<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, 1999.
|_| 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, 1999
WASHINGTON 91-1605464
(State or other jurisdiction of (I.R.S Employer Identification No.)
incorporation or organization)
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 3, 1999, there were 10,487,500 shares of the Registrant's Common
Stock, par value $.0001, outstanding.
<PAGE>
EMERITUS CORPORATION
Index
Part I. Financial Information
<TABLE>
<S> <C> <C>
Item 1. Financial Statements: Page No.
Condensed Consolidated Balance Sheets as of December 31, 1998 and
March 31, 1999 ............................................................ 1
Condensed Consolidated Statements of Operations for the Three Months
ended March 31, 1998 and 1999 ............................................. 2
Condensed Consolidated Statements of Comprehensive Operations for the
Three Months ended March 31, 1998 and 1999 ................................ 3
Condensed Consolidated Statements of Cash Flows for the Three Months
ended March 31, 1998 and 1999 ............................................. 4
Notes to Condensed Consolidated Financial Statements ...................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................ 11
Part II. Other Information
Item 6. Exhibits .................................................................. 12
Signature ................................................................. 13
Note: Items 1, 2, 3, 4, and 5 of Part II are omitted because they are not
applicable
</TABLE>
<PAGE>
EMERITUS CORPORATION CONDENSED
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and March 31, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
March 31,
December 31, 1999
1998 (unaudited)
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................ $ 11,442 $ 6,075
Short-term investments ................................... 4,491 3,037
Trade accounts receivable, net ........................... 2,235 2,166
Prepaid expenses and other current assets ................ 13,823 10,782
Property held for sale ................................... 3,661 2,327
------------ ------------
Total current assets ............................. 35,652 24,387
------------ ------------
Property and equipment, net ................................ 128,659 127,425
Property held for development .............................. 1,855 2,021
Notes receivable from and investments in affiliates ........ 10,247 10,286
Restricted deposits, less current portion .................. 6,271 6,380
Other assets, net .......................................... 10,186 9,791
------------ ------------
Total assets ..................................... $ 192,870 $ 180,290
============ ============
<CAPTION>
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Short-term borrowings .................................... $ 5,000 $ 5,000
Current portion of long-term debt ........................ 7,591 7,591
Margin loan on short-term investments .................... 2,324 2,038
Trade accounts payable ................................... 7,115 5,150
Accrued employee compensation and benefits ............... 3,386 3,256
Other current liabilities ................................ 11,213 7,945
------------ ------------
Total current liabilities ........................ 36,629 30,980
------------ ------------
Deferred rent .............................................. 4,352 2,683
Deferred gain on sale of communities ....................... 19,483 20,042
Deferred income ............................................ 216 160
Convertible debentures ..................................... 32,000 32,000
Long-term debt, less current portion ....................... 119,674 119,336
Security deposits and other long-term liabilities .......... 570 222
------------ ------------
Total liabilities ................................ 212,924 205,423
------------ ------------
Minority interests ......................................... 910 804
Redeemable preferred stock ................................. 25,000 25,000
Shareholders' Deficit:
Common stock, $.0001 par value. Authorized 40,000,000
shares; issued and outstanding 10,484,050 and
10,487,050 shares at December 31, 1998 and
March 31, 1999, respectively ........................... 1 1
Additional paid-in capital ................................ 38,995 38,995
Accumulated other comprehensive loss ...................... (4,420) (5,882)
Accumulated deficit ....................................... (80,540) (84,051)
------------ ------------
Total shareholders' deficit ...................... (45,964) (50,937)
------------ ------------
Total liabilities and shareholders' deficit ...... $ 192,870 $ 180,290
============ ============
</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, 1998 and 1999
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Community revenue ........................................ $ 34,143 $ 33,054
Other service fees ....................................... 598 426
Management fees .......................................... 61 699
------------ ------------
Total operating revenues ......................... 34,802 34,179
------------ ------------
Expenses:
Community operations ..................................... 25,709 21,652
General and administrative ............................... 3,201 3,512
Depreciation and amortization ............................ 1,568 1,465
Rent ..................................................... 10,299 7,585
------------ ------------
Total operating expenses ......................... 40,777 34,214
------------ ------------
Loss from operations ............................. (5,975) (35)
------------ ------------
Other income (expense):
Interest expense, net .................................... (2,778) (3,225)
Other, net ............................................... 329 304
------------ ------------
Net other expense ................................ (2,449) (2,921)
------------ ------------
Loss before cumulative effect of change in
accounting principle ........................ $ (8,424) $ (2,956)
Cumulative effect of change in accounting principle ........ (1,320) --
------------ ------------
Net loss ......................................... $ (9,744) $ (2,956)
------------ ------------
Preferred stock dividends .................................. 555 555
------------ ------------
Net loss to common shareholders .................. $ (10,299) $ (3,511)
============ ============
Loss per common share - basic and diluted:
Loss before cumulative effect of change in accounting
principle ............................................. $ (0.84) $ (0.33)
Cumulative effect of change in accounting principle ...... $ (0.13) --
------------ ------------
Loss per common share ...................................... $ (0.97) $ (0.33)
============ ============
Weighted average number of common shares outstanding -
basic and diluted ..................................... 10,633 10,485
============ ============
</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, 1998 and 1999
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Net loss .................................................... $ (9,744) $ (2,956)
Other comprehensive income (loss):
Foreign currency translation adjustments ............... 2 6
Unrealized losses on investment securities:
Unrealized holding losses arising during the period . (2,355) (1,468)
Reclassification adjustment for gains included in
net loss .......................................... (450) --
------------ ------------
Total other comprehensive loss ................. (2,803) (1,462)
------------ ------------
Comprehensive loss ......................................... $ (12,547) $ (4,418)
============ ============
</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, 1998 and 1999
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Net cash used in operating activities (including changes
in all operating assets and liabilities ............... $ (8,664) $ (5,989)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment .................... (4,145) (972)
Acquisition of property held for development ............. (442) (165)
Proceeds from sale of property and equipment ............. 3,985 3,444
Purchase of investment securities ........................ -- (12)
Sale of investment securities ............................ 5,530 --
Construction advances - leased communities ............... 4,624 5,264
Construction expenditures - leased communities ........... (4,754) (5,893)
Advances to affiliates ................................... (87) (39)
Acquisition of interest in affiliates .................... (1,312) --
------------ ------------
Net cash provided by investing activities ........ 3,399 1,627
------------ ------------
Cash flows from financing activities:
Increase in restricted deposits .......................... (449) (269)
Proceeds from short-term borrowings ...................... 5,149 --
Repayment of short-term borrowings ....................... (5,532) (286)
Debt issue and other financing costs ..................... 538 (118)
Proceeds from long-term borrowings ....................... 4,894 --
Repayment of long-term borrowings ........................ (1,004) (338)
Repurchase of common stock ............................... (5,406) --
------------ ------------
Net cash used in financing activities ............ (1,810) (1,011)
------------ ------------
Effect of exchange rate changes on cash .......... 2 6
Net decrease in cash and cash equivalents ........ (7,073) (5,367)
Cash and cash equivalents at the beginning of the period ... 17,537 11,442
------------ ------------
Cash and cash equivalents at the end of the period ......... $ 10,464 $ 6,075
============ ============
Supplemental disclosure of cash flow information -- cash
paid during the period for interest ................... $ 2,101 $ 3,206
============ ============
Noncash investing and financing activities:
Transfer of property and equipment to property held for
sale .................................................. $ 32,188 $ 99
Vehicle acquisitions through debt financing .............. 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
(Unaudited)
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, comprehensive
operations, and cash flows of Emeritus Corporation, (the "Company") as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999. The
Company presumes that users of the interim financial information herein have
read or have access to the Company's 1998 audited consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the 1998 Form 10-K filed March 31, 1999 by
the Company under the Securities Act of 1934. Accordingly, footnotes and other
disclosures which would substantially duplicate the disclosures in Form 10-K
have been omitted. The financial information herein is not necessarily
representative of a full year's operations.
Property Held For Sale
The Company currently has three communities being held for sale.
Loss Per Share
Loss per common share on a dilutive basis has been calculated without
consideration of 3,918,822 and 4,251,788 common shares at March 31, 1998 and
1999, respectively, related to outstanding options, warrants, convertible
debentures and convertible preferred stock because the inclusion of such common
stock equivalents would be anti-dilutive.
Sales of Communities
In March 1999, the Company completed the disposition of its leasehold interests
in 15 communities, consisting of 14 currently operational communities previously
leased by the Company from Meditrust Corporation, a health care REIT,
("Meditrust") as well as one development community to a related entity.
Additionally, the Company will dispose of its leasehold interests in four
development communities (together with the 15 communities above known as the
"Emeritrust II communities") to the related entity, upon completion of their
development. The combined purchase price for the Emeritrust II comunities will
approximate $123 million. As of March 31, 1999, Emeritus has received net
proceeds of $3.7 million. The Company will continue to operate the Emeritrust
II communities pursuant to a three year management contract and will receive
management fees of 5% of revenues currently payable as well as 2% of revenues
which is contingent upon the communities achieving positive cash flows. The
management agreement provides the Company an option to purchase the 19
communities at a formula price. The management agreement further stipulates a
cash shortfall funding requirement by the Company to the extent that the five
development communities generate cash deficiencies in excess of individually
specified amounts per community, ranging from $400,000 to $500,000. Previously
deferred gains on this transaction collectively totaling approximately $5.7
million are still being deferred given the continuing financial involvement of
the Company stipulated in the management agreement.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is a nationally integrated senior housing services organization
focused on operating residential-style assisted-living communities. The Company
is one of the largest and most experienced providers of assisted-living
communities in the United States. These communities provide a residential
housing alternative for senior citizens who need help with the activities of
daily living, with an emphasis on assisted-living and personal care services.
To date, the Company's revenues have primarily been derived from rents and
service fees charged to its residents. With the consummation of Emeritrust II
and with the previous repositioning of 25 communities which closed on December
31, 1998 ("Emeritrust I"), the Company expects to generate approximately $4.3
million in management fee income during 1999. For the three months ended March
31, 1998 and 1999, the Company generated total operating revenues of $34.8
million and $34.2 million, respectively, including $699,000 in management fees
for the three months ended March 31, 1999. For the three months ended March
31, 1998 and 1999, the Company incurred losses of $8.4 million and $3.0
million (excluding a charge related to the cumulative effect of a change in
accounting principle in 1998), respectively. Loss before cumulative effect of
change in accounting principle decreased $3.0 million from $6.0 million for
the three months ended December 31, 1998 to $3.0 million for the three months
ended March 31, 1999.
During 1998 the Company adopted an operating strategy focused on: 1) increasing
occupancy throughout the Company's portfolio, 2) reducing acquisition and
development activities and 3) repositioning communities operating at a loss.
Occupancy across the Company's total portfolio at March 31, 1999 increased by
5% to 77% compared to 72% at March 31, 1998. In addition, average first
quarter occupancy increased by 6% to 77% for 1999 compared to 71% for 1998.
The Company has significantly reduced its acquisition and development
activities, only acquiring two communities during 1998 compared to 10 during
1997. In addition, the Company opened two and four development communities
during the three months ended March 31, 1998 and 1999, respectively. Slowing
its acquisition and development activities has enabled the Company to utilize
its resources more efficiently and increase its focus on community operations.
The Company disposed of no communities during the three months ended March 31,
1998 and disposed of 15 communities during the three months ended March 31,
1999 in the Emeritrust II transaction. The Company retains a management
interest in the repositioned facilities through three year management
contracts.
For 1999, the Company will stay primarily focused on increasing occupancy
throughout the Company's portfolio, consistent with 1998. In addition, the
Company will also devote attention to 1) generating alternative sources of
resident fee revenue and 2) containing operating costs to continue improving
its margins.
The Company's losses to date result from a number of factors. These factors
include, but are not limited to: the development of 48 and acquisition of 69
assisted living communities since inception that incurred operating losses
during the initial 12 to 24 month rent-up phase; initially lower levels of
occupancy at the Company's communities than originally anticipated; financing
costs arising from sale/leaseback transactions and mortgage financing;
refinancing transactions at proportionately higher levels of debt; and increased
administrative and corporate expenses to facilitate the Company's growth.
6
<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 December 31, As of December 31, As of March 31,
1997 1998 1999
------------------------ ---------------------- ---------------------------
Buildings Units Buildings Units Buildings Units
------------------------ ---------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Owned 19 2,099 15 1,492 15 1,492
Leased 76 6,124 52 3,937 38 2,816
Managed/Admin Services 4 327 38 3,734 56 5,237
Joint Venture/Partnership 1 140 8 809 8 809
------------------------ ---------------------- ---------------------------
Sub Total 100 8,690 113 9,972 117 10,354
Percentage Increase (2) 41% 47% 13% 15% 4% 4%
Pending Acquisitions -- -- -- -- -- --
Development Communities (1) 26 2,483 21 2,029 17 1,647
Minority Interest (Alert Care) 22 1,248 21 1,203 21 1,203
------------------------ ---------------------- ---------------------------
Total 148 12,421 155 13,204 155 13,204
------------------------ ---------------------- ---------------------------
Percentage Increase (2) 20% 22% 5% 6% --% --%
</TABLE>
(1) Of these 17 development communities, four are being developed by
Emeritus but are expected to be sold upon completion and managed by
Emeritus pursuant to management contracts with the purchaser, two are
owned and being developed by Emeritus, three are being developed by
Emeritus joint ventures with third parties, and the remainder are being
developed by third parties but will be managed by Emeritus upon
completion.
(2) The percentage increase indicates the change from the preceding December
31.
As of May 3, 1999, the Company held ownership, leasehold or management interests
in 117 communities (the "Operating Communities") consisting of approximately
10,400 units with the capacity of approximately 12,000 residents, located in 29
states. The Company leases 38 of the Operating Communities, typically from a
financial institution such as a Real Estate Investment Trust ("REIT"), owns 15
communities, manages or provides administrative services for 56 communities
and has a partnership interest or joint venture in 8 communities.
Additionally, the Company holds a minority interest of 31.3% in Alert Care, 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. Including its interest in Alert Care, the Company holds an interest
in 138 communities consisting of approximately 11,600 units with a capacity of
approximately 13,200 residents.
Of the 117 Operating Communities, five newly developed communities were opened
during 1998 and four opened in the first quarter of 1999. As of May 3, 1999, the
Company owned, had a leasehold interest in, management interest in or had
acquired an option to purchase development sites for 17 new assisted-living
communities (the "Development Communities"). Thirteen of these communities are
scheduled to open during 1999 and the remaining are scheduled to begin operating
in 2000.
Assuming completion of the Development Communities scheduled to open in 1999 and
including the minority interest in Alert Care, by the end of 1999, the Company
will own, lease, have an ownership interest in or manage 151 properties in 29
states, Canada and Japan, containing an aggregate of approximately 12,900
units with capacity of approximately 14,500 residents. There can be no
assurance, however, that the Development Communities will be completed on
schedule. Construction delays, the effects of government regulation or other
factors beyond the Company's control could delay the opening of these
communities.
The Company is exploring international development and acquisition possibilities
in Canada and Japan. The Company's investment in Alert Care in Ontario, Canada
represents a significant initial investment in the assisted-living industry in
Canada. The Company has also entered into a joint venture with Sayno Electric
Company, Ltd. of Osaka, Japan to provide assisted-living services in Japan. The
Company's first assisted-living community in Japan is under construction and is
anticipated to open by the end of 1999. The community will be among the first
assisted living communities in Japan to offer private apartments on a
month-to-month rental.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Results of Operations
The following table presents certain items of the Company's Condensed
Consolidated Statements of Operations as a percentage of total revenues and the
percentage change of the underlying dollar amounts from period to period.
<TABLE>
<CAPTION>
Period to Period
Percentage
Increase (Decrease)
Percentage of Revenues Three Months
Three Months Ended Ended
March 31, March 31,
---------------------------------- --------------------------
1998 1999 1998-1999
--------------- ----------------- --------------------------
<S> <C> <C> <C>
Revenues .......................................... 100.0% 100.0% (1.8)%
Expenses:
Community operations ......................... 73.9 63.3 (15.8)
General and administrative ................... 9.2 10.3 9.7
Depreciation and amortization ................ 4.5 4.3 (6.6)
Rent ......................................... 29.6 22.2 (26.4)
--------------- -----------------
Total operating expenses ................. 117.2 100.1 (16.0)
--------------- -----------------
Loss from operations ..................... (17.2) (0.1) (99.4)
--------------- -----------------
Other income (expense):
Interest expense, net ........................ (8.0) (9.4) 16.1
Other, net ................................... 1.0 0.9 (7.6)
--------------- -----------------
Net other expense ........................ (7.0) (8.5) 19.3
--------------- -----------------
Loss before cumulative effect of change
in accounting principle ............... (24.2) (8.6) (64.9)
Cumulative effect of change in accounting
principle ..................................... 3.8 N/A (100.0)
--------------- -----------------
Net loss ................................ (28.0)% (8.6)% (69.7)%
=============== ================= ==========================
</TABLE>
Three months ended March 31, 1999 compared to three months ended March 31, 1998
Revenues: Total operating revenues for the three months ended March 31, 1999
decreased 1.8% or $623,000 from the comparable period in 1998. The change in
revenue is a result of the repositioning of 28 communities subsequent to the
first quarter of 1998 from leased/owned communities to managed. The repositioned
communities generated $6.2 million in revenue during the first quarter 1998.
This decrease in revenue is offset by: 1) generally increasing levels of
occupancy throughout the Company's portfolio, including a 17% increase in
average occupancy in the Company's owned/leased portfolio to 86% in the first
quarter of 1999 compared to 69% for the first quarter of 1998; and 2) the
increase in management fee revenue of $630,000 during the first quarter of
1999 compared to the first quarter of 1998 as the Company retains a management
interest in the repositioned communities.
Community Operations: Community operating expenses for the three months ended
March 31, 1999 decreased 15.8% or $4.1 million from the comparable period in
1998 to $21.7 million. The overall decrease in community operating expenses is
a result of the community repositionings that occurred subsequent to the first
quarter of 1998. These repositioned communities had incurred $6.6 million of
community operating expenses during the first quarter of 1998. The decrease is
offset by: 1) increased variable costs resulting from the significant
occupancy gains; and 2) increased sales and marketing costs. Community
operating margins (community revenues less community operating expenses) have
increased to 35.3% for the three months ended March 31, 1999 compared to 26.0%
for the three months ended March 31, 1998 due to the repositioning of lower
margin communities to managed communities and to the effect of cost control
measures.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
General and Administrative: As a percentage of total operating revenues general
and administrative (G&A) expenses increased to 10.3% for the three months ended
March 31, 1999 as compared to the 9.2% recorded in the quarter ended March 31,
1998. The increase in G&A costs as percentage of revenue is due, in part, to
the shift from community revenue to management fees in the repositioning of
the Emeritrust I communities. Overall, G&A costs increased approximately
$310,000 primarily due to greater personnel costs to support the increasing
number of communities.
Depreciation and Amortization: Depreciation and amortization for the three
months ended March 31, 1999 were $1.5 million, or 4.3% of total operating
revenues, compared to $1.6 million, or 4.5% of total operating revenues for the
comparable period in 1998. The decrease is principally the result of
repositioning six owned communities to managed communities.
Rent: Rent expense for the three months ended March 31, 1999 was $7.6 million,
representing a decrease of $2.7 million, or 26.4% from the comparable period in
1998. The decrease is primarily attributable to the repositioning of 22 leased
communities to managed communities on December 31, 1998, accounting for $2.6
million in rent expense for the three months ended March 31, 1998. The Company
leased an average of 52 communities for the three months ended March 31, 1999,
compared to an average of 78 for the three months ended March 31, 1998. Rent
as a percentage of revenue was 29.6% and 22.2% for the three months ended
March 31, 1998 and 1999, respectively.
Interest Expense, Net: Interest expense, net for the three months ended March
31, 1999 increased $447,000 from the comparable period in 1998. This increase is
primarily related to the increase of average quarterly total debt from $157.4
million at March 31, 1998 to $164.1 million at March 31, 1999. In addition,
the amount of interest cost capitalized as part of the Company's development
activities declined in 1999 from 1998 levels.
Cumulative Effect of Change in Accounting Principle: During the three month
period ended March 31, 1998, 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. No such charge was incurred for the three months
ended March 31, 1999.
Same Community Comparison
The Company operated 54 of its communities, excluding the Emeritrust I and
Emeritrust II communities, ("Same Community") during both three months periods
ended March 31, 1998 and 1999. The following table sets forth a comparison of
Same Community results of operations for the three months ended March 31, 1998
and 1999.
<TABLE>
<CAPTION>
Three months Ended March 31,
(In thousands)
Dollar Percentage
1998 1999 Change Change
----------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue ............................. $ 22,491 $25,462 $ 2,971 13%
Community operating expenses ........ 15,423 16,260 837 5
----------------- -------------- ---------------- ----------------
Community operating income ....... 7,068 9,202 2,134 30
----------------- -------------- ---------------- ----------------
Depreciation and amortization ....... 1,161 1,317 156 13
Rent ................................ 5,598 5,344 (254) (5)
----------------- -------------- ---------------- ----------------
Operating income ............... 309 2,541 2,232 722
----------------- -------------- ---------------- ----------------
Interest expense, net ............... 1,764 1,950 186 11
Other income ........................ (60) -- 60 (100)
----------------- -------------- ---------------- ----------------
Net income (loss) .............. $ (1,395) $ 591 $ 1,986 (142)%
================= ============== ================ ================
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
The Same Communities represented $25.5 million or 75% of the Company's total
revenue for the first quarter of 1999. Same Community revenues increased by $3.0
million or 13% for the quarter ended March 31, 1999 from the comparable period
in 1998. The increase in revenue is attributable to increased occupancy and
monthly rate increases due to an expanded range of services offered at the
communities. During the quarter ended March 31, 1999, average occupancy
increased by 8% to 87% compared to the quarter ended March 31, 1998 average
occupancy of 79%. In addition, Same Community average revenue per unit
increased from $2,071 per month for the quarter ended March 31, 1998 to $2,140
per month for the quarter ended March 31, 1999. During the three months ended
March 31, 1999, the Company recorded net income of $591,000 compared to net
loss of $1.4 million for the three months ended March 31, 1998.
Liquidity and Capital Resources
For the three months ended March 31, 1999, net cash used in operating activities
was $6.0 million compared to $8.7 million for the comparable period in the prior
year. The primary component of this operating use of cash was the net loss of
$3.5 million and $10.3 million recorded in the three months ended March 31, 1999
and 1998, respectively.
Net cash provided by investing activities amounted to $1.6 million for the three
months ended March 31, 1999, stemming primarily from proceeds from Emeritrust II
of $3.7 million. This inflow of cash was offset in part by acquisitions of
property and equipment of $972,000 as well as an excess of $600,000 of
construction expenditures on leased communities over construction advances for
the same three month period. Net cash provided by investing activities for the
three months ended March 31, 1998 was $3.4 million, primarily from the sale of
investment securities offset by an investment in an affiliate.
For the three months ended March 31, 1999, net cash used in financing activities
was $1.0 million primarily the result of debt repayment. For the three months
ended March 31, 1998, net cash used in financing activities was $1.8 million,
primarily the result of the refinancing of existing assisted-living communities
and the repurchase the Company's common stock.
The Company has been, and expects to continue to be, dependent on third-party
financing for its cash needs in connection with operating losses as well as with
its acquisition and development of communities. There can be no assurance that
financing for these requirements will be available to the Company on acceptable
terms. Moreover, to the extent the Company acquires communities that do not
generate positive cash flow, the Company may have to seek additional capital or
borrowings for working capital and liquidity purposes.
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. The monthly charges
for the resident's unit and assisted living services are influenced by the
location of the community and local competition. 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.
Impact of Year 2000
General
The Company has developed a plan (the "Plan") to modify its information
technology to address "Year 2000" problems. The concerns surrounding the Year
2000 are the result of computer programs being written using two digits rather
than four to define the applicable year. Programs that employ time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could cause system errors or failures.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (Continued)
Plan
The Plan is comprised of three components including assessment of: a) the IT
infrastructure (hardware and systems software other than application software);
b) application software; and c) third party suppliers/vendors. The Company
commenced work on the Plan in the fourth quarter of 1998 by taking inventory of
Year 2000 problems in the areas of IT infrastructure as well as application
software. In addition, the Company has determined the priority of the items
based on their materiality to the Company's operations. No material items have
been noted to date. The Company intends to contact its third party
suppliers/vendors during the second quarter of 1999 to determine the status of
their Year 2000 compliance. For each component, the Company will address Year
2000 problems in six phases: 1) taking inventory of Year 2000 problems; 2)
assigning priorities to identified items; 3) assessing materiality of items to
the Company's operations; 4) replacing/repairing material non-compliant items;
5) testing material items; and 6) designing and implementing business
continuation plans. Material items are those believed by the Company to have a
risk that may affect revenue or may cause a discontinuation of operations. The
Company estimates a completion date of June 30, 1999.
Costs
The project is not expected to be material to the Company's operations or
financial position. The total cost is not expected to exceed $50,000 of which
approximately $10,000 have been incurred to date.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations. Such
failures could materially affect the Company's results of operations, liquidity,
and financial condition. The Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on its
results of operations, liquidity or financial condition due, in part, to
uncertainty regarding compliance by third parties. The Plan is expected to
significantly reduce the Company's level of uncertainty regarding the Year 2000
problem, however, particularly compliance and readiness of its third-party
suppliers/vendors. The Company believes that, with the completion of the Plan as
scheduled, the possibility of significant interruptions of normal operations
will be reduced and, therefore, a contingency plan has not been deemed necessary
to date.
Forward-Looking Statements
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: A number of the matters and subject areas discussed in this report that
are not historical or current facts deal with potential future circumstances,
operations, and prospects. The discussion of such matters and subject areas is
qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's actual
future experience involving any one or more of such matters and subject areas
relating to demand, pricing, competition, construction, licensing, permitting,
construction delays on new developments contractual and licensure, and other
delays on the disposition of assisted living communities in the Company's
portfolio, and the ability of the Company to continue managing its costs while
maintaining high occupancy rates and market rate assisted living charges in its
assisted living communities. The Company has attempted to identify, in context,
certain of the factors that they currently believe may cause actual future
experience and results to differ from the Company's current expectations
regarding the relevant matter or subject area. These and other risks and
uncertainties are detailed in the Company's reports filed with the Securities
and Exchange Commission, including the Company's Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's earnings are affected by changes in interest rates as a result of
its short- and long-term borrowings. The Company manages this risk by obtaining
fixed rate borrowings when possible. At March 31, 1999, the Company's variable
rate borrowings totaled $97.3 million. If market interest rates average 2% more
in 1999 than they did in 1998, the Company's interest expense would increase and
income before taxes would decrease by $1.9 million. These amounts are determined
by considering the impact of hypothetical interest rates on the Company's
outstanding variable rate borrowings as of March 31, 1999 and does not consider
changes in the actual level of borrowings which may occur subsequent to March
31, 1999. This analysis also does not consider the effects of the reduced level
of overall economic activity that could exist in such an environment nor does it
consider likely actions that management could take with respect to the Company's
financial structure to mitigate the exposure to such a change.
11
<PAGE>
The Company is exposed to equity price risk on its short-term investments.
These investments are generally in companies in the healthcare sector. The
Company typically does not attempt to reduce or eliminate its market exposure
on these securities. The decrease in the fair value of the Company's
short-term available-for-sale securities compared to the December 31, 1998
value reflects the decrease in the dollar value of the Company's securities,
the majority of which represents unrealized market depreciation.
PART II OTHER INFORMATION
Items 1-5 are not applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
10.1 Emeritrust II Communities
10.1.1 Supplemental Purchase Agreement in Connection with Purchase of
Facilities (AL II - 14 Operating Facilities) dated March 26,
1999 between the registrant, Emeritus Properties I, Inc. ESC
G.G. I, Inc., ESC I, L.P. and AL Investors II LLC.
10.1.2 Management Agreement with Option to Purchase (AL II - 14
Operating Facilities) dated March 26, 1999 between the
registrant, Emeritus Management I LP, Emeritus Properties I,
Inc, ESC G.P. I, Inc., ESC I, L.P., Emeritus Management LLC and
AL Investors II LLC.
10.1.3 Guaranty of Management Agreement (AL II - 14 Operating
Facilities) dated March 26, 1999 between the registrant and AL
Investors II LLC.
10.1.4 Supplemental Purchase Agreement in Connection with Purchase of
Facilities (AL II - 5 Development Facilities) dated March 26,
1999 between the registrant, Emeritus Properties I, Inc. and AL
Investors Development LLC.
10.1.5 Management Agreement with Option to Purchase (AL II - 5
Development Facilities) dated March 26, 1999 between the
registrant, Emeritus Properties I, Inc, Emeritus Management LLC
and AL Investors Development LLC.
10.1.6 Guaranty of Management Agreement and Shortfall Funding Agreement
(AL II - 5 Development Facilities) dated March 26, 1999 between
the registrant and AL Investors Development LLC.
10.1.7 Put and Purchase Agreement (AL II Holdings - 14 Operating
Facilities and 5 Development Facilities) dated March 26, 1999
between Daniel R. Baty and AL II Holdings LLC, AL Investors II
LLC and AL Investors Development LLC.
27.1 Financial Data Schedule
(a) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months
ended March 31, 1999.
12
<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 7, 1999
EMERITUS CORPORATION
(Registrant)
/s/: Kelly J. Price
-------------------
Kelly J. Price, Vice President, Finance, Chief
Financial Officer and Principal Accounting Officer
13
<PAGE>
SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
1. PARTIES. This Supplemental Purchase Agreement in Connection with Purchase of
Facilities ("Agreement") is entered into as of March ____, 1999 by and among
Emeritus Corporation, a Washington corporation ("Emeritus"), and its affiliates
Emeritus Properties I, Inc., ESC G.P. I Inc. and ESC I, L.P. (collectively
"Emeritus Affiliates"), and AL Investors II LLC, a Delaware limited liability
company, and its permitted assigns ("AL Investors II"). Emeritus and Emeritus
Affiliates are sometimes collectively referred to herein as the "Emeritus
Entities." All capitalized terms not otherwise defined herein shall have the
meaning set forth in Exhibit A.
2. FACTS.
2.1 Acquisition of Facilities. AL Investors II contemplates entering into a
Purchase and Sale Agreement ("Purchase Agreement") with Meditrust Company LLC,
successor by merger to Meditrust Acquisition Corporation I (collectively
"Meditrust"), relating to the acquisition of fourteen (14) Facilities identified
on Exhibit A (collectively, the "Facilities"). Emeritus Affiliates currently
lease from Meditrust each of the Facilities ("Facility Leases") and own certain
personal property and leasehold improvements which AL Investors II desires to
purchase and the Emeritus Entities desire to sell pursuant to this Agreement.
Upon the Closing under the Purchase Agreement and this Agreement, each of the
Facility Leases will terminate or be amended and restated as determined by AL
Investors II and Emeritus except for certain indemnity provisions by the
Emeritus Entities which may survive the Closing in favor of Meditrust as
Meditrust may require. AL Investors II intends to create a Facility Entity for
the purpose of owning each Facility. The resulting pool of fourteen (14)
Facilities, will close simultaneously and be financed in part by a loan from the
Lending Group.
2.2 Consideration. In consideration of AL Investors II performing the due
diligence as contemplated under the Purchase Agreement, the mutual covenants
herein, and for other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Emeritus Entities agree to give and perform
the representations, warranties, covenants and agreements contained in this
Agreement. AL Investors II would not perform the due diligence on the Facilities
or contemplate entering into the Purchase Agreement without this Agreement.
3. RIGHT TO PURCHASE. Emeritus entered into a Letter of Intent dated as of
January 11, 1999 ("Letter of Intent") with Meditrust to purchase the Facilities.
Emeritus agrees and confirms that any right of Emeritus to purchase the
Facilities under the Letter of Intent is hereby assigned to AL Investors II.
Provided, however,
-1-
<PAGE>
the form of the Purchase Agreement shall be subject to the review and comment of
Emeritus, but the final form of the Purchase Agreement shall be determined in
the sole discretion of AL Investors II.
4. DUE DILIGENCE.
4.1 Investigations. Under the terms of the Purchase Agreement and under this
Agreement, AL Investors II has until the Closing Date (the "Due Diligence
Period") to undertake such due diligence on the Facilities as it deems necessary
in its sole discretion, including but not limited to the review of title reports
and financial information, the conducting of surveys, environmental assessments
and physical inspections, and the finalizing of financing commitments, and other
matters deemed necessary by AL Investors II. The Emeritus Entities shall provide
access to the Facilities and cooperate with AL Investors II and its designated
representatives in conducting its due diligence activities. If AL Investors II
in its sole discretion has not waived or satisfied this condition prior to
expiration of the Due Diligence Period, then AL Investors II may terminate this
Agreement by written notice to Emeritus and neither party shall have any
liability to the other except as expressly set forth in Section 18.
4.2 Documentation. Promptly upon request therefor, or as soon as practicable, if
it has not already done so, the Emeritus Entities shall provide to AL Investors
II or its designated representatives copies of the following in the possession
of the Emeritus Entities for each Facility:
(a) Residents. A current resident roll, occupancy report and copy of the
standard form Residency Agreement.
(b) Contracts and Leases. A listing of all Major Contracts and Major
Leases which shall be attached to this Agreement as Exhibit B prior to
expiration of the Due Diligence Period, and any correspondence with any Person
relating to outstanding disputes or claims relating to the Major Contracts and
Major Leases.
(c) Operating Statements. Operating statements, showing all of the income
and expenses related to owning and operating each Facility (with current
receivables aging) for the preceding three (3) full calendar years and the most
recent operating statement for the current year through December 31, 1998
reflecting operations on a year-to-date basis (collectively, the "Operating
Statements").
(d) Tax Statements and Utility Bills. All real and personal property tax
statements for the preceding three (3) full calendar years and utility bills for
the preceding calendar year.
-2-
<PAGE>
(e) Approvals. All Permits, including any zoning variances or special use
permits, if any, and any notices alleging any violations and zoning letters for
each Facility.
(f) Plans and Specifications. As-built plans and specifications which are
in the possession of the Emeritus Entities.
(g) Environmental Reports. Phase I environmental assessments and any prior
studies and reports relating to Hazardous Substances in or on a Facility and all
correspondence or claims from any Person alleging violations of Environmental
Laws which are in the possession of the Emeritus Entities.
(h) Structural and Engineering Reports. All structural, soils, or
engineering reports or surveys for any Facility which are in the possession of
the Emeritus Entities and a current property condition survey and seismic survey
performed by Consultants approved by AL Investors II.
(i) Insurance. Current property and liability insurance policies or a
summary thereof and any correspondence with the insurer related to circumstances
or conditions affecting the cost or continuation of any insurance.
(j) Maintenance or Incident Logs. Facility maintenance and incident logs
insofar as they relate to claims or notices alleging material defects in or
violations of Legal Requirements relating to the Facility including any related
correspondence with any Governmental Authorities.
(k) Title. Title commitments and UCC searches conducted by Title Company
for each Facility.
(l) Survey. Survey for each Facility in form specified by AL Investors II.
(m) Health Surveys. Local and/or state Department of Health survey for
most recent period.
(n) Other Matters. Any other document or matter reasonably requested by AL
Investors II.
The term "in the possession of the Emeritus Entities" as used above means in the
possession of Emeritus, at its main corporate office in Seattle, Washington,
after inquiry to the manager of each Facility for copies of pertinent documents
and other records.
-3-
<PAGE>
5. REPRESENTATIONS, WARRANTIES AND COVENANTS. Emeritus, jointly and severally,
with Emeritus Affiliates (and each of the Emeritus Affiliates severally with
respect to the Facility leased and operated by it), represent, warrant and
covenant with respect to all of the Facilities to each of AL Investors II and
the Facility Entities, as of the date of this Agreement, as follows:
5.1 Existence; Power; Qualification. Each of the Emeritus Entities is a
corporation or limited partnership respectively duly organized, validity
existing and in good standing under the laws of the State of Washington. Each of
the Emeritus Entities has all requisite corporate or limited partnership power
and authority to operate and lease each of the Facilities and to carry on its
business as now conducted and to enter into and carry out the terms of this
Agreement.
5.2 Valid and Binding. Each of the Emeritus Entities is duly authorized to make
and enter into this Agreement and to carry out the transactions contemplated
herein and is, or will be by Closing, duly authorized to make and enter into all
of the other documents to which it is or will be a party under this Agreement or
under the Purchase Agreement (the "Transaction Documents") and to carry out the
transactions contemplated therein. This Agreement has been duly executed and
delivered by each of the Emeritus Entities and is the legal, valid and binding
obligation of each of the Emeritus Entities enforceable in accordance with its
terms. The Transaction Documents to which each of the Emeritus Entities is or
will be a party have been, or will be by the Closing, duly executed and
delivered by each of the Emeritus Entities, and each is, or will be by Closing,
a legal, valid and binding obligation of the respective Emeritus Entity,
enforceable in accordance with its terms.
5.3 No Violation. The execution, delivery and performance of this Agreement and
the Transaction Documents and the consummation of the transaction thereby
contemplated shall not result in any breach of, or constitute a default under,
or result in the acceleration of, or constitute an event which, with the giving
of notice or the passage of time, or both, could result in default or
acceleration of any obligations of the Emeritus Entities under any Permit,
contract, mortgage, lien, lease, agreement, instrument, franchise, license,
arbitration award, judgement, decree, bank loan or credit agreement, trust
indenture or other instrument to which any of the Emeritus Entities is a party
or by which any of the Emeritus Entities may be bound or affected and do not
violate or contravene any Legal Requirements.
5.4 Consents and Approvals. As of Closing, no consent or approval or other
authorization of, or exemption by, or declaration or filing with, any Person and
no waiver of any right by any Person is required to authorize or permit, or is
otherwise required as a condition of the execution, delivery and performance of
the Emeritus Entities' obligations under this Agreement or the Transaction
Documents.
-4-
<PAGE>
5.5 FIRPTA Representation. None of the Emeritus Entities is a "foreign person"
as that term is defined in the Code.
5.6 Emeritus' Documents. All copies of documents furnished or to be furnished to
AL Investors II by the Emeritus Entities or any of them in connection with this
Agreement are true and complete copies of the originals.
5.7 Nothing Omitted. No certificate, agreement, statement or other document
prepared or executed by any of the Emeritus Entities and furnished to or to be
furnished to AL Investors II or its attorneys in connection with the
transactions contemplated by this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to prevent all statements contained herein and therein from
being misleading.
5.8 Litigation. There is no material claim, litigation, or proceeding pending
against any of the Emeritus Entities or to the current actual knowledge of any
of them threatened against any of the Emeritus Entities, which relate to the
Facilities or the transactions contemplated by this Agreement except as set
forth on Exhibit C. All of the matters set forth on Exhibit C, and any other
such material claim, litigation or proceeding currently pending or threatened
shall be defended, settled or paid at the Emeritus Entities' sole expense. None
of the Emeritus Entities has filed (nor has any filing been made against any of
them) any proceeding in bankruptcy or insolvency in any jurisdiction. Neither
any of the Emeritus Entities nor any Facility is currently the subject of any
proceeding by any Governmental Authorities, and no notice of any violation has
been received from any Governmental Authorities that would, directly or
indirectly, or with the passage of time:
(a) Have a material adverse impact on the Facility Entities' ability to
accept and/or retain residents or result in the imposition of a fine in excess
of $500, a sanction, a lower rate certification or a lower reimbursement rate
for services rendered to eligible residents;
(b) Modify, limit or annul or result in the transfer, suspension, revocation
or imposition of probationary use of any of the Permits; or
(c) Affect the Facility Entities' continued participation in the Medicare or
Medicaid programs or any other Third-Party Payors' Programs (if applicable), or
any successor programs thereto, at current rate certifications.
5.9 Compliance. All Permits and other authorizations from Governmental
Authorities required to own and operate each Facility for its present
-5-
<PAGE>
use as an assisted living facility and with the number of beds (and with respect
to the Facility entitled Anderson Place as a nursing home with respect to 44
beds) indicated on Exhibit A have been obtained, are in full force and effect,
and are free from violation or claim of violation in all material respects of
any Legal Requirement, except as set forth on Exhibit D. Without limiting the
generality of the foregoing, Emeritus Entities are the lawful owner of all
Permits for each Facility, including, without limitation, the Certificate of
Need, if applicable, which (a) are in full force and effect, (b) constitute all
of the permits, licenses and certificates required for the use, operation and
occupancy thereof, (c) as of the Closing Date have not been pledged as
collateral for any loan or indebtedness other than the Mortgage, (d) are held
free from restrictions or any encumbrance which would materially adversely
affect the use or operation of the Facility, and (e) are not provisional,
probationary or restricted in any way. The Emeritus Entities as well as the
operation of each Facility are in compliance in all material respects with the
applicable provisions of assisted living facility (and where applicable, nursing
home) laws, rules, regulations and published interpretations to which the
Facility is subject. No waivers of any laws, rules, regulations, or requirements
(including, but not limited to, minimum foot requirements per bed) are required
for the Facility to operate at the current licensed unit and/or bed capacity.
Emeritus Entities have not granted to any third party the right to reduce the
number of licensed beds in any Facility or to apply for approval to transfer the
right to any and all of the licensed Facility beds to any other location. As of
Closing, all such Permits and other authorizations shall have been duly and
validly transferred to or reissued in the name of each Facility Entity or, if
not so transferred or reissued at Closing, shall be transferred or reissued by
the Emeritus Entities at their sole cost and expense within ninety (90) days
after Closing. Except as set forth on Exhibit D, each Facility and the operation
and use thereof complies in all material respects with all applicable Legal
Requirements and all covenants, easements and restrictions of record, affecting
the Facility (and, without limitation, the property on which each Facility is
located is zoned for the buildings and the uses conducted thereon, including but
not limited to parking requirements and none of the Emeritus Entities has
received any notice alleging any material non-compliance with respect to any
Facility). There are no unsatisfied requests or demands for repairs,
restorations or improvements to any Facility from any Person, including, but not
limited to, any Governmental Authorities pursuant to which the cost of repair,
restoration or improvement would exceed $10,000 in the aggregate for any
Facility except as set forth on Exhibit D.
5.10 No Prior Options, Sales or Assignments. None of the Emeritus Entities has
granted an option or obligated itself in any manner whatsoever to assign the
Facility Leases or their rights under the Facility Leases or to sell the
Facilities to any party other than AL Investors II.
-6-
<PAGE>
5.11 Condition of Improvements. The structural components, roofs, mechanical,
electrical, plumbing, elevator and HVAC systems of the improvements comprising
each Facility are in good working order and free from defects which would
materially impair the use of the Facility, ordinary wear and tear excepted,
except as set forth in the engineering reports prepared by Commercial Inspectors
LLC and delivered to AL Investors II in connection with this transaction.
Construction of each Facility has been completed and each Facility is stocked
with usual and customary Operating Equipment and Operating Supplies. Each
Facility is open for business and all work in connection with the initial
construction and development of each Facility, all capital improvements made or
contracted or committed prior to Closing, and all remodeling and refurbishment,
including, but not limited to, construction of kitchen facilities remodeling at
Facility entitled Oakbridge to the extent the Emeritus Entities are obligated to
construct or pay for such Facilities, has been completed and paid for in full by
the Emeritus Entities (or will be completed and paid for in full by Emeritus
Entities at their sole expense) and no Party has any Lien or right to assert a
Lien on account thereof.
5.12 Title. As of the Closing, title to each of the Facilities, including the
Land, Improvements and Personal Property, shall be subject to no lien, mortgage,
pledge, encroachment, zoning violation, or encumbrance, except for (a) the
Permitted Encumbrances which do not and will not materially interfere with the
current use or operation of any Facility, (b) the Mortgage, and (c) such liens,
mortgages, pledges and encumbrances arising by or through Meditrust without the
consent of or the actual current knowledge of the Emeritus Entities. All
Improvements situated on each Facility are situated wholly within the boundaries
of the Land except for minor and immaterial encroachments.
5.13 Special Assessments. The Emeritus Entities have not been notified of any
contemplated improvements to any Facility or the area closely surrounding any
Facility by any Governmental Authorities which is not disclosed by the public
records and shown in the title commitments for each Facility prepared by Title
Company which would result in the assessment of a special improvement or similar
lien in an amount exceeding $10,000 per year against any Facility.
5.14 Utilities; Access. All water, sewer, gas, electric, telephone, drainage and
other utility service lines or facilities serving each Facility or required by
Legal Requirements: (i) are located within the boundaries of the land on which
the Facility is located or within land dedicated to public use or within
recorded easements for same, (ii) are in good working order, and (iii) are
adequate to serve the present use of each Facility. Each Facility has direct
access to a publicly dedicated street or road or over a recorded easement for
such purpose to a publicly dedicated street or road.
-7-
<PAGE>
5.15 Existing Agreements. There are no contracts, agreements, understandings
(whether written or oral), or other liabilities of any type or kind relating to
any Facility which will be binding on AL II Holdings, AL Investors II or a
Facility Entity after Closing, except for the Permitted Exceptions, the
Contracts, the Permits, and the Leases transferred to each Facility Entity at
Closing and except as otherwise disclosed in writing to and approved in writing
by AL Investors II. There is no material default by any of the Emeritus Entities
or to the current actual knowledge of any of them by any other party under any
of the Permitted Exceptions, the Contracts, the Permits, or the Leases. There
are no Major Contracts or Major Leases which will be binding on AL Investors II
or any of the Facilities Entities after Closing except as set forth on Exhibit
B.
5.16 Environmental Compliance. Except as set forth in Exhibit E (which matters,
if any, shall be remediated by the Emeritus Entities at their sole expense):
(a) The Emeritus Entities have not at any time caused or permitted any
Hazardous Substances to be placed or used in any Facility.
(b) No Hazardous Substances exist or have existed on any Facility.
(c) No Facility now contains any underground storage tanks, and, to the
best of Emeritus Entities' knowledge after reasonable and diligent inquiry, no
Facilities have contained any underground storage tanks in the past. If there is
an underground storage tank located on any Facility, that tank complies with all
requirements of Environmental Laws.
(d) Emeritus Entities have complied with all Environmental Laws, including
all requirements for notification regarding releases of Hazardous Substances.
Without limiting the generality of the foregoing, the Emeritus Entities have
obtained any Permits required for the operation of the Facilities in accordance
with Environmental Laws now in effect and all such Permits are in full force and
effect. No event has occurred with respect to any Facility that constitutes, or
with the passing of time or the giving or notice would constitute, noncompliance
with the terms of any Permit.
(e) There are no actions, suits, claims or proceedings pending or, to the
best of Emeritus Entities' current actual knowledge , threatened that involve
any Facility and allege, arise out of, or relate to any violation of
Environmental Laws.
(f) Emeritus Entities has not received any complaint, order, notice of
violation or other communication from any Governmental Authority with
-8-
<PAGE>
regard to air emissions, water discharges, noise emissions or Hazardous
Substances, or any other environmental, health or safety matters affecting any
Facility which has not been remediated in accordance with Legal Requirements.
5.17 Reports. The Operating Statements and all financial information, schedules
and other documents containing factual information delivered to AL Investors II
and prepared by any of the Emeritus Entities in connection with this Agreement
or the Purchase Agreement are true and correct in all material respects.
5.18 Employees. All employees at the Facilities are the employees of the
Emeritus Affiliates and none of AL II Holdings, AL Investors II or any of the
Facility Entities shall have any liability or responsibility whatsoever after
the Closing for any matters related to such employees occurring prior to the
Closing. Emeritus Affiliates shall transfer or otherwise reassign at its expense
the employment of all employees to the Managers under the Management Agreement
effective as of Closing in accordance with all Legal Requirements and neither AL
Investors II nor any of the Facility Entities shall have any liability or
responsibility in connection therewith. There are no union contracts or
collective bargaining agreements with any of such employees of the Facilities.
5.19 Casualty; Condemnation. No Facility is subject to any Casualty or
Condemnation.
5.20 Loan Closing Certification. All statements, warranties, and representations
in the Initial Senior Loan documents and in the Initial Junior Loan documents
which relate to the condition, title, fitness, and compliance with Legal
Requirements and Environmental Laws of any or all of the Facilities are true and
correct.
5.21 Current Actual Knowledge. The representations and warranties herein which
are based upon the current actual knowledge of the Emeritus Entities are based
upon the current actual knowledge of the following employees of Emeritus:
Jennifer Valenta, Business Development and Legal Analyst; William Shorten,
Director of Real Estate Finance; Kelly Price, Vice President of Finance, Chief
Financial Officer and Secretary; and Daniel R. Baty, Chairman and Chief
Executive Officer, without any obligation to acquire any knowledge other than a
review of the files and records in their possession they would in the ordinary
course of their duties be responsible for having knowledge of.
5.22 Hart-Scott-Rodino Antitrust Improvements Act. The non-exempt assets within
the mean of 16 C.F.R. ss. 802.2 being acquired in connection with the Facilities
do not equal or exceed $15,000,000 in the aggregate.
-9-
<PAGE>
5.23 Indemnification. Each of the Emeritus Entities, jointly and severally,
agrees to indemnify, defend and hold each of AL II Holdings, AL Investors II,
their Affiliates and the Facility Entities harmless from and against any and all
loss, damage, liability or expense, including attorneys' fees and costs, AL II
Holdings, AL Investors II, its Affiliates or any of the Facility Entities may
suffer as a result of (a) any breach of or inaccuracy in the foregoing
representations, warranties, and covenants and (b) any claim by any Person for
personal injury or malpractice (including death) or damage to property arising
out of facts and circumstances occurring (or alleged to have occurred) at the
Facilities on or prior to the Closing.
5.24 General Provision. The liability of the Emeritus Entities and each of them
for breach of any of the warranties, representations and indemnities set forth
herein shall survive Closing, shall not be diminished by, nor shall any defense
to enforcement thereof arise by reason of, any investigation conducted by or
knowledge of AL II Holdings, AL Investors II, their Affiliates or the Facility
Entities or any remedy any of them may have against any other Person, and shall
be cumulative with any other remedies any of them may have against any of the
Emeritus Entities.
6. BUYER'S REPRESENTATIONS. AL Investors II represents and warrants to the
Emeritus Entities, as of the date of this Agreement, as follows:
(a) Status. AL Investors II is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware
and each of the Facility Entities is, or will be prior to Closing, duly
organized, validly existing and in good standing in the state of Washington and
qualified to do business in the jurisdiction in which it owns or will own a
Facility.
(b) Authority. This Agreement and all documents to be executed by AL
Investors II or the Facility Entities at Closing have been duly authorized,
executed and delivered by AL Investors II and/or the Facility Entities and are
binding on and enforceable against AL Investors II and the Facility Entities in
accordance with their terms.
