herein,
each party shall bear its own costs and expenses
(including legal fees and expenses) incurred in
connection with this Agreement and the
19
<PAGE>
transactions contemplated hereby.
32. Third Party Beneficiary
Nothing in this Agreement express or implied is
intended to and shall not be construed to confer upon
or create in any person (other than the parties hereto)
any rights or remedies under or by reason of this
Agreement, including without limitation, any right to
enforce this Agreement.
33. Radon Gas.
RADON IS A NATURALLY OCCURRING RADIOACTIVE GAS
THAT, WHEN IT HAS ACCUMULATED IN A BUILDING IN
SUFFICIENT QUANTITIES, MAY PRESENT HEALTH RISKS TO
PERSONS WHO ARE EXPOSED TO IT OVER TIME. LEVELS OF
RADON THAT EXCEED FEDERAL AND STATE GUIDELINES HAVE
BEEN FOUND IN BUILDINGS IN FLORIDA. ADDITIONAL
INFORMATION REGARDING RADON AND RADON TESTING MAY BE
OBTAINED FROM YOUR COUNTY PUBLIC HEALTH UNIT.
[SIGNATURES ON THE FOLLOWING PAGE)
IN WITNESS WHEREOF, the parties hereby execute
this Agreement as of the day and year first written
above.
SELLER: EMERITUS PROPERTIES I,
INC.
By: /s/ Kelly J. Price
- -------------------------------------------
Its: Vice President of
Finance
PURCHASER: BAYSIDE HEALTH GROUP LLC
By: /s/ Raymond B. Peirce
- ------------------------------------
Its: President
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS FOUND ON PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE
THREE MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,464
<SECURITIES> 9,800
<RECEIVABLES> 3,235
<ALLOWANCES> 474
<INVENTORY> 370
<CURRENT-ASSETS> 65,150
<PP&E> 125,886
<DEPRECIATION> 9,496
<TOTAL-ASSETS> 215,021
<CURRENT-LIABILITIES> 63,390
<BONDS> 166,145
25,000
0
<COMMON> 1
<OTHER-SE> (17,301)
<TOTAL-LIABILITY-AND-EQUITY> 215,021
<SALES> 0
<TOTAL-REVENUES> 34,802
<CGS> 0
<TOTAL-COSTS> 40,777
<OTHER-EXPENSES> (329)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,111
<INCOME-PRETAX> (8,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,424)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,320
<NET-INCOME> (10,299)
<EPS-PRIMARY> (0.97)
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</TABLE>