AL Investors II hereby agrees to defend, protect, indemnify and hold the
Emeritus Entities harmless from and against any and all loss, damage, liability
or expense, including attorneys' fees and costs, the Emeritus Entities may
suffer as a result of any breach of or any inaccuracy in the foregoing
representations and warranties.
7. [INTENTIONALLY DELETED]
-10-
<PAGE>
8. MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE. Concurrently with and as a
condition to the Closing, Emeritus and Emeritus Management LLC and Emeritus
Management I LP, and other wholly owned Affiliates of Emeritus ("Managers"),
shall enter into a Management Agreement With Option To Purchase with AL
Investors II and each Facility Entity ("Management Agreement"), in the form to
be attached as Exhibit F to this Agreement. Emeritus shall unconditionally
guarantee the obligations of each of the Managers under the Management Agreement
pursuant to Guaranty of Management Agreement ("Guaranty Agreement") attached
hereto as Exhibit G.
9. EMPLOYEE MATTERS. The Emeritus Entities acknowledge and agree that they shall
be responsible for all costs, expenses and liabilities with respect to the
severance, transfer, hiring or any other matters relating to the transfer or
other reassignment of employees presently operating the Facilities to the
Managers. The Emeritus Entities shall jointly and severally indemnify and hold
each of AL II Holdings, AL Investors II, its Affiliates and the Facility
Entities harmless from any claims arising out of or relating to such employees,
and reassignment of employment to Managers, including but not limited to claims
arising from salaries, benefits and profit-sharing plans at any of the
Facilities or of the Emeritus Entities.
10. PUT AGREEMENT. Concurrently with and as a condition to the Closing, Emeritus
shall cause Daniel R. Baty to enter into the Put and Purchase Agreement ("Put
Agreement") attached hereto as Exhibit H.
11. FINANCING OF THE PURCHASE OF THE FACILITIES. AL Investors II has negotiated
the terms and conditions of the Initial Senior Loan and the Initial Junior Loan
which shall be subject to the approval of Emeritus, such approval not to be
unreasonably withheld. By execution hereof, Emeritus has approved the terms and
conditions of the Initial Senior Loan and Initial Junior Loan. The Lending Group
and/or AL Investors II may require a Capital Improvements Reserve Escrow
("Capital Reserve") to fund the correction of deficiencies in one or more of the
Facilities. Funding of the Capital Reserve of Closing shall be the sole
obligation of the Emeritus Entities.
12. OPERATIONS OF FACILITIES PENDING CLOSING. At all times prior to the Closing
or the sooner termination of this Agreement, the Emeritus Entities agree: (a) to
maintain, manage and operate the Facilities in accordance with the terms and
conditions of the Facility Leases; (b) to maintain the Facilities in their
current condition and state of repair and to rebuild, repair or restore any
damage or destruction to the Facilities by casualty or otherwise which may occur
prior to Closing; (c) to maintain the existing property, casualty and other
insurance required under the Facility Leases; (d) to perform all of its material
obligations under the Permits, Permitted Exceptions, Contracts and Leases and
not to amend, modify or terminate or permit the termination of any Permit,
Contract, Permitted Exceptions
-11-
<PAGE>
or Lease, except with respect to Contracts and Leases in the ordinary course of
business, without the prior written consent of AL Investors II, which shall not
unreasonably be withheld; (e) not to enter into any Major Lease or Major
Contract for a Facility, without the prior written consent of AL Investors II,
which shall not unreasonably be withheld; (f) not to amend, modify, terminate,
or exercise any option to purchase under any of the Facility Leases; (g) not to
mortgage, encumber or otherwise place or permit any encumbrance on its leasehold
estate under the Facility Leases; and (h) not to enter into any contracts or
agreements to sell or otherwise transfer its interest in any of the Facilities.
13. CONVEYANCE OF INTERESTS IN FACILITIES.
13.1 Closing Delivery by the Emeritus Entities. On or prior to the Closing, the
Emeritus Entities shall deposit with or cause to be deposited with Escrow
Holder, the following, each in form satisfactory to AL Investors II:
(a) A duly executed and acknowledged Quit Claim Deed to the respective
Facility Entity conveying any leasehold improvements or other Real Estate
interest owned by any of the Emeritus Entities in the Facilities ready for
recordation in the jurisdiction where the Facility is located;
(b) A duly executed Assignment of Leases, Permits and Contracts for the
Facilities ("Assignment") to the respective Facility Entity. In connection with
the Assignment, it shall be the sole responsibility of the Emeritus Entities to
obtain all necessary consents and approvals for the transfer of and vesting in
the respective Facility Entity for all Permits, Contracts and Leases at Closing
or within ninety (90) days thereafter;
(c) FIRPTA Affidavit;
(d) Bill of Sale for all Personal Property with respect to Facilities,
(including but not limited to the Tangible Personal Property as defined in the
Facility Leases) vesting title free and clear of all Liens, except for the
Permitted Exceptions, in the respective Facility Entity;
(e) Duly executed Management Agreement, Guaranty Agreement, and Put
Agreement;
(f) Such corporate or partnership resolutions regarding due authorization
and execution and such opinions of counsel regarding authorization and execution
of the documents and instruments to be executed and delivered by any of Emeritus
and the Emeritus Entities hereunder as AL Investors II may reasonably require.
-12-
<PAGE>
(g) A certificate confirming that all of the warranties and
representations set forth in Section 5 are true and correct as of Closing.
(h) Termination agreement or if mutually agreed by AL Investors II and
Emeritus amendment and restatement of the Facility Leases.
(i) Licensing Indemnity Agreement between AL Investors II and Emeritus.
(j) Such other documents as AL Investors II may reasonably require to vest
in the respective Facility Entity all of the Emeritus Entities' right, title and
interest in each of the Facilities.
13.2 Closing Delivery by AL Investors II and the Facility Entities. On or prior
to the Closing, AL Investors II and the Facility Entities shall cause to be
delivered to the Emeritus Entities the following;
(a) The Purchase Price for the property interests described above are
allocated among the Facilities as set forth on Exhibit I. The Purchase Price set
forth on Exhibit I is the good faith allocation of the aggregate purchase price
among the Facilities agreed to by AL Investors II and the Emeritus Entities (it
being understood that the Facilities are being purchased as a group).
(b) An executed counterpart where required of the Assignment, the
Management Agreement, the Guaranty Agreement, and the Put Agreement.
(c) A certificate confirming that all of the warranties and
representations set forth in Section 6 are true and correct as of Closing.
(d) Such limited liability company resolutions regarding due authorization
and execution and such opinions of counsel regarding authorization and execution
of the documents and instruments to be executed by AL Investors II as Emeritus
Entities may reasonably require.
14. CONDITIONS PRECEDENT.
14.1 AL Investors II. AL Investors II's obligations under this Agreement are
expressly conditioned on, and subject to satisfaction of, the following
conditions precedent:
(a) Performance by Emeritus and the Emeritus Entities. The Emeritus
Entities shall each have timely performed all obligations required by this
Agreement to be performed by it.
-13-
<PAGE>
(b) Closing under Purchase Agreement. Simultaneous closing under the
Purchase Agreement.
(c) Representations and Warranties True. The representations and
warranties of the Emeritus Entities contained herein shall be true and correct
as of the Closing.
(d) No Material Adverse Change. At no time prior to the Closing shall
there be any material adverse change in the financial condition of any of the
Emeritus Entities or in the physical condition of one or more of the Facilities
due to Casualty or Condemnation.
(e) Purchase Agreement for Development Facilities. Simultaneous closing of
the facility entitled Loyalton of Phoenix under the Supplemental Purchase
Agreement in Connection with Purchase of Facilities (AL II - 5 Development
Facilities) between Emeritus and certain of its Affiliates and AL Investors
Development LLC.
(f) AL Investors II Financing. The lenders under the Initial Senior Loan
and Initial Junior Loan shall be ready, willing and able to close simultaneous
with the closing hereunder.
(g) Final Approval. Final approval of this transaction by each of the
members of AL II Holdings, the parent of AL Investors II.
The conditions set forth in Section 14.1 above are intended solely for the
benefit of AL Investors II. If any of the foregoing conditions are not satisfied
as of the Closing, AL Investors II shall have the right at its sole election
either to waive the condition in question and proceed with the purchase or, in
the alternative, to terminate this Agreement, whereupon this Agreement shall
terminate, and the parties shall have no further obligations hereunder except as
expressly provided herein.
14.2 Emeritus Entities. The obligations of the Emeritus Entities under this
Agreement are expressly conditioned on, and subject to satisfaction of, the
following conditions precedent:
(a) Performance by AL Investors II. AL Investors II and the Facility
Entities shall each have timely performed all obligations required by this
Agreement to be performed by it.
(b) Closing under Purchase Agreement. Simultaneous closing under the
Purchase Agreement.
-14-
<PAGE>
(c) Representations and Warranties True. The representations and
warranties of AL Investors II contained herein shall be true and correct as of
the Closing.
(d) Purchase Agreement for Development Facilities. Simultaneous closing of
the facility entitled Loyalton of Phoenix under the Supplemental Purchase
Agreement in Connection with Purchase of Facilities (AL II - 5 Development
Facilities) between Emeritus and certain of its Affiliates and AL Investors
Development LLC.
(e) Final Approval. Final approval of the board of Emeritus.
The conditions set forth in Section 14.2 above are intended solely for the
benefit of the Emeritus Entities. If any of the foregoing conditions are not
satisfied as of the Closing, the Emeritus Entities shall have the right at its
sole election either to waive the condition in question and proceed with the
purchase or, in the alternative, to terminate this Agreement, whereupon this
Agreement shall terminate, and the parties shall have no further obligations
hereunder except as expressly provided herein.
15. CLOSING COSTS. If this transaction closes, AL Investors II shall pay the
following closing costs with respect to Closing under this Agreement and the
Purchase Agreement, subject to the aggregate dollar limitation below:
(a) The premium for owner's and lender's title insurance for each Facility
and such additional title insurance as may be required by the Lending Group and
any search or additional title review charges to be paid to Title Company;
(b) All real estate excise taxes and other transfer taxes applicable to
the transfer of a Facility to the Facility Entities including any sales tax on
any Personal Property.
(c) The fees incurred by the Escrow Holder in connection with the Closing.
(d) All recording fees and expenses for recording of all documents and
instruments.
(e) All costs and expenses of AL Investors II, AL II Holdings, including
the Facility Entities' financing in connection with the Initial Senior Loan and
the Initial Junior Loan (except funding of any Capital Reserve which shall be
the sole obligation of Emeritus Entities).
-15-
<PAGE>
(f) Costs and expenses of due diligence investigations, studies, surveys
and reports prepared for AL Investors II and the Lending Group and the formation
and qualification of the Facility Entities.
(g) AL Investors II's, AL II Holdings', and the Facility Entities'
attorneys and accounting fees, costs and expenses.
(h) All other normal and customary closing costs incurred by AL Investors
II, Al II Holdings, and the Facility Entities.
To the extent the aggregate of the foregoing exceeds $2,947,401, as outlined in
Exhibit I the balance of the closing costs shall be paid by the Emeritus
Entities.
16. CLOSING STATEMENTS. All income and expense arising out of the management and
operation of the Facilities, including, but not limited to real property taxes
and insurance, shall be prorated between the Emeritus Entities and AL Investors
II or each Facility Entity as of the Closing. Prepaid amounts or deposits under
Residency Agreements or security deposits under the Leases shall be credited to
AL Investors II and utility deposits or prepaid amounts under the Contracts
shall be credited to the Emeritus Entities. The prorations of income and expense
for each Facility shall be made on the basis of a written closing statement
submitted by the Emeritus Entities to AL Investors II prior to the Closing and
approved by AL Investors II. In the event any prorations or apportionments made
hereunder shall prove to be incorrect for any reason, then any party shall be
entitled to an adjustment to correct the same. Any item which cannot be prorated
because of the unavailability of information shall be tentatively prorated on
the basis of the best data then available and re-prorated between the parties
when the information is available. Any prepaid rents or other prepaid expenses,
escrow accounts or deposits under the Facility Leases returned by Meditrust to
AL Investors II or the Facility Entities, or credited against the purchase price
under the Purchase Agreement, shall be refunded to the Emeritus Entities.
Notwithstanding the foregoing, any adjustments or re-prorations shall be made,
if at all, within one hundred eighty (180) days after Closing.
17. DELIVERY OUTSIDE OF ESCROW. The Emeritus Entities shall deliver to AL
Investors II and the Facility Entities at Closing outside of the Closing escrow
the originals of the diligence materials referenced in Section 4.2 (except for
the originals of the Contracts, Leases and Permits to be held by Managers for
use in managing the Facilities), and such copies of all books and records used
in the operation, maintenance, and repair of the Facilities as AL Investors II
may direct.
-16-
<PAGE>
18. BREAK-UP EXPENSES.
18.1 Emeritus' Obligation. The Emeritus Entities acknowledge and agree that
Closing under the Purchase Agreement, or this Agreement may not occur due to a
variety of events or circumstances beyond the control of AL Investors II
including but not limited to:
(a) The refusal or failure of the Lending Group to provide financing for
the acquisition of the Facilities;
(b) The failure of Governmental Authorities or other Parties to approve
the transfer of Permits, Contracts or Leases to the Facility Entities for the
operation of the Facility prior to the Closing under the Purchase Agreement or
this Agreement;
(c) The failure to secure the consent or approval from Senior Housing
Partners I, L.P., a member of AL II Holdings, to proceed with the transaction
prior to expiration of the Due Diligence Period;
(d) Casualty or Condemnation of one or more Facilities prior to the
Closing under the Purchase Agreement;
(e) The failure of Meditrust to perform under the terms of the Purchase
Agreement or the failure of Meditrust to enter into a Purchase Agreement upon
terms and conditions acceptable to AL Investors II;
(f) Default by any of the Emeritus Entities hereunder or under any other
agreement in connection with this transaction.
(g) The failure of any condition precedent to AL Investors II's
obligations hereunder as set forth in Section 14.1; or
(h) Such other events or circumstances beyond the reasonable control of AL
Investors II and the Facility Entities.
In the event that Closing under the Purchase Agreement or this Agreement should
not occur as a result of any of the foregoing, and notwithstanding termination
or expiration of this Agreement, the Emeritus Entities shall pay to AL II
Holdings and AL Investors II all of their out-of-pocket costs and expenses
incurred in connection with the due diligence and the preparation of all
documentation relating to the purchase of the Facilities, including but not
limited to costs of all title insurance cancellation fees, preparation of
environmental reports, surveys, appraisals, structural engineering reports,
amounts owing to the Lenders under the Initial Senior Loan and Initial Junior
Loan for reimbursement of expenses, costs to
-17-
<PAGE>
form AL II Holdings, AL Investors II and the Facility Entities, attorneys' fees
and costs of AL II Holdings, AL Investors II, and all other reasonable
out-of-pocket expenses incurred by AL II Holdings and AL Investors II in
connection with this transaction as set forth under Transaction Costs on Exhibit
I (collectively "Break-up Expenses"). AL Investors II shall provide to the
Emeritus Entities an itemization of its Break-up Expenses within forty-five (45)
days after termination of the purchase and sale of the Facilities as
contemplated by this Agreement. The Emeritus Entities shall make payment to AL
Investors II within ten (10) days after receipt of such itemization. The payment
of the Break-up Expenses shall be the sole remedy of AL Investors II and the
Facility Entities against the Emeritus Entities under this Agreement for failure
to close under this Agreement.
18.2 Post Closing Remedies. AL Investors II shall have all rights and remedies
at law or in equity for enforcement of any indemnities, warranties or
representations or other agreements set forth herein after Closing.
19. MISCELLANEOUS.
19.1 Entire Agreement. This Agreement, together with the Exhibits attached
hereto and all certificates and documents delivered in connection herewith,
contain the entire understanding of the parties with respect to the subject
matters hereof and supersedes all prior and other contemporaneous oral or
written understandings and agreements between the parties hereto.
19.2 Binding Effect; Assignment. This Agreement, shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, successors,
personal representatives and permitted assigns. Except as specifically provided
for herein, neither party may assign its rights hereunder without the prior
written consent of the other. Notwithstanding the foregoing, AL Investors II may
assign this Agreement in whole or part to any Facility Entity which holds or is
intended to hold title to any Facility and such Facility Entity's successors and
assigns.
19.3 Notices. Any notice, demand, offer or other writing required or permitted
pursuant to this Agreement shall be in writing, furnished in duplicate and shall
be transmitted by hand delivery, facsimile, certified mail, return receipt
requested, or Federal Express or another nationally recognized overnight courier
service, postage prepaid, as follows:
-18-
<PAGE>
If to AL Investors II AL Investors II LLC
or any of its Affiliates: c/o Bruce D. Thorn
2250 McGilchrist Street SE, Suite 200
Salem, Oregon 97302
Facsimile: (503)375-7644
Telephone: (503)370-7071 ext. 7143
With a copy to: Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attn: Gary E. Fluhrer
Facsimile: (206)447-9700
Telephone: (206)447-4400
Prudential Real Estate Investors
8 Campus Drive
Parsippany, New Jersey 07054
Attn: Joan Hayden
Facsimile: (973)683-1788
Telephone: (973)683-1772
Senior Housing Partners I, L.P.
c/o Mr. Noah Levy
Prudential Real Estate Investors
Suite 1400, Two Ravinia Drive
Atlanta, Georgia 30346
Facsimile: (770)399-5363
Telephone: (770)395-8606
If to the Emeritus Entities: Emeritus Corporation
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121-1031
Attn: Mr. Kelly Price
Facsimile: (206)301-4500
Telephone: (206)301-4507
With a copy to: Perkins Coie
1201 Third Avenue, Suite 4000
Seattle, Washington 98101
Attn: Mike Stansbury
Facsimile: (206)583-8500
Telephone: (206)583-8888
-19-
<PAGE>
Any party shall have the right to change the place to which such notice shall be
given or add additional parties to receive notices by similar notice sent in
like manner to all other parties hereto. Any notice, if sent by overnight
courier service, shall be deemed delivered on the earlier of the date of actual
delivery or the next business day and if delivered by hand delivery or facsimile
shall be deemed delivered on the date of the actual delivery and if sent by
mail, shall be deemed delivered on the earlier of the third day following
deposit with the U.S. Postal Service or actual delivery.
19.4 Captions. The captions of this Agreement are for convenience and reference
only, and in no way define, describe, extend or limit the scope or intent of
this Agreement or the intent of any provisions hereof.
19.5 Joint Effort. The preparation of this Agreement has been the joint effort
of the parties, and the resulting document shall not be construed more severely
against one of the parties than the other.
19.6 Counterparts. This Agreement may be executed in counterparts and each
executed copy shall be deemed an original which shall be binding upon all
parties hereto.
19.7 Partial Invalidity. The invalidity of one or more of the phrases,
sentences, clauses, sections or articles contained in this Agreement shall not
affect the remaining portions so long as the material purposes of this Agreement
can be determined and effectuated.
19.8 No Offer. Neither the negotiations to date nor the preparation of this
Agreement shall be deemed an offer by any party to the other. No such contract
shall be deemed binding on any party until each party has executed and delivered
this Agreement.
19.9 Amendments. This Agreement may not be amended in any respect whatsoever
except by a further agreement, in writing, fully executed by each of the
parties.
19.10 Schedules and Exhibits. All Schedules and Exhibits referred to in this
Agreement shall be incorporated into this Agreement by such reference and shall
be deemed a part of this Agreement as if fully set forth in this Agreement.
19.11 Governing Law and Attorneys' Fees. This Agreement including the validity
thereof and the rights and obligations of the parties hereunder shall be
governed by and construed in accordance with the laws of the State of Washington
without regard to its principals of conflicts of laws. AL Investors II may
enforce any or all of the provisions of this Agreement directly against the
Emeritus Entities
-20-
<PAGE>
or any of them in the State of Washington or at its option may enforce this
Agreement on behalf of any Facility Entity in the state in which such Facility
Entity owns a Facility. In the event either party brings an action or any other
proceeding against the other party to enforce or interpret any of the terms,
covenants or conditions hereof, the party prevailing in any such action or
proceeding shall be paid all costs and reasonable attorneys' fees by the other
party in such amounts as shall be set by the court, at trial and on appeal.
19.12 Third Parties. Nothing in this Agreement, whether express or implied, is
intended to confer any rights or remedies under or by reason of this Agreement
on any person other than to the Facility Entities, which are intended third
party beneficiaries.
19.13 Rules of Construction. References in this Agreement to "herein," "hereof"
and "hereunder" shall be deemed to refer to this Agreement and shall not be
limited to the particular text in which such words appear. The use of any gender
shall include all genders, and the singular number shall include the plural and
vice versa as the context may require.
19.14 Survival. The warranties, representations and indemnities in this
Agreement shall survive Closing and the delivery of the Transaction Documents
and other documents hereunder.
19.15 Joint and Several. The obligation of each of Emeritus and the Emeritus
Affiliates shall be joint and several.
19.16 No Broker. AL Investors II represents to Emeritus Entities and the
Emeritus Entities represent to AL Investors II, that no agent, finder or broker
has acted for it or was the producing and effective cause of this Agreement or
the transactions contemplated herein, and that no commissions or finder's fees
are due by it to any third parties. AL Investors II agrees to indemnify and hold
Emeritus Entities harmless, and the Emeritus Entities agree to indemnify and
hold AL Investors II harmless, with respect to any and all expenses,
obligations, and liabilities resulting from the claims or causes of action
relating to any claims made by any person retained or used by it for any agent's
broker's or finder's fees or commissions relating to the transactions
contemplated herein.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals
as of the date first above appearing.
AL INVESTORS II LLC, a Delaware limited
liability company
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
EMERITUS CORPORATION, a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
EMERITUS PROPERTIES I, INC., a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
ESC I, L.P., a Washington limited
partnership
By: ESC G.P. I, INC., a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
ESC G.P. I, a Washington corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
-22-
<PAGE>
LIST OF EXHIBITS
- ----------------
Exhibit A Certain Defined Terms
Exhibit B Major Contracts and Major Leases
Exhibit C Litigation, Claims and/or Proceedings
Exhibit D Claims for Repairs, Restorations and/or Improvements
Exhibit E Environmental Compliance
Exhibit F Management Agreement
Exhibit G Guaranty Agreement
Exhibit H Put Agreement
Exhibit I Purchase Price Allocation
-23-
<PAGE>
EXHIBIT A
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Certain Defined Terms
For all purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, capitalized terms in the Agreement have
the meanings assigned as set forth below and include the plural as well as the
singular.
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors II.
Accreditation Body: Any person, including any Person having or claiming
jurisdiction over the accreditation, certification, evaluation or operation of a
Facility.
Affiliate: With respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any other Person controlling, controlled
by, or under common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an Affiliate of
such Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
Approved Equipment Leases: Leases for any of the Furnishings and Equipment which
have been approved by AL Investors II in writing.
Award: All compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Business Day: Any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
A-1
<PAGE>
Casualty: The damage or destruction by act of god or otherwise of any portion of
any Facility which would cost more than $50,000 to repair or restore.
Closing or Closing Date: The date upon which the purchase and sale of the
fourteen (14) operating Facilities being purchased from Meditrust closes as
defined in the Purchase Agreement.
Code: The Internal Revenue Code of 1986, as amended.
Condemnation: With respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: Any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Consultants: Collectively, the architects, engineers, inspectors, surveyors and
other consultants that have been engaged from time to time prior to Closing by
the Emeritus Entities or AL Investors II to perform services for any of them in
connection with a Facility or this Agreement.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
Date of Taking: The date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: Environmental Laws means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other governmental
requirements, administrative rulings, and court judgments and decrees in effect
now or in the future and including all amendments, that relate to Hazardous
Materials and apply to any Facility. Hazardous Materials Laws include, but are
not limited to, the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act,
15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et
seq., and the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, and their state analogs.
Escrow Holder: First American Title Insurance Company.
A-2
<PAGE>
Facility: Each of the assisted living facilities including the Land,
Improvements and Personal Property associated therewith, located in the city and
state as set forth below:
<TABLE>
<CAPTION>
Facility City State Units Beds Facility LLC and LP Name
<S> <C> <C> <C> <C> <C>
Colonial Park
Club Sarasota FL 90 110 AL Investors II
Sarasota LLC
Park Club of
Fort Myers Fort Myers FL 90 100 AL Investors II Fort
Myers LLC
Park Club of
Oakbridge Lakeland FL 77 94 AL Investors II
Lakeland LLC
Park Club of
Brandon Brandon FL 89 110 AL Investors II
Brandon LLC
Highland Hills Pocatello ID 49 57 AL Investors II
Pocatello LLC
Ridge Wind Chubbuck ID 110 96 AL Investors II
Chubbuck LLC
Lakewood Inn Coeur d'Alene ID 73 109 AL Investors II Coeur
D'Alene
The Pines of
Tewksbury Tewksbury MA 49 50 AL Investors II
Tewksbury LLC
Meadowbrook Ontario OR 53 82 AL Investors II
Ontario LLC
Anderson Place Anderson SC 127 84 AL Investors II
Anderson LLC
Elmbrook Estates Lubbock TX 79 100 Lubbock AL Investors
II LP
Fairhaven Estates
Bellingham WA 98 110 AL Investors II
Bellingham LLC
Hearthstone Moses Lake WA 50 100 AL Investors II Moses
Lake LLC
Evergreen Lodge
Federal Way WA 84 92 AL Investors II
Federal Way LLC
</TABLE>
The legal description of each of the above Facilities is set forth in the
Purchase Agreement.
Facility Entity: Each of the Facility LLC's or LP's which owns or will own at
Closing a Facility as set forth opposite the name of each Facility above.
Facility Lease: Each of the leases by which a Facility has been leased by any of
the Emeritus Entities from Meditrust.
Furnishings and Equipment: All furniture, furnishings, beds, televisions,
equipment, food service equipment, apparatus, computers and other personal
property used in (or if the context so dictates, required in connection with),
the operation of each Facility, other than Operating Equipment, Operating
Supplies and fixtures attached to and forming part of the Improvements.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
A-3
<PAGE>
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material, or substance now or in the future defined as a
"hazardous substance," "hazardous material," hazardous waste," "toxic
substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning
of any Environmental Law. Provided, however, Hazardous Substances shall not
include the safe and lawful use and storage of quantities of (i) pre-packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of any Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Facilities' parking areas, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Environmental Laws.
Improvements: The buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Junior Loan: Any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors II and/or the membership
interests of AL Investors II in the Facility Entities. Initially, the Junior
Loan is evidenced by that certain Loan Agreement among AL II Holdings, AL
Investors II, AL Investors Development, the Facility Entities, and their
Affiliates and Senior Housing Partners I, L.P. dated on or about the same date
hereof ("Initial Junior Loan").
Land: The parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreement.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: Collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with
A-4
<PAGE>
the Facility, including, without limitation, any of the foregoing which may (i)
require repairs, modifications or alterations in or to the Facility, (ii) in any
way affect (adversely or otherwise) the use and enjoyment of the Facility or
(iii) require the assessment, monitoring, clean-up, containment, removal,
remediation or other treatment of any Hazardous Substances on, under or from the
Facility. Without limiting the foregoing, the term "Legal Requirements" includes
all Environmental Laws and shall also include all Permits and Contracts issued
or entered into by any Governmental Authority, any Accreditation Body and/or any
Third Party Payor and all Permitted Encumbrances.
Lending Group: GMAC Commercial Mortgage in a debt facility to AL Investors II
secured by the Facilities in the maximum aggregate original principal balance of
$68,000,000.
Lien: With respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected.
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or has a noncancellable term in excess of one year or in which the provider of
the goods or services is an Emeritus Entity or an Affiliate of any of them.
Major Lease. Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which an Emeritus
Entity or an Affiliate of any of them is the tenant.
Managed Care Plans: All health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Managers: Any Person who has entered into a Management Agreement with a Facility
Entity, which initially shall mean Emeritus Management LLC and Emeritus
Management I LP. or any other entity approved by AL Investors II.
Medicaid: The medical assistance program established by Title XIX of the Social
Security Act (42 US C ss.ss. 1396 et seq.) and any statute succeeding thereto.
A-5
<PAGE>
Medicare: The health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
Meditrust: Meditrust Acquisition Corporation I and Meditrust Company LLC.
Mortgage: collectively, the terms and conditions of the Senior Loan and the
Junior Loan.
Operating Equipment. All dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Supplies. All consumable items used in, or held in storage for use in
(or if the context so dictates, required in connection with), the operation of
the Facilities, including food, medical supplies, fuel, soap, cleaning
materials, and other similar consumable items.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) to the extent such other agreements and contracts
have been entered into by the Emeritus Entities in the ordinary course of
business of construction, owning, operating or managing the Facilities, contract
rights (including without limitation, warranties provided in construction
contracts, subcontracts, and architects' contracts), right to proceeds or
payment on account of any Award or Casualty, warranties and representations,
franchises, and records and books of account benefiting, relating to or
affecting the Facility or the operation of any programs or services in
conjunction with the Facility and all renewals, replacement and substitutions
therefor entered into by the Emeritus Entities with any Governmental Authority,
Accreditation Body or Third Party Payor or entered into by any of the Emeritus
Entities with any third Person, excluding, however, any agreements pursuant to
which money has been or will be borrowed or advanced, the Facility Leases, the
Leases, any agreements with or obligations relating to employees of a Facility,
and any agreement creating or permitting any Lien, or other encumbrance on title
(except for the Permitted Exceptions), and any Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by any of the Emeritus
Entities and encumbering or affecting a Facility.
Permits: Collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents,
A-6
<PAGE>
agreements, contracts, contract rights, franchises, interim licenses, permits
and other authorizations of every nature whatsoever required by, or issued
under, applicable Legal Requirements relating or affecting a Facility or the
construction, development, maintenance, management, use or operation thereof, or
the operation of any programs or services in conjunction with the Facility and
all renewals, replacements and substitutions therefor, now or hereafter required
or issued by any Governmental Authority, Accreditation Body or Third Party
Payor, or maintained or used by any of the Emeritus Entities, or entered into by
any of the Emeritus Entities with any third Person with respect to a Facility.
Permitted Exceptions: The exceptions to title approved by AL Investors II
pursuant to the Purchase Agreement, including the Approved Equipment Leases.
Person: Any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
Personal Property: All machinery, equipment, furniture, furnishings, vans,
buses, vehicles, movable walls or partitions, computers or trade fixtures,
goods, inventory, supplies, the name of the Facility, and other personal or
intangible property located on or in or used in connection with a Facility
including, but not limited to, all Operating Equipment, Furnishings and
Equipment and Operating Supplies. Notwithstanding the foregoing, title to vans
or buses shall remain in Emeritus or Managers under the Management Agreement and
be held in trust by them for the benefit of the respective Facility Entity.
Prime Rate: The variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors II.
Provider Agreements: All participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of the Emeritus Entities or
Meditrust in connection with the operation of the Facility relating to any right
of payment or other claim arising out of or in connection with participation in
any Third Party Payor Program.
Real Estate: Collectively, (i) the Land, (ii) the Improvements, and (iii) all
rights, rights-of-way, easements, mineral rights, privileges, options, leases,
licenses, and appurtenances in any manner belonging to, or pertaining to, the
Land and the Improvements.
A-7
<PAGE>
Residency Agreement: All contracts, agreements and consents executed by or on
behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Loan is evidenced by that certain Loan Agreement between
AL Investors II (and the Facility Entities) and GMAC Commercial Mortgage
Corporation dated on or about the same date hereof ("Initial Senior Loan").
Third Party Payor Programs: Collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield,
Managed Care Plans, other private insurance plans and employee assistance
programs.
Third Party Payors: Collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
Title Company: First American Title Insurance Company.
Unavoidable Delays: Delays due to strikes, lockouts, inability to procure
materials, power failure, acts of God, governmental restrictions, enemy action,
civil commotion, fire, unavoidable casualty or other causes beyond the control
of the party responsible for performing an obligation hereunder, provided that
lack of funds shall not be deemed a cause beyond the control of either party
hereto.
A-8
<PAGE>
EXHIBIT B
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Major Contracts and Major Leases
1. Park Club of Brandon
None
2. Park Club of Fort Myers
Ground Maintenance Agreement between Earth Lovers Landscape and Lawn and The
Park Club of Fort Myers, $900/month)
Gas Service Agreement, dated July 3, 1995, between Ferrellgas and The Park Club
(5 year term then year to year, $900/month, either party may terminate upon 30
days written notice).
Equipment Rental Agreement, dated February 1998, between Mellon First United
Leasing and Integrated Health Services at Sarasota, Inc. (3 year term,
$207/month, Agreement not executed by Mellon First United Leasing).
Equipment Maintenance Agreement, dated November 18, 1997, between Pitney Bowes
Credit Corporation and The Park Club of Fort Myers (63 month term,
$368/quarter).
Production and Warranty Contract, dated June 15, 1998, between The Message on
Hold Network and The Park Club of Fort Myers (36 month term, $69/month).
Commercial Lease Agreement, dated February 6, 1997, between Associates Leasing,
Inc. and Emeritus - Park Club of Fort Myers (36 month term, $349.80/month,
Lessee has right to purchase equipment for $1.00 30 days prior to end of term,
Agreement not executed by Associates Leasing, Inc.).
Pest Prevention Service Agreement, dated January 11, 1999, between Steritech
Group, Inc. and The Park Club of Fort Myers (one year term, then year to year,
$150/month, either party may terminate upon 30 days written notice).
B-1
<PAGE>
3. Park Club of Oakbridge
Fire Alarm Testing and Inspection Service Agreement, dated September 8, 1995,
between Security Engineers Systems, Inc. and Emeritus Corporation (one year
term, then year to year, $900/year plus labor costs, either party may terminate
upon 30 days written notice).
Pharmacy Service Agreement, dated July 19, 1996, between First Priority Pharmacy
and Park Club of Oakbridge (one year term, then year to year, either party may
terminate upon 30 days written notice).
4. Colonial Park Club
Pharmacy Provider Agreement, dated October 1, 1997, between Olson Liggett Drug
and Colonial Park Club (one year term, then year to year, either party may
terminate upon 30 days written notice for breach).
5. Ridge Wind
None
6. Lakewood Inn tbka Loyalton of Coeur d' Alene
Landscape Maintenance Agreement, dated February 5, 1998, between Artistic
Landscape and Lakewood Inn (one year, $1018.84/month)
Elevator Maintenance Agreement, dated May 4, 1998, between Thyssen Elevator
Corporation and The Lakewood Inn (one year, then year to year, $280/month,
either party may terminate upon 30 days written notice).
7. Highland Hills
None
8. Fairhaven Estates
MDU Service Agreement, dated May 28, 1998, between TCI Cablevision of Washington
and Fairhaven Estates (5 year term with 5 year renewal terms, $656.78/month,
either party may terminate upon 6 months written notice).
Monitoring Contract, dated October 23, 1998, between D-Tech, Inc. and Fairhaven
Estates (5 year term then year to year, $25/month, either party may terminate
upon 30 days written notice).
B-2
<PAGE>
9. Evergreen Lodge
Elevator Maintenance Agreement, dated April 1, 1996, between Sound Elevator
Company and Emeritus Properties I, Inc. (3 years with 3 year renewal terms,
$179.74/month, either party may terminate upon 90 days written notice).
Central Station Protective Signaling Service Agreement, dated September 10,
1996, between Edwards Company and Emeritus Corporation (3 years then year to
year, $30/month, either party may terminate upon 60 days written notice).
10. Hearthstone
Consultant Agreement, dated December 1, 1997, between Pharmacy Corporation of
America and Hearthstone Inn (one year term, then year to year, $40/hour as
needed, either party may terminate upon 60 days written notice).
Pharmaceutical Service Agreement, dated December 1, 1997, between Pharmacy
Corporation of America and Hearthstone Inn (one year term, then year to year,
either party may terminate upon 60 days written notice).
11. Pines at Tewksbury
Contract for Alarm and Detection Equipment, dated January 1, 1999, between
Grinnell Fire Protection Systems and Pines at Tewksbury (one year term then year
to year, $1,400/year, either party may terminate upon 30 days written notice,
Agreement not executed by Pines at Tewksbury).
12. Meadowbrook
None
13. Anderson Place
Agreement for Services, dated December 1997, between Dr. Harry Geisberg and
Anderson Place ($900/month, either party may terminate upon 60 days written
notice).
Agreement for Commercial Garbage Service, dated November 11, 1998, between
Carolina Container Company and Anderson Place (2 year term, $255.65/month).
Service Agreement for Podiatry Care, dated April 1, 1997, between Diversified
Health Services and Anderson Place Health Care (one year term then year to year,
either party may terminate upon 30 days written notice).
B-3
<PAGE>
Consultant Pharmacist Retainer Agreement, dated November 1, 1998, between
Network HealthCare and Summer House (one year term then year to year, $50/hour,
either party may terminate upon 60 days written notice).
Nursing Home Vendor Pharmacy Agreement, dated November 1, 1998, between Network
HealthCare and Anderson Place Health Care Center (one year term then year to
year, either party may terminate upon 30 days written notice).
14. Elmbrook Estates
Waste Collection Agreement, dated June 13, 1997 between Browning Ferris Inc. and
Elmbrook Estates (3 year term with 3 year renewal terms, $295.37/month, either
party may terminate upon 60 days prior written notice).
B-4
<PAGE>
EXHIBIT C
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Litigation, Claims and/or Proceedings
1. Highland Hills (Pocatello, Idaho)
Claimant: Hazel Gregg
Nature of Claim: Age Discrimination
2. Ridgewind (Chubbuck, Idaho)
Claimant: Audra Hess
Nature of Claim: Wrongful Termination
C-1
<PAGE>
EXHIBIT D
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Claims for Repairs, Restorations and/or Improvements
None
Exceptions to Compliance With Legal Requirements
<TABLE>
<CAPTION>
<S> <C>
Community Issue
Hearthstone Inn Elevators do not conform to current ADA
requirements
Meadowbrook The public restrooms are not in compliance
with current ADA guidelines
Meadowbrook Parking does not meet current zoning
requirements; eight (8) additional stalls
are required to be in compliance
Evergreen Lodge Door hardware does not conform to current
ADA requirements
Fairhaven Estates Door hardware does not conform to current
ADA requirements
The Park Club of
Fort Meyers The public men's rest room does not conform
to current ADA requirements
</TABLE>
Emeritus Entities shall remedy all of the above exceptions within a reasonable
time at their sole cost and expense.
D-1
<PAGE>
EXHIBIT E
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Environmental Compliance
<TABLE>
<CAPTION>
Community (Location) Issue Status Resolution
<S> <C> <C> <C>
Meadowbrook O&M Program Completed Comply with O&M
program
Evergreen Lodge O&M Program Completed Comply with O&M
program
Colonial Park Club Storage Drums Contact Test and dispose
local firm to
properly test and dispose
Park Club of Prior Underground Removed in
Oakbridge Storage Tank 1999 by IHS
(1,000 gallon propane Propane tank use
for kitchen
appliances was
removed when
kitchen
converted to
natural gas.
Confirm removal
in accordance
with all Legal
Requirements.
</TABLE>
E-1
<PAGE>
EXHIBIT F
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Management Agreement
See attached Management Agreement
F-1
<PAGE>
EXHIBIT G
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Guaranty Agreement
See attached Guaranty Agreement
G-1
<PAGE>
EXHIBIT H
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Put Agreement
See attached Put Agreement
H-1
<PAGE>
EXHIBIT I
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 14 Operating Facilities)
Purchase Price Allocation
I-1
<PAGE>
MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
(AL II - 14 Operating Facilities)
This Management Agreement with Option to Purchase (the "Agreement") is entered
into as of March ____, 1999, by and among Emeritus Management LLC, a Washington
limited liability company, Emeritus Management I LP, a Washington limited
partnership, Emeritus Properties I, Inc., a Washington corporation, ESC I, L.P.,
a Washington limited partnership, and ESC G.P. I, Inc., a Washington corporation
(collectively "Managers" and each a "Manager"), Emeritus Corporation, a
Washington Corporation ("Emeritus"), and AL Investors II LLC, a Delaware limited
liability company ("AL Investors II") for itself and as sole managing member on
behalf of each of the Facility Entities as set forth in Exhibit A (collectively
"Facility Entities" and each a "Facility Entity"). (AL Investors II and the
respective Facility Entity which owns a Facility are sometimes collectively
referred to herein as "Owner" or with respect to all Facilities "Owners").
Owners desire to engage Managers to manage the Facilities as defined in Exhibit
A upon the terms and conditions set forth herein. All capitalized terms not
otherwise defined herein shall have the meaning set forth in Exhibit A.
1. BACKGROUND AND GENERAL TERMS
1.1 Purchase Agreements. AL Investors II has entered into (a) a Purchase and
Sale Agreement dated of even date herewith with Meditrust Company LLC, a
Delaware limited liability company ("Meditrust"), relating to the purchase of
the Facilities (the "Purchase Agreement"), and (b) a Supplemental Purchase
Agreement In Connection With Purchase Of Facilities with Emeritus, Emeritus
Properties I, Inc., ESC G.P. I, Inc., and ESC I, L.P. (the "Supplemental
Agreement") relating to certain additional terms and conditions in connection
with purchase of the Facilities (the Purchase Agreement and the Supplemental
Agreement, collectively the "Purchase Agreements"). Closing under the Purchase
Agreements will occur simultaneously and the resulting pool of fourteen (14)
Facilities will each be owned by the respective Facility Entity and managed by
the Managers pursuant to this Agreement.
1.2 Master Agreement. Under the terms and conditions of this Agreement, Emeritus
Management LLC will manage all of the Facilities other than those located in
Texas which will be managed by Emeritus Management I LP. Pursuant to Section
3.6, Emeritus Properties I, Inc., an Affiliate of Emeritus, will be co-manager
of all Facilities except Elmbrook Estates and Park Club of Brandon, subject to
the provisions of Section 3.6. ESC I, L.P., an Affiliate of Emeritus, will be
co-manager of the Facility entitled Elmbrook Estates and ESC G.P. I, Inc. will
be
-1-
<PAGE>
co-manager of the Facility entitled Park Club of Brandon. It is intended that
the terms of this Agreement shall apply to each of the Facilities as if this
Agreement were a direct agreement between each Facility Entity and the
respective Manager (and, if applicable, co-Manager) but the operational results
upon which the Management Fee (Base Management Fee and Accrued Management Fee)
and Operating Deficit and Operating Profit are determined, except as otherwise
expressly provided herein, shall be based on the combined results of all the
Facilities and not separately for each Facility. A default or Event of Default
under this Agreement with respect to any Facility shall be a default or Event of
Default as to all Facilities.
1.3 Qualifications. Owners desire to engage the Managers to manage, on behalf of
the Owners and subject to their overall supervision and control, each respective
Facility and Managers represent to AL Investors II and the Facility Entities
that they are experienced and duly qualified under all applicable Legal
Requirements to manage assisted living facilities. By entering into this
Agreement, Owners do not delegate or intend to delegate to Managers any powers,
duties, or responsibilities which Facility Entities are prohibited by Legal
Requirements from delegating. Owners also retain such other management authority
as shall not have been expressly delegated to the Managers pursuant to this
Agreement.
1.4 Emeritus Guaranty. Concurrently with the execution of this Agreement,
Emeritus is entering into a Guaranty of Management Agreement ("Emeritus
Guaranty") in favor of the Facility Entities and Owners guaranteeing the
Managers' obligations under this Agreement.
1.5 Consideration. In consideration of Owners' consummating the Purchase
Agreements and the mutual covenants contained herein, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree to enter into and perform their respective obligations
under this Agreement.
2. TERM
2.1 The Term. The term ("Initial Term") of this Agreement shall commence on the
date hereof ("Commencement Date") and shall expire at midnight on December 31,
2001 (the "Termination Date"). If the Closing under the Purchase Agreements does
not occur for any reason, this Agreement shall terminate and no party hereto
shall have any liability or obligation under this Agreement. The Initial Term
and Extension Term are sometimes collectively referred to herein as the "Term".
-2-
<PAGE>
2.2 Extension Term. If Emeritus fails to exercise or is not entitled to exercise
the Purchase Option as provided for in Section 13, Owners may extend this
Agreement for a period of up to twelve (12) months beyond the Termination Date
as to any or all Facilities as determined by Owner in its sole discretion
("Extension Term") by giving notice of such election (which shall include
designation of the Facilities and the applicable Extension Term) to Managers at
least ninety (90) days prior to the Termination Date. In such event, the
provisions of Section 13 of this Agreement shall not be applicable during any
Extension Term.
3. GRANT OF AUTHORITY AND OBLIGATIONS OF MANAGERS
3.1 Grant to Managers. Owners hereby grant to Managers the right to supervise
and direct the management and operation of the Facilities subject to the terms
of this Agreement and the overall supervision and control of Owners. Managers
accept such grant and agree that they will supervise and direct the management
and operation of the Facilities in accordance with the terms of this Agreement
and the general supervision of Owner. Managers, subject to the terms of this
Agreement, shall have the general authority and responsibility to (i) determine
operating policy and standards of operation, maintenance, and resident care for
the Facilities except where Legal Requirements require an Owner to do so in
which event Manager and such Owner shall consult with each other to allow Owner
to determine policy and standards, (ii) supervise and direct all phases of
advertising and marketing for the Facilities, (iii) carry out all phases of the
Annual Plans and (iv) perform such other acts and things as shall be necessary
to operate the Facilities in an efficient manner which is consistent with
customary and commercially reasonable practice in the industry for comparable
facilities. Managers acknowledge the trust and confidence placed in them
pursuant to this Agreement and at all times agree to act in the best interest of
Owners in managing and operating the Facilities.
3.2 Annual Plans
3.2.1 Preparation and Approval. Not later than December 1 prior to the
commencement of each Operating Year, other than the initial Operating Year, the
Managers shall submit to Owners a draft of an annual budget and forecast for the
operation of each Facility and all Facilities in the aggregate for the
forthcoming Operating Year containing projections of Total Revenues and budgets
of Operating Expenses, Fixed Operating Expenses, Capital Improvements, and
Operating Deficit or Operating Profit (the "Annual Plan"). Such budget and
forecasts shall be in reasonable detail and in such form as reasonably required
by Owners. The Annual Plan shall include the assumptions upon which the
forecasts and budgets were prepared, and shall include a proposed annual
marketing plan and proposed resident care and services plan and such other
information as may be reasonable and
-3-
<PAGE>
appropriate to fully advise Owners of all material facts and assumptions
relevant to an evaluation of the Annual Plan for each Facility. Managers shall
review the Annual Plan with Owners, and subject to Owners' approval of each
Annual Plan (which Owners shall endeavor to give by December 31), Manager shall
implement and operate the Facilities in accordance with such approved Annual
Plan for the successive Operating Year. When the Annual Plan is approved by
Owners, the respective Manager is authorized to incur and pay for the Operating
Expenses, Fixed Operating Expenses and Capital Improvements set forth in the
Annual Plan and implement the provisions of the Annual Plan. The Annual Plan
shall be updated as of June 1 of each Operating Year if requested by Owner. The
draft Annual Plan for the first Operating Year shall be provided to Owners on or
before April 30, 1999 and such draft Annual Plan shall be approved or
disapproved in accordance with this Section 3.2.1. and Section 3.2.2.
3.2.2 Disapproval of Plan. If an Owner declines to approve a specific item or
items of an Annual Plan for a Facility or the Facilities, the Manager shall make
appropriate revisions to the Annual Plan and resubmit the Annual Plan to the
Owner for approval. Until an Annual Plan is approved for each Operating Year,
the item or items in question will be replaced by an amount equal to such budget
item for the Operating Year prior thereto, except for Fixed Operating Expenses
over which Manager has no control and except for Capital Improvements as to
which the item or items will be replaced with $250 per Operating Year per unit
for each Facility.
3.2.3 Compliance with Annual Plan. Managers agree to use best efforts to operate
the Facilities as provided in the Annual Plan for that Facility. Notwithstanding
the foregoing, Managers shall not expend more than the aggregate budget category
for each of Operating Expenses, Fixed Operating Expenses and Capital
Improvements with respect to each Facility or exceed any line item in Operating
Expenses or Capital Improvements for a Facility by more than ten percent (10%)
without an Owner's prior approval. In the event actual Total Revenues shall be
less than projected Total Revenues as set forth in the Annual Plan, Managers
shall use all reasonable efforts to effect a proportionate reduction in variable
Operating Expenses.
3.2.4 Group Services. Managers and their Affiliates will furnish to the
Facilities the benefits of any "Group Services" which Managers and their
Affiliates may have in effect from time to time, which phrase shall mean goods
and services provided jointly to other assisted living facilities owned or
managed by Emeritus or its Affiliates on a group or joined basis to realize
maximum economy. Group Services may include (a) bulk purchases of supplies and
services, (b) centralized purchasing service, and (c) centralized marketing
services. Each Owner shall have the option of whether and to the extent each
respective Facility shall participate in
-4-
<PAGE>
Group Services; provided that if Owner determines that a Facility shall not
participate in Group Services, then to the extent such goods and services are
reasonably required for the operation of such Facility, Manager shall arrange
for an alternative provider of such goods and services on the most favorable
terms then practicable. The costs of all Group Services shall be allocated among
the Facilities and other assisted living facilities on an equitable basis in
proportion to the benefits rendered to each and the costs of any Group Services
provided to the Facilities shall be included in the Annual Plan if the
Facilities participate in Group Services.
3.3 Personnel.
3.3.1 General. Consistent with the Annual Plan for each Facility, the respective
Manager shall hire, discharge, promote and supervise the executive staff of the
Facilities and will supervise through such executive staff the hiring,
discharging, promotion and work of all other operating and service employees of
the Facility. All members of the staff of a Facility shall be reasonably
qualified for their positions, and the Compensation payable to such persons
shall be comparable to the compensation paid to the staff of other comparable
assisted living facilities in the general area, taking into account the location
and size and targeted residents of each Facility. Manager shall have in its
employ at all times at each Facility a sufficient number of capable employees to
enable it to properly, adequately, safely and efficiently manage, operate,
maintain and account for the Facilities. Manager shall fully comply with all
applicable Legal Requirements with respect to such employees. Manager represents
that it is and will continue to be an equal opportunity employer and must
advertise as such and Manager shall not engage in any form of discrimination
from the employment or hiring as independent contractors of any personnel,
including, without limitation, discrimination as to race, color, creed,
religion, age, gender, marital status, sexual preference, national origin or
disability.
3.3.2 Managers as Employer. All executive staff members and other employees at
the Facilities shall be direct employees of the Managers or their Affiliates and
not of Owners, and all Compensation of such employees shall be paid by the
Managers as part of Operating Expenses as approved in the Annual Plan. Without
limiting the foregoing, Managers shall, for purposes of such employment
relationship, be acting as an independent contractor and not as an agent of
Owners. Owners shall not have any liability or responsibility for the work place
conditions or employees at any Facility. Managers shall ensure that all
employees required to be licensed under any Legal Requirements shall be so
licensed.
3.3.3 Labor Relations. The Managers will not become involved in any negotiations
with any labor unions or enter into any collective bargaining agreement
-5-
<PAGE>
or labor contract resulting therefrom without the prior approval of the Owner of
any affected Facility.
3.4 Additional Responsibilities of Managers. Manager shall, as agent for the
respective Facility Entity, perform the following services, or cause the same to
be performed, for each Facility:
(a) Enter into Residency Agreements in the general form approved by Owner
for each Facility and perform the services required thereunder and use diligent
efforts to enforce the provisions thereof.
(b) In accordance with the applicable Annual Plan, enter into such
Ordinary Contracts for goods and services or furnishing of utilities,
maintenance and repair as shall be reasonably necessary for the proper operation
and maintenance of each Facility. Major Contracts, unless set forth in the
Annual Plan, shall require the prior approval of Owner.
(c) In accordance with the applicable Annual Plan, enter into such
Ordinary Leases as shall be necessary or convenient for the operation of a
Facility. Major Leases, unless set forth in the applicable Annual Plan, shall
require the prior approval of Owner.
(d) In accordance with the applicable Annual Plan, make all repairs and
improvements (including Capital Improvements) to the Facility as shall be
reasonably necessary for good order, condition and repair.
(e) In accordance with the applicable Annual Plan, purchase such Operating
Equipment and Operating Supplies as shall be reasonably necessary for the proper
operation of a Facility.
(f) Maintain in the name of the applicable Facility Entity all Permits
required in connection with the operation and management of the Facility. In
connection with all Permits, each Facility Entity agrees to execute and deliver
any and all applications and other documents as shall be reasonably required and
to otherwise reasonably cooperate with the Manager in applying for, obtaining
and maintaining such Permits. Provided, however, it shall be the sole
responsibility of Managers to cause each Facility and Facility Entity to obtain
and maintain all required Permits and to operate the Facility in compliance with
such Permits.
(g) Cause to be done all such acts and things in and about a Facility as
shall be necessary to comply with all Insurance and Legal Requirements. Without
limiting the foregoing, Manager shall, consistent with the applicable Annual
Plan, provide adequate security in and about the Facility.
-6-
<PAGE>
(h) Cause each Facility to comply with all applicable covenants and
provisions of any Mortgage to the extent such covenants and provisions relate to
the operation, management, compliance with Legal Requirements, and condition of
the Facilities, provided that Owners shall have delivered to Manager true and
correct copies of any Mortgage then in effect. Without limiting the generality
of the foregoing, (A) Managers acknowledge that they have been provided with a
copy of and have approved the terms and conditions of (i) the Initial Senior
Loan and (ii) the Initial Junior Loan and (B) Managers agree to cause the
Facilities at all times to be in compliance with the provisions of Sections 4.6,
4.7, 4.10, 4.11, 4.17, 4.18, 4.20 and Section 6 of the Loan Agreement entered
into in connection with the Initial Senior Loan. Managers also agree to cause
the Facilities to be in compliance at all times with the provisions of the
Initial Junior Loan relating to the operation, management, compliance with Legal
Requirements and condition of the Facilities. Owners shall promptly forward to
Managers any notices of default or noncompliance with respect to the foregoing
which they may receive under the Initial Senior Loan, Initial Junior Loan or any
successor Mortgage.
(i) Cause each Facility and its operations to comply with the requirements
of all Contracts, including but not limited to Residency Agreements, Third Party
Payors and Third Party Payor Programs, and all Leases.
(j) Retain legal counsel for a Facility selected by an Owner which will
represent the Owner, Manager and the Facility on all legal questions as
reasonably necessary relating to Legal Requirements, and will institute any and
all legal actions or proceedings as shall be reasonably necessary to collect
charges or other income for the Facility, prepare or review Contracts, or to
resolve claims (except those arising under this Agreement); provided, however,
that without the prior approval of Owner, Manager shall not institute any
proceedings involving claims in excess of $5,000 or to terminate any Major
Contract or Major Lease.
(k) With respect to refurbishment or renovation of any Facility or other
Capital Improvements approved by Owner, Managers shall negotiate contracts for
the construction or acquisition of such Capital Improvements, secure all
necessary Permits, and supervise the design, acquisition, and construction to
assure that such Capital Improvements are completed in a good and workmanlike
manner free of any Liens and in accordance with the budget approved by Owners.
(l) Promptly notify Owners of any default by Emeritus or its Affiliates
under the warranties, representations, covenants and indemnities in the Purchase
Agreements and promptly cure any such default at its sole cost and expense (and
not as an Operating Expense).
-7-
<PAGE>
(m) Cause Emeritus to comply with all reporting, net worth, and liquidity
requirements of the Initial Senior Loan and the Initial Junior Loan applicable
to Emeritus.
(n) Cause to be done all such acts and things to maintain the Facility in
good condition for the Primary Intended Use.
(o) Maintain and repair in good condition all buses or vans used in
connection with the operation of the Facilities, title to which shall remain in
Managers or their Affiliates.
(p) Prepare and, consistent with the applicable Annual Plan, implement a
life safety plan for the Facility complying with all Legal Requirements to be
used in the event of fire or other casualty at the Facility.
3.5 Unauthorized Acts. Notwithstanding anything to the contrary herein, Managers
shall have no authority to:
3.5.1 No Borrowing. Borrow on behalf of or loan any funds of a Facility Entity;
3.5.2 No Liens or Transfer. Create or permit any Lien on all or any portion of a
Facility (except for a Mortgage) or sell, convey or otherwise transfer all or
any portion of a Facility without Owner's approval which may be withheld in its
sole discretion except for replacement of Furnishings and Equipment and
Operating Equipment in the ordinary course of business.
3.5.3 No Change of Use. Do or permit any act or omission which would impair the
use of any Facility for the Primary Intended Use;
3.5.4 No Violation. Do or permit any act or omission which would violate Legal
Requirements or the terms of any Permit with respect to any Facility or which
would cause any such Permit to lapse or expire;
3.5.5 Violation of Agreement. Do or permit any act or omission or incur any
liability which exceeds Manager's authority under this Agreement;
3.6 Licensing. If all Permits required by Governmental Authorities have not been
duly and validly transferred or reissued in accordance with all Legal
Requirements in the name of the applicable Facility Entity at closing under the
Purchase Agreements, then Managers at their sole cost and expense shall cause
all such Permits to be transferred or reissued in accordance with all Legal
Requirements in the name of the applicable Facility Entity within ninety (90)
days
-8-
<PAGE>
after the date of this Agreement. Until such time, ESC I, L.P., ESC G.P. I, Inc.
and Emeritus Properties I, Inc., as holders of the Permits, shall act as
co-managers hereunder in order to ensure that each Facility has the benefit of
such Permits as they may hold until transfer or reissuance of the Permits. At
such time, ESC I, L.P., ESC G.P. I, Inc. and Emeritus Properties I, Inc. shall
cease to be Managers hereunder.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF MANAGERS
Managers hereby represent, warrant and covenant as follows:
4.1 Existence, Power, Qualification. Each of the Managers is a limited liability
company, corporation, or limited partnership respectively duly organized,
validly existing and in good standing under the laws of the State of Washington
and qualified to do business in each state in which it is managing a Facility.
Each of the Managers has all requisite limited liability company, corporate or
limited partnership power and authority respectively to manage each Facility
pursuant to the terms of this Agreement.
4.2 Valid and Binding. Each of the Managers is duly authorized to make and enter
into this Agreement and to carry out the duties contemplated herein. This
Agreement has been duly executed and delivered by each of the Managers and is
the legal, valid and binding obligation of each of the Managers enforceable in
accordance with its terms.
4.3 Single Purpose. Managers have not engaged in and shall not during the Term
engage in any business other than management and operation of the Facilities
pursuant to this Agreement, and the operation of the facilities pursuant to the
AL Management Agreement, and the AL II Development Management Agreement.
4.4 Ownership of Managers. Managers are and shall remain during the Term of this
Agreement wholly owned by Emeritus and no other Person shall have any direct or
indirect interest or management rights therein.
5. INSURANCE
5.1 General Insurance Requirements. During the Term of this Agreement and
thereafter until Managers no longer manage one or more Facilities, Managers
shall cause each Facility and the business operations conducted at the Facility
insured as set forth below (the cost of which shall be an Operating Expense):
-9-
<PAGE>
5.1.1 Types and Amounts of Insurance. The insurance on all of the Facilities
shall include the following unless otherwise approved by Owners:
(a) property loss and physical damage insurance on an all-risk basis (with
only such exceptions as Owner may approve) covering each Facility (exclusive of
Land) for its full replacement cost (without deduction for depreciation) and a
deductible for each Facility not in excess of TWENTY FIVE THOUSAND DOLLARS
($25,000). Nonconforming uses shall be insured for replacement cost of existing
improvements without regard to the ability to rebuild the improvements. Manager
as an Operating Expense will keep in force an all risk property insurance policy
covering Manager's furniture, furnishings and equipment situated at the
Facilities, including but not limited to the van or bus for each Facility until
legal title is transferred to Owners, but the proceeds of any insurance on a van
or bus shall be paid to the respective Owner.
(b) flood insurance (if the Facility or any portion thereof is situated in
an area which is considered a flood risk area by the U.S. Department of Housing
and Urban Development or any future Governmental Authority charged with flood
risk analysis) in limits reasonably acceptable to the Owner and subject to the
availability of such flood insurance;
(c) boiler and machinery insurance (including related electrical apparatus
and components) under a standard comprehensive form, providing coverage against
loss or damage caused by explosion of steam boilers, pressure vessels or similar
vessels, now or hereafter installed at any Facility, in limits approved by
Owners;
(d) business interruption insurance in an amount and to the extent
reasonably specified by Owners, but in no event in an amount less than Fixed
Operating Expenses plus projected Operating Profit for a period of twelve (12)
months, and include either an agreed amount endorsement or a waiver of any
co-insurance provisions so as to prevent any insured from being a co-insurer;
(e) commercial general liability insurance on an occurrence basis insuring
the applicable Owner and Managers against claims for personal injury or death or
property damage occurring at each Facility, including coverages with amounts not
less than FIVE MILLION DOLLARS ($5,000,000) per occurrence with respect to
bodily injury and death and THREE MILLION DOLLARS ($3,000,000) for property
damage;
(f) Employees' fidelity insurance in an amount not less than $1,000,000
protecting owner against any misappropriation of funds with respect to any
Facility by Manager's employees;
-10-
<PAGE>
(g) umbrella/excess general liability insurance on an occurrence basis in
an amount not less than $5,000,000;
(h) professional liability insurance in an amount not less than TEN
MILLION DOLLARS ($10,000,000) for each medical incident;
(i) physical damage insurance on an all-risk basis (with only such
exceptions as Owners in their reasonable discretion shall approve) covering
tangible Personal Property for the full replacement cost thereof (without
deduction for depreciation) and with a deductible not in excess of $5,000 for
each Facility;
(j) "Workers Compensation" and Employees Liability Insurance providing
protection against all claims arising out of injuries to all employees of
Managers (employed at the Facility or any portion thereof) in amounts approved
by Owners; and
(k) During the period of any construction at any Facility, the so-called
"builder's all-risk completed value" insurance for any improvements under
construction;
(l) Business auto liability insurance including hired and non-owned
automobile coverage in an amount not less than $1,000,000 combined single limit;
and
(m) such other insurance or modifications to the above insurance
requirements as Owners from time to time approve and as may from time to time be
required by applicable Legal Requirements and/or by any Mortgagee. Managers
shall be responsible to ensure that each contractor and subcontractor working at
a Facility provides evidence of general liability insurance including coverages
with amounts not less than $1,000,000 per occurrence and workers' compensation
insurance in the amount required by law, and which liability insurance shall
cover the applicable Owner and Mortgagee as an additional insured.
5.1.2 Insurance Company Requirements. All such insurance required by this
Agreement shall be issued and underwritten by insurance companies licensed to do
insurance business by, and in good standing under the laws of, the state in
which each Facility is located and which companies have and maintain a rating of
A:X or better by A.M. Best Co. or such higher rating as may be required by any
Mortgagee.
5.1.3 Policy Requirements. Every policy of insurance from time to time required
under this Agreement (other than worker's compensation) shall name
-11-
<PAGE>
the respective Facility Entity and Owners as owner or loss payee and additional
named insured as appropriate with respect to liability insurance. Each such
policy, where applicable or appropriate, shall:
(a) include mortgagee, loss payable and additional named insured
endorsements reasonably acceptable to Mortgagee;
(b) provide that the coverages may not be cancelled, reduced or otherwise
modified except upon not less than thirty (30) days' prior written notice to
Owner and to any Mortgagee;
(c) be primary and noncontributing with respect to any other insurance
carried by Owners and Managers, not be invalidated by any negligent act or
omission of Owner or Manager or any foreclosure proceeding relating to a
Facility and otherwise be in such form as shall be acceptable to Owners.
5.1.4 Notices, Certificates and Polices. Manager shall promptly provide to Owner
copies of any and all notices (including notice of non-renewal), claims and
demands which Manager receives from insurers with respect to a Facility. At
least ten (10) days prior to the expiration of any insurance policy required
hereunder, Manager shall deliver to Owner certificates and evidence of insurance
relating to all renewals and replacements thereof, together with evidence,
satisfactory to Owner, of payment of the premiums thereon. Manager shall deliver
to Owner original counterparts or copies certified by the insurance company to
be true and complete copies, of all insurance policies required hereunder not
later than ten (10) days after receipt thereof by Manager.
5.1.5 Right to Place Insurance. If Manager shall fail to obtain any insurance
policy required hereunder or shall fail to deliver the certificate and evidence
of insurance relating to any such policy to Owner, or if any insurance policy
required hereunder (or any part thereof) shall expire or be cancelled or become
void or voidable by reason of any breach of any condition thereof, or if Owner
reasonably determines that such insurance coverage is unsatisfactory by reason
of the failure or impairment of the capital of any insurance company which wrote
any such policy, upon demand by Owner, Manager shall promptly but in any event
in not more than ten (10) days thereafter obtain new or additional insurance
coverage on the Facility, as provided herein. In the event Manager fails to
perform its obligations under this Section, Owner may obtain such insurance and
pay the premium or premiums therefor and be reimbursed therefor as an Operating
Expense, plus, at Manager's sole expense interest from the date advanced at the
Overdue Rate.
-12-
<PAGE>
5.1.6 Payment of Proceeds. All insurance policies required hereunder (except for
general public liability, professional liability and workers' compensation and
employers liability insurance) shall provide that in the event of loss, injury
or damage, subject to the rights of any Mortgagee, all proceeds shall be paid
solely to Owner. Only Owner is authorized to adjust and compromise any such loss
and to collect and receive such proceeds unless Owners authorize Manager in
writing to act as Owners' authorized agent.
5.1.7 Blanket Policies. Notwithstanding anything to the contrary contained
herein, Managers' obligations to secure and maintain the insurance provided for
herein may be brought within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Managers and its Affiliates;
provided, however, that any such blanket policy shall include an agreed amount
endorsement with respect to each Facility and such other provisions so that the
coverage afforded to Owner shall not be reduced or diminished or otherwise be
different from that which would exist under a separate policy meeting all other
requirements of this Agreement by reason of the use of such blanket policy of
insurance.
5.2 Waiver of Liability. Notwithstanding anything to the contrary herein,
neither Managers nor Owners shall assert against the other, and do hereby waive
with respect to each other, any claims for any losses, damages, liability or
expenses (including attorneys' fees) incurred or sustained by either of them on
account of injury to persons or damage to property arising out of the ownership,
operation and maintenance of the Facilities to the extent that the same are
covered by the insurance carried under this Section 5. Each party shall notify
their respective insurance carriers of such mutual waivers and shall cause their
respective insurance companies to waive in writing, by endorsement or otherwise,
subrogation against the other on account thereof and to acknowledge that such
waivers do not cause any invalidation of coverage provided by such insurance
companies.
6. INDEMNITY
6.1 Indemnification by Manager. Except with respect to the gross negligence or
willful misconduct of the respective Owner or any of the other Indemnified
Parties, as to which no indemnity is provided, each Manager and Emeritus,
jointly and severally, hereby agrees to indemnify, defend and hold harmless with
counsel reasonably acceptable to Owner, the respective Owner and each of the
other Indemnified Parties from and against all damages, losses, liabilities,
obligations, penalties, costs and expenses (including, without limitation,
reasonable attorneys' fees, court costs and other expenses of litigation)
suffered by, or claimed or asserted against, the respective Owner or any of the
other
-13-
<PAGE>
Indemnified Parties, directly or indirectly, by any Person based on, arising out
of or resulting from (a) the management of the Facility or any business
conducted therein; (b) any act, fault, omission to act or misconduct by (i) any
Manager, (ii) any Affiliate of a Manager, or (iii) any employee, agent,
licensee, business invitee, guest, customer, contractor or submanager of any of
the foregoing parties, relating to, directly or indirectly, the respective
Facility; (c) any accident, claim of malpractice, injury or damage whatsoever
caused to any Person; (d) any default or Event of Default under this Agreement
by Manager or any liability, damage, loss, obligation, penalty, cost, and other
expense incurred by Manager which exceeds Manager's authority under this
Agreement; (e) following closing pursuant to the Purchase Option set forth in
Section 13 any liability, damage, loss, obligation, penalty, cost, and other
expense whatsoever, whether arising before or after closing thereunder from the
Contracts, Leases, Legal Requirements, the Permits, or the operation of the
Facility or any business conducted therein; and (f) any liability under Section
6.10 of the Loan Agreement executed in connection with the Initial Senior Loan
and comparable provisions of the Initial Junior Loan except to the extent caused
by the actions of Owners. All costs and expenses of Manager pursuant to this
indemnity shall be at the sole expense of Manager except the cost or expense
shall be an Operating Expense rather than the sole expense of Manager only under
the following circumstances and only under subsections (a) and (c) above as long
as Manager was not in violation or breach of this Agreement, not negligent, and
such claim arose in the ordinary course of business. In all other circumstances,
all costs and expenses under this Section shall be the sole cost and expense of
Managers and shall not be an Operating Expense. The indemnity provided for in
this Section 6.1 shall survive the expiration or sooner termination of this
Agreement.
6.2 Indemnified Parties. As used in Section 6.1, the term "Indemnified Parties"
shall mean Owners or any of them, the Facility Entities or any of them, AL II
Holdings, any Mortgagee and their respective successors, assigns, employees,
servants, agents, attorneys, officers, directors, shareholders, members,
managers, partners and owners.
6.3 Indemnification by Owners. Owners, jointly and severally, agree to
indemnify, defend, and hold harmless with counsel reasonably acceptable to
Managers, the Managers and Emeritus from and against all damages, losses,
liabilities, obligations, penalties, costs and expenses (including without
limitation, reasonable attorneys' fees, court costs and other expenses of
litigation) suffered by, or claimed or asserted against, the Managers or
Emeritus, directly or indirectly, by any Person based on, arising out of or
resulting from the gross negligence or willful misconduct of Owners under this
Agreement.
-14-
<PAGE>
7. MANAGEMENT FEES
7.1 Payment. Subject to the provisions of Section 7.2, the Facility Entities
shall pay the Managers for services rendered by the Managers pursuant to this
Agreement an amount equal to seven percent (7%) of the Total Revenues from all
Facilities in the aggregate then subject to this Agreement during the Initial
Term and any Extension Term of this Agreement ("Management Fee"), which amount
shall be paid on a monthly basis, based upon the Total Revenues earned by the
Facilities during the previous month, with the first payment to be made on the
4th day of the first full month after the Commencement Date, and continuing on
the 4th day of each month thereafter until the expiration or sooner termination
of this Agreement. During the Extension Term, the Management Fee shall be 7% of
Total Revenues with no further accrual of any portion of the Management Fee.
7.2 Limitation on Fees. The Management Fees payable to the Managers shall be
limited during the Initial Term to five percent (5%) of Total Revenues ("Base
Management Fee") until such time that the Facilities in the aggregate are
producing an Operating Profit for three (3) consecutive calendar months. The
unpaid two percent (2%) of the Management Fee shall be accrued without interest
until an Operating Profit is achieved for three (3) consecutive calendar months
("Accrued Management Fee"). From and after the date that the Facilities in the
aggregate continue to produce an Operating Profit for not less than three (3)
consecutive calendar months, the Managers shall be entitled to receive the full
Management Fee and the Accrued Management Fee from prior periods to the extent
Operating Profit is available therefor. If there is an Operating Deficit for
three (3) consecutive calendar months, the Management Fee shall be limited to
the Base Management Fee thereafter until Operating Profit is thereafter achieved
for three (3) consecutive calendar months. Notwithstanding anything to the
contrary contained herein, any obligation of Owners to pay any Accrued
Management Fee shall terminate automatically at the expiration of the Initial
Term if Emeritus does not timely exercise or at such time as it is not entitled
to exercise the Purchase Option set forth in Section 13, and in any event any
Accrued Management Fee shall be paid solely out of Operating Profit and neither
the Facility Entities nor AL Investors II shall have any liability to pay the
Accrued Management Fee during the Initial Term or upon expiration or sooner
termination of this Agreement from any other funds or by any Owner's Deficit
Contribution pursuant to Section 8.3.
8. ACCOUNTS; OPERATING DEFICIT CONTRIBUTIONS; RECORDS AND REPORTS
8.1 Bank Accounts. Manager shall establish an Agency Account and a Reserve
Account for each Facility (which may be aggregated for one or more Facilities as
Owner may reasonably specify) at a banking institution or institutions selected
by Owner after consultation with Manager, and such accounts shall be in
-15-
<PAGE>
Manager's name, as agent for the respective Owner (collectively the "Facility
Accounts"). Manager, as agent of Owners, will deposit in the Agency Account all
monies received from the operation of the Facilities as Total Revenue and,
together with any interest earned thereon, will disburse the same from the
Agency Account for the purposes set forth in the following Section 8.2. Revenues
or funds received by Managers from the Facilities that do not constitute Total
Revenues shall be immediately paid to Owner or placed in the Agency Account as
directed by Owners. To the extent required under any Legal Requirement, deposits
received pursuant to any Residency Agreement shall be maintained in a segregated
Agency Account for such deposits, and all amounts in such segregated deposit
Agency Account shall be used only to refund deposits in accordance with
Residency Agreements and, if any such deposits are forfeited under the terms of
a Residency Agreement, for deposit into the Agency Account. All funds derived
from the deduction for the Reserve Fund described in Section 8.4 shall be placed
in the Reserve Account and shall be transferred to the Agency Account for the
purpose of disbursement as expenditures are made in accordance with the
provisions of Section 8.4. Manager shall not commingle any funds in the Facility
Accounts with Manager's or any Affiliate's other funds. Notwithstanding the
foregoing as to each of the Facility Accounts, the Owner shall be designated as
an additional signatory on each of the Facility Accounts entitled to withdraw
all or any of the funds in said accounts in the event that Manager has filed a
voluntary petition or is the subject of an involuntary petition in bankruptcy,
insolvency or reorganization under the bankruptcy law or in any event if this
Agreement has expired or sooner terminated. In addition, if Emeritus does not
timely exercise or no longer has the right to exercise the Purchase Option, then
Owner shall have the right to implement a cash management system whereby amounts
in the Agency Accounts are automatically swept into accounts of the Owners on a
monthly or other regular basis specified by Owners. Managers shall reasonably
cooperate with Owners in implementing such cash management system. It is
expressly agreed and understood that all funds standing in the Facility Accounts
described herein are the sole property of the respective Owner, notwithstanding
that Manager shall have the right to withdraw funds therefrom for the purposes
set forth in this Agreement.
8.2 Expenditures. In accordance with the Annual Plan, except as otherwise
approved by Owners, Managers as agent of the Facility Entities are hereby
authorized to pay from the Agency Account for each Facility in the following
order of priority such amounts and at such times as are required to pay the
following expenditures:
(a) The Operating Expenses;
-16-
<PAGE>
(b) The Fixed Operating Expenses (exclusive of any Base, Accrued or other
Management Fee and Capital Improvements) except for such items as Owner has
elected to pay directly;
(c) The cost of Capital Improvements approved by Owner;
(d) The Base Management Fee or if the conditions set forth in Section 7.2
have been satisfied the full Management Fee for the current period;
(e) The Accrued Management Fee from prior periods if the conditions set
forth in Section 7.2 have been satisfied;
(f) Any Operating Deficit Loan (as defined in Section 8.3 below), if any:
(g) Any Cash Available for Distribution to Owner, which shall be paid over
to Owners as directed by Owners within twenty (20) days after the end of each
calendar month during the Term.
Funds in the Agency Account shall not be utilized for any other purpose.
8.3 Deficit Contributions. It is anticipated that Total Revenues will be
sufficient to pay the Operating Expenses and Fixed Operating Expenses of the
Facilities during the Term. In the event that Total Revenue from the Facilities
is insufficient, or is anticipated to be insufficient, to pay the Operating
Expenses and Fixed Operating Expenses of the Facilities during any calendar
month during the Initial Term, then Emeritus shall loan such Operating Deficit
to Owners, with interest accruing at the Prime Rate ("Operating Deficit Loan").
If an Operating Deficit Loan for any calendar month is not repaid as provided in
Section 8.2 within six (6) months from the date of advance, then upon twenty
(20) days written notice from the Manager, Owners shall deposit or cause to be
deposited funds in the Agency Account in an amount equal to the outstanding
Operating Deficit Loan ("Owner's Deficit Contribution") which shall be used to
repay such Operating Deficit Loan. Notwithstanding anything in this Agreement to
the contrary, upon expiration or sooner termination of this Agreement, repayment
and priority of any outstanding Operating Deficit Loan shall be subordinate in
all respects to repayment and priority of the Senior Loan.
8.4 Reserve Account. In the event the approved Annual Plan for any Facility
provides for expenditures of less than $250 per unit in such Facility for the
applicable Operating Year for replacements of Furnishings and Equipment or
Capital Improvements, there shall be deducted from Total Revenue as part of
Fixed Operating Expenses the difference between such expenditures and $250 per
unit in
-17-
<PAGE>
such Facility for such Operating Year (or such lesser amount as Owners may
approve) funded quarterly and the cash funds so created shall be deposited in
the Reserve Account. Funds in the Reserve Account shall be utilized for the
purpose of making replacements, substitutions, and additions to Furnishings and
Equipment originally included in the Facility or Capital Improvements to the
extent approved by Owners in the Annual Plan or as directed by Owners to
maintain each Facility in good order and operating condition. Funds in the
Reserve Account shall be invested in an interest bearing account or securities
as Owners may direct and interest thereon shall be added to the Reserve Account.
Funds from the Reserve Account shall not be utilized for any other purpose.
8.5 Books and Records. Under Manager's supervision, each Facility shall keep (at
the Facility or at Emeritus' corporate headquarters) full and adequate books of
account and such other records and information as are necessary to reflect the
results of the operation of the Facility and to comply with all Legal
Requirements with respect to the Facility. Managers will keep the books and
records for each Facility in all material respects in accordance with generally
accepted accounting principles except as otherwise approved by Owners. All such
records shall be and remain the exclusive property of the Owners, subject to
Manager's right to make and retain copies thereof.
8.6 Reports to Owners. Manager and Emeritus will deliver, or cause to be
delivered, to Owners the following forecasts, budgets, reports and statements
each in form reasonably acceptable to Owners:
8.6.1 Not later than December 1 the draft Annual Plan for the succeeding
Operating Year;
8.6.2 Within thirty (30) days after the end of each calendar month, an end of
the month financial report showing the results of operation of each Facility and
a balance sheet for the prior month and the year to date for each Facility and
all Facilities in the aggregate prepared in accordance with GAAP and certified
as fairly representing the financial results in all material respects by a
financial officer of Emeritus;
8.6.3 Within thirty (30) days after the end of each calendar month during the
Term, a computation for all Facilities in the aggregate and for each Facility
individually of Total Revenue, Operating Expenses, Fixed Operating Expenses and
Operating Deficit or Operating Profit for the prior month, year to date, and for
Operating Profit or Operating Deficit cumulative from the Commencement Date, in
each case on a cash basis and certified as fairly representing the financial
results in all material respects by a financial officer of Emeritus;
-18-
<PAGE>
8.6.4 As soon as practicable after each Operating Year, but in any event, within
seventy-five (75) days of the end of each Operating Year, an income statement
and balance sheet for all Facilities in the aggregate and for each Facility
individually in form reasonably acceptable to Owners as of the last day of such
Operating Year, which income statement and balance sheet shall be certified as
fairly representing the financial results in all material respects by a
financial officer of Emeritus and if requested by Owners be audited by an
independent nationally recognized accounting firm approved by Owners and such
other annual end of year financial reports as may be reasonably necessary for
each Owner and Owners to file its or their federal and state income tax returns;
8.6.5 The financial reports to be delivered to any Mortgagee as more
particularly defined in the respective Mortgage or related loan documents;
8.6.6 Within ninety (90) days after the end of each fiscal year of Emeritus,
audited financial statements of Emeritus prepared by an independent "big five"
accounting firm approved by Owners, prepared in accordance with GAAP, including
a balance sheet and an income statement for such fiscal year, certified as true
and correct in all material respects by a financial officer of Emeritus.
Emeritus shall also submit to Owners, upon its filing thereof, a copy of any
Form 10K or Form 10Q as filed with the United States Securities and Exchange
Commission;
8.6.7 Copies of all Medicare and/or Medicaid cost reports and any amendments
thereto filed with any Governmental Authority with respect to any Facility, and
all responses, audit reports and other correspondence and other documents
received with respect to such cost reports.
8.6.8 Within three (3) days of receipt, copies of any notice received from any
Governmental Authority or Third Party Payor that any Permit, Medicare and/or
Medicaid certification or similar item with respect to a Facility is being
downgraded, revoked or suspended or that any such action is pending or being
considered.
8.6.9 Such other reports reasonably required by Owners or any Mortgagee.
8.7 Rights to Inspection and Review. Each Owner, its accountants, attorneys,
agents and any Mortgagee shall have the right to enter upon any part of any
Facility at any time during normal business hours during the Term, and on not
less than eight (8) hours prior notice unless an emergency exists, for the
purpose of examining or inspecting the same or examining and making extracts and
copies of books and records of the Facility or for any other purpose, including
audits, which
-19-
<PAGE>
the Owner of any Facility, in its discretion, shall deem necessary or advisable,
but same shall be done with as little disruption to the business of the Facility
as practicable. Books and records of the Facility shall be kept at the Facility
and a summary thereof in such location as directed by Owners.
8.8 Deficiencies and Overpayments. If any audit or financial report discloses a
deficiency in the reporting of Total Revenues, or any overpayment in Operating
Expenses, Fixed Operating Expenses or Management Fees, Managers shall forthwith
recalculate Operating Profit, Operating Deficit or Management Fees and pay to
the Owners any overpayment or otherwise, together with interest at Manager's
sole expense on the amount of deficiency or overpayment, calculated at the
Overdue Rate, from the date when such overpayment was made until the date Owners
receive return of such overpayment. If any audit conducted for Owners pursuant
to the provisions hereof discloses that the Total Revenues for any Operating
Year exceed those reported by Managers by more than five percent (5%) or that
the full Management Fee or any Accrued Management Fee was overpaid by more than
five percent (5%), the Managers at their sole expense (and not as an Operating
Expense) shall pay the reasonable cost of such audit and examination. Otherwise,
the cost of audits approved by Owners shall be an Operating Expense.
8.9 Survival. The obligations and rights of the Managers and Owners referenced
in Section 8.8 shall survive the expiration or earlier termination of this
Agreement for a period of three (3) years.
9. TERMINATION RIGHTS AND REMEDIES
9.1 By Managers. The Managers may terminate this Agreement with respect to all
(but not less than all) of the Facilities by reason of any of the following
("Event of Default"): (i) failure of Owners to fund an Operating Deficit in
accordance with Section 8.3 within fifteen (15) days after written notice to the
Owner that payment has not been paid when due; or (ii) the Owner otherwise
breaches or fails to perform a material term of this Agreement, which breach or
failure is not cured within thirty (30) days after written notice of said breach
is provided to Owner. Provided, however, that Manager shall not have the right
to terminate this Agreement without the prior written consent of any Mortgagee.
Provided, further, Manager shall have no right to terminate this Agreement nor
shall Owner be in default if such right to terminate or such default is caused
by a default or an Event of Default committed or suffered hereunder by Managers
or Emeritus.
If Managers terminate the Agreement pursuant to this Section 9.1, such
termination shall not terminate the Purchase Option under Section 13 below, and
the Purchase Option shall remain in full force and effect. If Managers terminate
this Agreement pursuant to this Section 9.1 and the Purchase Option is
thereafter
-20-
<PAGE>
exercised, the purchaser shall be entitled to offset and deduct from the
Purchase Price that portion of Owner's Deficit Contribution which Owners did not
fund but were required to do so in accordance with Section 8.3 and which
Managers or Emeritus funded and were not reimbursed by Owners.
9.2 Owner. The Owner may terminate this Agreement with respect to any one or all
of the Facilities by reason of any of the following (each an "Event of
Default"): (i) Emeritus breaches or fails to perform any obligation, including
but not limited to the warranties, representations and indemnities, under the
Emeritus Guaranty which is not cured within the time period set forth therein;
(ii) Emeritus or its Affiliates fail to perform any obligation under the
Purchase Agreements which survive closing thereunder; (iii) Managers or any of
them or Emeritus breaches or fails to perform a material term of this Agreement
as to any or all Facilities, which breach or failure is not cured within thirty
(30) days after written notice of said breach is provided to the Managers; (iv)
Daniel Baty fails to perform or defaults under the Put and Purchase Agreement
within the time period set forth therein; (v) Emeritus fails to perform or
defaults under the Licensing Indemnity Agreement within the time period set
forth therein; or (vi) either Manager or Emeritus suffers a Bankruptcy Event.
Provided, however, Owners shall have no right to terminate this Agreement nor
shall Managers be in default if such right to terminate or such default is
caused by a failure by Owner to fund Operating Deficits to the extent provided
in Section 8.3. Any such termination pursuant to this Section 9.2 shall also
constitute a termination of the Purchase Option.
9.3 Curing Defaults. Except for failure to close under the Purchase Option set
forth in Section 13, or a default under Section 9.2(iv), (v), or (vi), any
default by Managers or Owner under the provisions of Section 9.1 or 9.2, except
for defaults involving the payment of money which must be cured within the
applicable cure period, shall not constitute an Event of Default if the nature
of such default will not permit it to be cured within the cure period allotted,
provided that either Managers or Owner promptly shall commence to cure such
default and shall proceed to complete the same with diligence but in no event
later than sixty (60) days after the written notice of default has been given.
9.4 Effect of Termination. The termination of this Agreement in whole or in part
under the provisions of this Section 9 shall not affect the rights of the
terminating party with respect to any damages it may have suffered as a result
of any breach of this Agreement, nor shall it affect the rights of either party
with respect to liability or claims accrued or arising out of events occurring
prior to the date of termination. Any termination of this Agreement, whether in
whole or in part, other than by reason of an Event of Default by Owner and other
than as a result of a Casualty or Condemnation as to a particular Facility,
shall automatically terminate the Purchase Option provided for in Section 13,
but any termination of
-21-
<PAGE>
this Agreement by reason of an Event of Default by Owner shall not terminate the
Purchase Option provided for in Section 13. Upon any termination, Owner shall
repay any outstanding Operating Deficit Loan subject to prior repayment of the
Senior Loan as more particularly provided in Section 8.3.
9.5 Remedies Cumulative. The right of termination shall not be an exclusive
remedy and either party shall have the right to sue for damages or seek
equitable relief following an Event of Default. Neither the right of termination
nor the right to sue for damages nor any other remedy available to either party
hereunder shall be exclusive of any other remedy given hereunder or now or
hereafter existing at law or in equity.
9.6 Transfer Upon Termination. Upon expiration or sooner termination of this
Agreement in whole or in part, except for termination upon closing under the
Purchase Option, Managers at their sole expense shall transfer or assign as
directed by Owners to the respective Facility Entity all books, records,
Facility Accounts, Permits, Contracts, Leases, any Personal Property owned by or
in the possession of Managers, all of which shall be free and clear of all Liens
(except for the Mortgage), and other matters and things utilized by Manager in
the operation of the Facilities which are no longer subject to this Agreement.
In such event, legal title to any vans or buses in the name of Emeritus or
Managers shall be transferred to the respective Facility Entity free and clear
of Liens at the sole cost of Managers and for no additional consideration.
Without limiting the generality of the foregoing, all licensing fees and sales
tax on the transfer shall be paid by Emeritus and Managers. Upon any termination
of this Agreement, Manager shall assign and otherwise take all actions required
to effectively transfer to the Facility Entities all Permits which are required
under applicable Legal Requirements to be issued in the name of Managers.
Managers shall cooperate fully in such transfer and shall not interfere with an
Owner employing any and all employees of the Facility who desire to accept such
Owner's offer of employment. Manager's obligations hereunder and under the
Purchase Agreements and Owner's remedies for breach thereof shall survive the
expiration or sooner termination of this Agreement and the transfer and
assignment herein.
9.7 Termination of Agreement as to Individual Facilities. The parties
acknowledge that this is a master Management Agreement with respect to all of
the Facilities and this Agreement may be terminated by Owner as to a particular
Facility in one or more of the following circumstances. In such event, this
Agreement shall continue in full force and effect as to the remaining
Facilities.
9.7.1 Default. There has been an Event of Default by the Manager as to a
particular Facility and Owner has terminated this Agreement as to such Facility;
-22-
<PAGE>
9.7.2 Casualty or Condemnation. There has been an election by Owner to terminate
this Agreement as to a particular Facility resulting from Casualty or
Condemnation which Owner has elected not to repair as provided for in Section
11; or
9.7.3 Termination During Extension Term. If Owner has elected the option for the
Extension Term, Owner may terminate this Agreement as to any Facility in its
sole discretion upon not less than sixty (60) days prior notice to the Manager;
9.7.4 Termination of Put Facilities. Upon closing of the purchase of a Put
Facility pursuant to the Put and Purchase Agreement, such Put Facility or
Facilities shall be automatically deleted from this Agreement.
9.7.5 Termination of Failed Facilities. Upon closing of the purchase by Emeritus
or its Affiliates of a Failed Facility pursuant to the Licensing Indemnity
Agreement, such Failed Facility or Facilities shall be automatically deleted
from this Agreement.
In the event of the termination of this Agreement as to less than all of the
Facilities, then in determining Operating Deficit and Operating Profit the
Facilities, less only those Facilities terminated pursuant to Section 9.7.2 -
9.7.5, shall be the basis for such calculations.
10. ASSIGNMENT
10.1 Assignment by Manager. Manager shall not assign, transfer or encumber this
Agreement or any right or interest herein or hereunder voluntarily or by
operation of law or in any other manner without the prior written consent of
Owners, which may be withheld in their sole discretion.
10.2 Assignment by Facility Entities. Owners may assign or transfer this
Agreement to any Affiliate or to any Mortgagee without the consent of Emeritus
or Managers. In such event, the Owner or Owners assigning this Agreement (except
as to an assignment for security purposes to any Mortgagee, but not excepting
the realization by such Mortgagee of such assignment in connection with a
foreclosure of the applicable Mortgage or the granting of a deed in lieu of
foreclosure to such Mortgagee) shall be relieved of all liability under this
Agreement accruing or arising out of facts and circumstances occurring after the
date of such assignment, except for the obligation to fund the Owner's Deficit
Contribution pursuant to Section 8.3 (which shall not apply to the holder of any
Senior Loan). In connection with any
-23-
<PAGE>
security assignment to a Mortgagee, Managers and Emeritus shall subordinate this
Agreement to the Mortgage in such form as any Mortgagee may require.
10.3 Refinancing. Without the consent of Managers and Emeritus, the Facility
Entities shall have the right to refinance the Mortgage initially held by the
Lending Group as to one or more Facilities upon the following terms and
conditions:
10.3.1 Obligations of Managers and Emeritus. Any refinancing shall provide that
upon closing of the Purchase Option, Emeritus may assume the Mortgage resulting
from such refinancing upon commercially-reasonable terms including payment of
the Mortgagee's assumption expenses and an assumption fee not to exceed one-half
percent (.5%) of the indebtedness secured by the Mortgage.
10.3.2 Segregation of this Agreement. In connection with a refinancing, this
Agreement shall be segregated into two or more separate management agreements
with the Facilities being managed pursuant to each management agreement
corresponding to the Facilities subject to each Mortgage or Mortgages held by a
separate Mortgagee. In such event, the terms and conditions of each separate
management agreement shall be the same as this Agreement, except Total Revenues,
Operating Expenses, Fixed Operating Expenses, Operating Profit and Operating
Deficit shall be computed only with respect to the Facilities subject to each
separate management agreement. Each segregated management agreement may be
assigned to the respective Mortgagee and shall be subordinate to the respective
Mortgage as provided in Section 10.2 above. Upon such segregation, Emeritus
shall execute a restated Emeritus Guaranty or such other confirmation of the
continuing obligations under the Emeritus Guaranty.
10.3.3 Costs of Refinancing. The reasonable costs and expenses of such
refinancing, including but not limited to the Mortgagee's title review and
insurance, due diligence, loan fees, mortgage taxes (if any), loan document
preparation, legal fees, and other customary loan closing costs, together with
Owners' reasonable costs and expenses of arranging and closing such refinancing,
shall be an Operating Expense unless otherwise approved or directed by Owners in
their sole discretion.
10.4 Remedies. Any assignment by either party of this Agreement in violation of
the provisions of this Section 10 shall be null and void. In addition to any
other remedies available to the parties, the provisions of this Section 10 shall
be enforceable by injunctive proceeding or by a suit for specific performance.
-24-
<PAGE>
11. CASUALTY AND CONDEMNATION
11.1 Casualty. If a Facility shall be damaged by a Casualty such that Owner
determines in its sole but good faith judgment that it is not feasible to
restore the Facility, or if for any reason insurance proceeds are not available
to effect such restoration, then Owner may terminate this Agreement as to that
Facility upon thirty (30) days prior written notice to Manager, and neither
party shall have any further obligation to the other party hereunder with
respect to that Facility and this Agreement shall remain in full force and
effect as to the remaining Facilities. If this Agreement shall not be terminated
by Owner in the event of a Casualty to the Facility, then Owner with the
cooperation of Manager, or Manager if Owner so directs, shall proceed with
reasonable diligence to commence and complete the restoration of the Facility to
substantially its condition and character just prior to the occurrence of such
casualty to the extent permitted under Legal Requirements. The cost of
restoration shall not be an Operating Expense or Fixed Operating Expense except
to the extent such cost of restoration exceeds available insurance proceeds and
such costs of restoration in excess of available insurance proceeds, including
any deductibles under applicable insurance policies shall constitute an
Operating Expense.
11.2 Condemnation. If a Facility is subject to Condemnation, or such substantial
portion thereto as to make it unfeasible, in the sole but good faith judgment of
Owner, to restore and continue to operate the remaining portion of the Facility
following Condemnation, then upon the Date of Taking, this Agreement shall
terminate as to that Facility and neither party shall have any further
obligation to the other party hereunder with respect to that Facility and this
Agreement shall remain in full force and effect as to the remaining Facilities.
If Owner elects to restore and continue to operate the remaining portion of the
Facility, then this Agreement shall not terminate as to the Facility, and Owner
with the cooperation of Manager, or Manager if Owner so directs, shall proceed
with reasonable diligence to repair any damage to the Facility, or to alter or
modify the Facility so as to render it a complete architectural unit which can
be operated as a Facility of substantially the same type and class as before.
The cost of restoration shall not be an Operating Expense or Fixed Operating
Expense except to the extent the cost of restoration exceeds the net amount of
any Award received by any Owner. In the case of any Condemnation, whether or not
this Agreement shall cease and terminate, the entire Award shall be the property
of Owner, and Manager hereby assigns to Owner all its right, title and interest
in and to any Award. Manager shall have the right, however, to claim and recover
from the condemning authority compensation for any loss which Manager may be put
for Manager's moving expenses or taking of Manager's personal property (not
including any value assigned to this Agreement), provided that such damages may
be claimed only if
-25-
<PAGE>
they are awarded separately in the Condemnation proceedings and not out of or as
part of the Award recoverable by Owner.
12. CAPITAL IMPROVEMENTS.
Any program of improvements, or improvement involving an addition to a Facility
or the renovation or refurbishing of the Facility, the cost of which is not or
should not be charged to property operation and maintenance and which should be
capitalized in accordance with generally accepted accounting principles, shall
be a "Capital Improvement." Capital Improvements shall be undertaken only upon
the approval of or direction by Owner in its sole discretion, which may be by
separate approval or by specific inclusion in the Annual Plan. Notwithstanding
anything to the contrary herein, Emeritus shall have the unconditional
obligation at its sole expense (and not as an Operating Expense or Fixed
Operating Expense) to complete and pay for: (a) to the extent Managers or
Emeritus are obligated to perform or pay for construction of kitchen facilities
at Facility entitled Park Club of Oakbridge, (b) all Capital Improvements made
or contracted or committed during calendar year 1998 and the first quarter of
1999, (c) any sales tax or other Impositions resulting from construction of any
Facilities in Texas. All capital improvements required by that letter agreement
dated March 26, 1999 between AL Investors II and the Lending Group related to
Anderson Place shall be performed by the Managers at their direct cost (without
markup of any kind) within six (6) months of the date hereof, but the cost
thereof shall be an Operating Expense or Fixed Operating Expense as the case may
be. To the extent any improvements to the Facilities are to be funded from an
escrow or similar account at Closing under the Purchase Agreements or the terms
of any Mortgage ("Holdback Accounts"), such improvements shall not be deemed
Capital Improvements hereunder and the cost thereof shall not be Operating
Expenses or Fixed Operating Expenses. Managers shall expeditiously cause the
completion of all improvements to be funded by the Holdback Accounts.
13. EMERITUS' OPTION TO PURCHASE
13.1 Conditions to Option. On the conditions precedent (which conditions Owners
may waive, in their sole discretion, by notice to Emeritus at any time) that (a)
at the time of exercise of the Purchase Option, there then exists no Event of
Default under this Agreement, or the AL II Development Management Agreement by
the Managers or Emeritus, and (b) Emeritus timely complies with the provisions
of this Section 13, and (c) the Purchase Option under the AL II Development
Management Agreement has been exercised simultaneously by delivery of a Purchase
Option Notice (as defined therein) and (d) if a Put Notice has been delivered on
account of Section 3.1(d) or 3.1(e) of the Put and Purchase Agreement, less than
sixty (60) days has elapsed since delivery of such Put Notice,
-26-
<PAGE>
then Emeritus or its Affiliates shall have the option to purchase all, but not
less than all, of the Facilities then subject to this Agreement including,
without limitation, any Facilities which are the subject of a segregated
Management Agreement pursuant to Section 10.3, at the price and upon the terms
hereinafter set forth in this Section 13 (the "Purchase Option").
13.2 Exercise of Option; Deposit. The Purchase Option shall permit Emeritus to
purchase the Facilities (a) at any time during the Initial Term but not later
than the last day of the Initial Term ("Purchase Option Expiration Date")
provided that written notice of the exercise of the option is given by Emeritus
to the Owners (the "Purchase Option Notice") at least one hundred eighty (180)
days prior to the Purchase Option Expiration Date. Emeritus shall have no right
to rescind the Purchase Option Notice once given. With the Purchase Option
Notice, Emeritus shall deposit with the Owners the sum of $340,000 (together
with the interest earned thereon, the "Deposit") which shall constitute
liquidated damages and Owners' sole remedy if Emeritus fails to consummate the
purchase of the Facilities for any reason other than Owners' default and refusal
to deliver the Deeds conveying the Facilities upon payment of the Purchase
Price, but the Deposit shall be applied to the Purchase Price if the Purchase
Option closes. Emeritus and the Owners acknowledge that damages that would
accrue from Emeritus' failure to close the Purchase Option are difficult to
determine and that the amount of liquidated damages set forth above constitutes
a good faith and reasonable estimate of the damages that would otherwise have
accrued. The Deposit shall be deposited in a money market or similar account
with a commercial bank with all interest thereon remaining in such account and
reported as income of Emeritus, and Emeritus agrees to complete a Form W-9 and
such other forms as such bank may require in order to report such interest.
13.3 Conveyance. If the Purchase Option is exercised by Emeritus in accordance
with the terms hereof, each Facility shall be conveyed by a special warranty
deed subject to the Permitted Exceptions, Leases, Contracts and Permits (except
for the Mortgage) and all matters arising through or with the consent of
Managers or Emeritus with covenants only against acts of Owners or Persons
claiming by, through or under Owners during their period of ownership, a quit
claim bill of sale as to all Personal Property, and a quit claim assignment of
all Leases, Contracts, Permits, and funds in Facility Accounts in form
satisfactory to Owners (collectively, the "Deed") running to Emeritus or to its
designee. Transfer of all Permits to Emeritus or its Affiliate designee in
accordance with Legal Requirements shall be the sole responsibility of Emeritus.
Owners, other than an obligation to reasonably cooperate (at no material
out-of-pocket cost) in such transfer, shall have no liability or responsibility
for the adequacy or completeness of any transfer of the Permits. Owners shall
reasonably cooperate with Emeritus and its title companies in order to provide
all necessary documents, owner's affidavits (provided Owners
-27-
<PAGE>
have no liability thereunder except for their own acts during their period of
ownership) and other evidence of authority to enable Emeritus to purchase title
insurance covering all of the Facilities at the closing under the Purchase
Option.
13.4 Calculation of Purchase Price. The price to be paid by Emeritus for the
acquisition of the Facilities pursuant to this Purchase Option shall be equal to
the amount calculated as set forth on Exhibit B ("Purchase Price"). The Purchase
Price shall be a net price to be received by Owners without deduction for due
diligence, transfer taxes, title insurance or other closing costs, all of which
shall be paid by Emeritus. Owners shall not bear any closing costs or prorations
of any kind or nature, subject to any offset as provided in Section 9.1. and
except for repayment of any outstanding Operating Deficit Loan.
13.5 Payment of Purchase Price. The Purchase Price, less the Deposit, shall be
paid by Emeritus at the Time of Closing in good funds.
13.6 Place and Time of Closing. If this Purchase Option is exercised, the
closing shall occur and the Deed for each Facility shall be delivered to Title
Company (the "Closing") pursuant to escrow closing arrangements reasonably
satisfactory to Owners and Emeritus at 12:00 o'clock noon (P.S.T.) one hundred
eighty (180) days following delivery of the Purchase Option Notice but in no
event later than the Purchase Option Expiration Date (such time, as the same may
be extended to the next succeeding Business Day, the "Time of Closing"). It is
agreed that time is of the essence of this Purchase Option.
13.7 Condition of Facilities. The Facilities and each of them shall be purchased
by Emeritus "AS IS" and "WHERE IS" as of the Time of Closing. Without limiting
the foregoing, and except as set forth in the Deed, Owners make and shall not
make representations or warranties, express or implied, with respect to, and
shall have no liability for: (i) the condition of the Facilities or any
Improvements thereon or the suitability, habitability, merchantability or
fitness of the Facilities; (ii) compliance with any Legal Requirements; (iii)
the presence of any Hazardous Substances in or about the Facilities, including
without limitation asbestos or urea-formaldehyde, or the presence of any
Hazardous Substances on or under the Land; (iv) the accuracy or completeness of
any plans and specifications, reports, or other materials provided to Emeritus;
or (v) any other matter relating to the Facilities, including, without
limitation, the title thereto or the condition, value or operating results or
prospects thereof. Without limiting the generality of the foregoing, Owners
shall have no liability to Emeritus with respect to the condition of the
Facilities under common law, or under any Legal Requirements and Emeritus hereby
waives any and all claims which Emeritus has or may have against Owners with
respect to the condition, value or operating results or prospects of the
Facilities. Emeritus assumes the responsibility and risks of all defects and
-28-
<PAGE>
conditions, including such defects and conditions, if any, that cannot be
observed by inspection or examination of records. Managers and Emeritus shall
indemnify, defend, and hold harmless Owners from and against all claims and
liabilities arising out of or related to the Facilities as more particularly set
forth in Section 6.1 and from and against any guaranties of any Mortgages, it
being intended that Owners shall have no liability from and after the Time of
Closing with respect to the Facilities, except as set forth in the Deed.
13.8 Use of Purchase Price to Clear Title. To enable the Facility Entities to
make the conveyance as provided in this Section 13, the Facility Entities may,
at the Time of Closing, use the Purchase Price or any portion thereof to clear
the title of any Mortgage, provided that all instruments so procured are
recorded contemporaneously with the Closing or reasonable arrangements are made
for recording subsequent to the Time of Closing in accordance with customary
conveyance practices.
13.9 Emeritus' Default. If Emeritus delivers the Purchase Option Notice and
fails to timely consummate the purchase of the Facilities in accordance with the
terms hereof for any reason other than Facility Entities' default and refusal to
deliver the Deed, (a) the Purchase Option hereunder and under the AL II
Development Management Agreement shall be deemed terminated and Emeritus shall
thereafter have no further right to purchase the Facilities pursuant to this
Section 13 or otherwise, (b) Owners shall retain the Deposit as liquidated
damages and as Owners' sole remedy in full satisfaction of any claims against
Emeritus for its failure to consummate the purchase of the Facilities, but
nothing herein shall relieve Emeritus from its obligations under the Emeritus
Guaranty, and (c) Owners shall have the right to terminate this Agreement
without further notice.
14. INTENTIONALLY DELETED
15. GENERAL PROVISIONS
15.1 Purchases by Manager. In purchasing services, goods and supplies for the
Facilities, Managers shall use their best efforts to obtain the benefits of
volume purchasing for Owners. In addition, all direct and indirect trade
discounts, rebates and refunds, and all returns from the sale of Furnishings and
Equipment and Operating Equipment or other equipment shall accrue to the benefit
of the Facility Entities.
15.2 Budgets and Forecasts. In preparing all budgets and forecasts to be
submitted to the Facility Entities hereunder, Managers will base its estimates
upon the most recent and reliable information then available, taking into
account the
-29-
<PAGE>
location of each Facility and its experience in other comparable assisted living
facilities.
15.3 Notices. Any notice, demand, offer, approval or other writing required or
permitted pursuant to this Agreement shall be in writing, furnished in duplicate
and shall be transmitted by hand delivery, facsimile, certified mail, return
receipt requested, or Federal Express or another nationally recognized overnight
courier service which provides evidence of delivery, postage prepaid, as
follows:
If to any Owner
or Owners: AL Investors II LLC
c/o Bruce D. Thorn
2250 McGilchrist Street SE, Suite 200
Salem, Oregon 97302
Facsimile: (503)375-7644
Telephone: (503)370-7071 ext. 7143
With a copy to: Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attn: Gary E. Fluhrer
Facsimile: (206)447-9700
Telephone: (206)447-4400
and Senior Housing Partners I, L.P.
c/o Mr. Noah Levy
Two Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
Facsimile: (770)399-5363
Telephone: (770)395-8606
and Goodwin Procter & Hoar LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109-2881
Attn: Minta Kay
Facsimile: (617)227-8591
Telephone: (617)570-1877
-30-
<PAGE>
and Prudential Real Estate Investors
8 Campus Drive
Parsippany, New Jersey 07054
Attn: Joan Hayden
Facsimile: (973)683-1788
Telephone: (973)683-1772
If to the Managers
or Emeritus: c/o Emeritus Corporation
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121-1031
Attn: Mr. Kelly Price
Facsimile: (206)301-4500
Telephone: (206)301-4507
With a copy to: Perkins Coie
Suite 4000, 1201 Third Avenue
Seattle, Washington 98101
Attn: Michael E. Stansbury
Facsimile: (206)583-8500
Telephone: (206)583-8888
Any party shall have the right to change the place to which such notice shall be
given or add additional parties, including any Mortgagee, to receive notices by
similar notice sent in like manner to all other parties hereto. Any notice if
sent by overnight courier service shall be deemed delivered on the earlier of
the date of actual delivery or the next business day, if delivered by hand
delivery or facsimile shall be deemed delivered on the date of the actual
delivery and if sent by mail, shall be deemed delivered on the earlier of the
third day following deposit with the U.S. Postal Service or actual delivery. Any
notice sent by facsimile shall also be sent on the same business day by
overnight courier or mail as set forth above.
15.4 No Partnership or Joint Venture. This Agreement shall not be construed to
be or create a partnership or joint venture between Owners and their successors
or assigns, on the one part, and Emeritus and Managers, their successors and
assigns, on the other part. Managers are acting as independent contractors to
the Facility Entities in performing their duties and obligations hereunder,
except where this Agreement expressly provides Managers are acting as the agent
of Owners.
15.5 Modification and Changes. This Agreement cannot be changed or modified
except by another agreement in writing signed by the party sought to be charged
therewith.
-31-
<PAGE>
15.6 Understandings and Agreements. This Agreement constitutes all of the
understandings and agreements of whatsoever nature or kind existing between the
parties with respect to Managers' management of the Facilities.
15.7 Headings. Section headings contained herein are for convenience of
reference only and are not intended to define, limit or describe the scope or
intent of any provision of this Agreement.
15.8 Consents. Except as otherwise specified herein, each party agrees that it
will not unreasonably withhold any consent or approval requested by the other
party pursuant to the terms of the Agreement, and that any such consent or
approval shall not be unreasonably delayed or qualified. Similarly, each party
agrees that any provision of this Agreement which permits such party to make
requests of the other party shall not be construed to permit the making of
unreasonable requests.
15.9 Survival of Covenants. Any indemnity, agreement, covenant, term or
provision of this Agreement which, in order to be effective, must survive the
termination of this Agreement, shall survive any such termination.
15.10 Third Parties. None of the obligations hereunder of any party shall run to
or be enforceable by any party other than the parties to this Agreement and the
Facility Entities or by a party deriving rights hereunder as a result of an
assignment permitted pursuant to the terms hereof.
15.11 Waivers. No failure by the Owners to enforce or insist upon the strict
performances of any covenant, agreement, term or condition of this Agreement
shall constitute a waiver of any such breach or any subsequent breach of such
covenant, agreement, term or condition. No covenant, agreement, term or
condition of this Agreement and no breach thereof shall be waived, altered or
modified except by written instrument.
15.12 Applicable Law. This Agreement shall be construed and interpreted, and be
governed by, the laws of the State of Washington.
15.13 Non-Discrimination. Managers shall not discriminate against any Person as
provided by Legal Requirements.
15.14 Joint and Several. The obligations and liabilities of each of Managers and
Emeritus hereunder shall be joint and several. The obligations of each of AL
Investors II and the Facility Entities hereunder shall be joint and several.
-32-
<PAGE>
15.15 Exculpation. The liability of Owners hereunder shall be limited to their
interest in the Facilities and no personal judgment or personal liability or
deficiency judgment beyond their interest in the Facilities shall be asserted
against Owners or any member thereof.
15.16 Status of AL Investors II. AL Investors II joins in this Agreement for the
purpose of exercising management rights in its capacity as the sole managing
member or the sole managing member of the general partner of Owners. AL
Investors II does not intend to be conducting business or holding title to any
property in any jurisdiction. AL Investors II may enforce any or all of the
provisions of this Agreement directly against Managers or Emeritus in the State
of Washington or at its option may enforce this Agreement on behalf of any
Facility Entity in any state in which such Facility Entity owns a Facility.
15.17 Owners Right to Cure Default. If Managers or Emeritus commit or suffer any
Event of Default hereunder, Owners, at their option and in their sole
discretion, may cure such Event of Default and the cost thereof or funds
advanced, together with interest at the Overdue Rate, shall be repaid on demand
("Default Advances"). Each of Managers and Emeritus shall be jointly and
severally liable for the repayment of Default Advances.
15.18 Recording. The parties agree that simultaneously herewith they shall
execute and deliver a memorandum of this Agreement and the Purchase Option or
Right of First Refusal and record the memorandum in the appropriate real estate
records applicable to each Facility which shall be in form satisfactory to
Owners and Managers.
IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to
be executed, all as of the day and year first above written.
EMERITUS: EMERITUS CORPORATION, a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
-33-
<PAGE>
MANAGERS: EMERITUS PROPERTIES I, INC., a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
ESC I, L.P., a Washington limited
partnership
By: ESC G.P. I, INC., a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
EMERITUS MANAGEMENT LLC, a Washington
limited liability company
By: Emeritus Corporation, a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
-34-
<PAGE>
EMERITUS MANAGEMENT I LP, a Washington
limited partnership
By: EM I, LLC, a Washington limited
liability company
By: Emeritus Corporation, a
Washington Corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
ESC G.P. I, Inc., a Washington corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
OWNER: AL INVESTORS II LLC, a Delaware limited
liability company, for itself and as sole
managing member on behalf of each of the
Facility Entities, or in cases where the
Facility Entity is a limited partnership,
as sole managing member on behalf of the
general partner thereof
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
-35-
<PAGE>
EXHIBIT A
TO MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
Certain Defined Terms
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors II and AL Investors Development.
AL Investors II: AL Investors II LLC, a Delaware limited liability company
AL Investors Development: AL Investors Development LLC, a Delaware limited
liability company
AL II Development Management Agreement: That certain Management Agreement with
Option to Purchase dated on or about the same date hereof, among AL Investors
Development and Emeritus Corporation and its Affiliates relating to the
management of up to five (5) assisted living facilities.
AL Management Agreement: That certain Management Agreement With Option to
Purchase dated December 30, 1998 Among AL Investors LLC and Emeritus Corporation
and its Affiliates relating to the management of twenty-five (25) assisted
living facilities.
Affiliate: with respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any other Person controlling, controlled
by, or under common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an Affiliate of
such Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
Agency Account: The Agency Account to be maintained for each Facility for
payment of Fixed Operating Expenses and Operating Expenses as described in
Section 8.1 of the Management Agreement.
Annual Plan(s): as defined in Section 4.2 of the Management Agreement.
A-1
<PAGE>
Award: all compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Base Management Fee: as defined in Section 7.1 of the Management Agreement.
Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to
pay debts as they become due; or applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian or makes a general
assignment for the benefit of creditors, or in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is appointed and
is not discharged within sixty (60) days after such appointment; or an order for
relief is entered or a petition is filed under Title 11, United States
Bankruptcy Code, with respect to any of them; or any other bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, now or hereafter in effect, is commenced with
respect to any of them.
Business Day: any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
Capital Improvements: as defined in Section 12 of the Management Agreement.
Cash Available for Distribution: on any date the amount contained in the Agency
Accounts (as defined in Section 8.1 of the Management Agreement), minus an
amount (to be retained in the Agency Accounts) equal to any reasonably projected
Operating Deficit for the succeeding 30 days, taking into account all Operating
Expenses and Fixed Operating Expenses and all anticipated Total Revenues during
such 30-day period.
Casualty: the damage or destruction by act of God or otherwise of any portion of
any Facility which Owner reasonably estimates would cost more than $50,000 to
repair or restore.
Change of Control: shall mean the occurrence of any one of the following events
with respect to Emeritus:
(a) any Person or group of Persons (within the meaning of Rule 13d-5 under
the Act (as defined below) other than Emeritus, any of its subsidiaries, or any
trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of Emeritus or any of its subsidiaries, together
with all "affiliates" and "associates" (as such terms are defined in
A-2
<PAGE>
Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Act")) of
such Person or group, shall become the "beneficial owner" (as such term is
defined in Rule 13d-3 under the Act), directly or indirectly, of securities of
Emeritus representing a greater percentage than that then owned by Daniel R.
Baty, together with all "affiliates" and "associates" of Daniel R. Baty (as
defined above) of either (A) the combined voting power of Emeritus' then
outstanding securities having the right to vote in an election of Emeritus'
Board of Directors ("Voting Securities") or (B) the then outstanding shares of
Stock of Emeritus; or
(b) Persons who, as of the date hereof, constitute Emeritus' Board of
Directors (the "Incumbent Directors") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that any
person becoming a director of Emeritus subsequent to the date hereof whose
election or nomination for election was approved by a vote of at least a
majority of the Incumbent Directors shall, for purposes of this Plan, be
considered an Incumbent Director; or
(c) the stockholders of Emeritus shall approve (A) any consolidation or
merger of Emeritus or any subsidiary where the shareholders of Emeritus,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, shares representing a majority of
the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any), (B) any
sale, lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of Emeritus or (C) any plan or proposal for the
liquidation or dissolution of Emeritus; or
(d) other than by reason of death or legal disability, Daniel Baty ceases
to be the chief executive officer of Emeritus.
Change of Control with respect to any Manager shall mean the occurrence of any
event whereby 100% of the ownership interests in such Manager are no longer
owned by Emeritus.
Closing: the date of closing under the Purchase Agreements.
Code: the Internal Revenue Code of 1986, as amended.
Commencement Date: as defined in Section 2.1 of the Management Agreement.
A-3
<PAGE>
Compensation: the direct salaries and wages paid to, or accrued for the benefit
of, any employee working and employed at each Facility together with all
reasonably customary fringe benefits payable to, or accrued for the benefit of
such employee, including employer's contribution under FICA., unemployment
compensation, or other employment taxes, pension fund contributions, workmen's
compensation, group life and accident and health insurance premiums, and other
reasonable employee benefits customary in the industry.
Condemnation: with respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
CPA: The certified public accountants retained to provide necessary accounting
services for the Facility or Owner, the selection of which shall be subject to
approval by Owner.
Date of Taking: the date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: means all federal, state, and local laws, ordinances and
regulations and standards, rules, policies and other governmental requirements,
administrative rulings, and court judgments and decrees in effect now or in the
future and including all amendments, that relate to Hazardous Materials and
apply to the Facilities or to the Land and/or the Improvements. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water
Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, and their state analogs.
Excluded Expenses: depreciation, amortization and other non-cash expenses; items
to be provided or paid for at Owner's or Managers' sole expense as provided
herein; costs and expenses resulting from or required to cure any matter or
defect which constitutes a breach of warranty, representation or indemnity under
the Purchase Agreements, the Licensing Agreement, or the Management Agreement
A-4
<PAGE>
which cost or expense shall be the sole responsibility of the breaching party;
unreasonable or excessive charges or expenses.
Escrow Holder: First American Title Insurance Company.
Extension Term: as defined in Section 2.2 of the Management Agreement.
Facility or Facilities: Each of the assisted living facilities, including the
Land, Improvements, and Personal Property associated therewith, located in the
city and state as set forth below:
<TABLE>
<CAPTION>
Facility City State Units Beds Facility LLC and LP
Name
<S> <C> <C> <C> <C> <C>
Colonial Park
Club Sarasota FL 90 110 AL Investors II Sarasota
LLC
Park Club of
Fort Myers Fort Myers FL 90 100 AL Investors II Fort
Myers LLC
Park Club of
Oakbridge Lakeland FL 77 94 AL Investors II Lakeland
LLC
Park Club of
Brandon Brandon FL 89 110 AL Investors II Brandon
LLC
Highland Hills Pocatello ID 49 57 AL Investors II Pocatello
LLC
Ridge Wind Chubbuck ID 110 96 AL Investors II Chubbuck
LLC
Lakewood Inn Coeur d'Alene ID 73 109 AL Investors II Coeur
D'Alene
The Pines of
Tewksbury Tewksbury MA 49 50 AL Investors II Tewksbury
LLC
Meadowbrook Ontario OR 53 82 AL Investors II Ontario
LLC
Anderson Place Anderson SC 127 84 AL Investors II Anderson
LLC
Elmbrook Estates Lubbock TX 79 100 Lubbock AL Investors II
LP
Fairhaven Estates Bellingham WA 98 110 AL Investors II
Bellingham LLC
Hearthstone MosesLake WA 50 100 AL Investors II Moses
Lake LLC
Evergreen Lodge Federal Way WA 84 92 AL Investors II Federal
Way LLC
</TABLE>
Facility Accounts: as defined in Section 8.1 of the Management Agreement.
Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set
forth opposite the name of each Facility above and their respective successors
or assigns.
Fixed Operating Expenses: for any period, all fixed costs and expenses of
owning, and operating the Facilities in the aggregate except where the Agreement
expressly provides that Fixed Operating Expenses shall be determined for each
Facility to the extent such costs and expenses are not included in Operating
Expenses, including but not limited to (a) Managers' Base Management Fee
(excluding the amount of any Accrued Management Fee accrued during such period);
(b) all amounts to be paid into the Reserve Account and the cost of Capital
Improvements approved by Owners not funded from the Reserve Account; (c) the
debt service on account of the Senior Loan; (d) the real and personal property
ad valorem taxes and assessments; and (e) all costs and expenses of all property
and casualty insurance on or in respect of the Facilities provided for herein
and the amount of all self-insured
A-5
<PAGE>
losses or deductibles. Fixed Operating Expenses shall not include the Excluded
Expenses.
Furnishings and Equipment: all furniture, furnishings, beds, equipment, food
service equipment, apparatus and other personal property used in (or if the
context so dictates, required in connection with), the operation of each
Facility, other than Operating Equipment, Operating Supplies and fixtures
attached to and forming part of the Improvements.
GAAP: means generally accepted accounting principles applied on a consistent
basis.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Group Service: as defined in Section 3.2.4 of the Management Agreement.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material, or substance now or in the future defined as a
"hazardous substance," "hazardous material," hazardous waste," "toxic
substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning
of any Environmental Law. Provided, however, Hazardous Substances shall not
include the safe and lawful use and storage of quantities of (i) pre-packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of any Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Facilities' parking areas, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Environmental Laws.
A-6
<PAGE>
Impositions: collectively, all taxes (including, without limitation, all capital
stock and franchise taxes of AL Investors II, AL II Holdings, or any Facility
Entity, all ad valorem, property, sales and use, single business, gross
receipts, transaction privilege, rent or similar taxes), assessments (including,
without limitation, all assessments for public improvements or benefits, whether
or not commenced or completed prior to the date hereof and assessments levied by
condominium associations), ground rents, water and sewer rents other than normal
utility charges, excises, tax levies, fees (including, without limitation,
license, permit, inspection, authorization and similar fees), and all other
charges imposed by Governmental Authorities, in each case whether general or
special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Facility (including all interest and penalties
thereon due to any failure in payment by Manager), which at any time prior to,
during or in respect of the Term of the Management Agreement may be assessed or
imposed on or in respect of or be a Lien upon (a) Facility Entities' interest in
the Facility, (b) the Facility or any rent or income therefrom or any estate,
right, title or interest therein, or (c) any occupancy, operation, use or
possession of, sales from, or activity conducted on, or in connection with, the
Facility or the leasing or use of the Facility. Notwithstanding the foregoing,
"Impositions" shall not include: (1) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on any Owners
or Managers, (2) any tax imposed with respect to the sale, exchange or other
disposition of a Facility or the proceeds thereof, or (3) any principal or
interest on any Mortgage; provided, however, the provisos set forth in clause
(1) of this sentence shall not be applicable to the extent that any real or
personal property tax, assessment, tax levy or charge pursuant to the first
sentence of this definition and which is in effect at any time during the Term
hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (1) is levied, assessed or imposed expressly in lieu
thereof.
Improvements: the buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Initial Term: as defined in Section 2.1 of the Management Agreement.
Insurance Requirements: all terms of each insurance policy required to be
carried in this Agreement, or agreed to be carried by Owners and Managers, and
all orders, rules, regulations and other requirements of the National Board of
Fire Underwriters (or any other body exercising similar functions) applicable to
the Facilities or the operation thereof.
Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors II and/or the membership
interests of AL Investors II in the Facility Entities. Initially, the Junior
Loan is
A-7
<PAGE>
evidenced by that certain Loan Agreement among AL II Holdings, AL Investors II,
AL Investors Development and the Facility Entities and Senior Housing Partners
I, L.P. dated on or about the same date hereof ("Initial Junior Loan").
Land: the parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreements.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with a Facility, including, without limitation, any of
the foregoing which may (i) require repairs, modifications or alterations in or
to any Facility, (ii) in any way affect (adversely or otherwise) the use and
enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up,
containment, removal, remediation or other treatment of any Hazardous Substances
on, under or from any Facility. Without limiting the foregoing, the term "Legal
Requirements" includes all Environmental Laws and shall also include all Permits
and Contracts issued or entered into by any Governmental Authority, any
Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances.
Lending Group: GMAC Commercial Mortgage in a debt facility referred to herein as
the Initial Senior Loan secured by the Facilities in the maximum aggregate
original principal balance of $68,000,000.
Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement
between Emeritus Corporation and AL Investors II dated on or about the same date
hereof.
Lien: with respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected, other than the Mortgage.
A-8
<PAGE>
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or which cannot be terminated without penalty or termination fee on sixty (60)
days notice or in which the provider of the goods or services is Emeritus or an
Affiliate (except pursuant to Group Services approved in connection with an
Annual Plan).
Major Lease: Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which Emeritus or
an Affiliate is the lessee or lessor.
Managed Care Plans: all health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Management Fee: an amount equal to seven percent (7%) of Total Revenue for all
Facilities, subject to the provisions of Section 7.2 of the Management
Agreement.
Medicaid: the medical assistance program established by Title XIX of the Social
Security Act (42 US C ss.ss. 1396 et seq.) and any statute succeeding thereto.
Medicare: the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
Mortgage: collectively, the terms and conditions of the Senior Loan and the
Junior Loan.
Mortgagee: the holder or beneficiary of a Mortgage and their respective
successors and assigns.
Operating Deficit and Operating Profit: for any period, the amount, if any, by
which Total Revenues for that period is less than or exceeds, respectively, the
sum of (i) Operating Expenses and (ii) Fixed Operating Expenses for that period
in each case determined on a cash basis.
Operating Equipment: all dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Expenses: for any period, all reasonable costs and expenses of owning
and operating the Facilities in the aggregate except where the Agreement
A-9
<PAGE>
expressly provides that Operating Expenses shall be determined for each Facility
(which costs and expenses do not include the Fixed Operating Expenses or the
Excluded Expenses) including the following:
(a) The cost of all Operating Equipment and Operating Supplies placed in
use, with the exception of the Operating Equipment and Operating Supplies
initially supplied by the Facility Entities. The cost of maintaining and
operating the vans and buses for each Facility (but not any debt service or
lease payments which shall remain the sole expense of Emeritus).
(b) The Compensation of all employees working and employed by Managers at
the Facilities. The Compensation of Managers' or Emeritus' home office or
executive or other personnel not regularly employed at the Facilities shall not
be included in Operating Expenses or Fixed Operating Expenses, but reasonable
out-of-pocket travel expenses of Managers or Owners' executive personnel while
traveling to and from a Facility on business shall be reimbursable as an
Operating Expense; provided, however, that if such business travel relates to
business or properties other than with respect to the Facilities, then such
travel expenses shall be equitably prorated between such other business or
properties and the Facilities.
(c) The cost of all utilities including, without limitation, electricity,
water, gas, heat and other utilities, and office supplies and equipment, and
goods and services purchased under all Contracts, including leasing expenses in
connection with telephone and data processing equipment and such other equipment
as the parties hereto may agree upon in writing.
(d) The cost of repairs to and maintenance of the Facilities whether
performed by Facility employees or contracted to third parties.
(e) Insurance premiums for all insurance required under this Agreement and
self-insured losses and deductibles with respect to such insurance coverages
(but excluding premiums and self-insured losses and deductibles on property and
casualty insurance which are included in Fixed Operating Costs). Premiums on
policies for more than one year will be prorated over the period of insurance
coverage and premiums under blanket policies will be equitably allocated among
properties covered.
(f) All Impositions (except for real and Personal Property ad valorem
taxes and assessments which shall be a Fixed Operating Expenses).
(g) Except as otherwise provided in Section 6.1 of the Management
Agreement, legal fees and fees of any CPA for services directly related to the
operations of the Facilities (whether incurred by Owners or Managers).
A-10
<PAGE>
(h) The costs and expenses of technical consultants and specialized
operational experts for specialized services in connection with non-recurring
work on operational, functional, design or construction problems and activities
whether incurred by Owner or Manager; provided, however, that if such costs end
expenses have not been included in the Annual Plan, the same shall be subject to
approval by Owner.
(i) All expenses for marketing the Facilities and all expenses of sales
promotion and public relations activities as set forth in the Annual Plan
(j) The cost of Group Services, as provided in Section 3.2.4 of the
Management Agreement.
(k) Bad debts or uncollectible amounts from residents of the Facilities.
(l) Refund of deposits to residents under Residency Agreements
(m) Owners' reasonable costs and expenses of administering, supervising,
and managing Owners' activities in connection with this Agreement and any
Mortgage, including Owners' reasonable cost and expense of preparing and filing
federal, state and local income tax returns and audits.
(n) All other reasonable expenses and charges incurred in the operation
and management of the Facilities to the extent set forth in the Annual Plan or
otherwise approved by the Owners or as otherwise set forth in the Agreement.
Operating Period: the period beginning with the Commencement Date and ending
upon the expiration of the Initial Term.
Operating Supplies: consumable items used in, or held in storage for use in (or
if the context so dictates, required in connection with), the operation of the
Facilities, including food, medical supplies, fuel, soap, cleaning materials,
and other similar consumable items.
Operating Year: the Operating Years shall coincide with and be identical with
the calendar years, except that the first Operating Year shall be the period
beginning on the Commencement Date and ending on the following December 31,
1999, and such long or short year, as applicable, shall constitute a full
Operating Year as used herein.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) in the ordinary course of business of
A-11
<PAGE>
refurbishing, owning, operating or managing the Facilities, or the operation of
any programs or services in conjunction with the Facility and all renewals,
replacement and substitutions therefor with any Governmental Authority,
Accreditation Body or Third Party Payor or entered into with any third Person,
excluding, however, any agreements pursuant to which money has been or will be
borrowed or advanced, the Leases, any agreement creating or permitting any Lien
or other encumbrance on title (except for the Permitted Exceptions), and any
Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by Managers affecting a
Facility.
Overdue Rate: on any date, a rate of interest per annum equal to the greater of:
(i) a variable rate of interest per annum equal to one hundred twenty percent
(120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided,
however, in no event shall the Overdue Rate be greater than the maximum rate
then permitted under Legal Requirements.
Permits: collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents, agreements, contracts, contract rights, franchises, interim licenses,
permits and other authorizations of every nature whatsoever required by, or
issued under, applicable Legal Requirements relating or affecting a Facility or
the construction, development, maintenance, management, use or operation
thereof, or the operation of any programs or services in conjunction with the
Facility and all renewals, replacements and substitutions therefor, now or
hereafter required or issued by any Governmental Authority, Accreditation Body
or Third Party Payor to Owners or Managers.
Permitted Exceptions: (i) all encumbrances to title present at closing pursuant
to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii)
easements, restrictions on use, zoning laws and ordinances, rights of way and
other encumbrances and minor irregularities in title, whether now existing or
hereafter arising, which are approved by Owner and do not individually or in the
aggregate materially impair the use of any Facility.
Person: any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
A-12
<PAGE>
Personal Property: all machinery, equipment, furniture, furnishings, vans,
buses, movable walls or partitions, computers or trade fixtures, goods,
inventory, supplies, the name of the Facility, and other personal or intangible
property used in the operation of the Facility, including, but not limited to,
all Operating Equipment, Furnishings and Equipment and Operating Supplies.
Notwithstanding the foregoing, title to the vans and buses shall remain in
Emeritus or Managers and be held in trust by them for the benefit of the
respective Owner; provided that legal title to the vans and buses shall be
transferred to the respective Facility Entity upon expiration or sooner
termination of the Management Agreement as provided in Section 9.6 of the
Management Agreement.
Primary Intended Use: the use of the Facility as an assisted living facility and
such ancillary uses as are permitted by applicable Legal Requirements and may be
necessary in connection therewith or incidental thereto.
Prime Rate: the variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors.
Provider Agreements: all participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of Owners or Managers in
connection with the operation of the Facility relating to any right of payment
or other claim arising out of or in connection with participation in any Third
Party Payor Program.
Put and Purchase Agreement: that certain Put and Purchase Agreement between
Daniel Baty and AL II Holdings dated on or about the same date hereof.
Residency Agreement: all contracts, agreements and consents executed by or on
behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Debt is evidenced by that certain Loan Agreement between
AL Investors II (and the Facility Entities) and GMAC Commercial Mortgage
Corporation dated on or about the same date hereof ("Initial Senior Loan").
Third Party Payor Programs: collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including
A-13
<PAGE>
without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield, Managed
Care Plans, other private insurance plans and employee assistance programs.
Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
Title Company: First American Title Insurance Company.
Total Revenues: collectively, but without duplication all revenues generated by
reason of the operation of the Facilities in the aggregate, except where the
Agreement expressly provides that Total Revenues shall be determined for each
Facility, directly or indirectly received by any Facility Entity or Managers,
including, without limitation, all resident revenues received or receivable for
the use of, or otherwise by reason of, all rooms, units and other facilities
provided, deposits received from residents under Residency Agreements, meals
served, services performed, space or facilities leased pursuant to the Leases or
goods sold on or from the Facility, all amounts from Third Party Payors, and all
revenues from all ancillary services provided at or relating to any Facility;
provided, however, that Total Revenues shall not include:
(a) federal, state or local sales, use, gross receipts and excise taxes
and any tax based upon or measured by said Total Revenues which is added to or
made a part of the amount billed to the resident or other recipient of such
services or goods, whether included in the billing or stated separately, which
is paid to the Governmental Authority;
(b) proceeds from sale of capital assets, including the sale of the
Facility and proceeds therefrom other than sale of Furnishings and Equipment in
the ordinary course of business,;
(c) proceeds of any insurance other than business interruption insurance;
(d) proceeds of any financing or capital contributions to Owners;
(e) interest or earnings on the Reserve Account;
(f) any Award resulting from Condemnation;
(g) any other income or proceeds from any source other than in the
ordinary course of business of the Facility.
A-14
<PAGE>
Except as otherwise specifically indicated, all references to Section and
Subsection numbers refer to Sections and Subsections of this Agreement, and all
references to Exhibits refer to the Exhibits attached hereto. The words
"herein," "hereof", "hereunder", "hereinafter", and words of similar import
refer to this Agreement as a whole and not to any particular Section or
Subsection hereof unless the context otherwise requires.
A-15
<PAGE>
EXHIBIT B
TO MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
Determination of Purchase Price
The Purchase Price with respect to all of the Facilities means:
(a) The amount required to repay the Senior Loan secured by all Facilities
in full, including prepayment penalties or other costs of repayment; plus
(b) The amount required to repay that portion of the Junior Loan allocable
by AL II Holdings to the Facilities (which allocation, together with the
allocation of the Junior Loan set forth in Exhibit C to the AL II Development
Management Agreement, shall repay the Junior Loan in full) evidenced by that
certain Promissory Note dated of even date herewith, in the original principal
amount of $19,704,000, including repayment of the allocable portion of
principal, Base Interest, and Contingent Interest, as such terms are defined
therein, plus
(c) The amount required to repay in full the initial investment of
$3,400,000 made by the members of AL II Holdings through AL Investors II to
acquire the Facilities, plus any additional contributions by AL II Holdings to
AL Investors II, plus an eighteen percent per annum rate of return, compounded
annually (computed taking into account any distributions made by AL Investors II
to AL II Holdings from time to time), plus an additional amount equal to
$68,000, as may be increased by the Emeritus Stock Appreciation Amount, plus
(d) The outstanding amount of any Operating Deficit Loan, plus
(e) The reasonable costs allocable to the Facilities which AL II Holdings,
AL Investors II and its Subsidiaries will incur to dissolve and fully liquidate.
The foregoing Option Price is intended to equal the purchase price which would
be required to be paid for the Facilities in connection with a dissolution and
liquidation of AL Investors II and its Subsidiaries (assuming a simultaneous
closing of the Purchase Option under the AL II Development Management
Agreement), to provide a net liquidating payment to the members of AL II
Holdings, after satisfaction in full of the Senior Loan and the Junior Loan, and
payment of all reasonable costs of such assumed dissolutions, equal to AL II
Holdings' investment in AL Investors II plus an 18% per annum return, compounded
annually (computed taking into account periodic distributions), plus $68,000 as
may be increased by
B-1
<PAGE>
the Emeritus Stock Appreciation Amount. The parties hereto acknowledge such
intention and agree that the foregoing shall be construed accordingly.
For purposes hereof, the "Emeritus Stock Appreciation Amount" means (a) the sum
of $68,000 divided by the arithmetic average of the closing price of one share
of Emeritus common stock as reported in the Wall Street Journal for the
60-trading-day period preceding the Commencement Date plus $1, which amount is
_____________; (b) the quotient of (a) multiplied by the arithmetic average of
the closing price of one share of Emeritus common stock as reported in the Wall
Street Journal for the 20-trading-day period preceding the Time of Closing (as
defined in Section 13 of the Management Agreement); and (c) the product derived
from (b) less $68,000 (if such number is negative, it shall be deemed zero). The
foregoing calculation shall be appropriately adjusted for any dilution of
Emeritus common stock occurring between the Commencement Date and the Time of
Closing.
B-2
<PAGE>
EX 10.1.3
GUARANTY OF MANAGEMENT AGREEMENT
(AL II - 14 Operating Facilities)
This Guaranty of Management Agreement ("Agreement") dated as of the _____ day of
March, 1999, is entered into by Emeritus Corporation, a Washington corporation
("Emeritus"), in favor of AL Investors II LLC, a Delaware limited liability
company ("AL Investors II"), for itself and as sole managing member on behalf of
each of the Facility Entities as set forth in Exhibit A (collectively "Facility
Entities" and each a "Facility Entity"). Al Investors II and the respective
Facility Entity which owns a Facility are sometimes collectively referred to
herein as "Owner" or with respect to all Facilities "Owners". All capitalized
terms not otherwise defined herein shall have the meaning set forth in Exhibit
A.
This Agreement is made with reference to the following facts:
A. AL Investors II has entered into (a) a Purchase and Sale Agreement dated of
even date herewith with Meditrust Company LLC, a Delaware limited liability
company ("Meditrust") relating to the purchase of the Facilities, and (b) a
Supplemental Purchase Agreement dated of even date herewith with Emeritus,
Emeritus Properties I, Inc., ESC G.P. I, Inc. and ESC I, L.P. in connection with
the purchase of the Facilities (collectively the "Purchase Agreements"). Closing
under the Purchase Agreements will occur simultaneously and the resulting pool
of fourteen (14) Facilities will each be owned by the respective Facility Entity
and managed by Emeritus Management LLC and Emeritus Management I LP and their
Affiliates (the "Managers") pursuant to a Management Agreement with Option to
Purchase between Managers and Owners dated the same date of this Agreement
("Management Agreement"). Existing leases of the Facilities by an Emeritus
Affiliate from Meditrust and the existing management agreements for each of the
Facilities have been terminated.
B. Under the terms and conditions of the Management Agreement, Managers have
agreed to manage all of the Facilities and perform other obligations as set
forth therein.
C. Concurrently with the execution of the Management Agreement, Emeritus agreed
to enter into this Agreement in favor of Owners guaranteeing the Managers'
obligations under the Management Agreement. Owners would not have entered into
the Purchase Agreements or the Management Agreement without execution and
delivery of this Agreement.
In consideration of the Owners entering into the Purchase Agreement and the
Management Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Emeritus agrees as follows:
- -1-
<PAGE>
1. Obligations. Emeritus hereby absolutely, unconditionally and irrevocably
guarantees to each of Owners prompt payment and performance to Owners when due,
whether by acceleration or otherwise, of all indebtedness, liabilities, and
obligations of Managers to Owners of any kind or nature whatsoever under or
arising from the Management Agreement, or any modification, supplementation or
replacement thereof, or from other dealings by which any one or more of Owners
may become a creditor of Managers including but not limited to all of the
foregoing which arise or would accrue but for the filing of any bankruptcy or
other insolvency proceedings by or against any Manager (the "Obligations").
2. Consent to Modification of Obligations. Without affecting, diminishing or
otherwise impairing the liability of Emeritus hereunder and without notice to or
consent of Emeritus, Owners may from time to time grant renewals, extensions,
indulgences, releases and discharges to Managers or any other Person liable for
any of the Obligations, and may take security for payment of the Obligations,
and may release any or all security or refrain from perfecting any interest in
any security granted by Managers or any guarantor or other person or entity
liable for any of the Obligations. Owners may amend or modify the Obligations or
any document or instrument executed to evidence the Obligations and otherwise
may deal with the Managers or any other Person liable for any of the
Obligations, without notice to or consent of Emeritus, and without affecting,
diminishing, or otherwise impairing the liability of Emeritus under this
Agreement.
3. Consent to Waivers, Etc. by Owners. Owners may from time to time consent to
any action or non-action of Managers under the Management Agreement or any other
Person liable for any of the Obligations, which, in the absence of such consent,
violates or may violate the provisions of the Management Agreement or any
document or instrument otherwise executed in connection with the Obligations,
and such consent may be granted by Owners, without notice to or consent of
Emeritus and without in any manner affecting, diminishing, or impairing the
liability of Emeritus under this Agreement. No waiver, modification, extension,
forbearance, or delay on the part of the Owners with respect to the Obligations
or with respect to any document, instrument or agreement evidencing the
Obligations, securing repayment of the Obligations or otherwise executed in
connection with the Obligations, and no act or thing which might, but for this
provision of this Agreement, be deemed a legal or equitable discharge of a
surety, shall operate to release the obligations of Emeritus under this
Agreement, and no delay on the part of the Owners in exercising any of their
options, powers, or rights under this Agreement, or any partial or single
exercise thereof shall constitute a waiver of any other rights hereunder.
4. Continued Effectiveness of Agreement. This Agreement shall continue to be
effective, or be reinstated, as the case may be, if at any time payment of all
or any part of the Obligations is rescinded or otherwise must be returned by
Owners upon the insolvency, bankruptcy, or reorganization of any of the Managers
all as though such payment to Owners had not been made.
- -2-
<PAGE>
5. Form and Powers of Managers. No change in the name, purposes, capitalization,
ownership, form or organization of Managers shall in any way affect, diminish,
or otherwise impair the liability of Emeritus. Owners shall not be obligated to
inquire into the powers of the Managers notwithstanding that any of the
Obligations may be in excess of the powers of the Managers.
6. Guaranty of Payment and Performance. This is a guaranty of payment and
performance and Owners shall not be obligated to exhaust their recourse against
the Managers, or any other Person, or any security they may have for performance
or payment of the Obligations before being entitled to payment and performance
from Emeritus of the Obligations.
7. Effect of Certain Laws. Notwithstanding the provisions of the laws of any
state, this Agreement shall remain in full force and effect and no invalidity,
irregularity, or unenforceability (by reason of any bankruptcy or similar law,
any other law or any order of any Governmental Authorities thereof purporting to
reduce, amend, or otherwise affect any liability or obligation of the Managers)
and no release or discharge of the Managers, or rejection of the Management
Agreement by any one or more of the Managers or any trustee, receiver or similar
official on behalf of the Managers (whether pursuant to 11 U.S.C. Section 365 or
otherwise), in any receivership, bankruptcy, liquidation, winding-up,
reorganization or other proceedings shall affect, diminish, or otherwise impair
or otherwise be a defense to this Agreement. If Owners are stayed by any
bankruptcy or other proceeding with respect to Managers from declaring the
Obligations immediately due and payable from Managers, it may nevertheless do so
as to Emeritus.
8. No Conditions to Agreement. This Agreement is absolute and unconditional and
has been delivered free of any conditions and no representations have been made
to Emeritus affecting or limiting the liability of Emeritus under this
Agreement. This Agreement is in addition to and not in substitution for any
agreement of Emeritus in the Management Agreement, the Purchase Agreements or in
any other document or instrument executed by Emeritus agreeing to perform all or
any part of the Obligations.
9. Continuing Agreement. This is a continuing guaranty and agreement. No action
or proceeding brought or instituted under this Agreement and no recovery in
pursuance thereof shall be a bar or defense to any further action or proceeding
which may be brought under this Agreement by reason of the same or any further
default or defaults under this Agreement or in the performance and observance of
the terms, covenants, conditions, and provisions in the Obligations, or any
document, instrument or agreement evidencing the Obligations, securing repayment
of the Obligations or otherwise executed in connection with the Obligations.
- -3-
<PAGE>
10. Certain Waivers by Emeritus. Emeritus hereby waives presentment, protest,
notice, demand, notice of nonpayment or action on delinquency in respect to any
of the Obligations and all other suretyship defenses generally. Emeritus waives
acceptance of this Agreement. Emeritus agrees that no release, delay,
compromise, indulgence, or other action or failure to act by Owners with respect
to any other Person liable for any of the Obligations shall in any manner
affect, diminish or impair the liability of Emeritus under this Agreement.
11. Survival. This Agreement shall survive expiration or sooner termination of
the Management Agreement for the period prior to December 31, 2001 with respect
to all terms and provisions of the Management Agreement which by their terms
survive expiration or sooner termination of the Management Agreement.
12. Subordination. Emeritus hereby subordinates any and all debts owed to
Emeritus by Managers or any other Person liable for any of the Obligations, and
any and all security for such debts, to the prior payment and performance in
full of the Obligations.
13. Joint and Several Obligation. Emeritus' obligations to Owners for payment
and performance of the Obligations shall be joint and several with the
obligations of Managers therefor.
14. Waiver of Subrogation. Emeritus waives all rights of subrogation to the
rights of Owners, and all rights of indemnity, contribution and reimbursement
against Owners, but not against Managers, but any such claim shall not be
asserted by Emeritus against Managers until after expiration of the Management
Agreement, payment and performance of all obligations to Owners, and in any
event shall be subordinate to all claims of Owners. Owners shall have no
obligation whatsoever to reimburse or otherwise pay Emeritus for any payments or
performance rendered under this Agreement by Emeritus.
15. Miscellaneous.
15.1 Notices. All notices required or permitted hereunder shall be deemed given:
(1) three calendar days following mailing via regular U.S. mail, return receipt
requested; or (2) one business day after deposit with a commercial courier
service which provides evidence of delivery for "next day" delivery;, or (3)
upon sending to a facsimile number set forth in this agreement or provided in a
notice to the party sending the notice by the party receiving the notice in
writing, provided that a copy is sent the same business day by commercial
courier as set forth above; or (4) upon actual receipt of notice, whichever is
earlier. The parties shall promptly give written notice to each other of any
change of address or facsimile number, and notice to the addresses or facsimile
numbers stated herein shall be deemed sufficient unless written notification of
a change has been received.
- -4-
<PAGE>
15.2 Governing Law. This Agreement has been executed and delivered to Owners in
the State of Washington. Emeritus agrees that the law of the State of Washington
(exclusive of principles of conflicts of law) shall be applicable for the
purpose of construing this Agreement, determining the validity hereof and
enforcing the same. Emeritus hereby consents to the jurisdiction of the courts
of the State of Washington or to any federal court sitting in the State of
Washington. Al Investors II or Owners may enforce any or all of the provisions
of this Agreement directly against Emeritus in the State of Washington or any
other jurisdiction in which Emeritus does business or at its option may enforce
this Agreement on behalf of any Facility Entity in the state in which such
Facility Entity owns a Facility.
15.3 No Waiver. No delay or omission to exercise any right, power or remedy
accruing to Owners upon any breach or default of Emeritus shall impair such
rights, powers or remedies of Owners, nor shall it be construed to be a waiver
of any such breach or default, or of any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring.
15.4 Assignment. Owners reserve the right to transfer or assign any or all of
their right, title and interest under this Agreement, including assignment to
any Mortgagee, and Emeritus hereby consents to any such transfer or assignment,
provided such assignee (other than any Mortgagee) assumes the Owners'
obligations under the Management Agreement accruing after the date of such
assignment.
15.5 Captions. Any captions applied to the sections of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any of the provisions of this Agreement.
15.6 Invalidity. If any term, condition or provision of this Agreement shall be
held invalid for any reason, such offending term, condition or provision shall
be stricken therefrom, and the remainder shall not be affected.
15.7 Entire Agreement. This Agreement constitutes the complete and final
expression of the entire agreement between the parties pertaining to the subject
matter hereof, but is in addition to and not in substitution for the obligations
of Emeritus under the Management Agreement. This Agreement may be amended only
by a written instrument executed by Emeritus and Owners.
15.8 Binding Effect. This Agreement shall inure to the benefit of Owners, its
successors and assigns, and shall be binding upon Emeritus and its successors
and assigns, as the case may be. This Agreement may be terminated only by means
of a written document duly executed by Owners.
15.9 Legal Expenses. In the event of any default on the Obligations, or in the
event that any dispute arises relating to the interpretation, enforcement or
- -5-
<PAGE>
performance of this Agreement, the prevailing party shall be entitled to collect
from the other party on demand all fees and expenses incurred in connection
therewith, including but not limited to fees of attorneys, accountants,
appraisers, consultants, expert witnesses, arbitrators, mediators and court
reporters. Without limiting the generality of the foregoing, the prevailing
party shall be entitled to all such costs and expenses incurred in connection
with: (a) arbitration or other alternative dispute resolution proceedings, trial
court actions and appeals; (b) bankruptcy or other insolvency proceedings of
Managers, Emeritus, any other party having any liability for any portion of the
Obligations or any party having any interest in any security for any of the
Obligations; (c) any default by Managers or Emeritus under the Management
Agreement; (d) all claims, counterclaims, cross-claims and defenses asserted in
any of the foregoing whether or not they arise out of or are related to this
Agreement; (e) all preparation for any of the foregoing; and (f) all settlement
negotiations with respect to any of the foregoing.
15.10 Jury Trial Waiver. EMERITUS AND OWNERS HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW
OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT.
TO THE EXTENT APPLICABLE, EMERITUS IS HEREBY ADVISED THAT ORAL AGREEMENTS OR
ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING
REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
DATED this ______________ day of March, 1999.
EMERITUS CORPORATION, a
Washington corporation
By: /s/ Daniel R. Baty
Name: Daniel R. Baty
Title: Chairman
Address: 3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
Facsimile: (206) 301-4500
- -6-
<PAGE>
EXHIBIT A
TO GUARANTY OF MANAGEMENT AGREEMENT
(AL II - 14 Operating Facilities)
Certain Defined Terms
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors II.
AL Investors II: AL Investors II LLC, a Delaware limited liability company
AL II Development Management Agreement: That certain Management Agreement with
Option to Purchase dated on or about the same date hereof among AL Investors II
and Emeritus Corporation and its Affiliates relating to the management of up to
five (5) assisted living facilities.
AL Management Agreement: That certain Management Agreement With Option to
Purchase dated December 30, 1998 Among AL Investors LLC and Emeritus Corporation
and its Affiliates relating to the management of twenty-five (25) assisted
living facilities.
Affiliate: with respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any other Person controlling, controlled
by, or under common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an Affiliate of
such Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
Agency Account: The Agency Account to be maintained for each Facility for
payment of Fixed Operating Expenses and Operating Expenses as described in
Section 8.1 of the Management Agreement.
Annual Plan(s): as defined in Section 4.2 of the Management Agreement.
A-1
<PAGE>
Award: all compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Base Management Fee: as defined in Section 7.1 of the Management Agreement.
Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to
pay debts as they become due; or applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian or makes a general
assignment for the benefit of creditors, or in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is appointed and
is not discharged within sixty (60) days after such appointment; or an order for
relief is entered or a petition is filed under Title 11, United States
Bankruptcy Code, with respect to any of them; or any other bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, now or hereafter in effect, is commenced with
respect to any of them.
Business Day: any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
Capital Improvements: as defined in Section 12 of the Management Agreement.
Cash Available for Distribution: on any date the amount contained in the Agency
Accounts (as defined in Section 8.1 of the Management Agreement), minus an
amount (to be retained in the Agency Accounts) equal to any reasonably projected
Operating Deficit for the succeeding 30 days, taking into account all Operating
Expenses and Fixed Operating Expenses and all anticipated Total Revenues during
such 30-day period.
Casualty: the damage or destruction by act of God or otherwise of any portion of
any Facility which Owner reasonably estimates would cost more than $50,000 to
repair or restore.
Change of Control: shall mean the occurrence of any one of the following events
with respect to Emeritus:
(a) any Person or group of Persons within the meaning of Rule 13d-5 under
the Act as defined below) other than Emeritus, any of its subsidiaries, or any
trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of Emeritus or any of its subsidiaries), together
with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (the "Act")) of such
Person or
A-2
<PAGE>
group, shall become the "beneficial owner" (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, of securities of Emeritus
representing a greater percentage than that then owned by Daniel R. Baty,
together with all "affiliates" and "associates" of Daniel R. Baty (as defined
above) of either (A) the combined voting power of Emeritus' then outstanding
securities having the right to vote in an election of Emeritus' Board of
Directors ("Voting Securities") or (B) the then outstanding shares of Stock of
Emeritus; or
(b) Persons who, as of the date hereof, constitute Emeritus' Board of
Directors (the "Incumbent Directors") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that any
person becoming a director of Emeritus subsequent to the date hereof whose
election or nomination for election was approved by a vote of at least a
majority of the Incumbent Directors shall, for purposes of this Plan, be
considered an Incumbent Director; or
(c) the stockholders of Emeritus shall approve (A) any consolidation or
merger of Emeritus or any subsidiary where the shareholders of Emeritus,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, shares representing a majority of
the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any), (B) any
sale, lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of Emeritus or (C) any plan or proposal for the
liquidation or dissolution of Emeritus; or
(d) other than by reason of death or legal disability, Daniel Baty ceases
to be the chief executive officer of Emeritus.
Change of Control with respect to any Manager shall mean the occurrence of any
event whereby 100% of the ownership interests in such Manager are no longer
owned by Emeritus.
Closing: the date of closing under the Purchase Agreements.
Code: the Internal Revenue Code of 1986, as amended.
Commencement Date: as defined in Section 2.1 of the Management Agreement.
Compensation: the direct salaries and wages paid to, or accrued for the benefit
of, any employee working and employed at each Facility together with all
A-3
<PAGE>
reasonably customary fringe benefits payable to, or accrued for the benefit of
such employee, including employer's contribution under FICA., unemployment
compensation, or other employment taxes, pension fund contributions, workmen's
compensation, group life and accident and health insurance premiums, and other
reasonable employee benefits customary in the industry.
Condemnation: with respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
CPA: The certified public accountants retained to provide necessary accounting
services for the Facility or Owner, the selection of which shall be subject to
approval by Owner.
Date of Taking: the date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: means all federal, state, and local laws, ordinances and
regulations and standards, rules, policies and other governmental requirements,
administrative rulings, and court judgments and decrees in effect now or in the
future and including all amendments, that relate to Hazardous Materials and
apply to the Facilities or to the Land and/or the Improvements. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water
Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, and their state analogs.
Excluded Expenses: depreciation, amortization and other non-cash expenses; items
to be provided or paid for at Owner's or Managers' sole expense as provided
herein; costs and expenses resulting from or required to cure any matter or
defect which constitutes a breach of warranty, representation or indemnity under
the Purchase Agreements, the Licensing Agreement, or the Management Agreement
which cost or expense shall be the sole responsibility of the breaching party;
unreasonable or excessive charges or expenses.
A-4
<PAGE>
Escrow Holder: First American Title Insurance Company.
Extension Term: as defined in Section 2.2 of the Management Agreement.
Facility or Facilities: Each of the assisted living facilities, including the
Land, Improvements, and Personal Property associated therewith, located in the
city and state as set forth below:
<TABLE>
<CAPTION>
Facility City State Units Beds Facility LLC and LP
<S> <C> <C> <C> <C> <C>
Name
Colonial Park
Club Sarasota FL 90 110 AL Investors II
Sarasota LLC
Park Club of
Fort Myers Fort Myers FL 90 100 AL Investors II Fort
Myers LLC
Park Club of
Oakbridge Lakeland FL 77 94 AL Investors II
Lakeland LLC
Park Club of
Brandon Brandon FL 89 110 AL Investors II
Brandon LLC
Highland Hills Pocatello ID 49 57 AL Investors II
Pocatello LLC
Ridge Wind Chubbuck ID 110 96 AL Investors II
Chubbuck LLC
Lakewood Inn Coeur d'Alene ID 73 109 AL Investors II Coeur
D'Alene
The Pines of
Tewksbury Tewksbury MA 49 50 AL Investors II
Tewksbury LLC
Meadowbrook Ontario OR 53 82 AL Investors II
Ontario LLC
Anderson Place Anderson SC 127 84 AL Investors II
Anderson LLC
Elmbrook Estates Lubbock TX 79 100 Lubbock AL Investors
II LP
Fairhaven Estates Bellingham WA 98 110 AL Investors II
Bellingham LLC
Hearthstone Moses Lake WA 50 100 AL Investors II Moses
Lake LLC
Evergreen Lodge Federal Way WA 84 92 AL Investors II
Federal Way LLC
</TABLE>
Facility Accounts: as defined in Section 8.1 of the Management Agreement.
Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set
forth opposite the name of each Facility above and their respective successors
or assigns.
Fixed Operating Expenses: for any period, all fixed costs and expenses of
owning, and operating the Facilities in the aggregate except where the Agreement
expressly provides that Fixed Operating Expenses shall be determined for each
Facility to the extent such costs and expenses are not included in Operating
Expenses, including but not limited to (a) Managers' Base Management Fee
(excluding the amount of any Accrued Management Fee accrued during such period);
(b) all amounts to be paid into the Reserve Account and the cost of Capital
Improvements approved by Owners not funded from the Reserve Account; (c) the
debt service on account of the Senior Loan; (d) the real and personal property
ad valorem taxes and assessments; and (e) all costs and expenses of all property
and casualty insurance on or in respect of the Facilities provided for herein
and the amount of all self-insured losses or deductibles. Fixed Operating
Expenses shall not include the Excluded Expenses.
A-5
<PAGE>
Furnishings and Equipment: all furniture, furnishings, beds, equipment, food
service equipment, apparatus and other personal property used in (or if the
context so dictates, required in connection with), the operation of each
Facility, other than Operating Equipment, Operating Supplies and fixtures
attached to and forming part of the Improvements.
GAAP: means generally accepted accounting principles applied on a consistent
basis.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Group Service: as defined in Section 3.2.4 of the Management Agreement.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material, or substance now or in the future defined as a
"hazardous substance," "hazardous material," hazardous waste," "toxic
substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning
of any Environmental Law. Provided, however, Hazardous Substances shall not
include the safe and lawful use and storage of quantities of (i) pre-packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of any Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Facilities' parking areas, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Environmental Laws.
Impositions: collectively, all taxes (including, without limitation, all capital
stock and franchise taxes of AL Investors II, AL II Holdings, or any Facility
Entity, all ad valorem, property, sales and use, single business, gross
receipts, transaction privilege, rent or similar taxes), assessments (including,
without limitation, all
A-6
<PAGE>
assessments for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and assessments levied by condominium
associations), ground rents, water and sewer rents other than normal utility
charges, excises, tax levies, fees (including, without limitation, license,
permit, inspection, authorization and similar fees), and all other charges
imposed by Governmental Authorities, in each case whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, of every character in
respect of the Facility (including all interest and penalties thereon due to any
failure in payment by Manager), which at any time prior to, during or in respect
of the Term of the Management Agreement may be assessed or imposed on or in
respect of or be a Lien upon (a) Facility Entities' interest in the Facility,
(b) the Facility or any rent or income therefrom or any estate, right, title or
interest therein, or (c) any occupancy, operation, use or possession of, sales
from, or activity conducted on, or in connection with, the Facility or the
leasing or use of the Facility. Notwithstanding the foregoing, "Impositions"
shall not include: (1) any tax based on net income (whether denominated as a
franchise or capital stock or other tax) imposed on any Owners or Managers, (2)
any tax imposed with respect to the sale, exchange or other disposition of a
Facility or the proceeds thereof, or (3) any principal or interest on any
Mortgage; provided, however, the provisos set forth in clause (1) of this
sentence shall not be applicable to the extent that any real or personal
property tax, assessment, tax levy or charge pursuant to the first sentence of
this definition and which is in effect at any time during the Term hereof is
totally or partially repealed, and a tax, assessment, tax levy or charge set
forth in clause (1) is levied, assessed or imposed expressly in lieu thereof.
Improvements: the buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Initial Term: as defined in Section 2.1 of the Management Agreement.
Insurance Requirements: all terms of each insurance policy required to be
carried in this Agreement, or agreed to be carried by Owners and Managers, and
all orders, rules, regulations and other requirements of the National Board of
Fire Underwriters (or any other body exercising similar functions) applicable to
the Facilities or the operation thereof.
Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors II and/or the membership
interests of AL Investors II in the Facility Entities. Initially, the Junior
Loan is evidenced by that certain Loan Agreement among AL II Holdings, AL
Investors II, AL Investors Development and the Facility Entities and Senior
Housing Partners I, L.P. dated on or about the same date hereof ("Initial Junior
Loan").
A-7
<PAGE>
Land: the parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreements.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with a Facility, including, without limitation, any of
the foregoing which may (i) require repairs, modifications or alterations in or
to any Facility, (ii) in any way affect (adversely or otherwise) the use and
enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up,
containment, removal, remediation or other treatment of any Hazardous Substances
on, under or from any Facility. Without limiting the foregoing, the term "Legal
Requirements" includes all Environmental Laws and shall also include all Permits
and Contracts issued or entered into by any Governmental Authority, any
Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances.
Lending Group: GMAC Commercial Mortgage in a debt facility referred to herein as
the Initial Senior Loan secured by the Facilities in the maximum aggregate
original principal balance of $68,000,000.
Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement
between Emeritus Corporation and AL Investors II dated on or about the same date
hereof.
Lien: with respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected, other than the Mortgage.
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or which cannot be terminated without penalty or termination fee on sixty (60)
days notice or in which the provider of the goods or services is Emeritus or an
A-8
<PAGE>
Affiliate (except pursuant to Group Services approved in connection with an
Annual Plan).
Major Lease: Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which Emeritus or
an Affiliate is the lessee or lessor.
Managed Care Plans: all health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Management Fee: an amount equal to seven percent (7%) of Total Revenue for all
Facilities, subject to the provisions of Section 7.2 of the Management
Agreement.
Medicaid: the medical assistance program established by Title XIX of the Social
Security Act (42 US C ss.ss. 1396 et seq.) and any statute succeeding thereto.
Medicare: the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
Mortgage: collectively, the terms and conditions of the Senior Loan and the
Junior Loan.
Mortgagee: the holder or beneficiary of a Mortgage and their respective
successors and assigns.
Operating Deficit and Operating Profit: for any period, the amount, if any, by
which Total Revenues for that period is less than or exceeds, respectively, the
sum of (i) Operating Expenses and (ii) Fixed Operating Expenses for that period
in each case determined on a cash basis.
Operating Equipment: all dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Expenses: for any period, all reasonable costs and expenses of owning
and operating the Facilities in the aggregate except where the Agreement
expressly provides that Operating Expenses shall be determined for each Facility
(which costs and expenses do not include the Fixed Operating Expenses or the
Excluded Expenses) including the following:
A-9
<PAGE>
(a) The cost of all Operating Equipment and Operating Supplies placed in
use, with the exception of the Operating Equipment and Operating Supplies
initially supplied by the Facility Entities. The cost of maintaining and
operating the vans and buses for each Facility (but not any debt service or
lease payments which shall remain the sole expense of Emeritus).
(b) The Compensation of all employees working and employed by Managers at
the Facilities. The Compensation of Managers' or Emeritus' home office or
executive or other personnel not regularly employed at the Facilities shall not
be included in Operating Expenses or Fixed Operating Expenses, but reasonable
out-of-pocket travel expenses of Managers or Owners' executive personnel while
traveling to and from a Facility on business shall be reimbursable as an
Operating Expense; provided, however, that if such business travel relates to
business or properties other than with respect to the Facilities, then such
travel expenses shall be equitably prorated between such other business or
properties and the Facilities.
(c) The cost of all utilities including, without limitation, electricity,
water, gas, heat and other utilities, and office supplies and equipment, and
goods and services purchased under all Contracts, including leasing expenses in
connection with telephone and data processing equipment and such other equipment
as the parties hereto may agree upon in writing.
(d) The cost of repairs to and maintenance of the Facilities whether
performed by Facility employees or contracted to third parties.
(e) Insurance premiums for all insurance required under this Agreement and
self-insured losses and deductibles with respect to such insurance coverages
(but excluding premiums and self-insured losses and deductibles on property and
casualty insurance which are included in Fixed Operating Costs). Premiums on
policies for more than one year will be prorated over the period of insurance
coverage and premiums under blanket policies will be equitably allocated among
properties covered.
(f) All Impositions (except for real and Personal Property ad valorem taxes
and assessments which shall be a Fixed Operating Expenses).
(g) Except as otherwise provided in Section 6.1 of the Management
Agreement, legal fees and fees of any CPA for services directly related to the
operations of the Facilities (whether incurred by Owners or Managers).
(h) The costs and expenses of technical consultants and specialized
operational experts for specialized services in connection with non-recurring
work on operational, functional, design or construction problems and activities
whether
A-10
<PAGE>
incurred by Owner or Manager; provided, however, that if such costs end expenses
have not been included in the Annual Plan, the same shall be subject to approval
by Owner.
(i) All expenses for marketing the Facilities and all expenses of sales
promotion and public relations activities as set forth in the Annual Plan
(j) The cost of Group Services, as provided in Section 3.2.4 of the
Management Agreement.
(k) Bad debts or uncollectible amounts from residents of the Facilities.
(l) Refund of deposits to residents under Residency Agreements
(m) Owners' reasonable costs and expenses of administering, supervising,
and managing Owners' activities in connection with this Agreement and any
Mortgage, including Owners' reasonable cost and expense of preparing and filing
federal, state and local income tax returns and audits.
(n) All other reasonable expenses and charges incurred in the operation
and management of the Facilities to the extent set forth in the Annual Plan or
otherwise approved by the Owners or as otherwise set forth in the Agreement.
Operating Period: the period beginning with the Commencement Date and ending
upon the expiration of the Initial Term.
Operating Supplies: consumable items used in, or held in storage for use in (or
if the context so dictates, required in connection with), the operation of the
Facilities, including food, medical supplies, fuel, soap, cleaning materials,
and other similar consumable items.
Operating Year: the Operating Years shall coincide with and be identical with
the calendar years, except that the first Operating Year shall be the period
beginning on the Commencement Date and ending on the following December 31,
1999, and such long or short year, as applicable, shall constitute a full
Operating Year as used herein.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) in the ordinary course of business of refurbishing,
owning, operating or managing the Facilities, or the operation of any programs
or services in conjunction with the Facility and all renewals, replacement and
substitutions therefor with any Governmental Authority, Accreditation Body or
Third Party Payor or entered into with any third Person, excluding, however, any
A-11
<PAGE>
agreements pursuant to which money has been or will be borrowed or advanced, the
Leases, any agreement creating or permitting any Lien or other encumbrance on
title (except for the Permitted Exceptions), and any Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by Managers affecting a
Facility.
Overdue Rate: on any date, a rate of interest per annum equal to the greater of:
(i) a variable rate of interest per annum equal to one hundred twenty percent
(120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided,
however, in no event shall the Overdue Rate be greater than the maximum rate
then permitted under Legal Requirements.
Permits: collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents, agreements, contracts, contract rights, franchises, interim licenses,
permits and other authorizations of every nature whatsoever required by, or
issued under, applicable Legal Requirements relating or affecting a Facility or
the construction, development, maintenance, management, use or operation
thereof, or the operation of any programs or services in conjunction with the
Facility and all renewals, replacements and substitutions therefor, now or
hereafter required or issued by any Governmental Authority, Accreditation Body
or Third Party Payor to Owners or Managers.
Permitted Exceptions: (i) all encumbrances to title present at closing pursuant
to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii)
easements, restrictions on use, zoning laws and ordinances, rights of way and
other encumbrances and minor irregularities in title, whether now existing or
hereafter arising, which are approved by Owner and do not individually or in the
aggregate materially impair the use of any Facility.
Person: any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
Personal Property: all machinery, equipment, furniture, furnishings, vans,
buses, movable walls or partitions, computers or trade fixtures, goods,
inventory, supplies, the name of the Facility, and other personal or intangible
property used in the operation of the Facility, including, but not limited to,
all Operating Equipment, Furnishings and Equipment and Operating Supplies.
Notwithstanding the foregoing,
A-12
<PAGE>
title to the vans and buses shall remain in Emeritus or Managers and be held in
trust by them for the benefit of the respective Owner; provided that legal title
to the vans and buses shall be transferred to the respective Facility Entity
upon expiration or sooner termination of the Management Agreement as provided in
Section 9.6 of the Management Agreement.
Primary Intended Use: the use of the Facility as an assisted living facility and
such ancillary uses as are permitted by applicable Legal Requirements and may be
necessary in connection therewith or incidental thereto.
Prime Rate: the variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors.
Provider Agreements: all participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of Owners or Managers in
connection with the operation of the Facility relating to any right of payment
or other claim arising out of or in connection with participation in any Third
Party Payor Program.
Put and Purchase Agreement: that certain Put and Purchase Agreement between
Daniel Baty and AL II Holdings dated on or about the same date hereof.
Residency Agreement: all contracts, agreements and consents executed by or on
behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Debt is evidenced by that certain Loan Agreement between
AL Investors II (and the Facility Entities) and GMAC Commercial Mortgage
Corporation dated on or about the same date hereof ("Initial Senior Loan").
Third Party Payor Programs: collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield,
Managed Care Plans, other private insurance plans and employee assistance
programs.
A-13
<PAGE>
Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
Title Company: First American Title Insurance Company.
Total Revenues: collectively, but without duplication all revenues generated by
reason of the operation of the Facilities in the aggregate, except where the
Agreement expressly provides that Total Revenues shall be determined for each
Facility, directly or indirectly received by any Facility Entity or Managers,
including, without limitation, all resident revenues received or receivable for
the use of, or otherwise by reason of, all rooms, units and other facilities
provided, deposits received from residents under Residency Agreements, meals
served, services performed, space or facilities leased pursuant to the Leases or
goods sold on or from the Facility, all amounts from Third Party Payors, and all
revenues from all ancillary services provided at or relating to any Facility;
provided, however, that Total Revenues shall not include:
(a) federal, state or local sales, use, gross receipts and excise taxes
and any tax based upon or measured by said Total Revenues which is added to or
made a part of the amount billed to the resident or other recipient of such
services or goods, whether included in the billing or stated separately, which
is paid to the Governmental Authority;
(b) proceeds from sale of capital assets, including the sale of the
Facility and proceeds therefrom other than sale of Furnishings and Equipment in
the ordinary course of business,;
(c) proceeds of any insurance other than business interruption insurance;
(d) proceeds of any financing or capital contributions to Owners;
(e) interest or earnings on the Reserve Account;
(f) any Award resulting from Condemnation;
(g) any other income or proceeds from any source other than in the
ordinary course of business of the Facility.
Except as otherwise specifically indicated, all references to Section and
Subsection numbers refer to Sections and Subsections of this Agreement, and all
references to Exhibits refer to the Exhibits attached hereto. The words
"herein,"
A-14
<PAGE>
"hereof", "hereunder", "hereinafter", and words of similar import refer to this
Agreement as a whole and not to any particular Section or Subsection hereof
unless the context otherwise requires.
A-15
<PAGE>
SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
1. PARTIES. This Supplemental Purchase Agreement in Connection with Purchase of
Facilities ("Agreement") is entered into as of March ____, 1999 by and among
Emeritus Corporation, a Washington corporation ("Emeritus"), and its affiliates
Emeritus Properties I, Inc., and such additional Affiliates as may be added by
amendment to this agreement (collectively, the "Emeritus Affiliates"), and AL
Investors Development LLC, a Delaware limited liability company, and its
permitted assigns ("AL Investors Development"). Emeritus and Emeritus Affiliates
are sometimes collectively referred to herein as the "Emeritus Entities." All
capitalized terms not otherwise defined herein shall have the meaning set forth
in Exhibit A.
2. FACTS.
2.1 Acquisition of Facilities. AL Investors Development contemplates entering
into a Purchase and Sale Agreement ("Purchase Agreement") with Meditrust Company
LLC, successor by merger to Meditrust Acquisition Corporation I (collectively
"Meditrust"), relating to the acquisition of up to five (5) Facilities
identified on Exhibit A (collectively, the "Facilities"). Initially, only the
Facility entitled Loyalton of Phoenix is being acquired pursuant to the Purchase
Agreement and this Agreement. The other Facilities ("Remaining Development
Facilities") are currently under construction and leased by Meditrust to the
Emeritus Affiliates and may be acquired, subject to satisfaction of the
conditions herein, thirty (30) days after issuance of a certificate of occupancy
for each Remaining Development Facility. Meditrust and AL Investors Development
contemplate that upon issuance of a certificate of occupancy for each of the
Remaining Development Facilities, that Remaining Development Facility will be
made the subject of the Purchase Agreement (or a separate purchase agreement in
substantially the same form); such Remaining Development Facility (and the
Exhibits hereto applicable to such Remaining Development Facility) will likewise
be added by amendment to this Agreement at that time and such Remaining
Development Facility shall thereupon become a Facility as defined herein and
thereby made subject to the terms, conditions, warranties and representations of
this Agreement. This Agreement shall be fully effective as to the Facility
entitled Loyalton of Phoenix and such Remaining Development Facilities that may
be added by amendment to this Agreement, notwithstanding, that all Remaining
Development Facilities may not be acquired. The resulting pool of up to five (5)
Facilities, will each be owned by the respective Facility Entity. Except for the
obligation of the Emeritus Entities not to sell, transfer or assign their
interest in the Remaining Development Facilities to any person other than AL
Investors
- -1-
<PAGE>
Development prior to the expiration of thirty (30) days after issuance of a
certificate of occupancy for such Remaining Development Facility, neither AL
Investors Development nor the Emeritus Entities shall have any obligation with
respect to a Remaining Development Facility until the addition of such Remaining
Development Facility to this Agreement.
2.2 Consideration. In consideration of AL Investors Development performing the
due diligence as contemplated under the Purchase Agreement, the mutual covenants
herein, and for other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Emeritus Entities agree to give and perform
the representations, warranties, covenants and agreements contained in this
Agreement. AL Investors Development would not perform the due diligence each
Facility or contemplate entering into the Purchase Agreement without this
Agreement.
3. RIGHT TO PURCHASE. Emeritus entered into a Letter of Intent dated as of
January 11, 1999 ("Letter of Intent") with Meditrust to purchase the Facilities.
Emeritus agrees and confirms that any right of Emeritus to purchase the
Facilities under the Letter of Intent is hereby assigned to AL Investors
Development. Provided, however, the form of the Purchase Agreement shall be
subject to the review and comment of Emeritus, but the final form of the
Purchase Agreement shall be determined in the sole discretion of AL Investors
Development.
4. DUE DILIGENCE.
4.1 Investigations. Under the terms of the Purchase Agreement and under this
Agreement, AL Investors Development has until the Closing Date for such Facility
(the "Due Diligence Period") to undertake such due diligence on the Facility as
it deems necessary in its sole discretion, including but not limited to the
review of title reports and financial information, the conducting of surveys,
environmental assessments and physical inspections, and the finalizing of
financing commitments, and other matters deemed necessary by AL Investors
Development. The Emeritus Entities shall provide access to the Facilities and
cooperate with AL Investors Development and its designated representatives in
conducting its due diligence activities. If AL Investors Development in its sole
discretion has not waived or satisfied this condition prior to expiration of the
Due Diligence Period, then AL Investors Development may terminate this Agreement
by written notice to Emeritus and neither party shall have any liability to the
other except as expressly set forth in Section 18.
4.2 Documentation. Promptly upon request therefor, or as soon as practicable, if
it has not already done so, the Emeritus Entities shall provide to AL Investors
Development or its designated representatives copies of the following in the
possession of the Emeritus Entities for each Facility:
- -2-
<PAGE>
(a) Residents. A current resident roll, occupancy report and copy of the
standard form Residency Agreement.
(b) Contracts and Leases. A listing of all Major Contracts and Major
Leases which shall be attached to this Agreement as Exhibit B prior to
expiration of the Due Diligence Period for each Facility, and any correspondence
with any Person relating to outstanding disputes or claims relating to the Major
Contracts and Major Leases.
(c) Operating Statements. Operating statements, showing all of the income
and expenses related to owning and operating each Facility from the date it
opened for business (collectively, the "Operating Statements").
(d) Tax Statements and Utility Bills. All real and personal property tax
statements for the preceding calendar year and utility bills for the preceding
calendar year.
(e) Approvals. All Permits, including the certificate of occupancy and any
zoning variances or special use permits, if any, and any notices alleging any
violations and zoning letters for each Facility.
(f) Plans and Specifications. As-built plans and specifications which are
in the possession of the Emeritus Entities and the architect's certificate of
substantial completion.
(g) Environmental Reports. Phase I environmental assessments and any prior
studies and reports relating to Hazardous Substances in or on a Facility and all
correspondence or claims from any Person alleging violations of Environmental
Laws which are in the possession of the Emeritus Entities.
(h) Structural and Engineering Reports. All structural, soils, or
engineering reports or surveys for any Facility which are in the possession of
the Emeritus Entities and a current property condition survey and seismic survey
performed by Consultants approved by AL Investors Development.
(i) Insurance. Current property and liability insurance policies or a
summary thereof and any correspondence with the insurer related to circumstances
or conditions affecting the cost or continuation of any insurance.
(j) Maintenance or Incident Logs. Facility maintenance and incident logs
insofar as they relate to claims or notices alleging material defects in or
violations of Legal Requirements relating to the Facility including any related
correspondence with any Governmental Authorities.
- -3-
<PAGE>
(k) Title. Title commitments and UCC searches conducted by Title Company
for each Facility.
(l) Survey. Survey for each Facility in form specified by AL Investors
Development.
(m) Health Surveys. Local and/or state Department of Health survey for
most recent period.
(n) The Emeritus Entities' Certified Cost for the Facility as described in
Section 7.
(o) Other Matters. Any other document or matter reasonably requested by AL
Investors Development.
The term "in the possession of the Emeritus Entities" as used above means in the
possession of Emeritus, at its main corporate office in Seattle, Washington,
after inquiry to the manager of each Facility for copies of pertinent documents
and other records.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS. Emeritus, jointly and severally,
with Emeritus Affiliates (and each of the Emeritus Affiliates severally with
respect to the Facility leased and operated by it), represent, warrant and
covenant to each of AL Investors Development and the Facility Entities, with
respect to each Facility, as of the date of Closing of such Facility, as
follows:
5.1 Existence; Power; Qualification. Each of the Emeritus Entities is a
corporation or limited partnership respectively duly organized, validity
existing and in good standing under the laws of the State of Washington. Each of
the Emeritus Entities has all requisite corporate or limited partnership power
and authority to operate and lease each of the Facilities and to carry on its
business as now conducted and to enter into and carry out the terms of this
Agreement.
5.2 Valid and Binding. Each of the Emeritus Entities is duly authorized to make
and enter into this Agreement and to carry out the transactions contemplated
herein and is, or will be by Closing, duly authorized to make and enter into all
of the other documents to which it is or will be a party under this Agreement or
under the Purchase Agreement (the "Transaction Documents") and to carry out the
transactions contemplated therein. This Agreement has been duly executed and
delivered by each of the Emeritus Entities and is the legal, valid and binding
obligation of each of the Emeritus Entities enforceable in accordance with its
terms. The Transaction Documents to which each of the Emeritus Entities is or
will be a party have been, or will be by the Closing, duly executed and
delivered by
- -4-
<PAGE>
each of the Emeritus Entities, and each is, or will be by Closing, a legal,
valid and binding obligation of the respective Emeritus Entity, enforceable in
accordance with its terms.
5.3 No Violation. The execution, delivery and performance of this Agreement and
the Transaction Documents and the consummation of the transaction thereby
contemplated shall not result in any breach of, or constitute a default under,
or result in the acceleration of, or constitute an event which, with the giving
of notice or the passage of time, or both, could result in default or
acceleration of any obligations of the Emeritus Entities under any Permit,
contract, mortgage, lien, lease, agreement, instrument, franchise, license,
arbitration award, judgement, decree, bank loan or credit agreement, trust
indenture or other instrument to which any of the Emeritus Entities is a party
or by which any of the Emeritus Entities may be bound or affected and do not
violate or contravene any Legal Requirements.
5.4 Consents and Approvals. As of Closing, no consent or approval or other
authorization of, or exemption by, or declaration or filing with, any Person and
no waiver of any right by any Person is required to authorize or permit, or is
otherwise required as a condition of the execution, delivery and performance of
the Emeritus Entities' obligations under this Agreement or the Transaction
Documents.
5.5 FIRPTA Representation. None of the Emeritus Entities is a "foreign person"
as that term is defined in the Code.
5.6 Emeritus' Documents. All copies of documents furnished or to be furnished to
AL Investors Development by the Emeritus Entities or any of them in connection
with this Agreement are true and complete copies of the originals.
5.7 Nothing Omitted. No certificate, agreement, statement or other document
prepared or executed by any of the Emeritus Entities and furnished to or to be
furnished to AL Investors Development or its attorneys in connection with the
transactions contemplated by this Agreement contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to prevent all statements contained herein and therein from
being misleading.
5.8 Litigation. There is no material claim, litigation, or proceeding pending
against any of the Emeritus Entities or to the current actual knowledge of any
of them threatened against any of the Emeritus Entities, which relate to the
Facility or the transactions contemplated by this Agreement except as set forth
on Exhibit C. All of the matters set forth on Exhibit C, and any other such
material claim, litigation or proceeding currently pending or threatened shall
be defended, settled or paid at the Emeritus Entities' sole expense. None of the
Emeritus Entities
- -5-
<PAGE>
has filed (nor has any filing been made against any of them) any proceeding in
bankruptcy or insolvency in any jurisdiction. Neither any of the Emeritus
Entities nor the Facility is currently the subject of any proceeding by any
Governmental Authorities, and no notice of any violation has been received from
any Governmental Authorities that would, directly or indirectly, or with the
passage of time:
(a) Have a material adverse impact on the Facility Entities' ability to
accept and/or retain residents or result in the imposition of a fine in excess
of $500, a sanction, a lower rate certification or a lower reimbursement rate
for services rendered to eligible residents;
(b) Modify, limit or annul or result in the transfer, suspension,
revocation or imposition of probationary use of any of the Permits; or
(c) Affect the Facility Entities' continued participation in the Medicare
or Medicaid programs or any other Third-Party Payors' Programs (if applicable),
or any successor programs thereto, at current rate certifications.
5.9 Compliance. All Permits and other authorizations from Governmental
Authorities required to own and operate the Facility for its present use as an
assisted living facility and with the number of beds indicated on Exhibit A have
been obtained, are in full force and effect, and are free from violation or
claim of violation in all material respects of any Legal Requirement except as
set forth on Exhibit D. Without limiting the generality of the foregoing,
Emeritus Entities are the lawful owner of all Permits for each Facility,
including, without limitation, the Certificate of Need, if applicable, which (a)
are in full force and effect, (b) constitute all of the permits, licenses and
certificates required for the use, operation and occupancy thereof, (c) as of
the Closing Date have not been pledged as collateral for any loan or
indebtedness other than the Mortgage, (d) are held free from restrictions or any
encumbrance which would materially adversely affect the use or operation of the
Facility, and (e) are not provisional, probationary or restricted in any way.
The Emeritus Entities as well as the operation of the Facility are in compliance
in all material respects with the applicable provisions of assisted living
facility laws, rules, regulations and published interpretations to which the
Facility is subject. No waivers of any laws, rules, regulations, or requirements
(including, but not limited to, minimum foot requirements per bed) are required
for the Facility to operate at the current licensed unit and/or bed capacity.
Emeritus Entities have not granted to any third party the right to reduce the
number of licensed beds in the Facility or to apply for approval to transfer the
right to any and all of the licensed Facility beds to any other location. As of
Closing, all such Permits and other authorizations shall have been duly and
validly transferred to or reissued in the name of each Facility Entity or, if
not so transferred or reissued at Closing, shall be transferred or reissued by
the Emeritus Entities at their sole cost
- -6-
<PAGE>
and expense within ninety (90) days after Closing. Except as set forth on
Exhibit D, the Facility and the operation and use thereof complies in all
material respects with all applicable Legal Requirements and all covenants,
easements and restrictions of record, affecting the Facility (and, without
limitation, the property on which each Facility is located is zoned for the
buildings and the uses conducted thereon, including but not limited to parking
requirements and none of the Emeritus Entities has received any notice alleging
any material non-compliance with respect to the Facility). There are no
unsatisfied requests or demands for repairs, restorations or improvements to the
Facility from any Person, including, but not limited to, any Governmental
Authorities pursuant to which the cost of repair, restoration or improvement
would exceed $10,000 in the aggregate for any Facility except as set forth on
Exhibit D.
5.10 No Prior Options, Sales or Assignments. None of the Emeritus Entities has
granted an option or obligated itself in any manner whatsoever to assign the
Facility Lease or their rights under the Facility Lease or to sell the Facility
to any party other than AL Investors Development.
5.11 Condition of Improvements. Construction of each Facility has been
completed, except for "punchlist items" as that term is used in the construction
industry, in a good and workmanlike manner, free from defects, in accordance
with all Legal Requirements, and free of Liens, except for the Mortgage. The
Facility is fully equipped, including but not limited to all Operating
Equipment, Operating Supplies and Personal Property necessary for operation of
the Facility in a good and efficient manner, and open for business or ready to
be opened for business upon issuance of the license therefor. All costs and
expenses of developing, construction and equipping the Facility, including,
without limitation, any Liens resulting therefrom and completion of all
"punchlist items", have been or will be paid in full by the Emeritus Entities.
5.12 Title. As of the Closing, title to each of the Facilities, including the
Land, Improvements and Personal Property, shall be subject to no lien, mortgage,
pledge, encroachment, zoning violation, or encumbrance, except for (a) the
Permitted Encumbrances which do not and will not materially interfere with the
current use or operation of any Facility, (b) the Mortgage, and (c) such liens,
mortgages, pledges and encumbrances arising by or through Meditrust without the
consent of or the actual current knowledge of the Emeritus Entities. All
Improvements situated on each Facility are situated wholly within the boundaries
of the Land except for minor and immaterial encroachments. Upon Closing under
this Agreement, all of the Emeritus Entities' right, title and interest in each
Facility, except for title to the vans and buses, shall have been conveyed to
the Facility Entity.
- -7-
<PAGE>
5.13 Special Assessments. The Emeritus Entities have not been notified of any
contemplated improvements to any Facility or the area closely surrounding any
Facility by any Governmental Authorities which is not disclosed by the public
records and shown in the title commitments for the Facility prepared by Title
Company which would result in the assessment of a special improvement or similar
lien in an amount exceeding $10,000 per year against any Facility.
5.14 Utilities; Access. All water, sewer, gas, electric, telephone, drainage and
other utility service lines or facilities serving each Facility or required by
Legal Requirements: (i) are located within the boundaries of the land on which
the Facility is located or within land dedicated to public use or within
recorded easements for same, (ii) are in good working order, and (iii) are
adequate to serve the present use of each Facility. The Facility has direct
access to a publicly dedicated street or road or over a recorded easement for
such purpose to a publicly dedicated street or road.
5.15 Existing Agreements. There are no contracts, agreements, understandings
(whether written or oral), or other liabilities of any type or kind relating to
any Facility which will be binding on AL II Holdings, AL Investors Development
or a Facility Entity after Closing, except for the Permitted Exceptions, the
Contracts, the Permits, and the Leases transferred to each Facility Entity at
Closing and except as otherwise disclosed in writing to and approved in writing
by AL Investors Development. There is no material default by any of the Emeritus
Entities or to the current actual knowledge of any of them by any other party
under any of the Permitted Exceptions, the Contracts, the Permits, or the
Leases. There are no Major Contracts or Major Leases which will be binding on AL
Investors Development or any of the Facilities Entities after Closing except as
set forth on Exhibit B.
5.16 Environmental Compliance. Except as set forth in Exhibit E (which matters,
if any, shall be remediated by the Emeritus Entities at their sole expense):
(a) The Emeritus Entities have not at any time caused or permitted any
Hazardous Substances to be placed or used in the Facility.
(b) No Hazardous Substances exist or have existed on any Facility.
(c) No Facility now contains any underground storage tanks, and, to the
best of Emeritus Entities' knowledge after reasonable and diligent inquiry, no
Facilities have contained any underground storage tanks in the past. If there is
an underground storage tank located on any Facility, that tank complies with all
requirements of Environmental Laws.
- -8-
<PAGE>
(d) Emeritus Entities have complied with all Environmental Laws, including
all requirements for notification regarding releases of Hazardous Substances.
Without limiting the generality of the foregoing, the Emeritus Entities have
obtained any Permits required for the operation of the Facility in accordance
with Environmental Laws now in effect and all such Permits are in full force and
effect. No event has occurred with respect to the Facility that constitutes, or
with the passing of time or the giving or notice would constitute, noncompliance
with the terms of any Permit.
(e) There are no actions, suits, claims or proceedings pending or, to the
best of Emeritus Entities' current actual knowledge , threatened that involve
the Facility and allege, arise out of, or relate to any violation of
Environmental Laws.
(f) Emeritus Entities has not received any complaint, order, notice of
violation or other communication from any Governmental Authority with regard to
air emissions, water discharges, noise emissions or Hazardous Substances, or any
other environmental, health or safety matters affecting the Facility which has
not been remediated in accordance with Legal Requirements.
5.17 Reports. The Operating Statements and all financial information, schedules
and other documents containing factual information delivered to AL Investors
Development and prepared by any of the Emeritus Entities in connection with this
Agreement or the Purchase Agreement are true and correct in all material
respects.
5.18 Employees. All employees at the Facility are the employees of the Emeritus
Affiliates and none of AL II Holdings, AL Investors Development or any of the
Facility Entities shall have any liability or responsibility whatsoever after
the Closing for any matters related to such employees occurring prior to the
Closing. Emeritus Affiliates shall transfer or otherwise reassign at its expense
the employment of all employees to the Managers under the Management Agreement
effective as of Closing in accordance with all Legal Requirements and neither AL
Investors Development nor any of the Facility Entities shall have any liability
or responsibility in connection therewith. There are no union contracts or
collective bargaining agreements with any of such employees of the Facility.
5.19 Casualty; Condemnation. The Facility is not subject to any Casualty or
Condemnation.
5.20 Loan Closing Certification. All statements, warranties, and representations
in the Initial Senior Loan documents and in the Initial Junior Loan documents
which relate to the condition, title, fitness, and compliance with Legal
- -9-
<PAGE>
Requirements and Environmental Laws of any or all of the Facilities are true and
correct.
5.21 Current Actual Knowledge. The representations and warranties herein which
are based upon the current actual knowledge of the Emeritus Entities are based
upon the current actual knowledge of the following employees of Emeritus:
Jennifer Valenta, Business Development and Legal Analyst; William Shorten,
Director of Real Estate Finance; Kelly Price, Vice President of Finance, Chief
Financial Officer and Secretary; and Daniel R. Baty, Chairman and Chief
Executive Officer, without any obligation to acquire any knowledge other than a
review of the files and records in their possession they would in the ordinary
course of their duties be responsible for having knowledge of.
5.22 Hart-Scott-Rodino Antitrust Improvements Act. The non-exempt assets within
the mean of 16 C.F.R. ss. 802.2 being acquired in connection with the Facilities
pursuant to the Purchase Agreement and this Agreement and in connection with
acquisition of the fourteen (14) operating Facilities by AL Investors II LLC and
its Affiliates pursuant to (a) that certain Purchase and Sale Agreement with
Meditrust Company LLC and (b) that certain Supplemental Purchase Agreement In
Connection With Purchase of Facilities with Emeritus and its Affiliates dated on
or about March 29, 1999, do not equal or exceed $15,000,000 in the aggregate.
5.23 Indemnification. Each of the Emeritus Entities, jointly and severally,
agrees to indemnify, defend and hold each of AL II Holdings, AL Investors
Development, their Affiliates and the Facility Entities harmless from and
against any and all loss, damage, liability or expense, including attorneys'
fees and costs, AL II Holdings, AL Investors Development, its Affiliates or any
of the Facility Entities may suffer as a result of (a) any breach of or
inaccuracy in the foregoing representations, warranties, and covenants and (b)
any claim by any Person for personal injury or malpractice (including death) or
damage to property arising out of facts and circumstances occurring (or alleged
to have occurred) at the Facilities on or prior to the Closing.
5.24 General Provision. The liability of the Emeritus Entities and each of them
for breach of any of the warranties, representations and indemnities set forth
herein shall survive Closing, shall not be diminished by, nor shall any defense
to enforcement thereof arise by reason of, any investigation conducted by or
knowledge of AL II Holdings, AL Investors Development, their Affiliates or the
Facility Entities or any remedy any of them may have against any other Person,
and shall be cumulative with any other remedies any of them may have against any
of the Emeritus Entities.
- -10-
<PAGE>
6. BUYER'S REPRESENTATIONS. AL Investors Development represents and warrants to
the Emeritus Entities, with respect to each Facility, as of the date of Closing
of such Facility, as follows:
(a) Status. AL Investors Development is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware and each of the Facility Entities is, or will be prior to Closing, duly
organized, validly existing and in good standing in the state of Washington and
qualified to do business in the jurisdiction in which it owns or will own a
Facility.
(b) Authority. This Agreement and all documents to be executed by AL
Investors Development or the Facility Entities at Closing have been duly
authorized, executed and delivered by AL Investors Development and/or the
Facility Entities and are binding on and enforceable against AL Investors
Development and the Facility Entities in accordance with their terms.
AL Investors Development hereby agrees to defend, protect, indemnify and hold
the Emeritus Entities harmless from and against any and all loss, damage,
liability or expense, including attorneys' fees and costs, the Emeritus Entities
may suffer as a result of any breach of or any inaccuracy in the foregoing
representations and warranties.
7. COST CERTIFICATION; PURCHASE PRICE. The Emeritus Entities shall certify the
actual aggregate cost incurred (whether or not then paid) in developing,
constructing, and equipping the Facility in compliance with the warranties,
representations, and terms of this Agreement ("Certified Cost"). Such Certified
Cost shall be in the general form of Exhibit I for such Facility, together with
such additional certifications as may be required by AL Investors Development
and the holder of the Senior Loan or the holder of the Junior Loan. With respect
to the Facility entitled Loyalton of Phoenix, the amounts shown on Exhibit I
constitute the Cost Certification for such Facility To the extent the Certified
Cost for the Facility, exclusive of any lease-up reserve, exceeds the Total
Project Cost as shown on Exhibit I, exclusive of line item entitled Lease-Up
Reserve, the Emeritus Entities shall pay such excess at their sole cost and
expense. Subject to the foregoing limitation, the purchase price for a Facility
paid to the Emeritus Entities ("Purchase Price") shall be the Certified Cost
less the amount paid to Meditrust pursuant to the Purchase Agreement for such
Facility. In no event shall the Purchase Price paid by AL Investors Development
for a Facility, including all closing costs pursuant to Section 15 of this
Agreement and the purchase price pursuant to the Purchase Agreement, exceed the
Total Project Cost shown on Exhibit I, less the Lease-Up Reserve. To the extent
the Certified Cost including all closing costs pursuant to Section 15 is less
than the Total Project Cost, exclusive of the line item entitled Lease-Up
Reserve, the benefit shall accrue to AL Investors Development. Within one
hundred twenty (120) days after Closing, Emeritus Entities shall provide a
- -11-
<PAGE>
reconciliation of all Facility costs actually paid or incurred with the
Certified Cost, and remit any overpayment to the respective Facility Entity.
8. MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE. Concurrently with and as a
condition to the Closing, Emeritus and Emeritus Management LLC and Emeritus
Management I LP, and other wholly owned Affiliates of Emeritus ("Managers"),
shall enter into a Management Agreement With Option To Purchase with AL
Investors Development and each Facility Entity ("Management Agreement"), in the
form to be attached as Exhibit F to this Agreement. Emeritus shall
unconditionally guarantee the obligations of each of the Managers under the
Management Agreement and agree to fund all operating deficits of the Facilities
exceeding the amounts set forth in the Management Agreement pursuant to Guaranty
of Management Agreement and Shortfall Funding Agreement ("Guaranty Agreement")
attached hereto as Exhibit G. Upon Closing of a Facility, such Facility shall be
made subject to the Management Agreement and the Guaranty Agreement ratified and
affirmed.
9. EMPLOYEE MATTERS. The Emeritus Entities acknowledge and agree that they shall
be responsible for all costs, expenses and liabilities with respect to the
severance, transfer, hiring or any other matters relating to the transfer or
other reassignment of employees presently operating a Facility to the Managers.
The Emeritus Entities shall jointly and severally indemnify and hold each of AL
II Holdings, AL Investors Development, its Affiliates and the Facility Entities
harmless from any claims arising out of or relating to such employees, and
reassignment of employment to Managers, including but not limited to claims
arising from salaries, benefits and profit-sharing plans at any Facility or of
the Emeritus Entities.
10. PUT AGREEMENT. Concurrently with and as a condition to the Closing, Emeritus
shall cause Daniel R. Baty to enter into the Put and Purchase Agreement ("Put
Agreement") attached hereto as Exhibit H. At closing of each subsequent
Facility, the Put and Purchase Agreement shall be ratified and affirmed.
11. FINANCING OF THE PURCHASE OF THE FACILITIES. AL Investors Development has
negotiated the terms and conditions of the Initial Senior Loan and the Initial
Junior Loan which shall be subject to the approval of Emeritus, such approval
not to be unreasonably withheld. By execution hereof, Emeritus has approved the
terms and conditions of the Initial Senior Loan and Initial Junior Loan. The
Lending Group and/or AL Investors Development may require a Capital Improvements
Reserve Escrow ("Capital Reserve") to fund the correction of deficiencies in one
or more of the Facilities. Funding of the Capital Reserve of Closing shall be
the sole obligation of the Emeritus Entities.
12. OPERATIONS OF FACILITIES PENDING CLOSING. At all times prior to the Closing
or the sooner termination of this Agreement, the Emeritus Entities
- -12-
<PAGE>
agree: (a) to maintain, manage and operate the Facility in accordance with the
terms and conditions of the respective Facility Lease; (b) to maintain the
Facility in its current condition and state of repair and to rebuild, repair or
restore any damage or destruction to the Facilities by casualty or otherwise
which may occur prior to Closing; (c) to maintain the existing property,
casualty and other insurance required under the Facility Lease; (d) to perform
all of its material obligations under the Permits, Permitted Exceptions,
Contracts and Leases and not to amend, modify or terminate or permit the
termination of any Permit, Contract, Permitted Exceptions or Lease, except with
respect to Contracts and Leases in the ordinary course of business, without the
prior written consent of AL Investors Development, which shall not unreasonably
be withheld; (e) not to enter into any Major Lease or Major Contract for a
Facility, without the prior written consent of AL Investors Development, which
shall not unreasonably be withheld; (f) not to amend, modify, terminate, or
exercise any option to purchase under any of the Facility Lease; (g) not to
mortgage, encumber or otherwise place or permit any encumbrance on its leasehold
estate under the Facility Lease; and (h) not to enter into any contracts or
agreements to sell or otherwise transfer its interest in any Facility.
13. CONVEYANCE OF INTERESTS IN FACILITIES.
13.1 Closing Delivery by the Emeritus Entities. On or prior to the Closing, the
Emeritus Entities shall deposit with or cause to be deposited with Escrow Holder
for each Facility, the following, each in form satisfactory to AL Investors
Development:
(a) A duly executed and acknowledged Quit Claim Deed to the respective
Facility Entity conveying any leasehold improvements or other Real Estate
interest owned by any of the Emeritus Entities in the Facility ready for
recordation in the jurisdiction where the Facility is located;
(b) A duly executed Assignment of Leases, Permits and Contracts for the
Facilities ("Assignment") to the respective Facility Entity. In connection with
the Assignment, it shall be the sole responsibility of the Emeritus Entities to
obtain all necessary consents and approvals for the transfer of and vesting in
the respective Facility Entity for all Permits, Contracts and Leases at Closing
or within ninety (90) days thereafter;
(c) FIRPTA Affidavit;
(d) Bill of Sale for all Personal Property with respect to Facilities,
(including but not limited to the Tangible Personal Property as defined in the
Facility Leases) vesting title free and clear of all Liens, except for the
Permitted Exceptions, in the respective Facility Entity;
- -13-
<PAGE>
(e) Duly executed Management Agreement, Guaranty Agreement, and Put
Agreement or ratification thereof;
(f) Such corporate or partnership resolutions regarding due authorization
and execution and such opinions of counsel regarding authorization and execution
of the documents and instruments to be executed and delivered by any of Emeritus
and the Emeritus Entities hereunder as AL Investors Development may reasonably
require.
(g) A certificate confirming that all of the warranties and
representations set forth in Section 5 are true and correct as of Closing.
(h) Termination agreement or if mutually agreed by AL Investors
Development and Emeritus amendment and restatement of the Facility Leases.
(i) Duly executed Licensing Indemnity Agreement between AL Investors
Development and Emeritus or ratification thereof.
(j) Such other documents as AL Investors Development may reasonably
require to vest in the respective Facility Entity all of the Emeritus Entities'
right, title and interest in each of the Facilities.
13.2 Closing Delivery by AL Investors Development and the Facility Entities. On
or prior to the Closing, AL Investors Development and the Facility Entities
shall cause to be delivered the following:
(a) The Purchase Price under the Purchase Agreement.
(b) An executed counterpart where required of the Assignment, the
Management Agreement, the Guaranty Agreement, and the Put Agreement.
(c) A certificate confirming that all of the warranties and
representations set forth in Section 6 are true and correct as of Closing.
(d) Such limited liability company resolutions regarding due authorization
and execution and such opinions of counsel regarding authorization and execution
of the documents and instruments to be executed by AL Investors Development as
Emeritus Entities may reasonably require.
- -14-
<PAGE>
14. CONDITIONS PRECEDENT.
14.1 AL Investors Development. AL Investors Development's obligations under this
Agreement are expressly conditioned on, and subject to satisfaction of, the
following conditions precedent for each Facility:
(a) Performance by Emeritus and the Emeritus Entities. The Emeritus
Entities shall each have timely performed all obligations required by this
Agreement to be performed by it.
(b) Closing under Purchase Agreement. Simultaneous closing under the
Purchase Agreement as may be amended.
(c) Representations and Warranties True. The representations and
warranties of the Emeritus Entities contained herein shall be true and correct
as of the Closing.
(d) No Material Adverse Change. At no time prior to the Closing shall
there be any material adverse change in the financial condition of any of the
Emeritus Entities or in the physical condition of the Facility due to Casualty
or Condemnation.
(e) AL Investors Development Financing. The lenders under the Initial
Senior Loan (or any substitute therefor) and Initial Junior Loan shall be ready,
willing and able to close simultaneous with the closing hereunder.
(f) Final Approval. Final approval of this transaction by each of the
members of AL II Holdings, the parent of AL Investors Development.
The conditions set forth in Section 14.1 above are intended solely for the
benefit of AL Investors Development. If any of the foregoing conditions are not
satisfied as of the Closing for a Facility, AL Investors Development shall have
the right at its sole election either to waive the condition in question and
proceed with the purchase or, in the alternative, to terminate this Agreement,
whereupon this Agreement shall terminate, and the parties shall have no further
obligations hereunder except as expressly provided herein.
14.2 Emeritus Entities. The obligations of the Emeritus Entities under this
Agreement are expressly conditioned on, and subject to satisfaction of, the
following conditions precedent for each Facility:
(a) Performance by AL Investors Development. AL Investors Development and
the Facility Entities shall each have timely performed all obligations required
by this Agreement to be performed by it.
- -15-
<PAGE>
(b) Closing under Purchase Agreement. Simultaneous closing under the
Purchase Agreement as may be amended.
(c) Representations and Warranties True. The representations and
warranties of AL Investors Development contained herein shall be true and
correct as of the Closing.
(d) Final Approval. Final approval of the board of Emeritus.
The conditions set forth in Section 14.2 above are intended solely for the
benefit of the Emeritus Entities. If any of the foregoing conditions are not
satisfied as of the Closing for a Facility, the Emeritus Entities shall have the
right at its sole election either to waive the condition in question and proceed
with the purchase or, in the alternative, to terminate this Agreement, whereupon
this Agreement shall terminate, and the parties shall have no further
obligations hereunder except as expressly provided herein.
15. CLOSING COSTS. If this transaction closes, AL Investors Development shall
pay the following closing costs with respect to Closing under this Agreement and
the Purchase Agreement for each Facility, subject to the aggregate dollar
limitation below:
(a) The premium for owner's and lender's title insurance for each Facility
and such additional title insurance as may be required by the Lending Group and
any search or additional title review charges to be paid to Title Company;
(b) All real estate excise taxes and other transfer taxes applicable to
the transfer of a Facility to the Facility Entities including any sales tax on
any Personal Property.
(c) The fees incurred by the Escrow Holder in connection with the Closing.
(d) All recording fees and expenses for recording of all documents and
instruments.
(e) All costs and expenses of AL Investors Development, AL II Holdings,
including the Facility Entities' financing in connection with the Initial Senior
Loan and the Initial Junior Loan (except funding of any Capital Reserve which
shall be the sole obligation of Emeritus Entities).
- -16-
<PAGE>
(f) Costs and expenses of due diligence investigations, studies, surveys
and reports prepared for AL Investors Development and the Lending Group and the
formation and qualification of the Facility Entities.
(g) AL Investors Development's, AL II Holdings', and the Facility
Entities' attorneys and accounting fees, costs and expenses.
(h) All other normal and customary closing costs incurred by AL Investors
Development, Al II Holdings, and the Facility Entities up to the amounts listed
on Exhibit I.
To the extent the aggregate of the foregoing for a Facility exceeds the line
item entitled Other Transaction Fees for the Facility on Exhibit I, exceeds the
balance of the closing costs for such Facility shall be paid by the Emeritus
Entities.
16. CLOSING STATEMENTS. All income and expense arising out of the management and
operation of the Facility, including, but not limited to real property taxes and
insurance, shall be prorated between the Emeritus Entities and AL Investors
Development or each Facility Entity as of the Closing. Prepaid amounts or
deposits under Residency Agreements or security deposits under the Leases shall
be credited to AL Investors Development and utility deposits or prepaid amounts
under the Contracts shall be credited to the Emeritus Entities. The prorations
of income and expense for each Facility shall be made on the basis of a written
closing statement submitted by the Emeritus Entities to AL Investors Development
prior to the Closing and approved by AL Investors Development. In the event any
prorations or apportionments made hereunder shall prove to be incorrect for any
reason, then any party shall be entitled to an adjustment to correct the same.
Any item which cannot be prorated because of the unavailability of information
shall be tentatively prorated on the basis of the best data then available and
re-prorated between the parties when the information is available. Any prepaid
rents or other prepaid expenses, escrow accounts or deposits under the Facility
Leases returned by Meditrust to AL Investors Development or the Facility
Entities, or credited against the purchase price under the Purchase Agreement,
shall be refunded to the Emeritus Entities. Notwithstanding the foregoing, any
adjustments or re-prorations shall be made, if at all, within one hundred eighty
(180) days after Closing.
17. DELIVERY OUTSIDE OF ESCROW. The Emeritus Entities shall deliver to AL
Investors Development and the Facility Entities at Closing outside of the
Closing escrow the originals of the diligence materials referenced in Section
4.2 (except for the originals of the Contracts, Leases and Permits to be held by
Managers for use in managing the Facilities), and such copies of all books and
records used in the operation, maintenance, and repair of the Facilities as AL
Investors Development may direct.
- -17-
<PAGE>
18. BREAK-UP EXPENSES.
18.1 Emeritus' Obligation. The Emeritus Entities acknowledge and agree that
Closing under the Purchase Agreement as to any Facility, or this Agreement as to
any Facility may not occur due to a variety of events or circumstances beyond
the control of AL Investors Development including but not limited to:
(a) The refusal or failure of the Lending Group to provide financing for
the acquisition of a Facility;
(b) The failure of Governmental Authorities or other Parties to approve
the transfer of Permits, Contracts or Leases to the Facility Entity for the
operation of the Facility prior to the Closing under the Purchase Agreement or
this Agreement;
(c) The failure to secure the consent or approval from Senior Housing
Partners I, L.P., a member of AL II Holdings, to proceed with the transaction
prior to expiration of the Due Diligence Period;
(d) Casualty or Condemnation of the Facility prior to the Closing under
the Purchase Agreement;
(e) The failure of Meditrust to perform under the terms of the Purchase
Agreement or the failure of Meditrust to enter into a Purchase Agreement or
amendment thereto upon terms and conditions acceptable to AL Investors
Development;
(f) Default by any of the Emeritus Entities hereunder or under any other
agreement in connection with this transaction.
(g) The failure of any condition precedent to AL Investors Development's
obligations hereunder as set forth in Section 14.1; or
(h) Such other events or circumstances beyond the reasonable control of AL
Investors Development and the Facility Entities.
In the event that Closing under the Purchase Agreement or this Agreement should
not occur as a result of any of the foregoing, and notwithstanding termination
or expiration of this Agreement as to such Facility, the Emeritus Entities shall
pay to AL II Holdings and AL Investors Development all of their out-of-pocket
costs and expenses incurred in connection with the due diligence and the
preparation of all documentation relating to the purchase of the Facility,
including
- -18-
<PAGE>
but not limited to costs of all title insurance cancellation fees, preparation
of environmental reports, surveys, appraisals, structural engineering reports,
amounts owing to the Lenders under the Initial Senior Loan and Initial Junior
Loan for reimbursement of expenses, costs to form AL II Holdings, AL Investors
Development and the Facility Entities, attorneys' fees and costs of AL II
Holdings, AL Investors Development, and all other reasonable out-of-pocket
expenses incurred by AL II Holdings and AL Investors Development in connection
with this transaction as categorized on Exhibit I is the line item "Other
Transaction Fees" (collectively "Break-up Expenses"). AL Investors Development
shall provide to the Emeritus Entities an itemization of its Break-up Expenses
within forty-five (45) days after termination of the purchase and sale of the
Facilities as contemplated by this Agreement. The Emeritus Entities shall make
payment to AL Investors Development within ten (10) days after receipt of such
itemization. The payment of the Break-up Expenses shall be the sole remedy of AL
Investors Development and the Facility Entities against the Emeritus Entities
under this Agreement for failure to close under this Agreement.
18.2 Post Closing Remedies. AL Investors Development shall have all rights and
remedies at law or in equity for enforcement of any indemnities, warranties or
representations or other agreements set forth herein after Closing.
19. MISCELLANEOUS.
19.1 Entire Agreement. This Agreement, together with the Exhibits attached
hereto and all certificates and documents delivered in connection herewith,
contain the entire understanding of the parties with respect to the subject
matters hereof and supersedes all prior and other contemporaneous oral or
written understandings and agreements between the parties hereto.
19.2 Binding Effect; Assignment. This Agreement, shall be binding upon and inure
to the benefit of the parties hereto and their respective heirs, successors,
personal representatives and permitted assigns. Except as specifically provided
for herein, neither party may assign its rights hereunder without the prior
written consent of the other. Notwithstanding the foregoing, AL Investors
Development may assign this Agreement in whole or part to any Facility Entity
which holds or is intended to hold title to any Facility and such Facility
Entity's successors and assigns.
19.3 Notices. Any notice, demand, offer or other writing required or permitted
pursuant to this Agreement shall be in writing, furnished in duplicate and shall
be transmitted by hand delivery, facsimile, certified mail, return receipt
requested, or Federal Express or another nationally recognized overnight courier
service, postage prepaid, as follows:
- -19-
<PAGE>
If to AL Investors Development AL Investors Development LLC
or any of its Affiliates: c/o Bruce D. Thorn
2250 McGilchrist Street SE,
Suite 200
Salem, Oregon 97302
Facsimile: (503)375-7644
Telephone: (503)370-7071 ext.7143
With a copy to: Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attn: Gary E. Fluhrer
Facsimile: (206)447-9700
Telephone: (206)447-4400
Prudential Real Estate Investors
8 Campus Drive
Parsippany, New Jersey 07054
Attn: Joan Hayden
Facsimile: (973)683-1788
Telephone: (973)683-1772
Senior Housing Partners I, L.P.
c/o Mr. Noah Levy
Prudential Real Estate Investors
Suite 1400, Two Ravinia Drive
Atlanta, Georgia 30346
Facsimile: (770)399-5363
Telephone: (770)395-8606
If to the Emeritus Entities: Emeritus Corporation
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121-1031
Attn: Mr. Kelly Price
Facsimile: (206)301-4500
Telephone: (206)301-4507
With a copy to: Perkins Coie
1201 Third Avenue, Suite 4000
Seattle, Washington 98101
Attn: Mike Stansbury
Facsimile: (206)583-8500
Telephone: (206)583-8888
- -20-
<PAGE>
Any party shall have the right to change the place to which such notice shall be
given or add additional parties to receive notices by similar notice sent in
like manner to all other parties hereto. Any notice, if sent by overnight
courier service, shall be deemed delivered on the earlier of the date of actual
delivery or the next business day and if delivered by hand delivery or facsimile
shall be deemed delivered on the date of the actual delivery and if sent by
mail, shall be deemed delivered on the earlier of the third day following
deposit with the U.S. Postal Service or actual delivery.
19.4 Captions. The captions of this Agreement are for convenience and reference
only, and in no way define, describe, extend or limit the scope or intent of
this Agreement or the intent of any provisions hereof.
19.5 Joint Effort. The preparation of this Agreement has been the joint effort
of the parties, and the resulting document shall not be construed more severely
against one of the parties than the other.
19.6 Counterparts. This Agreement may be executed in counterparts and each
executed copy shall be deemed an original which shall be binding upon all
parties hereto.
19.7 Partial Invalidity. The invalidity of one or more of the phrases,
sentences, clauses, sections or articles contained in this Agreement shall not
affect the remaining portions so long as the material purposes of this Agreement
can be determined and effectuated.
19.8 No Offer. Neither the negotiations to date nor the preparation of this
Agreement shall be deemed an offer by any party to the other. No such contract
shall be deemed binding on any party until each party has executed and delivered
this Agreement.
19.9 Amendments. This Agreement may not be amended in any respect whatsoever
except by a further agreement, in writing, fully executed by each of the
parties.
19.10 Schedules and Exhibits. All Schedules and Exhibits referred to in this
Agreement shall be incorporated into this Agreement by such reference and shall
be deemed a part of this Agreement as if fully set forth in this Agreement.
19.11 Governing Law and Attorneys' Fees. This Agreement including the validity
thereof and the rights and obligations of the parties hereunder shall be
governed by and construed in accordance with the laws of the State of Washington
without regard to its principals of conflicts of laws. AL Investors Development
may enforce any or all of the provisions of this Agreement directly against the
Emeritus
- -21-
<PAGE>
Entities or any of them in the State of Washington or at its option may enforce
this Agreement on behalf of any Facility Entity in the state in which such
Facility Entity owns a Facility. In the event either party brings an action or
any other proceeding against the other party to enforce or interpret any of the
terms, covenants or conditions hereof, the party prevailing in any such action
or proceeding shall be paid all costs and reasonable attorneys' fees by the
other party in such amounts as shall be set by the court, at trial and on
appeal.
19.12 Third Parties. Nothing in this Agreement, whether express or implied, is
intended to confer any rights or remedies under or by reason of this Agreement
on any person other than to the Facility Entities, which are intended third
party beneficiaries.
19.13 Rules of Construction. References in this Agreement to "herein," "hereof"
and "hereunder" shall be deemed to refer to this Agreement and shall not be
limited to the particular text in which such words appear. The use of any gender
shall include all genders, and the singular number shall include the plural and
vice versa as the context may require.
19.14 Survival. The warranties, representations and indemnities in this
Agreement shall survive Closing and the delivery of the Transaction Documents
and other documents hereunder.
19.15 Joint and Several. The obligation of each of Emeritus and the Emeritus
Affiliates shall be joint and several.
19.16 No Broker. AL Investors Development represents to Emeritus Entities and
the Emeritus Entities represent to AL Investors Development, that no agent,
finder or broker has acted for it or was the producing and effective cause of
this Agreement or the transactions contemplated herein, and that no commissions
or finder's fees are due by it to any third parties. AL Investors Development
agrees to indemnify and hold Emeritus Entities harmless, and the Emeritus
Entities agree to indemnify and hold AL Investors Development harmless, with
respect to any and all expenses, obligations, and liabilities resulting from the
claims or causes of action relating to any claims made by any person retained or
used by it for any agent's broker's or finder's fees or commissions relating to
the transactions contemplated herein.
- -22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals
as of the date first above appearing.
AL INVESTORS DEVELOPMENT LLC, a Delaware limited
liability company
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
EMERITUS CORPORATION, a Washington corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
EMERITUS PROPERTIES I, INC., a Washington
corporation
By By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
- -23-
<PAGE>
LIST OF EXHIBITS
Exhibit A Certain Defined Terms
Exhibit B Major Contracts and Major Leases
Exhibit C Litigation, Claims and/or Proceedings
Exhibit D Claims for Repairs, Restorations and/or Improvements
Exhibit E Environmental Compliance
Exhibit F Management Agreement
Exhibit G Guaranty Agreement
Exhibit H Put Agreement
Exhibit I Purchase Price Allocation
- -24-
<PAGE>
EXHIBIT A
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Certain Defined Terms
For all purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires, capitalized terms in the Agreement have
the meanings assigned as set forth below and include the plural as well as the
singular.
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors Development.
Accreditation Body: Any person, including any Person having or claiming
jurisdiction over the accreditation, certification, evaluation or operation of a
Facility.
Affiliate: With respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any other Person controlling, controlled
by, or under common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an Affiliate of
such Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
Approved Equipment Leases: Leases for any of the Furnishings and Equipment which
have been approved by AL Investors Development in writing.
Award: All compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Business Day: Any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
A-1
<PAGE>
Casualty: The damage or destruction by act of god or otherwise of any portion of
any Facility which would cost more than $50,000 to repair or restore.
Closing or Closing Date: The date upon which the purchase and sale of the
Facility entitled Loyalton of Phoenix is being purchased from Meditrust closes
as defined in the Purchase Agreement and the date thirty (30) days after
issuance of a certificate of occupancy as to each of the other Facilities or
such other closing date as may be specified in the purchase agreement with
Meditrust for such Facility.
Code: The Internal Revenue Code of 1986, as amended.
Condemnation: With respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: Any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Consultants: Collectively, the architects, engineers, inspectors, surveyors and
other consultants that have been engaged from time to time prior to Closing by
the Emeritus Entities or AL Investors Development to perform services for any of
them in connection with a Facility or this Agreement.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
Date of Taking: The date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: Environmental Laws means all federal, state, and local laws,
ordinances and regulations and standards, rules, policies and other governmental
requirements, administrative rulings, and court judgments and decrees in effect
now or in the future and including all amendments, that relate to Hazardous
Materials and apply to any Facility. Hazardous Materials Laws include, but are
not limited to, the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act,
15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et
seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801,
and their state analogs.
Escrow Holder: First American Title Insurance Company.
A-2
<PAGE>
Facility: Each of the assisted living facilities which is subject to this
Agreement, including the Land, Improvements and Personal Property associated
therewith, located in the city and state as set forth below:
<TABLE>
<CAPTION>
Development
Facility City State Units Beds Facility LLC and LP
Name
<S> <C> <C> <C> <C> <C>
Loyalton of
Flagstaff Flagstaff AZ 61 61 AL Investors
Development Flagstaff
LLC
Loyalton of
Phoenix Phoenix AZ 100 101 AL Investors
Development Phoenix
LLC
Loyalton of
Hagerstown Hagerstown MD 101 101 AL Investors
Development
Hagerstown LLC
Loyalton of
Lakewood Lakewood NY 83 83 AL Investors
Development Lakewood
LLC
Loyalton of
Staunton Staunton VA 101 101 AL Investors
Development Staunton
LLC
</TABLE>
The legal description of each of the above Facilities is set forth in the
Purchase Agreement.
Facility Entity: Each of the Facility LLC's or LP's which owns or will own at
Closing a Facility as set forth opposite the name of each Facility above.
Facility Lease: Each of the leases by which a Facility has been leased by any of
the Emeritus Entities from Meditrust.
Furnishings and Equipment: All furniture, furnishings, beds, televisions,
equipment, food service equipment, apparatus, computers and other personal
property used in (or if the context so dictates, required in connection with),
the operation of each Facility, other than Operating Equipment, Operating
Supplies and fixtures attached to and forming part of the Improvements.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other
A-3
<PAGE>
material, or substance now or in the future defined as a "hazardous substance,"
"hazardous material," hazardous waste," "toxic substance," "toxic pollutant,"
"contaminant," or "Pollutant" within the meaning of any Environmental Law.
Provided, however, Hazardous Substances shall not include the safe and lawful
use and storage of quantities of (i) pre-packaged supplies, medical waste,
cleaning materials and petroleum products customarily used in the operation and
maintenance of comparable Facilities, (ii) cleaning materials, personal grooming
items and other items sold in pre-packaged containers for consumer use and used
by occupants of any Facility; and (iii) petroleum products used in the operation
and maintenance of motor vehicles from time to time located on the Facilities'
parking areas, so long as all of the foregoing are used, stored, handled,
transported and disposed of in compliance with Environmental Laws.
Improvements: The buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Junior Loan: Any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors Development and/or the
membership interests of AL Investors Development in the Facility Entities.
Initially, the Junior Loan is evidenced by that certain Loan Agreement among AL
II Holdings, AL Investors II, AL Investors Development, the Facility Entities,
and their Affiliates and Senior Housing Partners I, L.P. dated on or about the
same date hereof ("Initial Junior Loan").
Land: The parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreement.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: Collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with the Facility, including, without limitation, any of
the foregoing which may (i) require repairs, modifications or alterations in or
to the Facility, (ii) in any way affect (adversely or otherwise) the use and
enjoyment of the Facility or (iii) require the assessment, monitoring, clean-up,
containment, removal, remediation or other
A-4
<PAGE>
treatment of any Hazardous Substances on, under or from the Facility. Without
limiting the foregoing, the term "Legal Requirements" includes all Environmental
Laws and shall also include all Permits and Contracts issued or entered into by
any Governmental Authority, any Accreditation Body and/or any Third Party Payor
and all Permitted Encumbrances.
Lending Group: Guaranty Federal Bank, F.S.B. in a debt facility to AL Investors
Development secured by the Facilities in the maximum aggregate original
principal balance of approximately $10,700,000 with respect to Facilities
entitled Loyalton of Phoenix and Loyalton of Flagstaff.
Lien: With respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected.
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or has a noncancellable term in excess of one year or in which the provider of
the goods or services is an Emeritus Entity or an Affiliate of any of them.
Major Lease. Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which an Emeritus
Entity or an Affiliate of any of them is the tenant.
Managed Care Plans: All health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Managers: Any Person who has entered into a Management Agreement with a Facility
Entity, which initially shall mean Emeritus Management LLC and Emeritus
Management I LP. or any other entity approved by AL Investors Development.
Medicaid: The medical assistance program established by Title XIX of the Social
Security Act (42 US Css.ss.1396 et seq.) and any statute succeeding thereto.
Medicare: The health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
A-5
<PAGE>
Meditrust: Meditrust Acquisition Corporation I and Meditrust Company LLC.
Mortgage: collectively, the terms and conditions of the Senior Loan and the
Junior Loan.
Operating Equipment. All dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Supplies. All consumable items used in, or held in storage for use in
(or if the context so dictates, required in connection with), the operation of
the Facilities, including food, medical supplies, fuel, soap, cleaning
materials, and other similar consumable items.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) to the extent such other agreements and contracts
have been entered into by the Emeritus Entities in the ordinary course of
business of construction, owning, operating or managing the Facilities, contract
rights (including without limitation, warranties provided in construction
contracts, subcontracts, and architects' contracts), right to proceeds or
payment on account of any Award or Casualty, warranties and representations,
franchises, and records and books of account benefiting, relating to or
affecting the Facility or the operation of any programs or services in
conjunction with the Facility and all renewals, replacement and substitutions
therefor entered into by the Emeritus Entities with any Governmental Authority,
Accreditation Body or Third Party Payor or entered into by any of the Emeritus
Entities with any third Person, excluding, however, any agreements pursuant to
which money has been or will be borrowed or advanced, the Facility Leases, the
Leases, any agreements with or obligations relating to employees of a Facility,
and any agreement creating or permitting any Lien, or other encumbrance on title
(except for the Permitted Exceptions), and any Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by any of the Emeritus
Entities and encumbering or affecting a Facility.
Permits: Collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents, agreements, contracts, contract rights, franchises, interim licenses,
permits and other authorizations of every nature whatsoever required by, or
issued under, applicable Legal Requirements relating or affecting a Facility or
the construction, development, maintenance, management, use or operation
thereof, or the operation
A-6
<PAGE>
of any programs or services in conjunction with the Facility and all renewals,
replacements and substitutions therefor, now or hereafter required or issued by
any Governmental Authority, Accreditation Body or Third Party Payor, or
maintained or used by any of the Emeritus Entities, or entered into by any of
the Emeritus Entities with any third Person with respect to a Facility.
Permitted Exceptions: The exceptions to title approved by AL Investors
Development pursuant to the Purchase Agreement, including the Approved Equipment
Leases.
Person: Any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
Personal Property: All machinery, equipment, furniture, furnishings, vans,
buses, vehicles, movable walls or partitions, computers or trade fixtures,
goods, inventory, supplies, the name of the Facility, and other personal or
intangible property located on or in or used in connection with a Facility
including, but not limited to, all Operating Equipment, Furnishings and
Equipment and Operating Supplies. Notwithstanding the foregoing, title to vans
or buses shall remain in Emeritus or Managers under the Management Agreement and
be held in trust by them for the benefit of the respective Facility Entity.
Prime Rate: The variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors Development.
Provider Agreements: All participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of the Emeritus Entities or
Meditrust in connection with the operation of the Facility relating to any right
of payment or other claim arising out of or in connection with participation in
any Third Party Payor Program.
Real Estate: Collectively, (i) the Land, (ii) the Improvements, and (iii) all
rights, rights-of-way, easements, mineral rights, privileges, options, leases,
licenses, and appurtenances in any manner belonging to, or pertaining to, the
Land and the Improvements.
A-7
<PAGE>
Residency Agreement: All contracts, agreements and consents executed by or on
behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Loan is evidenced by that certain Master Loan Agreement
between AL II Holdings, AL Investors Development (and the Facility Entities) and
Guaranty Federal Bank, F.S.B. on behalf of the Lenders (as defined therein)
dated on or about the same date hereof ("Initial Senior Loan").
Third Party Payor Programs: Collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield,
Managed Care Plans, other private insurance plans and employee assistance
programs.
Third Party Payors: Collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
Title Company: First American Title Insurance Company.
Unavoidable Delays: Delays due to strikes, lockouts, inability to procure
materials, power failure, acts of God, governmental restrictions, enemy action,
civil commotion, fire, unavoidable casualty or other causes beyond the control
of the party responsible for performing an obligation hereunder, provided that
lack of funds shall not be deemed a cause beyond the control of either party
hereto.
A-8
<PAGE>
EXHIBIT B
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Major Contracts and Major Leases
None
B-1
<PAGE>
EXHIBIT C
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Litigation, Claims and/or Proceedings
None
C-1
<PAGE>
EXHIBIT D
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Claims for Repairs, Restorations and/or Improvements
None
D-1
<PAGE>
EXHIBIT E
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Environmental Compliance
None
E-1
<PAGE>
EXHIBIT F
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Management Agreement
See attached Management Agreement
F-1
<PAGE>
EXHIBIT G
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Guaranty Agreement
See attached Guaranty Agreement
G-1
<PAGE>
EXHIBIT H
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Put Agreement
See attached Put Agreement
H-1
<PAGE>
EXHIBIT I
TO SUPPLEMENTAL PURCHASE AGREEMENT
IN CONNECTION WITH PURCHASE OF FACILITIES
(AL II - 5 Development Facilities)
Purchase Price Allocation
I-1
<PAGE>
MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
(AL II - 5 Development Facilities)
This Management Agreement with Option to Purchase (the "Agreement") is entered
into as of March ____, 1999, by and among Emeritus Management LLC, a Washington
limited liability company, and Emeritus Properties I Inc., (collectively
"Managers" and each a "Manager"), Emeritus Corporation, a Washington Corporation
("Emeritus"), and AL Investors Development LLC, a Delaware limited liability
company ("AL Investors Development") for itself and as sole managing member on
behalf of each of the Facility Entities as set forth in Exhibit A (collectively
"Facility Entities" and each a "Facility Entity"). (AL Investors Development and
the respective Facility Entity which owns a Facility are sometimes collectively
referred to herein as "Owner" or with respect to all Facilities "Owners").
Owners desire to engage Managers to manage the Facilities as defined in Exhibit
A upon the terms and conditions set forth herein. All capitalized terms not
otherwise defined herein shall have the meaning set forth in Exhibit A.
1. BACKGROUND AND GENERAL TERMS
1.1 Purchase Agreements. AL Investors Development has entered into (a) a
Purchase and Sale Agreement dated of even date herewith with Meditrust Company
LLC, a Delaware limited liability company ("Meditrust"), relating to the
purchase of the Facilities ("Purchase Agreement"), and (b) a Supplemental
Purchase Agreement In Connection With Purchase Of Facilities with Emeritus and
Emeritus Properties I, Inc., ("Supplemental Agreement") relating to certain
additional terms and conditions in connection with purchase of the Facilities
(the Purchase Agreement and the Supplemental Agreement collectively the
"Purchase Agreements"). Initially, the Facility entitled Loyalton of Phoenix is
being acquired pursuant to the Purchase Agreements by the respective Facility
Entity on or about the date of this Agreement and shall be subject to this
Agreement. Each additional Facility shall be acquired, subject to satisfaction
of the conditions in the Supplemental Agreement, and made subject to the
Purchase Agreement at Closing of that Facility. This Agreement shall be fully
effective as to the Facility entitled Loyalton of Phoenix and such additional
Facilities that may be acquired by Owners and made subject to this Agreement,
notwithstanding that all Facilities may not be acquired. All Facilities made
subject to this Agreement will each be owned by the respective Facility Entity
and managed by the Managers pursuant to this Agreement.
1.2 Master Agreement. Under the terms and conditions of this Agreement, Emeritus
Management LLC will manage all of the Facilities made
-1-
<PAGE>
subject to this Agreement (except the Facility entitled Loyalton of Lakewood
shall be co-managed by Painted Post Properties, Inc. as set forth in an
Amendment to this Agreement at the time Loyalton of Lakewood is acquired by
Owners and made subject to this Agreement). Pursuant to Section 3.6, Emeritus
Properties I, Inc., an Affiliate of Emeritus, will be co-manager of all
Facilities except Loyalton of Lakewood, subject to the provisions of Section
3.6. It is intended that the terms of this Agreement shall apply to each of the
Facilities as if this Agreement were a direct agreement between each Facility
Entity and the respective Manager (and, if applicable, co-Manager) and the
operational results upon which the Management Fee (Base Management Fee and
Accrued Management Fee) and Operating Deficit and Operating Profit are
determined, except as otherwise expressly provided herein, shall be determined
separately for each Facility. A default or Event of Default under this Agreement
with respect to any Facility shall be a default or Event of Default as to all
Facilities.
1.3 Qualifications. Owners desire to engage the Managers to manage, on behalf of
the Owners and subject to their overall supervision and control, each respective
Facility and Managers represent to AL Investors Development and the Facility
Entities that they are experienced and duly qualified under all applicable Legal
Requirements to manage assisted living facilities. By entering into this
Agreement, Owners do not delegate or intend to delegate to Managers any powers,
duties, or responsibilities which Facility Entities are prohibited by Legal
Requirements from delegating. Owners also retain such other management authority
as shall not have been expressly delegated to the Managers pursuant to this
Agreement.
1.4 Emeritus Guaranty. Concurrently with the execution of this Agreement,
Emeritus is entering into a Guaranty of Management Agreement and Shortfall
Funding Agreement ("Emeritus Guaranty") in favor of the Facility Entities and
Owners guaranteeing the Managers' obligations under this Agreement and agreeing
to fund any Operating Deficit in excess of the Owner's Deficit Contribution as
more particularly defined herein and in the Emeritus Guaranty.
1.5 Consideration. In consideration of Owners' consummating the Purchase
Agreements and the mutual covenants contained herein, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree to enter into and perform their respective obligations
under this Agreement.
2. TERM
2.1 The Term. The term ("Initial Term") of this Agreement shall commence on the
date hereof and as to each Facility subsequently acquired by
-2-
<PAGE>
Owners pursuant to the Purchase Agreements and made subject to this Agreement
upon execution of a memorandum so indicating ("Commencement Date") and shall
expire as to all Facilities made subject to this Agreement at midnight on
December 31, 2001 (the "Termination Date"). If the Closing under the Purchase
Agreements as to any Facility does not occur for any reason, this Agreement
shall not be applicable as to such Facility and no party hereto shall have any
liability or obligation under this Agreement as to such Facility. The Initial
Term and Extension Term are sometimes collectively referred to herein as the
"Term".
2.2 Extension Term. If Emeritus fails to exercise or is not entitled to exercise
the Purchase Option as provided for in Section 13, Owners may extend this
Agreement for a period of up to twelve (12) months beyond the Termination Date
as to any or all Facilities as determined by Owner in its sole discretion
("Extension Term") by giving notice of such election (which shall include
designation of the Facilities and the applicable Extension Term) to Managers at
least ninety (90) days prior to the Termination Date. In such event, the
provisions of Section 13 of this Agreement shall not be applicable during any
Extension Term.
3. GRANT OF AUTHORITY AND OBLIGATIONS OF MANAGERS
3.1 Grant to Managers. Owners hereby grant to Managers the right to supervise
and direct the management and operation of the Facilities subject to the terms
of this Agreement and the overall supervision and control of Owners. Managers
accept such grant and agree that they will supervise and direct the management
and operation of the Facilities in accordance with the terms of this Agreement
and the general supervision of Owner. Managers, subject to the terms of this
Agreement, shall have the general authority and responsibility to (i) determine
operating policy and standards of operation, maintenance, and resident care for
the Facilities except where Legal Requirements require an Owner to do so in
which event Manager and such Owner shall consult with each other to allow Owner
to determine policy and standards, (ii) supervise and direct all phases of
advertising and marketing for the Facilities, (iii) carry out all phases of the
Annual Plans and (iv) perform such other acts and things as shall be necessary
to operate the Facilities in an efficient manner which is consistent with
customary and commercially reasonable practice in the industry for comparable
facilities. Managers acknowledge the trust and confidence placed in them
pursuant to this Agreement and at all times agree to act in the best interest of
Owners in managing and operating the Facilities.
3.2 Annual Plans
3.2.1 Preparation and Approval. Not later than December 1 prior to the
commencement of each Operating Year, other than the initial Operating Year,
-3-
<PAGE>
the Managers shall submit to Owners a draft of an annual budget and forecast for
the operation of each Facility subject to this Agreement for the forthcoming
Operating Year containing projections of Total Revenues and budgets of Operating
Expenses, Fixed Operating Expenses, Capital Improvements, and Operating Deficit
or Operating Profit (the "Annual Plan"). Such budget and forecasts shall be in
reasonable detail and in such form as reasonably required by Owners. The Annual
Plan shall include the assumptions upon which the forecasts and budgets were
prepared, and shall include a proposed annual marketing plan and proposed
resident care and services plan and such other information as may be reasonable
and appropriate to fully advise Owners of all material facts and assumptions
relevant to an evaluation of the Annual Plan for each Facility. Managers shall
review the Annual Plan with Owners, and subject to Owners' approval of each
Annual Plan (which Owners shall endeavor to give by December 31), Manager shall
implement and operate the Facilities in accordance with such approved Annual
Plan for the successive Operating Year. When the Annual Plan is approved by
Owners, the respective Manager is authorized to incur and pay for the Operating
Expenses, Fixed Operating Expenses and Capital Improvements set forth in the
Annual Plan and implement the provisions of the Annual Plan. The Annual Plan
shall be updated as of June 1 of each Operating Year if requested by Owner. The
draft Annual Plan for the first Operating Year for the Facility entitled
Loyalton of Phoenix shall be provided to Owners on or before April 30, 1999, and
such draft Annual Plan shall be approved or disapproved in accordance with this
Section 3.2.1. and Section 3.2.2. As to additional Facilities added to this
Agreement, the draft annual plan shall be provided to Owner on or before Closing
unless otherwise specified by Owners.
3.2.2 Disapproval of Plan. If an Owner declines to approve a specific item or
items of an Annual Plan for a Facility or the Facilities, the Manager shall make
appropriate revisions to the Annual Plan and resubmit the Annual Plan to the
Owner for approval. Until an Annual Plan is approved for each Operating Year,
the item or items in question will be replaced by an amount equal to such budget
item for the Operating Year prior thereto, except for Fixed Operating Expenses
over which Manager has no control and except for Capital Improvements as to
which the item or items will be replaced with $250 per Operating Year per unit
for each Facility.
3.2.3 Compliance with Annual Plan. Managers agree to use best efforts to operate
the Facilities as provided in the Annual Plan for that Facility. Notwithstanding
the foregoing, Managers shall not expend more than the aggregate budget category
for each of Operating Expenses, Fixed Operating Expenses and Capital
Improvements with respect to each Facility or exceed any line item in Operating
Expenses or Capital Improvements for a Facility by more than ten percent (10%)
without an Owner's prior approval. In the event actual Total
-4-
<PAGE>
Revenues shall be less than projected Total Revenues as set forth in the Annual
Plan, Managers shall use all reasonable efforts to effect a proportionate
reduction in variable Operating Expenses.
3.2.4 Group Services. Managers and their Affiliates will furnish to the
Facilities the benefits of any "Group Services" which Managers and their
Affiliates may have in effect from time to time, which phrase shall mean goods
and services provided jointly to other assisted living facilities owned or
managed by Emeritus or its Affiliates on a group or joined basis to realize
maximum economy. Group Services may include (a) bulk purchases of supplies and
services, (b) centralized purchasing service, and (c) centralized marketing
services. Each Owner shall have the option of whether and to the extent each
respective Facility shall participate in Group Services; provided that if Owner
determines that a Facility shall not participate in Group Services, then to the
extent such goods and services are reasonably required for the operation of such
Facility, Manager shall arrange for an alternative provider of such goods and
services on the most favorable terms then practicable. The costs of all Group
Services shall be allocated among the Facilities and other assisted living
facilities on an equitable basis in proportion to the benefits rendered to each
and the costs of any Group Services provided to the Facilities shall be included
in the Annual Plan if the Facilities participate in Group Services.
3.3 Personnel.
3.3.1 General. Consistent with the Annual Plan for each Facility, the respective
Manager shall hire, discharge, promote and supervise the executive staff of the
Facilities and will supervise through such executive staff the hiring,
discharging, promotion and work of all other operating and service employees of
the Facility. All members of the staff of a Facility shall be reasonably
qualified for their positions, and the Compensation payable to such persons
shall be comparable to the compensation paid to the staff of other comparable
assisted living facilities in the general area, taking into account the location
and size and targeted residents of each Facility. Manager shall have in its
employ at all times at each Facility a sufficient number of capable employees to
enable it to properly, adequately, safely and efficiently manage, operate,
maintain and account for the Facilities. Manager shall fully comply with all
applicable Legal Requirements with respect to such employees. Manager represents
that it is and will continue to be an equal opportunity employer and must
advertise as such and Manager shall not engage in any form of discrimination
from the employment or hiring as independent contractors of any personnel,
including, without limitation, discrimination as to race, color, creed,
religion, age, gender, marital status, sexual preference, national origin or
disability.
-5-
<PAGE>
3.3.2 Managers as Employer. All executive staff members and other employees at
the Facilities shall be direct employees of the Managers or their Affiliates and
not of Owners, and all Compensation of such employees shall be paid by the
Managers as part of Operating Expenses as approved in the Annual Plan. Without
limiting the foregoing, Managers shall, for purposes of such employment
relationship, be acting as an independent contractor and not as an agent of
Owners. Owners shall not have any liability or responsibility for the work place
conditions or employees at any Facility. Managers shall ensure that all
employees required to be licensed under any Legal Requirements shall be so
licensed.
3.3.3 Labor Relations. The Managers will not become involved in any negotiations
with any labor unions or enter into any collective bargaining agreement or labor
contract resulting therefrom without the prior approval of the Owner of any
affected Facility.
3.4 Additional Responsibilities of Managers. Manager shall, as agent for the
respective Facility Entity, perform the following services, or cause the same to
be performed, for each Facility:
(a) Enter into Residency Agreements in the general form approved by Owner
for each Facility and perform the services required thereunder and use diligent
efforts to enforce the provisions thereof.
(b) In accordance with the applicable Annual Plan, enter into such
Ordinary Contracts for goods and services or furnishing of utilities,
maintenance and repair as shall be reasonably necessary for the proper operation
and maintenance of each Facility. Major Contracts, unless set forth in the
Annual Plan, shall require the prior approval of Owner.
(c) In accordance with the applicable Annual Plan, enter into such
Ordinary Leases as shall be necessary or convenient for the operation of a
Facility. Major Leases, unless set forth in the applicable Annual Plan, shall
require the prior approval of Owner.
(d) In accordance with the applicable Annual Plan, make all repairs and
improvements (including Capital Improvements) to the Facility as shall be
reasonably necessary for good order, condition and repair.
(e) In accordance with the applicable Annual Plan, purchase such Operating
Equipment and Operating Supplies as shall be reasonably necessary for the proper
operation of a Facility.
-6-
<PAGE>
(f) Maintain in the name of the applicable Facility Entity all Permits
required in connection with the operation and management of the Facility. In
connection with all Permits, each Facility Entity agrees to execute and deliver
any and all applications and other documents as shall be reasonably required and
to otherwise reasonably cooperate with the Manager in applying for, obtaining
and maintaining such Permits. Provided, however, it shall be the sole
responsibility of Managers to cause each Facility and Facility Entity to obtain
and maintain all required Permits and to operate the Facility in compliance with
such Permits.
(g) Cause to be done all such acts and things in and about a Facility as
shall be necessary to comply with all Insurance and Legal Requirements. Without
limiting the foregoing, Manager shall, consistent with the applicable Annual
Plan, provide adequate security in and about the Facility.
(h) Cause each Facility to comply with all applicable covenants and
provisions of any Mortgage to the extent such covenants and provisions relate to
the operation, management, compliance with Legal Requirements, and condition of
the Facilities, provided that Owners shall have delivered to Manager true and
correct copies of any Mortgage then in effect. Without limiting the generality
of the foregoing, (A) Managers acknowledge that they have been provided with a
copy of and have approved the terms and conditions of (i) the Initial Senior
Loan and (ii) the Initial Junior Loan and (B) Managers agree to cause the
Facilities at all times to be in compliance with the provisions of Sections
6.2(a)(i), 6.2(a)(iv), 6.2(a)(v) and 6.20 of the Master Loan Agreement and
Sections 4.3, 4.4, 4.6 through 4.11, and 4.13 through 4.20 of each Project Loan
Agreement (as defined in the Master Loan Agreement) entered into in connection
with the Initial Senior Loan. Managers also agree to cause the Facilities to be
in compliance at all times with the provisions of the Initial Junior Loan
relating to the operation, management, compliance with Legal Requirements and
condition of the Facilities. Owners shall promptly forward to Managers any
notices of default or noncompliance with respect to the foregoing which they may
receive under the Initial Senior Loan, Initial Junior Loan or any successor
Mortgage.
(i) Cause each Facility and its operations to comply with the requirements
of all Contracts, including but not limited to Residency Agreements, Third Party
Payors and Third Party Payor Programs, and all Leases.
(j) Retain legal counsel for a Facility selected by an Owner which will
represent the Owner, Manager and the Facility on all legal questions as
reasonably necessary relating to Legal Requirements, and will institute any and
all legal actions or proceedings as shall be reasonably necessary to collect
charges or other income for the Facility, prepare or review Contracts, or to
resolve claims (except those arising under this Agreement); provided, however,
that without the
-7-
<PAGE>
prior approval of Owner, Manager shall not institute any proceedings involving
claims in excess of $5,000 or to terminate any Major Contract or Major Lease.
(k) With respect to refurbishment or renovation of any Facility or other
Capital Improvements approved by Owner, Managers shall negotiate contracts for
the construction or acquisition of such Capital Improvements, secure all
necessary Permits, and supervise the design, acquisition, and construction to
assure that such Capital Improvements are completed in a good and workmanlike
manner free of any Liens and in accordance with the budget approved by Owners.
(l) Promptly notify Owners of any default by Emeritus or its Affiliates
under the warranties, representations, covenants and indemnities in the Purchase
Agreements and promptly cure any such default at its sole cost and expense (and
not as an Operating Expense).
(m) Cause Emeritus to comply with all reporting, net worth, and liquidity
requirements of the Initial Senior Loan and the Initial Junior Loan applicable
to Emeritus.
(n) Cause to be done all such acts and things to maintain the Facility in
good condition for the Primary Intended Use.
(o) Maintain and repair in good condition all buses or vans used in
connection with the operation of the Facilities, title to which shall remain in
Managers or their Affiliates.
(p) Prepare and, consistent with the applicable Annual Plan, implement a
life safety plan for the Facility complying with all Legal Requirements to be
used in the event of fire or other casualty at the Facility.
3.5 Unauthorized Acts. Notwithstanding anything to the contrary herein, Managers
shall have no authority to:
3.5.1 No Borrowing. Borrow on behalf of or loan any funds of a Facility Entity;
3.5.2 No Liens or Transfer. Create or permit any Lien on all or any portion of a
Facility (except for a Mortgage) or sell, convey or otherwise transfer all or
any portion of a Facility without Owner's approval which may be withheld in its
sole discretion except for replacement of Furnishings and Equipment and
Operating Equipment in the ordinary course of business.
-8-
<PAGE>
3.5.3 No Change of Use. Do or permit any act or omission which would impair the
use of any Facility for the Primary Intended Use;
3.5.4 No Violation. Do or permit any act or omission which would violate Legal
Requirements or the terms of any Permit with respect to any Facility or which
would cause any such Permit to lapse or expire;
3.5.5 Violation of Agreement. Do or permit any act or omission or incur any
liability which exceeds Manager's authority under this Agreement;
3.6 Licensing. If all Permits required by Governmental Authorities have not been
duly and validly transferred or reissued in accordance with all Legal
Requirements in the name of the applicable Facility Entity at closing under the
Purchase Agreements, then Managers at their sole cost and expense shall cause
all such Permits to be transferred or reissued in accordance with all Legal
Requirements in the name of the applicable Facility Entity within ninety (90)
days after the date of this Agreement (except as to the Facility entitled
Loyalton of Lakewood where such transfer shall occur, if at all, at the time
specified in an amendment to this Agreement at the time Loyalton of Lakewood is
acquired by Owners and made subject to this Agreement. Until such time, Emeritus
Properties I, Inc., as holder of the Permits (except as to the Facility entitled
Loyalton of Lakewood), shall act as co-manager hereunder in order to ensure that
each Facility has the benefit of such Permits as they may hold until transfer or
reissuance of the Permits. At such time, Emeritus Properties I, Inc. and Painted
Post Properties, Inc., if applicable, shall cease to be Managers hereunder.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF MANAGERS
Managers hereby represent, warrant and covenant as follows:
4.1 Existence, Power, Qualification. Each of the Managers is a limited liability
company, corporation, or limited partnership respectively duly organized,
validly existing and in good standing under the laws of the State of Washington
and qualified to do business in each state in which it is managing a Facility.
Each of the Managers has all requisite limited liability company, corporate or
limited partnership power and authority respectively to manage each Facility
pursuant to the terms of this Agreement.
4.2 Valid and Binding. Each of the Managers is duly authorized to make and enter
into this Agreement and to carry out the duties contemplated herein. This
Agreement has been duly executed and delivered by each of the Managers and is
the legal, valid and binding obligation of each of the Managers enforceable in
accordance with its terms.
-9-
<PAGE>
4.3 Single Purpose. Managers have not engaged in and shall not during the Term
engage in any business other than management and operation of the Facilities
pursuant to this Agreement, and the operation and management of the facilities
pursuant to the AL Management Agreement and the AL II Operating Management
Agreement.
4.4 Ownership of Managers. Managers are and shall remain during the Term of this
Agreement wholly owned by Emeritus and no other Person shall have any direct or
indirect interest or management rights therein.
5. INSURANCE
5.1 General Insurance Requirements. During the Term of this Agreement and
thereafter until Managers no longer manage one or more Facilities, Managers
shall cause each Facility when made subject to this Agreement and the business
operations conducted at the Facility insured as set forth below (the cost of
which shall be an Operating Expense):
5.1.1 Types and Amounts of Insurance. The insurance on all of the Facilities
shall include the following unless otherwise approved by Owners:
(a) property loss and physical damage insurance on an all-risk basis (with
only such exceptions as Owner may approve) covering each Facility (exclusive of
Land) for its full replacement cost (without deduction for depreciation) and a
deductible for each Facility not in excess of TWENTY FIVE THOUSAND DOLLARS
($25,000). Nonconforming uses shall be insured for replacement cost of existing
improvements without regard to the ability to rebuild the improvements. Manager
as an Operating Expense will keep in force an all risk property insurance policy
covering Manager's furniture, furnishings and equipment situated at the
Facilities, including but not limited to the van or bus for each Facility until
legal title is transferred to Owners, but the proceeds of any insurance on a van
or bus shall be paid to the respective Owner.
(b) flood insurance (if the Facility or any portion thereof is situated in
an area which is considered a flood risk area by the U.S. Department of Housing
and Urban Development or any future Governmental Authority charged with flood
risk analysis) in limits reasonably acceptable to the Owner and subject to the
availability of such flood insurance;
(c) boiler and machinery insurance (including related electrical apparatus
and components) under a standard comprehensive form, providing coverage against
loss or damage caused by explosion of steam boilers, pressure
-10-
<PAGE>
vessels or similar vessels, now or hereafter installed at any Facility, in
limits approved by Owners;
(d) business interruption insurance in an amount and to the extent
reasonably specified by Owners, but in no event in an amount less than Fixed
Operating Expenses plus projected Operating Profit for a period of twelve (12)
months, and include either an agreed amount endorsement or a waiver of any
co-insurance provisions so as to prevent any insured from being a co-insurer;
(e) commercial general liability insurance on an occurrence basis insuring
the applicable Owner and Managers against claims for personal injury or death or
property damage occurring at each Facility, including coverages with amounts not
less than FIVE MILLION DOLLARS ($5,000,000) per occurrence with respect to
bodily injury and death and THREE MILLION DOLLARS ($3,000,000) for property
damage;
(f) Employees' fidelity insurance in an amount not less than $1,000,000
protecting owner against any misappropriation of funds with respect to any
Facility by Manager's employees;
(g) umbrella/excess general liability insurance on an occurrence basis in
an amount not less than $5,000,000;
(h) professional liability insurance in an amount not less than TEN
MILLION DOLLARS ($10,000,000) for each medical incident;
(i) physical damage insurance on an all-risk basis (with only such
exceptions as Owners in their reasonable discretion shall approve) covering
tangible Personal Property for the full replacement cost thereof (without
deduction for depreciation) and with a deductible not in excess of $5,000 for
each Facility;
(j) "Workers Compensation" and Employees Liability Insurance providing
protection against all claims arising out of injuries to all employees of
Managers (employed at the Facility or any portion thereof) in amounts approved
by Owners; and
(k) During the period of any construction at any Facility, the so-called
"builder's all-risk completed value" insurance for any improvements under
construction;
(l) Business auto liability insurance including hired and non-owned
automobile coverage in an amount not less than $1,000,000 combined single limit;
and
-11-
<PAGE>
(m) such other insurance or modifications to the above insurance
requirements as Owners from time to time approve and as may from time to time be
required by applicable Legal Requirements and/or by any Mortgagee. Managers
shall be responsible to ensure that each contractor and subcontractor working at
a Facility provides evidence of general liability insurance including coverages
with amounts not less than $1,000,000 per occurrence and workers' compensation
insurance in the amount required by law, and which liability insurance shall
cover the applicable Owner and Mortgagee as an additional insured.
5.1.2 Insurance Company Requirements. All such insurance required by this
Agreement shall be issued and underwritten by insurance companies licensed to do
insurance business by, and in good standing under the laws of, the state in
which each Facility is located and which companies have and maintain a rating of
A:X or better by A.M. Best Co. or such higher rating as may be required by any
Mortgagee.
5.1.3 Policy Requirements. Every policy of insurance from time to time required
under this Agreement (other than worker's compensation) shall name the
respective Facility Entity and Owners as owner or loss payee and additional
named insured as appropriate with respect to liability insurance. Each such
policy, where applicable or appropriate, shall:
(a) include mortgagee, loss payable and additional named insured
endorsements reasonably acceptable to Mortgagee;
(b) provide that the coverages may not be cancelled, reduced or otherwise
modified except upon not less than thirty (30) days' prior written notice to
Owner and to any Mortgagee;
(c) be primary and noncontributing with respect to any other insurance
carried by Owners and Managers, not be invalidated by any negligent act or
omission of Owner or Manager or any foreclosure proceeding relating to a
Facility and otherwise be in such form as shall be acceptable to Owners.
5.1.4 Notices, Certificates and Polices. Manager shall promptly provide to Owner
copies of any and all notices (including notice of non-renewal), claims and
demands which Manager receives from insurers with respect to a Facility. At
least ten (10) days prior to the expiration of any insurance policy required
hereunder, Manager shall deliver to Owner certificates and evidence of insurance
relating to all renewals and replacements thereof, together with evidence,
satisfactory to Owner, of payment of the premiums thereon. Manager shall deliver
to Owner original counterparts or copies certified by the insurance company to
be
-12-
<PAGE>
true and complete copies, of all insurance policies required hereunder not later
than ten (10) days after receipt thereof by Manager.
5.1.5 Right to Place Insurance. If Manager shall fail to obtain any insurance
policy required hereunder or shall fail to deliver the certificate and evidence
of insurance relating to any such policy to Owner, or if any insurance policy
required hereunder (or any part thereof) shall expire or be cancelled or become
void or voidable by reason of any breach of any condition thereof, or if Owner
reasonably determines that such insurance coverage is unsatisfactory by reason
of the failure or impairment of the capital of any insurance company which wrote
any such policy, upon demand by Owner, Manager shall promptly but in any event
in not more than ten (10) days thereafter obtain new or additional insurance
coverage on the Facility, as provided herein. In the event Manager fails to
perform its obligations under this Section, Owner may obtain such insurance and
pay the premium or premiums therefor and be reimbursed therefor as an Operating
Expense, plus, at Manager's sole expense interest from the date advanced at the
Overdue Rate.
5.1.6 Payment of Proceeds. All insurance policies required hereunder (except for
general public liability, professional liability and workers' compensation and
employers liability insurance) shall provide that in the event of loss, injury
or damage, subject to the rights of any Mortgagee, all proceeds shall be paid
solely to Owner. Only Owner is authorized to adjust and compromise any such loss
and to collect and receive such proceeds unless Owners authorize Manager in
writing to act as Owners' authorized agent.
5.1.7 Blanket Policies. Notwithstanding anything to the contrary contained
herein, Managers' obligations to secure and maintain the insurance provided for
herein may be brought within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Managers and its Affiliates;
provided, however, that any such blanket policy shall include an agreed amount
endorsement with respect to each Facility and such other provisions so that the
coverage afforded to Owner shall not be reduced or diminished or otherwise be
different from that which would exist under a separate policy meeting all other
requirements of this Agreement by reason of the use of such blanket policy of
insurance.
5.2 Waiver of Liability. Notwithstanding anything to the contrary herein,
neither Managers nor Owners shall assert against the other, and do hereby waive
with respect to each other, any claims for any losses, damages, liability or
expenses (including attorneys' fees) incurred or sustained by either of them on
account of injury to persons or damage to property arising out of the ownership,
operation and maintenance of the Facilities to the extent that the same are
covered
-13-
<PAGE>
by the insurance carried under this Section 5. Each party shall notify their
respective insurance carriers of such mutual waivers and shall cause their
respective insurance companies to waive in writing, by endorsement or otherwise,
subrogation against the other on account thereof and to acknowledge that such
waivers do not cause any invalidation of coverage provided by such insurance
companies.
6. INDEMNITY
6.1 Indemnification by Manager. Except with respect to the gross negligence or
willful misconduct of the respective Owner or any of the other Indemnified
Parties, as to which no indemnity is provided, each Manager and Emeritus,
jointly and severally, hereby agrees to indemnify, defend and hold harmless with
counsel reasonably acceptable to Owner, the respective Owner and each of the
other Indemnified Parties from and against all damages, losses, liabilities,
obligations, penalties, costs and expenses (including, without limitation,
reasonable attorneys' fees, court costs and other expenses of litigation)
suffered by, or claimed or asserted against, the respective Owner or any of the
other Indemnified Parties, directly or indirectly, by any Person based on,
arising out of or resulting from (a) the management of the Facility or any
business conducted therein; (b) any act, fault, omission to act or misconduct by
(i) any Manager, (ii) any Affiliate of a Manager, or (iii) any employee, agent,
licensee, business invitee, guest, customer, contractor or submanager of any of
the foregoing parties, relating to, directly or indirectly, the respective
Facility; (c) any accident, claim of malpractice, injury or damage whatsoever
caused to any Person; (d) any default or Event of Default under this Agreement
by Manager or any liability, damage, loss, obligation, penalty, cost, and other
expense incurred by Manager which exceeds Manager's authority under this
Agreement; (e) following closing pursuant to the Purchase Option set forth in
Section 13 any liability, damage, loss, obligation, penalty, cost, and other
expense whatsoever, whether arising before or after closing thereunder from the
Contracts, Leases, Legal Requirements, the Permits, or the operation of the
Facility or any business conducted therein; and (f) any liability under Section
2.4 of the mortgage or deed of trust executed by a Facility Entity pursuant to
the terms of the Master Loan Agreement executed in connection with the Initial
Senior Loan and comparable provisions of the Initial Junior Loan except to the
extent caused by the actions of Owners. All costs and expenses of Manager
pursuant to this indemnity shall be at the sole expense of Manager except the
cost or expense shall be an Operating Expense rather than the sole expense of
Manager only under the following circumstances and only under subsections (a)
and (c) above as long as Manager was not in violation or breach of this
Agreement, not negligent, and such claim arose in the ordinary course of
business. In all other circumstances, all costs and expenses under this Section
shall be the sole cost and expense of Managers and shall not be an Operating
Expense. The indemnity
-14-
<PAGE>
provided for in this Section 6.1 shall survive the expiration or sooner
termination of this Agreement.
6.2 Indemnified Parties. As used in Section 6.1, the term "Indemnified Parties"
shall mean Owners or any of them, the Facility Entities or any of them, AL II
Holdings, any Mortgagee and their respective successors, assigns, employees,
servants, agents, attorneys, officers, directors, shareholders, members,
managers, partners and owners.
6.3 Indemnification by Owners. Owners, jointly and severally, agree to
indemnify, defend, and hold harmless with counsel reasonably acceptable to
Managers, the Managers and Emeritus from and against all damages, losses,
liabilities, obligations, penalties, costs and expenses (including without
limitation, reasonable attorneys' fees, court costs and other expenses of
litigation) suffered by, or claimed or asserted against, the Managers or
Emeritus, directly or indirectly, by any Person based on, arising out of or
resulting from the gross negligence or willful misconduct of Owners under this
Agreement.
7. MANAGEMENT FEES
7.1 Payment. Subject to the provisions of Section 7.2, the Facility Entities
shall pay the Managers for services rendered by the Managers pursuant to this
Agreement an amount equal to seven percent (7%) of the Total Revenues from each
Facility (determined separately for each Facility) then subject to this
Agreement during the Initial Term and any Extension Term of this Agreement
("Management Fee"), which amount shall be paid on a monthly basis, based upon
the Total Revenues earned by such Facilities during the previous month, with the
first payment to be made on the 4th day of the first full month after the
Commencement Date, and continuing on the 4th day of each month thereafter until
the expiration or sooner termination of this Agreement. During the Extension
Term, the Management Fee shall be 7% of Total Revenues for such Facility with no
further accrual of any portion of the Management Fee.
7.2 Limitation on Fees. The Management Fees payable to the Managers shall be
limited during the Initial Term to five percent (5%) of Total Revenues for each
Facility (determined separately for each Facility) ("Base Management Fee") until
such time that such Facility is producing an Operating Profit for three (3)
consecutive calendar months. The unpaid two percent (2%) of the Management Fee
shall be accrued without interest until an Operating Profit is achieved for
three (3) consecutive calendar months ("Accrued Management Fee"). From and after
the date that each Facility (determined separately for each Facility) produces
an Operating Profit for not less than three (3) consecutive calendar months, the
Managers shall be entitled to receive the full Management Fee and the Accrued
-15-
<PAGE>
Management Fee from prior periods for such Facility to the extent Operating
Profit is available therefor. If there is an Operating Deficit for three (3)
consecutive calendar months, the Management Fee for such Facility shall be
limited to the Base Management Fee thereafter until Operating Profit is
thereafter achieved for such Facility for three (3) consecutive calendar months.
As set forth above, the computation of Base Management Fee, Accrued Management
Fee, and the conditions under which the Accrued Management Fee is payable shall
be determined separately for each Facility subject to this Agreement.
Notwithstanding anything to the contrary contained herein, any obligation of
Owners to pay any Accrued Management Fee for any Facility shall terminate
automatically at the expiration of the Initial Term if Emeritus does not timely
exercise or at such time as it is not entitled to exercise the Purchase Option
set forth in Section 13, and in any event any Accrued Management Fee shall be
paid solely out of Operating Profit for such Facility (and not out of Operating
Profit for any other Facility) and neither the Facility Entities nor AL
Investors Development shall have any liability to pay the Accrued Management Fee
during the Initial Term or upon expiration or sooner termination of this
Agreement from any other funds or by any Owner's Deficit Contribution pursuant
to Section 8.3.
8. ACCOUNTS; OPERATING DEFICIT CONTRIBUTIONS; RECORDS AND REPORTS
8.1 Bank Accounts. Manager shall establish an Agency Account and a Reserve
Account for each Facility (which may be aggregated for one or more Facilities as
Owner may reasonably specify) at a banking institution or institutions selected
by Owner after consultation with Manager, and such accounts shall be in
Manager's name, as agent for the respective Owner (collectively the "Facility
Accounts"). Manager, as agent of Owners, will deposit in the Agency Account all
monies received from the operation of the Facilities as Total Revenue and,
together with any interest earned thereon, will disburse the same from the
Agency Account for the purposes set forth in the following Section 8.2. Revenues
or funds received by Managers from the Facilities that do not constitute Total
Revenues shall be immediately paid to Owner or placed in the Agency Account as
directed by Owners. To the extent required under any Legal Requirement, deposits
received pursuant to any Residency Agreement shall be maintained in a segregated
Agency Account for such deposits, and all amounts in such segregated deposit
Agency Account shall be used only to refund deposits in accordance with
Residency Agreements and, if any such deposits are forfeited under the terms of
a Residency Agreement, for deposit into the Agency Account. All funds derived
from the deduction for the Reserve Fund described in Section 8.4 shall be placed
in the Reserve Account and shall be transferred to the Agency Account for the
purpose of disbursement as expenditures are made in accordance with the
provisions of Section 8.4. Manager shall not commingle any funds in the Facility
Accounts with Manager's or any Affiliate's other funds. Notwithstanding the
foregoing as to each
-16-
<PAGE>
of the Facility Accounts, the Owner shall be designated as an additional
signatory on each of the Facility Accounts entitled to withdraw all or any of
the funds in said accounts in the event that Manager has filed a voluntary
petition or is the subject of an involuntary petition in bankruptcy, insolvency
or reorganization under the bankruptcy law or in any event if this Agreement has
expired or sooner terminated. In addition, if Emeritus does not timely exercise
or no longer has the right to exercise the Purchase Option, then Owner shall
have the right to implement a cash management system whereby amounts in the
Agency Accounts are automatically swept into accounts of the Owners on a monthly
or other regular basis specified by Owners. Managers shall reasonably cooperate
with Owners in implementing such cash management system. It is expressly agreed
and understood that all funds standing in the Facility Accounts described herein
are the sole property of the respective Owner, notwithstanding that Manager
shall have the right to withdraw funds therefrom for the purposes set forth in
this Agreement.
8.2 Expenditures. In accordance with the Annual Plan, except as otherwise
approved by Owners, Managers as agent of the Facility Entities are hereby
authorized to pay from the Agency Account for each Facility in the following
order of priority such amounts and at such times as are required to pay the
following expenditures for each Facility:
(a) The Operating Expenses;
(b) The Fixed Operating Expenses (exclusive of any Base, Accrued or other
Management Fee and Capital Improvements) except for such items as Owner has
elected to pay directly;
(c) The cost of Capital Improvements approved by Owner;
(d) The Base Management Fee or if the conditions set forth in Section 7.2
have been satisfied the full Management Fee for the current period;
(e) The Accrued Management Fee from prior periods if the conditions set
forth in Section 7.2 have been satisfied;
(f) Any Operating Deficit Loan (as defined in Section 8.3 below), if any;
(g) Any Cash Available for Distribution to Owner, which shall be paid over
to Owners as directed by Owners within twenty (20) days after the end of each
calendar month during the Term.
Funds in the Agency Account shall not be utilized for any other purpose.
-17-
<PAGE>
8.3 Deficit Contributions. In the event that Total Revenue from a Facility is
insufficient, or is anticipated to be insufficient, to pay the Operating
Expenses and Fixed Operating Expenses of such Facility during any calendar month
during the Initial Term, upon twenty (20) days' written notice from the Manager,
Owners, subject to refusal or failure of the holders of the Senior Loan to fund
such amounts as provided below, shall deposit or cause to be deposited funds in
the Agency Account in advance on a monthly basis in an amount equal to the
Operating Deficit for the upcoming calendar month up to the aggregate Operating
Deficit for such Facility as set forth on Exhibit B ("Owners Deficit
Contribution"). Owner's Deficit Contribution shall be determined separately for
each Facility and Owner's obligation to fund Operating Deficits for each
Facility shall not exceed the amount for such Facility set forth on Exhibit B,
notwithstanding that Owner's Deficit Contribution as to any other Facility may
not have exceeded the maximum amount for such Facility. Manager acknowledges
that the Owner's Deficit Contribution will be funded from the proceeds of the
Senior Loan and be subject to the conditions for funding set forth therein.
Subject to Owner's approval of the draw request, which shall not unreasonably be
withheld, Manager agrees to process the draw request for the Owner's Deficit
Contribution from the Senior Lender and prepare all financial and other
information required to fund the draw request. If the Senior Lender refuses or
fails to advance all or any portion of Owner's Deficit Contribution for any
Facility, then Emeritus shall loan such amount, together with interest at the
Prime Rate, to the respective Owner ("Operating Deficit Loan"). Any outstanding
Operating Deficit Loans shall be repaid as provided in Section 8.2, from the
proceeds of the Senior Loan designated for such purpose, or, if not sooner
repaid, upon the expiration or sooner termination of this Agreement.
Notwithstanding anything to the contrary, upon expiration or sooner termination
of this Agreement, repayment and priority of any outstanding Operating Deficit
Loan shall be subordinate in all respects to repayment and priority of the
Senior Loan. Promptly after the end of such calendar month, the parties shall
reconcile the payment of Owner's Deficit Contribution based upon the actual
Operating Deficit for such month. All Operating Deficits for any Facility during
the Initial Term remaining after Owner has funded the full amount of the Owner's
Deficit Contribution, or Emeritus has loaned such amount to Owners, for such
Facility as set forth in Exhibit B, shall be funded absolutely and
unconditionally by Emeritus into the Agency Account or otherwise as directed by
Owners as and when necessary to pay, but in any event no later than ten (10)
days after written notice from Owners, all Operating Deficits for any Facility
during any calendar month during the Initial Term (which commences on the date
hereof and expires December 31, 2001), as more particularly set forth herein and
in the Emeritus Guaranty ("Emeritus Deficit Contribution"). Owners shall have no
obligations whatsoever to reimburse, bear the burden of or otherwise pay
Emeritus for any Emeritus Deficit Contribution. AL Investors Development shall
provide reasonable evidence of the availability of
-18-
<PAGE>
Owner's Deficit Contribution. The obligation of Emeritus to make Emeritus
Deficit Contributions pursuant to this Section 8.3 shall survive any termination
of this Agreement prior to the expiration of the Initial Term; provided,
however, that such obligations shall not survive any termination of this
Agreement arising out of an Event of Default by Owner, and shall not survive any
partial termination of this Agreement with respect to any Facility purchased by
Daniel R. Baty pursuant to the Put and Purchase Agreement following closing
thereunder.
8.4 Reserve Account. In the event the approved Annual Plan for any Facility
provides for expenditures of less than $250 per unit in such Facility for the
applicable Operating Year for replacements of Furnishings and Equipment or
Capital Improvements, there shall be deducted from Total Revenue as part of
Fixed Operating Expenses the difference between such expenditures and $250 per
unit in such Facility for such Operating Year (or such lesser amount as Owners
may approve) funded quarterly and the cash funds so created shall be deposited
in the Reserve Account. Funds in the Reserve Account shall be utilized for the
purpose of making replacements, substitutions, and additions to Furnishings and
Equipment originally included in the Facility or Capital Improvements to the
extent approved by Owners in the Annual Plan or as directed by Owners to
maintain each Facility in good order and operating condition. Funds in the
Reserve Account shall be invested in an interest bearing account or securities
as Owners may direct and interest thereon shall be added to the Reserve Account.
Funds from the Reserve Account shall not be utilized for any other purpose.
8.5 Books and Records. Under Manager's supervision, each Facility shall keep (at
the Facility or at Emeritus' corporate headquarters) full and adequate books of
account and such other records and information as are necessary to reflect the
results of the operation of the Facility and to comply with all Legal
Requirements with respect to the Facility. Managers will keep the books and
records for each Facility in all material respects in accordance with generally
accepted accounting principles except as otherwise approved by Owners. All such
records shall be and remain the exclusive property of the Owners, subject to
Manager's right to make and retain copies thereof.
8.6 Reports to Owners. Manager and Emeritus will deliver, or cause to be
delivered, to Owners the following forecasts, budgets, reports and statements
each in form reasonably acceptable to Owners:
8.6.1 Not later than December 1 the draft Annual Plan for the succeeding
Operating Year;
8.6.2 Within thirty (30) days after the end of each calendar month, an end of
the month financial report showing the results of operation of each Facility
-19-
<PAGE>
and a balance sheet for the prior month and the year to date for each Facility
and all Facilities in the aggregate prepared in accordance with GAAP and
certified as fairly representing the financial results in all material respects
by a financial officer of Emeritus;
8.6.3 Within thirty (30) days after the end of each calendar month during the
Term, a computation for all Facilities in the aggregate and for each Facility
individually of Total Revenue, Operating Expenses, Fixed Operating Expenses and
Operating Deficit or Operating Profit for the prior month, year to date, and for
Operating Profit or Operating Deficit cumulative from the Commencement Date, in
each case on a cash basis and certified as fairly representing the financial
results in all material respects by a financial officer of Emeritus;
8.6.4 As soon as practicable after each Operating Year, but in any event, within
seventy-five (75) days of the end of each Operating Year, an income statement
and balance sheet for all Facilities in the aggregate and for each Facility
individually in form reasonably acceptable to Owners as of the last day of such
Operating Year, which income statement and balance sheet shall be certified as
fairly representing the financial results in all material respects by a
financial officer of Emeritus and if requested by Owners be audited by an
independent nationally recognized accounting firm approved by Owners and such
other annual end of year financial reports as may be reasonably necessary for
each Owner and Owners to file its or their federal and state income tax returns;
8.6.5 The financial reports to be delivered to any Mortgagee as more
particularly defined in the respective Mortgage or related loan documents;
8.6.6 Within ninety (90) days after the end of each fiscal year of Emeritus,
audited financial statements of Emeritus prepared by an independent "big five"
accounting firm approved by Owners, prepared in accordance with GAAP, including
a balance sheet and an income statement for such fiscal year, certified as true
and correct in all material respects by a financial officer of Emeritus.
Emeritus shall also submit to Owners, upon its filing thereof, a copy of any
Form 10K or Form 10Q as filed with the United States Securities and Exchange
Commission;
8.6.7 Copies of all Medicare and/or Medicaid cost reports and any amendments
thereto filed with any Governmental Authority with respect to any Facility, and
all responses, audit reports and other correspondence and other documents
received with respect to such cost reports.
8.6.8 Within three (3) days of receipt, copies of any notice received from any
Governmental Authority or Third Party Payor that any Permit, Medicare
-20-
<PAGE>
and/or Medicaid certification or similar item with respect to a Facility is
being downgraded, revoked or suspended or that any such action is pending or
being considered.
8.6.9 Such other reports reasonably required by Owners or any Mortgagee.
8.7 Rights to Inspection and Review. Each Owner, its accountants, attorneys,
agents and any Mortgagee shall have the right to enter upon any part of any
Facility at any time during normal business hours during the Term, and on not
less than eight (8) hours prior notice unless an emergency exists, for the
purpose of examining or inspecting the same or examining and making extracts and
copies of books and records of the Facility or for any other purpose, including
audits, which the Owner of any Facility, in its discretion, shall deem necessary
or advisable, but same shall be done with as little disruption to the business
of the Facility as practicable. Books and records of the Facility shall be kept
at the Facility and a summary thereof in such location as directed by Owners.
8.8 Deficiencies and Overpayments. If any audit or financial report discloses a
deficiency in the reporting of Total Revenues, or any overpayment in Operating
Expenses, Fixed Operating Expenses or Management Fees, Managers shall forthwith
recalculate Operating Profit, Operating Deficit or Management Fees and pay to
the Owners any overpayment or otherwise, together with interest at Manager's
sole expense on the amount of deficiency or overpayment, calculated at the
Overdue Rate, from the date when such overpayment was made until the date Owners
receive return of such overpayment. If any audit conducted for Owners pursuant
to the provisions hereof discloses that the Total Revenues for any Operating
Year exceed those reported by Managers by more than five percent (5%) or that
the full Management Fee or any Accrued Management Fee was overpaid by more than
five percent (5%), the Managers at their sole expense (and not as an Operating
Expense) shall pay the reasonable cost of such audit and examination. Otherwise,
the cost of audits approved by Owners shall be an Operating Expense.
8.9 Survival. The obligations and rights of the Managers and Owners referenced
in Section 8.8 shall survive the expiration or earlier termination of this
Agreement for a period of three (3) years.
9. TERMINATION RIGHTS AND REMEDIES
9.1 By Managers. The Managers may terminate this Agreement, except for the
provisions of Section 8.3, with respect to all (but not less than all) of the
Facilities by reason of any of the following ("Event of Default"): (i) failure
of Owners to fund an Operating Deficit in accordance with Section 8.3 within
fifteen
-21-
<PAGE>
(15) days after written notice to the Owner that payment has not been paid when
due; or (ii) the Owner otherwise breaches or fails to perform a material term of
this Agreement, which breach or failure is not cured within thirty (30) days
after written notice of said breach is provided to Owner. Provided, however,
that Manager shall not have the right to terminate this Agreement without the
prior written consent of any Mortgagee. Provided, further, Manager shall have no
right to terminate this Agreement nor shall Owner be in default if such right to
terminate or such default is caused by a failure by Emeritus to fund Operating
Deficits or a default or an Event of Default committed or suffered hereunder by
Managers or Emeritus.
If Managers terminate the Agreement pursuant to this Section 9.1, such
termination shall not terminate the Purchase Option under Section 13 below, and
the Purchase Option shall remain in full force and effect. If Managers terminate
this Agreement pursuant to this Section 9.1 and the Purchase Option is
thereafter exercised, the purchaser shall be entitled to offset and deduct from
the Purchase Price that portion of Owner's Deficit Contribution which Owners did
not fund but were required to do so in accordance with Section 8.3 and which
Managers or Emeritus funded and were not reimbursed by Owners.
9.2 Owner. The Owner may terminate this Agreement with respect to any one or all
of the Facilities by reason of any of the following (each an "Event of
Default"): (i) Managers or Emeritus fail to fund the Emeritus Deficit
Contribution under Section 8.3 within fifteen (15) days after written notice
from Owner that payment has not been paid when due; (ii) Emeritus breaches or
fails to perform any obligation, including but not limited to the warranties,
representations and indemnities, under the Emeritus Guaranty which is not cured
within the time period set forth therein; (iii) Emeritus or its Affiliates fail
to perform any obligation under the Purchase Agreements which survive closing
thereunder; (iv) Managers or any of them or Emeritus breaches or fails to
perform a material term of this Agreement as to any or all Facilities, which
breach or failure is not cured within thirty (30) days after written notice of
said breach is provided to the Managers; (v) Daniel Baty fails to perform or
defaults under the Put and Purchase Agreement within the time period set forth
therein or fails to comply with the liquidity and reporting requirements of the
Initial Senior Loan (which is not cured within any applicable cure period set
forth therein); (vi) Emeritus fails to perform or defaults under the Licensing
Indemnity Agreement within the time period set forth therein; or (vii) either
Manager or Emeritus suffers a Bankruptcy Event. Provided, however, Owners shall
have no right to terminate this Agreement nor shall Managers be in default if
such right to terminate or such default is caused by a failure by Owner to fund
Operating Deficits to the extent provided in Section 8.3. Any such termination
pursuant to this Section 9.2 shall also constitute a termination of the Purchase
Option.
-22-
<PAGE>
9.3 Curing Defaults. Except for failure to close under the Purchase Option set
forth in Section 13, or a default under Section 9.2(v), (vi), or (vii), any
default by Managers or Owner under the provisions of Section 9.1 or 9.2, except
for defaults involving the payment of money which must be cured within the
applicable cure period, shall not constitute an Event of Default if the nature
of such default will not permit it to be cured within the cure period allotted,
provided that either Managers or Owner promptly shall commence to cure such
default and shall proceed to complete the same with diligence but in no event
later than sixty (60) days after the written notice of default has been given.
9.4 Effect of Termination. The termination of this Agreement in whole or in part
under the provisions of this Section 9 shall not affect the rights of the
terminating party with respect to any damages it may have suffered as a result
of any breach of this Agreement, nor shall it affect the rights of either party
with respect to liability or claims accrued or arising out of events occurring
prior to the date of termination. Any termination of this Agreement, whether in
whole or in part, other than by reason of an Event of Default by Owner and other
than as a result of a Casualty or Condemnation as to a particular Facility,
shall automatically terminate the Purchase Option provided for in Section 13,
but any termination of this Agreement by reason of an Event of Default by Owner
shall not terminate the Purchase Option provided for in Section 13. No
termination of this Agreement for any reason under any provision hereof,
including without limitation, Section 9.1, whether in whole or in part, shall
terminate any obligation of Emeritus to fund the Emeritus Deficit Contribution
or otherwise hereunder or under the Emeritus Guaranty except only as to those
Facilities terminated from this Agreement as a result of Casualty or
Condemnation pursuant to Section 9.7.2. Upon any termination, Owner shall repay
any outstanding Operating Deficit Loan subject to prior repayment of the Senior
Loan as more particularly provided in Section 8.3.
9.5 Remedies Cumulative. The right of termination shall not be an exclusive
remedy and either party shall have the right to sue for damages or seek
equitable relief following an Event of Default. Neither the right of termination
nor the right to sue for damages nor any other remedy available to either party
hereunder shall be exclusive of any other remedy given hereunder or now or
hereafter existing at law or in equity.
9.6 Transfer Upon Termination. Upon expiration or sooner termination of this
Agreement in whole or in part, except for termination upon closing under the
Purchase Option, Managers at their sole expense shall transfer or assign as
directed by Owners to the respective Facility Entity all books, records,
Facility Accounts, Permits, Contracts, Leases, any Personal Property owned by or
in the possession of Managers, all of which shall be free and clear of all Liens
(except for the Mortgage),
-23-
<PAGE>
and other matters and things utilized by Manager in the operation of the
Facilities which are no longer subject to this Agreement. In such event, legal
title to any vans or buses in the name of Emeritus or Managers shall be
transferred to the respective Facility Entity free and clear of Liens at the
sole cost of Managers and for no additional consideration. Without limiting the
generality of the foregoing, all licensing fees and sales tax on the transfer
shall be paid by Emeritus and Managers. Upon any termination of this Agreement,
Manager shall assign and otherwise take all actions required to effectively
transfer to the Facility Entities all Permits which are required under
applicable Legal Requirements to be issued in the name of Managers. Managers
shall cooperate fully in such transfer and shall not interfere with an Owner
employing any and all employees of the Facility who desire to accept such
Owner's offer of employment. Manager's obligations hereunder and under the
Purchase Agreements and Owner's remedies for breach thereof shall survive the
expiration or sooner termination of this Agreement and the transfer and
assignment herein.
9.7 Termination of Agreement as to Individual Facilities. The parties
acknowledge that this is a master Management Agreement with respect to all of
the Facilities and this Agreement may be terminated by Owner as to a particular
Facility in one or more of the following circumstances. In such event, this
Agreement shall continue in full force and effect as to the remaining Facilities
but the provisions of Section 8.3 shall nonetheless continue as to any
Facilities terminated from this Agreement except only for termination pursuant
to Sections 9.7.2 through 9.7.5 below.
9.7.1 Default. There has been an Event of Default by the Manager as to a
particular Facility and Owner has terminated this Agreement as to such Facility;
9.7.2 Casualty or Condemnation. There has been an election by Owner to terminate
this Agreement as to a particular Facility resulting from Casualty or
Condemnation which Owner has elected not to repair as provided for in Section
11; or
9.7.3 Termination During Extension Term. If Owner has elected the option for the
Extension Term, Owner may terminate this Agreement as to any Facility in its
sole discretion upon not less than sixty (60) days prior notice to the Manager;
9.7.4 Termination of Put Facilities. Upon closing of the purchase of a Put
Facility pursuant to the Put and Purchase Agreement, such Put Facility or
Facilities shall be automatically deleted from this Agreement.
-24-
<PAGE>
9.7.5 Termination of Failed Facilities. Upon closing of the purchase by Emeritus
or its Affiliates of a Failed Facility pursuant to the Licensing Indemnity
Agreement, such Failed Facility or Facilities shall be automatically deleted
from this Agreement.
10. ASSIGNMENT
10.1 Assignment by Manager. Manager shall not assign, transfer or encumber this
Agreement or any right or interest herein or hereunder voluntarily or by
operation of law or in any other manner without the prior written consent of
Owners, which may be withheld in their sole discretion.
10.2 Assignment by Facility Entities. Owners may assign or transfer this
Agreement to any Affiliate or to any Mortgagee without the consent of Emeritus
or Managers. In such event, the Owner or Owners assigning this Agreement (except
as to an assignment for security purposes to any Mortgagee, but not excepting
the realization by such Mortgagee of such assignment in connection with a
foreclosure of the applicable Mortgage or the granting of a deed in lieu of
foreclosure to such Mortgagee) shall be relieved of all liability under this
Agreement accruing or arising out of facts and circumstances occurring after the
date of such assignment, except for the obligation to fund the Owner's Deficit
Contribution pursuant to Section 8.3 (which shall not apply to the holder of any
Senior Loan). In connection with any security assignment to a Mortgagee,
Managers and Emeritus shall subordinate this Agreement to the Mortgage in such
form as any Mortgagee may require.
10.3 Refinancing. With the prior consent of Managers and Emeritus, which shall
not unreasonably be withheld, the Facility Entities shall have the right to
refinance the Mortgage initially held by the Lending Group as to one or more
Facilities upon the following terms and conditions:
10.3.1 Obligations of Managers and Emeritus. If any refinancing would increase
the reasonably projected amount of the Emeritus Deficit Contribution as computed
under this Agreement with respect to the initial Mortgage over the remaining
balance of the Initial Term, then, unless Emeritus shall approve such
refinancing, Emeritus shall not be obligated to fund such increased amount of
the Emeritus Deficit Contribution to the extent resulting from such refinancing.
Any refinancing shall provide that upon closing of the Purchase Option, Emeritus
may assume the Mortgage resulting from such refinancing upon
commercially-reasonable terms including payment of the Mortgagee's assumption
expenses and an assumption fee not to exceed one-half percent (.5%) of the
indebtedness secured by the Mortgage.
-25-
<PAGE>
10.3.2 Segregation of this Agreement. In connection with a refinancing, this
Agreement shall be segregated into two or more separate management agreements
with the Facilities being managed pursuant to each management agreement
corresponding to the Facilities subject to each Mortgage or Mortgages held by a
separate Mortgagee. In such event, the terms and conditions of each separate
management agreement shall be the same as this Agreement, except Total Revenues,
Operating Expenses, Fixed Operating Expenses, Operating Profit and Operating
Deficit shall be computed only with respect to the Facilities subject to each
separate management agreement. If such segregation would increase the reasonably
projected amount of the Emeritus Deficit Contribution as computed under this
Agreement with respect to the initial Mortgage, than unless Emeritus shall
approve such segregation, Emeritus shall not be obligated to fund such increased
amount of the Emeritus Deficit Contribution to the extent resulting from such
segregation. Each segregated management agreement may be assigned to the
respective Mortgagee and shall be subordinate to the respective Mortgage as
provided in Section 10.2 above. Upon such segregation, Emeritus shall execute a
restated Emeritus Guaranty or such other confirmation of the continuing
obligations under the Emeritus Guaranty.
10.3.3 Costs of Refinancing. The reasonable costs and expenses of such
refinancing, including but not limited to the Mortgagee's title review and
insurance, due diligence, loan fees, mortgage taxes (if any), loan document
preparation, legal fees, and other customary loan closing costs, together with
Owners' reasonable costs and expenses of arranging and closing such refinancing,
shall be an Operating Expense unless otherwise approved or directed by Owners in
their sole discretion.
10.3.4 Substitution of Initial Senior Loan. Owner, subject to the consent of
Managers and Emeritus, which shall not unreasonably be withheld, may substitute
a lender other than Lending Group for Facilities entitled Loyalton of
Hagerstown, Loyalton of Lakewood and Loyalton of Staunton. In such event, the
parties shall enter into a management agreement under the same terms and
conditions herein, subject to the above provisions of this Section 10.3.
10.4 Remedies. Any assignment by either party of this Agreement in violation of
the provisions of this Section 10 shall be null and void. In addition to any
other remedies available to the parties, the provisions of this Section 10 shall
be enforceable by injunctive proceeding or by a suit for specific performance.
11. CASUALTY AND CONDEMNATION
11.1 Casualty. If a Facility shall be damaged by a Casualty such that Owner
determines in its sole but good faith judgment that it is not feasible to
-26-
<PAGE>
restore the Facility, or if for any reason insurance proceeds are not available
to effect such restoration, then Owner may terminate this Agreement as to that
Facility upon thirty (30) days prior written notice to Manager, and neither
party shall have any further obligation to the other party hereunder with
respect to that Facility and this Agreement shall remain in full force and
effect as to the remaining Facilities. If this Agreement shall not be terminated
by Owner in the event of a Casualty to the Facility, then Owner with the
cooperation of Manager, or Manager if Owner so directs, shall proceed with
reasonable diligence to commence and complete the restoration of the Facility to
substantially its condition and character just prior to the occurrence of such
casualty to the extent permitted under Legal Requirements. The cost of
restoration shall not be an Operating Expense or Fixed Operating Expense except
to the extent such cost of restoration exceeds available insurance proceeds and
such costs of restoration in excess of available insurance proceeds, including
any deductibles under applicable insurance policies shall constitute an
Operating Expense.
11.2 Condemnation. If a Facility is subject to Condemnation, or such substantial
portion thereto as to make it unfeasible, in the sole but good faith judgment of
Owner, to restore and continue to operate the remaining portion of the Facility
following Condemnation, then upon the Date of Taking, this Agreement shall
terminate as to that Facility and neither party shall have any further
obligation to the other party hereunder with respect to that Facility and this
Agreement shall remain in full force and effect as to the remaining Facilities.
If Owner elects to restore and continue to operate the remaining portion of the
Facility, then this Agreement shall not terminate as to the Facility, and Owner
with the cooperation of Manager, or Manager if Owner so directs, shall proceed
with reasonable diligence to repair any damage to the Facility, or to alter or
modify the Facility so as to render it a complete architectural unit which can
be operated as a Facility of substantially the same type and class as before.
The cost of restoration shall not be an Operating Expense or Fixed Operating
Expense except to the extent the cost of restoration exceeds the net amount of
any Award received by any Owner. In the case of any Condemnation, whether or not
this Agreement shall cease and terminate, the entire Award shall be the property
of Owner, and Manager hereby assigns to Owner all its right, title and interest
in and to any Award. Manager shall have the right, however, to claim and recover
from the condemning authority compensation for any loss which Manager may be put
for Manager's moving expenses or taking of Manager's personal property (not
including any value assigned to this Agreement), provided that such damages may
be claimed only if they are awarded separately in the Condemnation proceedings
and not out of or as part of the Award recoverable by Owner.
-27-
<PAGE>
12. CAPITAL IMPROVEMENTS
Any program of improvements, or improvement involving an addition to a Facility
or the renovation or refurbishing of the Facility, the cost of which is not or
should not be charged to property operation and maintenance and which should be
capitalized in accordance with generally accepted accounting principles, shall
be a "Capital Improvement." Capital Improvements shall be undertaken only upon
the approval of or direction by Owner in its sole discretion, which may be by
separate approval or by specific inclusion in the Annual Plan. Notwithstanding
anything to the contrary herein, Emeritus shall have the unconditional
obligation at its sole expense (and not as an Operating Expense or Fixed
Operating Expense) to complete and pay for the completion of development,
construction and equipping of each Facility as set forth in the Supplemental
Agreement. To the extent any improvements to the Facilities are to be funded
from an escrow or similar account at Closing under the Purchase Agreements or
the terms of any Mortgage ("Holdback Accounts"), such improvements shall not be
deemed Capital Improvements hereunder and the cost thereof shall not be
Operating Expenses or Fixed Operating Expenses. Managers shall expeditiously
cause the completion of all improvements to be funded by the Holdback Accounts.
13. EMERITUS' OPTION TO PURCHASE
13.1 Conditions to Option. On the conditions precedent (which conditions Owners
may waive, in their sole discretion, by notice to Emeritus at any time) that (a)
at the time of exercise of the Purchase Option, there then exists no Event of
Default under this Agreement, or the AL II Operating Management Agreement by the
Managers or Emeritus, and (b) Emeritus timely complies with the provisions of
this Section 13, and (c) the Purchase Option under the AL II Operating
Management Agreement has been exercised simultaneously by delivery of a Purchase
Option Notice (as defined therein) and (d) if a Put Notice has been delivered on
account of Section 3.1(d) or 3.1(e) of the Put and Purchase Agreement, less than
sixty (60) days has elapsed since delivery of such Put Notice, then Emeritus or
its Affiliates shall have the option to purchase all, but not less than all, of
the Facilities then subject to this Agreement including, without limitation, any
Facilities which are the subject of a segregated Management Agreement pursuant
to Section 10.3, at the price and upon the terms hereinafter set forth in this
Section 13 (the "Purchase Option").
13.2 Exercise of Option; Deposit. The Purchase Option shall permit Emeritus to
purchase the Meditrust Facilities (a) at any time during the Initial Term but
not later than the last day of the Initial Term ("Purchase Option Expiration
Date") provided that written notice of the exercise of the option is given by
Emeritus to the Owners (the "Purchase Option Notice") at least one hundred
eighty
-28-
<PAGE>
(180) days prior to the Purchase Option Expiration Date. Emeritus shall have no
right to rescind the Purchase Option Notice once given. With the Purchase Option
Notice, Emeritus shall deposit with the Owners the sum of $152,600 (or such
lesser amount as shall equal two percent (2%) of Owner initial equity investment
in acquiring the Facilities) (together with the interest earned thereon, the
"Deposit") which shall constitute liquidated damages and Owners' sole remedy if
Emeritus fails to consummate the purchase of the Facilities for any reason other
than Owners' default and refusal to deliver the Deeds conveying the Facilities
upon payment of the Purchase Price, but the Deposit shall be applied to the
Purchase Price if the Purchase Option closes. Emeritus and the Owners
acknowledge that damages that would accrue from Emeritus' failure to close the
Purchase Option are difficult to determine and that the amount of liquidated
damages set forth above constitutes a good faith and reasonable estimate of the
damages that would otherwise have accrued. The Deposit shall be deposited in a
money market or similar account with a commercial bank with all interest thereon
remaining in such account and reported as income of Emeritus, and Emeritus
agrees to complete a Form W-9 and such other forms as such bank may require in
order to report such interest.
13.3 Conveyance. If the Purchase Option is exercised by Emeritus in accordance
with the terms hereof, each Facility shall be conveyed by a special warranty
deed subject to the Permitted Exceptions, Leases, Contracts and Permits (except
for the Mortgage) and all matters arising through or with the consent of
Managers or Emeritus with covenants only against acts of Owners or Persons
claiming by, through or under Owners during their period of ownership, a quit
claim bill of sale as to all Personal Property, and a quit claim assignment of
all Leases, Contracts, Permits, and funds in Facility Accounts in form
satisfactory to Owners (collectively, the "Deed") running to Emeritus or to its
designee. Transfer of all Permits to Emeritus or its Affiliate designee in
accordance with Legal Requirements shall be the sole responsibility of Emeritus.
Owners, other than an obligation to reasonably cooperate (at no material
out-of-pocket cost) in such transfer, shall have no liability or responsibility
for the adequacy or completeness of any transfer of the Permits. Owners shall
reasonably cooperate with Emeritus and its title companies in order to provide
all necessary documents, owner's affidavits (provided Owners have no liability
thereunder except for their own acts during their period of ownership) and other
evidence of authority to enable Emeritus to purchase title insurance covering
all of the Facilities at the closing under the Purchase Option.
13.4 Calculation of Purchase Price. The price to be paid by Emeritus for the
acquisition of the Facilities pursuant to this Purchase Option shall be equal to
the amount calculated as set forth on Exhibit C ("Purchase Price"). The Purchase
Price shall be a net price to be received by Owners without deduction for due
diligence, transfer taxes, title insurance or other closing costs, all of which
shall be paid by
-29-
<PAGE>
Emeritus. Owners shall not bear any closing costs or prorations of any kind or
nature, subject to any offset as provided in Section 9.1 and except for
repayment of any outstanding Operating Deficit Loan.
13.5 Payment of Purchase Price. The Purchase Price, less the Deposit, shall be
paid by Emeritus at the Time of Closing in good funds.
13.6 Place and Time of Closing. If this Purchase Option is exercised, the
closing shall occur and the Deed for each Facility shall be delivered to Title
Company (the "Closing") pursuant to escrow closing arrangements reasonably
satisfactory to Owners and Emeritus at 12:00 o'clock noon (P.S.T.) one hundred
eighty (180) days following delivery of the Purchase Option Notice but in no
event later than the Purchase Option Expiration Date (such time, as the same may
be extended to the next succeeding Business Day, the "Time of Closing"). It is
agreed that time is of the essence of this Purchase Option.
13.7 Condition of Facilities. The Facilities and each of them shall be purchased
by Emeritus "AS IS" and "WHERE IS" as of the Time of Closing. Without limiting
the foregoing, and except as set forth in the Deed, Owners make and shall not
make representations or warranties, express or implied, with respect to, and
shall have no liability for: (i) the condition of the Facilities or any
Improvements thereon or the suitability, habitability, merchantability or
fitness of the Facilities; (ii) compliance with any Legal Requirements; (iii)
the presence of any Hazardous Substances in or about the Facilities, including
without limitation asbestos or urea-formaldehyde, or the presence of any
Hazardous Substances on or under the Land; (iv) the accuracy or completeness of
any plans and specifications, reports, or other materials provided to Emeritus;
or (v) any other matter relating to the Facilities, including, without
limitation, the title thereto or the condition, value or operating results or
prospects thereof. Without limiting the generality of the foregoing, Owners
shall have no liability to Emeritus with respect to the condition of the
Facilities under common law, or under any Legal Requirements and Emeritus hereby
waives any and all claims which Emeritus has or may have against Owners with
respect to the condition, value or operating results or prospects of the
Facilities. Emeritus assumes the responsibility and risks of all defects and
conditions, including such defects and conditions, if any, that cannot be
observed by inspection or examination of records. Managers and Emeritus shall
indemnify, defend, and hold harmless Owners from and against all claims and
liabilities arising out of or related to the Facilities as more particularly set
forth in Section 6.1 and from and against any guaranties of any Mortgages, it
being intended that Owners shall have no liability from and after the Time of
Closing with respect to the Facilities, except as set forth in the Deed.
-30-
<PAGE>
13.8 Use of Purchase Price to Clear Title. To enable the Facility Entities to
make the conveyance as provided in this Section 13, the Facility Entities may,
at the Time of Closing, use the Purchase Price or any portion thereof to clear
the title of any Mortgage, provided that all instruments so procured are
recorded contemporaneously with the Closing or reasonable arrangements are made
for recording subsequent to the Time of Closing in accordance with customary
conveyance practices.
13.9 Emeritus' Default. If Emeritus delivers the Purchase Option Notice and
fails to timely consummate the purchase of the Facilities in accordance with the
terms hereof for any reason other than Facility Entities' default and refusal to
deliver the Deed, (a) the Purchase Option hereunder and under the AL II
Operating Management Agreement shall be deemed terminated and Emeritus shall
thereafter have no further right to purchase the Facilities pursuant to this
Section 13 or otherwise, (b) Owners shall retain the Deposit as liquidated
damages and as Owners' sole remedy in full satisfaction of any claims against
Emeritus for its failure to consummate the purchase of the Facilities, but
nothing herein shall relieve Emeritus from its obligations under the Emeritus
Guaranty, and (c) Owners shall have the right to terminate this Agreement
without further notice.
14. INTENTIONALLY DELETED
15. GENERAL PROVISIONS
15.1 Purchases by Manager. In purchasing services, goods and supplies for the
Facilities, Managers shall use their best efforts to obtain the benefits of
volume purchasing for Owners. In addition, all direct and indirect trade
discounts, rebates and refunds, and all returns from the sale of Furnishings and
Equipment and Operating Equipment or other equipment shall accrue to the benefit
of the Facility Entities.
15.2 Budgets and Forecasts. In preparing all budgets and forecasts to be
submitted to the Facility Entities hereunder, Managers will base its estimates
upon the most recent and reliable information then available, taking into
account the location of each Facility and its experience in other comparable
assisted living facilities.
15.3 Notices. Any notice, demand, offer, approval or other writing required or
permitted pursuant to this Agreement shall be in writing, furnished in duplicate
and shall be transmitted by hand delivery, facsimile, certified mail, return
receipt requested, or Federal Express or another nationally recognized overnight
courier service which provides evidence of delivery, postage prepaid, as
follows:
-31-
<PAGE>
If to any Owner
or Owners: AL Investors Development LLC
c/o Bruce D. Thorn
2250 McGilchrist Street SE, Suite 200
Salem, Oregon 97302
Facsimile: (503)375-7644
Telephone: (503)370-7071 ext. 7143
With a copy to: Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attn: Gary E. Fluhrer
Facsimile: (206)447-9700
Telephone: (206)447-4400
and Senior Housing Partners I, L.P.
c/o Mr. Noah Levy
Two Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
Facsimile: (770)399-5363
Telephone: (770)395-8606
and Goodwin Procter & Hoar LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109-2881
Attn: Minta Kay
Facsimile: (617)227-8591
Telephone: (617)570-1877
and Prudential Real Estate Investors
8 Campus Drive
Parsippany, New Jersey 07054
Attn: Joan Hayden
Facsimile: (973)683-1788
Telephone: (973)683-1772
-32-
<PAGE>
If to the Managers
or Emeritus: c/o Emeritus Corporation
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121-1031
Attn: Mr. Kelly Price
Facsimile: (206)301-4500
Telephone: (206)301-4507
With a copy to: Perkins Coie
Suite 4000, 1201 Third Avenue
Seattle, Washington 98101
Attn: Michael E. Stansbury
Facsimile: (206)583-8500
Telephone: (206)583-8888
Any party shall have the right to change the place to which such notice shall be
given or add additional parties, including any Mortgagee, to receive notices by
similar notice sent in like manner to all other parties hereto. Any notice if
sent by overnight courier service shall be deemed delivered on the earlier of
the date of actual delivery or the next business day, if delivered by hand
delivery or facsimile shall be deemed delivered on the date of the actual
delivery and if sent by mail, shall be deemed delivered on the earlier of the
third day following deposit with the U.S. Postal Service or actual delivery. Any
notice sent by facsimile shall also be sent on the same business day by
overnight courier or mail as set forth above.
15.4 No Partnership or Joint Venture. This Agreement shall not be construed to
be or create a partnership or joint venture between Owners and their successors
or assigns, on the one part, and Emeritus and Managers, their successors and
assigns, on the other part. Managers are acting as independent contractors to
the Facility Entities in performing their duties and obligations hereunder,
except where this Agreement expressly provides Managers are acting as the agent
of Owners.
15.5 Modification and Changes. This Agreement cannot be changed or modified
except by another agreement in writing signed by the party sought to be charged
therewith.
15.6 Understandings and Agreements. This Agreement constitutes all of the
understandings and agreements of whatsoever nature or kind existing between the
parties with respect to Managers' management of the Facilities.
-33-
<PAGE>
15.7 Headings. Section headings contained herein are for convenience of
reference only and are not intended to define, limit or describe the scope or
intent of any provision of this Agreement.
15.8 Consents. Except as otherwise specified herein, each party agrees that it
will not unreasonably withhold any consent or approval requested by the other
party pursuant to the terms of the Agreement, and that any such consent or
approval shall not be unreasonably delayed or qualified. Similarly, each party
agrees that any provision of this Agreement which permits such party to make
requests of the other party shall not be construed to permit the making of
unreasonable requests.
15.9 Survival of Covenants. Any indemnity, agreement, covenant, term or
provision of this Agreement which, in order to be effective, must survive the
termination of this Agreement, shall survive any such termination.
15.10 Third Parties. None of the obligations hereunder of any party shall run to
or be enforceable by any party other than the parties to this Agreement and the
Facility Entities or by a party deriving rights hereunder as a result of an
assignment permitted pursuant to the terms hereof.
15.11 Waivers. No failure by the Owners to enforce or insist upon the strict
performances of any covenant, agreement, term or condition of this Agreement
shall constitute a waiver of any such breach or any subsequent breach of such
covenant, agreement, term or condition. No covenant, agreement, term or
condition of this Agreement and no breach thereof shall be waived, altered or
modified except by written instrument.
15.12 Applicable Law. This Agreement shall be construed and interpreted, and be
governed by, the laws of the State of Washington.
15.13 Non-Discrimination. Managers shall not discriminate against any Person as
provided by Legal Requirements.
15.14 Joint and Several. The obligations and liabilities of each of Managers and
Emeritus hereunder shall be joint and several. The obligations of each of AL
Investors Development and the Facility Entities hereunder shall be joint and
several.
15.15 Exculpation. The liability of Owners hereunder shall be limited to their
interest in the Facilities and no personal judgment or personal liability or
deficiency judgment beyond their interest in the Facilities shall be asserted
against Owners or any member thereof.
-34-
<PAGE>
15.16 Status of AL Investors Development. AL Investors Development joins in this
Agreement for the purpose of exercising management rights in its capacity as the
sole managing member or the sole managing member of the general partner of
Owners. AL Investors Development does not intend to be conducting business or
holding title to any property in any jurisdiction. AL Investors Development may
enforce any or all of the provisions of this Agreement directly against Managers
or Emeritus in the State of Washington or at its option may enforce this
Agreement on behalf of any Facility Entity in any state in which such Facility
Entity owns a Facility.
15.17 Owners Right to Cure Default. If Managers or Emeritus commit or suffer any
Event of Default hereunder, Owners, at their option and in their sole
discretion, may cure such Event of Default and the cost thereof or funds
advanced, together with interest at the Overdue Rate, shall be repaid on demand
("Default Advances"). Each of Managers and Emeritus shall be jointly and
severally liable for the repayment of Default Advances.
15.18 Recording. The parties agree that simultaneously herewith they shall
execute and deliver a memorandum of this Agreement and the Purchase Option or
Right of First Refusal and record the memorandum in the appropriate real estate
records applicable to each Facility which shall be in form satisfactory to
Owners and Managers.
IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to
be executed, all as of the day and year first above written.
EMERITUS: EMERITUS CORPORATION, a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
-35-
<PAGE>
MANAGERS: EMERITUS PROPERTIES I, INC., a Washington
corporation
By /s/ Daniel R. Baty
Name Daniel R. Baty
Its Chairman
EMERITUS MANAGEMENT LLC, a
Washington limited liability
company
By: Emeritus Corporation, a
Washington corporation
By: /s/ Daniel R. Baty
Name: Daniel R. Baty
Its: Chairman
OWNER: AL INVESTORS DEVELOPMENT LLC, a Delaware
limited liability company, for itself
and as sole managing member on behalf of
each of the Facility Entities, or in
cases where the Facility Entity is a
limited partnership, as sole managing
member on behalf of the general partner
thereof
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
-36-
<PAGE>
EXHIBIT A
TO MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
(AL II - 5 Development Facilities)
Certain Defined Terms
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors II and AL Investors Development.
AL Investors II: AL Investors II LLC, a Delaware limited liability company
AL Investors Development: AL Investors Development LLC, a Delaware limited
liability company
AL II Operating Management Agreement: That certain Management Agreement with
Option to Purchase dated on or about the same date hereof, among AL Investors II
and Emeritus Corporation and its Affiliates relating to the management of up to
fourteen (14) assisted living facilities.
AL Management Agreement: That certain Management Agreement With Option to
Purchase dated December 30, 1998 Among AL Investors LLC and Emeritus Corporation
and its Affiliates relating to the management of twenty-five (25) assisted
living facilities.
Affiliate: with respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any other Person controlling, controlled
by, or under common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an Affiliate of
such Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
A-1
<PAGE>
Agency Account: The Agency Account to be maintained for each Facility for
payment of Fixed Operating Expenses and Operating Expenses as described in
Section 8.1 of the Management Agreement.
Annual Plan(s): as defined in Section 4.2 of the Management Agreement.
Award: all compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Base Management Fee: as defined in Section 7.1 of the Management Agreement.
Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to
pay debts as they become due; or applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian or makes a general
assignment for the benefit of creditors, or in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is appointed and
is not discharged within sixty (60) days after such appointment; or an order for
relief is entered or a petition is filed under Title 11, United States
Bankruptcy Code, with respect to any of them; or any other bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, now or hereafter in effect, is commenced with
respect to any of them.
Business Day: any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
Capital Improvements: as defined in Section 12 of the Management Agreement.
Cash Available for Distribution: on any date the amount contained in the Agency
Accounts (as defined in Section 8.1 of the Management Agreement), minus an
amount (to be retained in the Agency Accounts) equal to any reasonably projected
Operating Deficit for the succeeding 30 days, taking into account all Operating
Expenses and Fixed Operating Expenses and all anticipated Total Revenues during
such 30-day period.
Casualty: the damage or destruction by act of God or otherwise of any portion of
any Facility which Owner reasonably estimates would cost more than $50,000 to
repair or restore.
Change of Control: shall mean the occurrence of any one of the following events
with respect to Emeritus:
A-2
<PAGE>
(a) any Person or group of Persons (within the meaning of Rule 13d-5 under
the Act as defined below) other than Emeritus, any of its subsidiaries, or any
trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of Emeritus or any of its subsidiaries, together
with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (the "Act")) of such
Person or group, shall become the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of securities of Emeritus
representing a greater percentage than that then owned by Daniel R. Baty,
together with all "affiliates" and "associates" of Daniel R. Baty (as defined
above) of either (A) the combined voting power of Emeritus' then outstanding
securities having the right to vote in an election of Emeritus' Board of
Directors ("Voting Securities") or (B) the then outstanding shares of Stock of
Emeritus; or
(b) Persons who, as of the date hereof, constitute Emeritus' Board of
Directors (the "Incumbent Directors") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that any
person becoming a director of Emeritus subsequent to the date hereof whose
election or nomination for election was approved by a vote of at least a
majority of the Incumbent Directors shall, for purposes of this Plan, be
considered an Incumbent Director; or
(c) the stockholders of Emeritus shall approve (A) any consolidation or
merger of Emeritus or any subsidiary where the shareholders of Emeritus,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, shares representing a majority of
the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any), (B) any
sale, lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of Emeritus or (C) any plan or proposal for the
liquidation or dissolution of Emeritus; or
(d) other than by reason of death or legal disability, Daniel Baty ceases
to be the chief executive officer of Emeritus.
Change of Control with respect to any Manager shall mean the occurrence of any
event whereby 100% of the ownership interests in such Manager are no longer
owned by Emeritus.
Closing: the date of closing as to any Facility under the Purchase Agreements.
Code: the Internal Revenue Code of 1986, as amended.
A-3
<PAGE>
Commencement Date: as defined in Section 2.1 of the Management Agreement.
Compensation: the direct salaries and wages paid to, or accrued for the benefit
of, any employee working and employed at each Facility together with all
reasonably customary fringe benefits payable to, or accrued for the benefit of
such employee, including employer's contribution under FICA., unemployment
compensation, or other employment taxes, pension fund contributions, workmen's
compensation, group life and accident and health insurance premiums, and other
reasonable employee benefits customary in the industry.
Condemnation: with respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
CPA: The certified public accountants retained to provide necessary accounting
services for the Facility or Owner, the selection of which shall be subject to
approval by Owner.
Date of Taking: the date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: means all federal, state, and local laws, ordinances and
regulations and standards, rules, policies and other governmental requirements,
administrative rulings, and court judgments and decrees in effect now or in the
future and including all amendments, that relate to Hazardous Materials and
apply to the Facilities or to the Land and/or the Improvements. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water
Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, and their state analogs.
Escrow Holder: First American Title Insurance Company.
A-4
<PAGE>
Excluded Expenses: depreciation, amortization and other non-cash expenses; items
to be provided or paid for at Owner's or Managers' sole expense as provided
herein; costs and expenses resulting from or required to cure any matter or
defect which constitutes a breach of warranty, representation or indemnity under
the Purchase Agreements, the Licensing Agreement, or the Management Agreement
which cost or expense shall be the sole responsibility of the breaching party;
costs and expenses to complete construction, development and equipping of any
Facility as more particularly set forth in the Supplemental Agreement;
unreasonable or excessive charges or expenses.
Extension Term: as defined in Section 2.2 of the Management Agreement.
Facility or Facilities: Each of the assisted living facilities, including the
Land, Improvements, and Personal Property associated therewith, located in the
city and state as set forth below which are made subject to this Agreement.
Initially the Facility entitled Loyalton of Phoenix shall be subject to this
Agreement and each additional Facility shall be made subject to this Agreement
at Closing by execution of a memorandum between the Owner and Managers
acknowledging that such Facility shall be subject to this Agreement.
<TABLE>
<CAPTION>
Development
Facility City State Units Beds Facility LLC and LP
Name
<S> <C> <C> <C> <C> <C>
Loyalton of
Flagstaff Flagstaff AZ 61 61 AL Investors
Development Flagstaff
LLC
Loyalton of
Phoenix Phoenix AZ 100 101 AL Investors
Development Phoenix
LLC
Loyalton of
Hagerstown Hagerstown MD 101 101 AL Investors
Development
Hagerstown LLC
Loyalton of
Lakewood Lakewood NY 83 83 AL Investors
Development Lakewood
LLC
Loyalton of
Staunton Staunton VA 101 101 AL Investors
Development Staunton
LLC
</TABLE>
Facility Accounts: as defined in Section 8.1 of the Management Agreement.
Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set
forth opposite the name of each Facility above and their respective successors
or assigns.
Fixed Operating Expenses: for any period, all fixed costs and expenses of
owning, and operating each Facility (determined separately for each Facility) to
the extent such costs and expenses are not included in Operating Expenses,
including but not limited to (a) Managers' Base Management Fee (excluding the
amount of any Accrued Management Fee accrued during such period); (b) all
amounts to be paid into the Reserve Account and the cost of Capital Improvements
approved by Owners not
A-5
<PAGE>
funded from the Reserve Account; (c) the debt service on account of the Senior
Loan; (d) the real and personal property ad valorem taxes and assessments; and
(e) all costs and expenses of all property and casualty insurance on or in
respect of the Facilities provided for herein and the amount of all self-insured
losses or deductibles. Fixed Operating Expenses shall not include the Excluded
Expenses.
Furnishings and Equipment: all furniture, furnishings, beds, equipment, food
service equipment, apparatus and other personal property used in (or if the
context so dictates, required in connection with), the operation of each
Facility, other than Operating Equipment, Operating Supplies and fixtures
attached to and forming part of the Improvements.
GAAP: means generally accepted accounting principles applied on a consistent
basis.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Group Service: as defined in Section 3.2.4 of the Management Agreement.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material, or substance now or in the future defined as a
"hazardous substance," "hazardous material," hazardous waste," "toxic
substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning
of any Environmental Law. Provided, however, Hazardous Substances shall not
include the safe and lawful use and storage of quantities of (i) pre-packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of any Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Facilities' parking
A-6
<PAGE>
areas, so long as all of the foregoing are used, stored, handled, transported
and disposed of in compliance with Environmental Laws.
Impositions: collectively, all taxes (including, without limitation, all capital
stock and franchise taxes of AL Investors Development, AL II Holdings, or any
Facility Entity, all ad valorem, property, sales and use, single business, gross
receipts, transaction privilege, rent or similar taxes), assessments (including,
without limitation, all assessments for public improvements or benefits, whether
or not commenced or completed prior to the date hereof and assessments levied by
condominium associations), ground rents, water and sewer rents other than normal
utility charges, excises, tax levies, fees (including, without limitation,
license, permit, inspection, authorization and similar fees), and all other
charges imposed by Governmental Authorities, in each case whether general or
special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Facility (including all interest and penalties
thereon due to any failure in payment by Manager), which at any time prior to,
during or in respect of the Term of the Management Agreement may be assessed or
imposed on or in respect of or be a Lien upon (a) Facility Entities' interest in
the Facility, (b) the Facility or any rent or income therefrom or any estate,
right, title or interest therein, or (c) any occupancy, operation, use or
possession of, sales from, or activity conducted on, or in connection with, the
Facility or the leasing or use of the Facility. Notwithstanding the foregoing,
"Impositions" shall not include: (1) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on any Owners
or Managers, (2) any tax imposed with respect to the sale, exchange or other
disposition of a Facility or the proceeds thereof, or (3) any principal or
interest on any Mortgage; provided, however, the provisos set forth in clause
(1) of this sentence shall not be applicable to the extent that any real or
personal property tax, assessment, tax levy or charge pursuant to the first
sentence of this definition and which is in effect at any time during the Term
hereof is totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (1) is levied, assessed or imposed expressly in lieu
thereof.
Improvements: the buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Initial Term: as defined in Section 2.1 of the Management Agreement.
Insurance Requirements: all terms of each insurance policy required to be
carried in this Agreement, or agreed to be carried by Owners and Managers, and
all orders, rules, regulations and other requirements of the National Board of
Fire Underwriters (or any other body exercising similar functions) applicable to
the Facilities or the operation thereof.
A-7
<PAGE>
Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors Development and AL
Investors II and/or the membership interests of AL Investors Development in the
Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan
Agreement among AL II Holdings, AL Investors II, AL Investors Development and
the Facility Entities and Senior Housing Partners I, L.P. dated on or about the
same date hereof ("Initial Junior Loan").
Land: the parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreements.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with a Facility, including, without limitation, any of
the foregoing which may (i) require repairs, modifications or alterations in or
to any Facility, (ii) in any way affect (adversely or otherwise) the use and
enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up,
containment, removal, remediation or other treatment of any Hazardous Substances
on, under or from any Facility. Without limiting the foregoing, the term "Legal
Requirements" includes all Environmental Laws and shall also include all Permits
and Contracts issued or entered into by any Governmental Authority, any
Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances.
Lending Group: Guaranty Federal Bank, F.S.B. in a debt facility referred to
herein as the Initial Senior Loan secured by the Facilities in the maximum
aggregate original principal balance of $31,600,000 (assuming all Facilities are
acquired by Owners and financed by Lending Group).
Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement
between Emeritus Corporation and AL Investors Development dated on or about the
same date hereof.
A-8
<PAGE>
Lien: with respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected, other than the Mortgage.
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or which cannot be terminated without penalty or termination fee on sixty (60)
days notice or in which the provider of the goods or services is Emeritus or an
Affiliate (except pursuant to Group Services approved in connection with an
Annual Plan).
Major Lease: Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which Emeritus or
an Affiliate is the lessee or lessor.
Managed Care Plans: all health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Management Fee: an amount equal to seven percent (7%) of Total Revenue for any
Facility, determined separately for each Facility, subject to the provisions of
Section 7.2 of the Management Agreement.
Medicaid: the medical assistance program established by Title XIX of the Social
Security Act (42 US C ss.ss. 1396 et seq.) and any statute succeeding thereto.
Medicare: the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
Mortgage: collectively, the terms and conditions of the loan documentation
executed in connection with the Senior Loan and the Junior Loan.
Mortgagee: the holder or beneficiary of a Mortgage and their respective
successors and assigns.
Operating Deficit and Operating Profit: for any period, the amount, if any, by
which Total Revenues for any Facility, determined separately for each Facility,
for that period is less than or exceeds, respectively, the sum of (i) Operating
Expenses
A-9
<PAGE>
and (ii) Fixed Operating Expenses for that period in each case determined on a
cash basis.
Operating Equipment: all dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Expenses: for any period, all reasonable costs and expenses of owning
and operating any Facility, determined separately for each Facility (which costs
and expenses do not include the Fixed Operating Expenses or the Excluded
Expenses) including the following:
(a) The cost of all Operating Equipment and Operating Supplies placed in
use, with the exception of the Operating Equipment and Operating Supplies
initially supplied by the Facility Entities. The cost of maintaining and
operating the vans and buses for each Facility (but not any debt service or
lease payments which shall remain the sole expense of Emeritus).
(b) The Compensation of all employees working and employed by Managers at
the Facilities. The Compensation of Managers' or Emeritus' home office or
executive or other personnel not regularly employed at the Facilities shall not
be included in Operating Expenses or Fixed Operating Expenses, but reasonable
out-of-pocket travel expenses of Managers or Owners' executive personnel while
traveling to and from a Facility on business shall be reimbursable as an
Operating Expense; provided, however, that if such business travel relates to
business or properties other than with respect to the Facilities, then such
travel expenses shall be equitably prorated between such other business or
properties and the Facilities.
(c) The cost of all utilities including, without limitation, electricity,
water, gas, heat and other utilities, and office supplies and equipment, and
goods and services purchased under all Contracts, including leasing expenses in
connection with telephone and data processing equipment and such other equipment
as the parties hereto may agree upon in writing.
(d) The cost of repairs to and maintenance of the Facilities whether
performed by Facility employees or contracted to third parties.
(e) Insurance premiums for all insurance required under this Agreement and
self-insured losses and deductibles with respect to such insurance coverages
(but excluding premiums and self-insured losses and deductibles on property and
casualty insurance which are included in Fixed Operating Costs). Premiums on
policies for more than one year will be prorated over the period of
A-10
<PAGE>
insurance coverage and premiums under blanket policies will be equitably
allocated among properties covered.
(f) All Impositions (except for real and Personal Property ad valorem
taxes and assessments which shall be a Fixed Operating Expenses).
(g) Except as otherwise provided in Section 6.1 of the Management
Agreement, legal fees and fees of any CPA for services directly related to the
operations of the Facilities (whether incurred by Owners or Managers).
(h) The costs and expenses of technical consultants and specialized
operational experts for specialized services in connection with non-recurring
work on operational, functional, design or construction problems and activities
whether incurred by Owner or Manager; provided, however, that if such costs end
expenses have not been included in the Annual Plan, the same shall be subject to
approval by Owner.
(i) All expenses for marketing the Facilities and all expenses of sales
promotion and public relations activities as set forth in the Annual Plan
(j) The cost of Group Services, as provided in Section 3.2.4 of the
Management Agreement.
(k) Bad debts or uncollectible amounts from residents of the Facilities.
(l) Refund of deposits to residents under Residency Agreements
(m) Owners' reasonable costs and expenses of administering, supervising,
and managing Owners' activities in connection with this Agreement and any
Mortgage, including Owners' reasonable cost and expense of preparing and filing
federal, state and local income tax returns and audits.
(n) All other reasonable expenses and charges incurred in the operation
and management of the Facilities to the extent set forth in the Annual Plan or
otherwise approved by the Owners or as otherwise set forth in the Agreement.
Operating Period: the period beginning with the Commencement Date and ending
upon the expiration of the Initial Term.
Operating Supplies: consumable items used in, or held in storage for use in (or
if the context so dictates, required in connection with), the operation of the
Facilities,
A-11
<PAGE>
including food, medical supplies, fuel, soap, cleaning materials, and other
similar consumable items.
Operating Year: the Operating Years shall coincide with and be identical with
the calendar years, except that the first Operating Year shall be the period
beginning on the Commencement Date and ending on the following December 31,
1999, and such long or short year, as applicable, shall constitute a full
Operating Year as used herein.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) in the ordinary course of business of refurbishing,
owning, operating or managing the Facilities, or the operation of any programs
or services in conjunction with the Facility and all renewals, replacement and
substitutions therefor with any Governmental Authority, Accreditation Body or
Third Party Payor or entered into with any third Person, excluding, however, any
agreements pursuant to which money has been or will be borrowed or advanced, the
Leases, any agreement creating or permitting any Lien or other encumbrance on
title (except for the Permitted Exceptions), and any Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by Managers affecting a
Facility.
Overdue Rate: on any date, a rate of interest per annum equal to the greater of:
(i) a variable rate of interest per annum equal to one hundred twenty percent
(120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided,
however, in no event shall the Overdue Rate be greater than the maximum rate
then permitted under Legal Requirements.
Permits: collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents, agreements, contracts, contract rights, franchises, interim licenses,
permits and other authorizations of every nature whatsoever required by, or
issued under, applicable Legal Requirements relating or affecting a Facility or
the construction, development, maintenance, management, use or operation
thereof, or the operation of any programs or services in conjunction with the
Facility and all renewals, replacements and substitutions therefor, now or
hereafter required or issued by any Governmental Authority, Accreditation Body
or Third Party Payor to Owners or Managers.
Permitted Exceptions: (i) all encumbrances to title present at closing pursuant
to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii)
easements,
A-12
<PAGE>
restrictions on use, zoning laws and ordinances, rights of way and other
encumbrances and minor irregularities in title, whether now existing or
hereafter arising, which are approved by Owner and do not individually or in the
aggregate materially impair the use of any Facility.
Person: any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
Personal Property: all machinery, equipment, furniture, furnishings, vans,
buses, movable walls or partitions, computers or trade fixtures, goods,
inventory, supplies, the name of the Facility, and other personal or intangible
property used in the operation of the Facility, including, but not limited to,
all Operating Equipment, Furnishings and Equipment and Operating Supplies.
Notwithstanding the foregoing, title to the vans and buses shall remain in
Emeritus or Managers and be held in trust by them for the benefit of the
respective Owner; provided that legal title to the vans and buses shall be
transferred to the respective Facility Entity upon expiration or sooner
termination of the Management Agreement as provided in Section 9.6 of the
Management Agreement.
Primary Intended Use: the use of the Facility as an assisted living facility and
such ancillary uses as are permitted by applicable Legal Requirements and may be
necessary in connection therewith or incidental thereto.
Prime Rate: the variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors.
Provider Agreements: all participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of Owners or Managers in
connection with the operation of the Facility relating to any right of payment
or other claim arising out of or in connection with participation in any Third
Party Payor Program.
Put and Purchase Agreement: that certain Put and Purchase Agreement between
Daniel Baty and AL II Holdings dated on or about the same date hereof.
A-13
<PAGE>
Residency Agreement: all contracts, agreements and consents executed by or on
behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Debt is evidenced by that certain Master Loan Agreement
between AL II Holdings, AL Investors Development (and the Facility Entities) and
Guaranty Federal Bank, F.S.B. as agent for the Lenders (as defined therein) and
the Lenders dated on or about the same date hereof ("Initial Senior Loan").
Third Party Payor Programs: collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield,
Managed Care Plans, other private insurance plans and employee assistance
programs.
Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
Title Company: First American Title Insurance Company.
Total Revenues: collectively, but without duplication all revenues generated by
reason of the operation of any Facility, determined separately for each
Facility, directly or indirectly received by any Facility Entity or Managers,
including, without limitation, all resident revenues received or receivable for
the use of, or otherwise by reason of, all rooms, units and other facilities
provided, deposits received from residents under Residency Agreements, meals
served, services performed, space or facilities leased pursuant to the Leases or
goods sold on or from the Facility, all amounts from Third Party Payors, and all
revenues from all ancillary services provided at or relating to any Facility;
provided, however, that Total Revenues shall not include:
(a) federal, state or local sales, use, gross receipts and excise taxes
and any tax based upon or measured by said Total Revenues which is added to or
made a part of the amount billed to the resident or other recipient of such
services or goods, whether included in the billing or stated separately, which
is paid to the Governmental Authority;
(b) proceeds from sale of capital assets, including the sale of the
Facility and proceeds therefrom other than sale of Furnishings and Equipment in
the ordinary course of business;
A-13
<PAGE>
(c) proceeds of any insurance other than business interruption insurance;
(d) proceeds of any financing or capital contributions to Owners;
(e) interest or earnings on the Reserve Account;
(f) any Award resulting from Condemnation;
(g) any other income or proceeds from any source other than in the
ordinary course of business of the Facility.
Except as otherwise specifically indicated, all references to Section and
Subsection numbers refer to Sections and Subsections of this Agreement, and all
references to Exhibits refer to the Exhibits attached hereto. The words
"herein," "hereof", "hereunder", "hereinafter", and words of similar import
refer to this Agreement as a whole and not to any particular Section or
Subsection hereof unless the context otherwise requires.
A-14
<PAGE>
EXHIBIT B
TO MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
Owner's Deficit Contribution
<TABLE>
<CAPTION>
Facility Maximum
Owner's Deficit Contribution
<S> <C>
Loyalton of Flagstaff $400,000
Loyalton of Phoenix $500,000
Loyalton of Hagerstown $500,000
Loyalton of Lakewood $500,000
Loyalton of Staunton $500,000
</TABLE>
B-1
<PAGE>
EXHIBIT C
TO MANAGEMENT AGREEMENT
WITH OPTION TO PURCHASE
Determination of Purchase Price
The Purchase Price with respect to all of the Facilities means:
(a) The amount required to repay the Senior Loan secured by all Facilities
in full, including prepayment penalties or other costs of repayment; plus
(b) The amount required to repay that portion of the Junior Loan allocable
by AL II Holdings to the Facilities (which allocation, together with the
allocation of the Junior Loan set forth in Exhibit B to the AL II Operating
Management Agreement, shall repay the Junior Loan in full) evidenced by that
certain Promissory Note dated of even date herewith, in the original principal
amount of $19,704,000, including repayment of the allocable portion of
principal, Base Interest, and Contingent Interest, as such terms are defined
therein, plus
(c) The amount required to repay in full the initial investment of
$1,526,000 made by the members of AL II Holdings through AL Investors
Development to acquire the Facilities (which amount may be reduced if all
Facilities are not acquired), plus any additional contributions by AL II
Holdings to AL Investors Development, plus an eighteen percent per annum rate of
return, compounded annually (computed taking into account any distributions made
by AL Investors Development to AL II Holdings from time to time), plus an
additional amount equal to $30,520, or such lesser amount as shall equal two
percent (2%) of their initial investment ("Exit Fee"), as may be increased by
the Emeritus Stock Appreciation Amount, plus
(d) The outstanding amount of any Operating Deficit Loan, plus
(e) The reasonable costs allocable to the Facilities which AL II Holdings,
AL Investors Development and its Subsidiaries will incur to dissolve and fully
liquidate.
The foregoing Option Price is intended to equal the purchase price which would
be required to be paid for the Facilities in connection with a dissolution and
liquidation of AL Investors Development and its Subsidiaries (assuming a
simultaneous closing of the Purchase Option under the AL II Operating Management
Agreement), to provide a net liquidating payment to the members of AL II
Holdings, after satisfaction in full of the Senior Loan and the Junior Loan
C-1
<PAGE>
allocable to the Facilities, and payment of all reasonable costs of such assumed
dissolutions, equal to AL II Holdings' investment in AL Investors Development
plus an 18% per annum return, compounded annually (computed taking into account
periodic distributions), plus the Exit Fee as may be increased by the Emeritus
Stock Appreciation Amount. The parties hereto acknowledge such intention and
agree that the foregoing shall be construed accordingly.
For purposes hereof, the "Emeritus Stock Appreciation Amount" means (a) the Exit
Fee divided by the arithmetic average of the closing price of one share of
Emeritus common stock as reported in the Wall Street Journal for the
60-trading-day period preceding the Commencement Date plus $1, which amount is
_____________; (b) the quotient of (a) multiplied by the arithmetic average of
the closing price of one share of Emeritus common stock as reported in the Wall
Street Journal for the 20-trading-day period preceding the Time of Closing (as
defined in Section 13 of the Management Agreement); and (c) the product derived
from (b) less the Exit Fee (if such number is negative, it shall be deemed
zero). The foregoing calculation shall be appropriately adjusted for any
dilution of Emeritus common stock occurring between the Commencement Date and
the Time of Closing.
C-2
<PAGE>
GUARANTY OF MANAGEMENT AGREEMENT
AND SHORTFALL FUNDING AGREEMENT
(AL II - 5 Development Facilities)
This Guaranty of Management Agreement and Short Fall Funding Agreement
("Agreement") dated as of the _____ day of March, 1999, is entered into by
Emeritus Corporation, a Washington corporation ("Emeritus"), in favor of AL
Investors Development LLC, a Delaware limited liability company ("AL Investors
Development"), for itself and as sole managing member on behalf of each of the
Facility Entities as set forth in Exhibit A (collectively "Facility Entities"
and each a "Facility Entity"). AL Investors Development and the respective
Facility Entity which owns a Facility are sometimes collectively referred to
herein as "Owner" or with respect to all Facilities "Owners". All capitalized
terms not otherwise defined herein shall have the meaning set forth in Exhibit
A.
This Agreement is made with reference to the following facts:
A. AL Investors Development has entered into (a) a Purchase and Sale Agreement
dated of even date herewith with Meditrust Company LLC, a Delaware limited
liability company ("Meditrust") relating to the purchase of the Facilities
("Purchase Agreement"), and (b) a Supplemental Purchase Agreement dated of even
date herewith with Emeritus and Emeritus Properties I, Inc. ("Supplemental
Agreement") in connection with the purchase of the Facilities (the Purchase
Agreement and the Supplemental Agreement collectively the "Purchase
Agreements"). Initially, the Facility entitled Loyalton of Phoenix shall be
subject to this Agreement and each additional Facility shall be subject to this
Agreement when acquired pursuant to the Purchase Agreements and made subject to
the Management Agreement (as defined below). This Agreement shall be fully
effective as to the Facility entitled Loyalton of Phoenix and such additional
Facilities as may be acquired by Owners and made subject to this Agreement,
notwithstanding that all Facilities may not be acquired. All Facilities acquired
by Owners and made subject to this Agreement will each be owned by the
respective Facility Entity and managed by Emeritus Management LLC and their
Affiliates (the "Managers") pursuant to a Management Agreement with Option to
Purchase between Managers and Owners dated the same date of this Agreement
("Management Agreement"). Existing leases of the Facilities by an Emeritus
Affiliate from Meditrust and the existing management agreements for each of the
Facilities have been or will be terminated.
B. Under the terms and conditions of the Management Agreement, Managers have
agreed to manage all of the Facilities and perform other obligations as set
forth therein. In addition, Emeritus has agreed to fund certain Operating
Deficits of the Facilities pursuant to the Management Agreement.
-1-
<PAGE>
C. Concurrently with the execution of the Management Agreement, Emeritus agreed
to enter into this Agreement in favor of Owners guaranteeing the Managers'
obligations under the Management Agreement and agreeing to fund any Operating
Deficit in excess of the Owner's Deficit Contribution as more particularly
defined herein and in the Management Agreement. Owners would not have entered
into the Purchase Agreements or the Management Agreement without execution and
delivery of this Agreement.
In consideration of the Owners entering into the Purchase Agreement and the
Management Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Emeritus agrees as follows:
1. Obligations.
1.1 Guaranteed Obligations. Emeritus hereby absolutely, unconditionally and
irrevocably guarantees to each of Owners prompt payment and performance to
Owners when due, whether by acceleration or otherwise, of all indebtedness,
liabilities, and obligations of Managers to Owners of any kind or nature
whatsoever under or arising from the Management Agreement, or any modification,
supplementation or replacement thereof, or from other dealings by which any one
or more of Owners may become a creditor of Managers including but not limited to
all of the foregoing which arise or would accrue but for the filing of any
bankruptcy or other insolvency proceedings by or against any Manager (the
"Guaranteed Obligations").
1.2 Shortfall Funding Obligations. The Management Agreement provides that in the
event that Total Revenue from any Facility is insufficient to pay the Operating
Expenses and Fixed Operating Expenses of such Facility during any calendar month
during the Initial Term (which commences as defined therein and expires December
31, 2001), upon twenty (20) days' written notice from the Manager, Owners,
subject to the terms of the Senior Loan, shall deposit or cause to be deposited
funds in the Agency Account in advance on a monthly basis in an amount equal to
the Operating Deficit for the upcoming calendar month up to the aggregate
Operating Deficit for such Facility as set forth in Exhibit B hereto ("Owner's
Deficit Contribution"). The Management Agreement further provides that all
Operating Deficits for any Facility in excess of Owner's Deficit Contribution,
or as much thereof as Senior Lender has funded, shall be funded absolutely and
unconditionally by Emeritus into the Agency Account or otherwise as directed by
Owners as and when necessary to pay, but in any event no later than ten (10)
days after written notice from Owners, all Operating Deficits which accrue or
are incurred during the Initial Term as more particularly set forth herein and
in the Management Agreement ("Emeritus Deficit Contribution"). In addition to
the Guaranty of the Guaranteed Obligations set forth above, the purpose of this
Agreement is to create the obligation of Emeritus, separate and independent from
the obligation set forth in the Management Agreement, to fund the Emeritus
Deficit Contribution. Emeritus
-2-
<PAGE>
hereby absolutely, unconditionally and irrevocably agrees to pay the Emeritus
Deficit Contribution as and when the Emeritus Deficit Contribution is required
to be funded under the Management Agreement, or if the Management Agreement has
been terminated when the Emeritus Deficit Contribution would have been required
to be funded as if the Management Agreement remained in full force and effect.
(The obligations of Emeritus to pay the Emeritus Deficit Contribution and the
Guaranteed Obligations are sometimes referred to herein collectively as the
"Obligations.").
2. Consent to Modification of Obligations. Without affecting, diminishing or
otherwise impairing the liability of Emeritus hereunder and without notice to or
consent of Emeritus, Owners may from time to time grant renewals, extensions,
indulgences, releases and discharges to Managers or any other Person liable for
any of the Obligations, and may take security for payment of the Obligations,
and may release any or all security or refrain from perfecting any interest in
any security granted by Managers or any guarantor or other person or entity
liable for any of the Obligations. Owners may amend or modify the Obligations or
any document or instrument executed to evidence the Obligations and otherwise
may deal with the Managers or any other Person liable for any of the
Obligations, without notice to or consent of Emeritus, and without affecting,
diminishing, or otherwise impairing the liability of Emeritus under this
Agreement.
3. Consent to Waivers, Etc. by Owners. Owners may from time to time consent to
any action or non-action of Managers under the Management Agreement or any other
Person liable for any of the Obligations, which, in the absence of such consent,
violates or may violate the provisions of the Management Agreement or any
document or instrument otherwise executed in connection with the Obligations,
and such consent may be granted by Owners, without notice to or consent of
Emeritus and without in any manner affecting, diminishing, or impairing the
liability of Emeritus under this Agreement. No waiver, modification, extension,
forbearance, or delay on the part of the Owners with respect to the Obligations
or with respect to any document, instrument or agreement evidencing the
Obligations, securing repayment of the Obligations or otherwise executed in
connection with the Obligations, and no act or thing which might, but for this
provision of this Agreement, be deemed a legal or equitable discharge of a
surety, shall operate to release the obligations of Emeritus under this
Agreement, and no delay on the part of the Owners in exercising any of their
options, powers, or rights under this Agreement, or any partial or single
exercise thereof shall constitute a waiver of any other rights hereunder.
4. Continued Effectiveness of Agreement. This Agreement shall continue to be
effective, or be reinstated, as the case may be, if at any time payment of all
or any part of the Obligations is rescinded or otherwise must be returned by
Owners upon the insolvency, bankruptcy, or reorganization of any of the Managers
all as though such payment to Owners had not been made.
-3-
<PAGE>
5. Form and Powers of Managers. No change in the name, purposes, capitalization,
ownership, form or organization of Managers shall in any way affect, diminish,
or otherwise impair the liability of Emeritus. Owners shall not be obligated to
inquire into the powers of the Managers notwithstanding that any of the
Obligations may be in excess of the powers of the Managers.
6. Guaranty of Payment and Performance. This is a guaranty of payment and
performance and Owners shall not be obligated to exhaust their recourse against
the Managers, or any other Person, or any security they may have for performance
or payment of the Obligations before being entitled to payment and performance
from Emeritus of the Obligations.
7. Effect of Certain Laws. Notwithstanding the provisions of the laws of any
state, this Agreement shall remain in full force and effect and no invalidity,
irregularity, or unenforceability (by reason of any bankruptcy or similar law,
any other law or any order of any Governmental Authorities thereof purporting to
reduce, amend, or otherwise affect any liability or obligation of the Managers)
and no release or discharge of the Managers, or rejection of the Management
Agreement by any one or more of the Managers or any trustee, receiver or similar
official on behalf of the Managers (whether pursuant to 11 U.S.C. Section 365 or
otherwise), in any receivership, bankruptcy, liquidation, winding-up,
reorganization or other proceedings shall affect, diminish, or otherwise impair
or otherwise be a defense to this Agreement. If Owners are stayed by any
bankruptcy or other proceeding with respect to Managers from declaring the
Obligations immediately due and payable from Managers, it may nevertheless do so
as to Emeritus.
8. No Conditions to Agreement. This Agreement is absolute and unconditional and
has been delivered free of any conditions and no representations have been made
to Emeritus affecting or limiting the liability of Emeritus under this
Agreement. This Agreement is in addition to and not in substitution for any
agreement of Emeritus in the Management Agreement, the Purchase Agreements or in
any other document or instrument executed by Emeritus agreeing to perform all or
any part of the Obligations.
9. Continuing Agreement. This is a continuing guaranty and agreement. No action
or proceeding brought or instituted under this Agreement and no recovery in
pursuance thereof shall be a bar or defense to any further action or proceeding
which may be brought under this Agreement by reason of the same or any further
default or defaults under this Agreement or in the performance and observance of
the terms, covenants, conditions, and provisions in the Obligations, or any
document, instrument or agreement evidencing the Obligations, securing repayment
of the Obligations or otherwise executed in connection with the Obligations.
10. Certain Waivers by Emeritus. Emeritus hereby waives presentment, protest,
notice, demand, notice of nonpayment or action on delinquency in respect to
-4-
<PAGE>
any of the Obligations and all other suretyship defenses generally. Emeritus
waives acceptance of this Agreement. Emeritus agrees that no release, delay,
compromise, indulgence, or other action or failure to act by Owners with respect
to any other Person liable for any of the Obligations shall in any manner
affect, diminish or impair the liability of Emeritus under this Agreement.
11. Survival. This Agreement shall survive expiration or sooner termination of
the Management Agreement for the period prior to December 31, 2001. Without
limiting the generality of the foregoing, no termination of the Management
Agreement, whether in whole or in part, or whether by Managers, Owners, or
otherwise, shall terminate any obligation of Emeritus to fund the Emeritus
Deficit Contribution accruing or arising during the period commencing on the
date hereof and expiring December 31, 2001, except only as to Operating Deficits
with respect to a Facility terminated from the Management Agreement by reason of
Casualty or Condemnation as set forth in Section 9.7.2 of the Management
Agreement arising after such termination.
12. Subordination. Emeritus hereby subordinates any and all debts owed to
Emeritus by Managers or any other Person liable for any of the Obligations, and
any and all security for such debts, to the prior payment and performance in
full of the Obligations.
13. Joint and Several Obligation. Emeritus' obligations to Owners for payment
and performance of the Obligations shall be joint and several with the
obligations of Managers therefor.
14. Waiver of Subrogation. Emeritus waives all rights of subrogation to the
rights of Owners, and all rights of indemnity, contribution and reimbursement
against Owners, but not against Managers, but any such claim shall not be
asserted by Emeritus against Managers until after expiration of the Management
Agreement, payment and performance of all obligations to Owners, and in any
event shall be subordinate to all claims of Owners. Owners shall have no
obligation whatsoever to reimburse or otherwise pay Emeritus for any payments or
performance rendered under this Agreement by Emeritus except only to the extent
that Emeritus has funded a portion of Owner's Deficit Contribution that Owner
otherwise would be obligated to fund, but for Senior Lender's failure or refusal
to fund, and Senior Lender subsequently funds such amount.
15. Miscellaneous.
15.1 Notices. All notices required or permitted hereunder shall be deemed given:
(1) three calendar days following mailing via regular U.S. mail, return receipt
requested; or (2) one business day after deposit with a commercial courier
service which provides evidence of delivery for "next day" delivery;, or (3)
upon sending to a facsimile number set forth in this agreement or provided in a
notice to
-5-
<PAGE>
the party sending the notice by the party receiving the notice in writing,
provided that a copy is sent the same business day by commercial courier as set
forth above; or (4) upon actual receipt of notice, whichever is earlier. The
parties shall promptly give written notice to each other of any change of
address or facsimile number, and notice to the addresses or facsimile numbers
stated herein shall be deemed sufficient unless written notification of a change
has been received.
15.2 Governing Law. This Agreement has been executed and delivered to Owners in
the State of Washington. Emeritus agrees that the law of the State of Washington
(exclusive of principles of conflicts of law) shall be applicable for the
purpose of construing this Agreement, determining the validity hereof and
enforcing the same. Emeritus hereby consents to the jurisdiction of the courts
of the State of Washington or to any federal court sitting in the State of
Washington. AL Investors Development or Owners may enforce any or all of the
provisions of this Agreement directly against Emeritus in the State of
Washington or any other jurisdiction in which Emeritus does business or at its
option may enforce this Agreement on behalf of any Facility Entity in the state
in which such Facility Entity owns a Facility.
15.3 No Waiver. No delay or omission to exercise any right, power or remedy
accruing to Owners upon any breach or default of Emeritus shall impair such
rights, powers or remedies of Owners, nor shall it be construed to be a waiver
of any such breach or default, or of any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring.
15.4 Assignment. Owners reserve the right to transfer or assign any or all of
their right, title and interest under this Agreement, including assignment to
any Mortgagee, and Emeritus hereby consents to any such transfer or assignment,
provided such assignee (other than any Mortgagee) assumes the Owners'
obligations under the Management Agreement accruing after the date of such
assignment.
15.5 Captions. Any captions applied to the sections of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any of the provisions of this Agreement.
15.6 Invalidity. If any term, condition or provision of this Agreement shall be
held invalid for any reason, such offending term, condition or provision shall
be stricken therefrom, and the remainder shall not be affected.
15.7 Entire Agreement. This Agreement constitutes the complete and final
expression of the entire agreement between the parties pertaining to the subject
matter hereof, but is in addition to and not in substitution for the obligations
of Emeritus under the Management Agreement. This Agreement may be amended only
by a written instrument executed by Emeritus and Owners.
-6-
<PAGE>
15.8 Binding Effect. This Agreement shall inure to the benefit of Owners, its
successors and assigns, and shall be binding upon Emeritus and its successors
and assigns, as the case may be. This Agreement may be terminated only by means
of a written document duly executed by Owners.
15.9 Legal Expenses. In the event of any default on the Obligations, or in the
event that any dispute arises relating to the interpretation, enforcement or
performance of this Agreement, the prevailing party shall be entitled to collect
from the other party on demand all fees and expenses incurred in connection
therewith, including but not limited to fees of attorneys, accountants,
appraisers, consultants, expert witnesses, arbitrators, mediators and court
reporters. Without limiting the generality of the foregoing, the prevailing
party shall be entitled to all such costs and expenses incurred in connection
with: (a) arbitration or other alternative dispute resolution proceedings, trial
court actions and appeals; (b) bankruptcy or other insolvency proceedings of
Managers, Emeritus, any other party having any liability for any portion of the
Obligations or any party having any interest in any security for any of the
Obligations; (c) any default by Managers or Emeritus under the Management
Agreement; (d) all claims, counterclaims, cross-claims and defenses asserted in
any of the foregoing whether or not they arise out of or are related to this
Agreement; (e) all preparation for any of the foregoing; and (f) all settlement
negotiations with respect to any of the foregoing.
15.10 Jury Trial Waiver. EMERITUS AND OWNERS HEREBY WAIVE TRIAL BY JURY IN ANY
ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW
OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT.
-7-
<PAGE>
TO THE EXTENT APPLICABLE, EMERITUS IS HEREBY ADVISED THAT ORAL AGREEMENTS OR
ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING
REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
DATED this ______________ day of March, 1999.
EMERITUS CORPORATION, a
Washington corporation
By: /s/ Daniel R. Baty
Name: Daniel R. Baty
Title: Chairman
Address: 3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
Facsimile: (206) 301-4500
-8-
<PAGE>
EXHIBIT A
TO GUARANTY OF MANAGEMENT AGREEMENT
AND SHORTFALL FUNDING AGREEMENT
(AL II - 5 Development Facilities)
Certain Defined Terms
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors II and AL Investors Development.
AL Investors II: AL Investors II LLC, a Delaware limited liability company
AL Investors Development: AL Investors Development LLC, a Delaware limited
liability company
AL II Operating Management Agreement: That certain Management Agreement with
Option to Purchase dated on or about the same date hereof, among AL Investors II
and Emeritus Corporation and its Affiliates relating to the management of up to
fourteen (14) assisted living facilities.
AL Management Agreement: That certain Management Agreement With Option to
Purchase dated December 30, 1998 Among AL Investors LLC and Emeritus Corporation
and its Affiliates relating to the management of twenty-five (25) assisted
living facilities.
Affiliate: with respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any other Person controlling, controlled
by, or under common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an Affiliate of
such Person). For the purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any Person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such Person, through the ownership of voting securities,
partnership interests or other equity interests.
Agency Account: The Agency Account to be maintained for each Facility for
payment of Fixed Operating Expenses and Operating Expenses as described in
Section 8.1 of the Management Agreement.
A-1
<PAGE>
Annual Plan(s): as defined in Section 4.2 of the Management Agreement.
Award: all compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Base Management Fee: as defined in Section 7.1 of the Management Agreement.
Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to
pay debts as they become due; or applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian or makes a general
assignment for the benefit of creditors, or in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is appointed and
is not discharged within sixty (60) days after such appointment; or an order for
relief is entered or a petition is filed under Title 11, United States
Bankruptcy Code, with respect to any of them; or any other bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, now or hereafter in effect, is commenced with
respect to any of them.
Business Day: any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
Capital Improvements: as defined in Section 12 of the Management Agreement.
Cash Available for Distribution: on any date the amount contained in the Agency
Accounts (as defined in Section 8.1 of the Management Agreement), minus an
amount (to be retained in the Agency Accounts) equal to any reasonably projected
Operating Deficit for the succeeding 30 days, taking into account all Operating
Expenses and Fixed Operating Expenses and all anticipated Total Revenues during
such 30-day period.
Casualty: the damage or destruction by act of God or otherwise of any portion of
any Facility which Owner reasonably estimates would cost more than $50,000 to
repair or restore.
Change of Control: shall mean the occurrence of any one of the following
events with respect to Emeritus:
(a) any Person or group of Persons (within the meaning of Rule 13d-5 under
the Act as defined below) other than Emeritus, any of its subsidiaries, or any
trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of Emeritus or any of its subsidiaries), together
with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the
A-2
<PAGE>
Securities Exchange Act of 1934, as amended (the "Act")) of such Person or
group, shall become the "beneficial owner" (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, of securities of Emeritus
representing a greater percentage than that then owned by Daniel R. Baty,
together with all "affiliates" and "associates" of Daniel R. Baty (as defined
above) of either (A) the combined voting power of Emeritus' then outstanding
securities having the right to vote in an election of Emeritus' Board of
Directors ("Voting Securities") or (B) the then outstanding shares of Stock of
Emeritus; or
(b) Persons who, as of the date hereof, constitute Emeritus' Board of
Directors (the "Incumbent Directors") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that any
person becoming a director of Emeritus subsequent to the date hereof whose
election or nomination for election was approved by a vote of at least a
majority of the Incumbent Directors shall, for purposes of this Plan, be
considered an Incumbent Director; or
(c) the stockholders of Emeritus shall approve (A) any consolidation or
merger of Emeritus or any subsidiary where the shareholders of Emeritus,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, shares representing a majority of
the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any), (B) any
sale, lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of Emeritus or (C) any plan or proposal for the
liquidation or dissolution of Emeritus; or
(d) other than by reason of death or legal disability, Daniel Baty ceases
to be the chief executive officer of Emeritus.
Change of Control with respect to any Manager shall mean the occurrence of any
event whereby 100% of the ownership interests in such Manager are no longer
owned by Emeritus.
Closing: the date of closing as to any Facility under the Purchase Agreements.
Code: the Internal Revenue Code of 1986, as amended.
Commencement Date: as defined in Section 2.1 of the Management Agreement.
Compensation: the direct salaries and wages paid to, or accrued for the benefit
of, any employee working and employed at each Facility together with all
A-3
<PAGE>
reasonably customary fringe benefits payable to, or accrued for the benefit of
such employee, including employer's contribution under FICA., unemployment
compensation, or other employment taxes, pension fund contributions, workmen's
compensation, group life and accident and health insurance premiums, and other
reasonable employee benefits customary in the industry.
Condemnation: with respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
CPA: The certified public accountants retained to provide necessary accounting
services for the Facility or Owner, the selection of which shall be subject to
approval by Owner.
Date of Taking: the date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: means all federal, state, and local laws, ordinances and
regulations and standards, rules, policies and other governmental requirements,
administrative rulings, and court judgments and decrees in effect now or in the
future and including all amendments, that relate to Hazardous Materials and
apply to the Facilities or to the Land and/or the Improvements. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the
Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water
Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, and their state analogs.
Escrow Holder: First American Title Insurance Company.
Excluded Expenses: depreciation, amortization and other non-cash expenses; items
to be provided or paid for at Owner's or Managers' sole expense as provided
herein; costs and expenses resulting from or required to cure any matter or
defect which constitutes a breach of warranty, representation or indemnity under
the Purchase Agreements, the Licensing Agreement, or the Management Agreement
which cost or expense shall be the sole responsibility of the breaching party;
costs
A-4
<PAGE>
and expenses to complete construction, development and equipping of any Facility
as more particularly set forth in the Supplemental Agreement; unreasonable or
excessive charges or expenses.
Extension Term: as defined in Section 2.2 of the Management Agreement.
Facility or Facilities: Each of the assisted living facilities, including the
Land, Improvements, and Personal Property associated therewith, located in the
city and state as set forth below which are made subject to this Agreement.
Initially the Facility entitled Loyalton of Phoenix shall be subject to this
Agreement and each additional Facility shall be made subject to this Agreement
at Closing by execution of a memorandum between the Owner and Managers
acknowledging that such Facility shall be subject to this Agreement.
<TABLE>
<CAPTION>
Development
Facility City State Units Beds Facility LLC and LP
Name
<S> <C> <C> <C> <C> <C>
Loyalton of
Flagstaff Flagstaff AZ 61 61 AL Investors
Development Flagstaff
LLC
Loyalton of
Phoenix Phoenix AZ 100 101 AL Investors
Development Phoenix
LLC
Loyalton of
Hagerstown Hagerstown MD 101 101 AL Investors
Development
Hagerstown LLC
Loyalton of
Lakewood Lakewood NY 83 83 AL Investors
Development Lakewood
LLC
Loyalton of
Staunton Staunton VA 101 101 AL Investors
Development Staunton
LLC
</TABLE>
Facility Accounts: as defined in Section 8.1 of the Management Agreement.
Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set
forth opposite the name of each Facility above and their respective successors
or assigns.
Fixed Operating Expenses: for any period, all fixed costs and expenses of
owning, and operating each Facility (determined separately for each Facility) to
the extent such costs and expenses are not included in Operating Expenses,
including but not limited to (a) Managers' Base Management Fee (excluding the
amount of any Accrued Management Fee accrued during such period); (b) all
amounts to be paid into the Reserve Account and the cost of Capital Improvements
approved by Owners not funded from the Reserve Account; (c) the debt service on
account of the Senior Loan; (d) the real and personal property ad valorem taxes
and assessments; and (e) all costs and expenses of all property and casualty
insurance on or in respect of the Facilities provided for herein and the amount
of all self-insured losses or deductibles. Fixed Operating Expenses shall not
include the Excluded Expenses.
A-5
<PAGE>
Furnishings and Equipment: all furniture, furnishings, beds, equipment, food
service equipment, apparatus and other personal property used in (or if the
context so dictates, required in connection with), the operation of each
Facility, other than Operating Equipment, Operating Supplies and fixtures
attached to and forming part of the Improvements.
GAAP: means generally accepted accounting principles applied on a consistent
basis.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Group Service: as defined in Section 3.2.4 of the Management Agreement.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material, or substance now or in the future defined as a
"hazardous substance," "hazardous material," hazardous waste," "toxic
substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning
of any Environmental Law. Provided, however, Hazardous Substances shall not
include the safe and lawful use and storage of quantities of (i) pre-packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of any Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Facilities' parking areas, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Environmental Laws.
Impositions: collectively, all taxes (including, without limitation, all capital
stock and franchise taxes of AL Investors Development, AL II Holdings, or any
Facility Entity, all ad valorem, property, sales and use, single business, gross
receipts, transaction privilege, rent or similar taxes), assessments (including,
without limitation, all assessments for public improvements or benefits, whether
or not commenced or
A-6
<PAGE>
completed prior to the date hereof and assessments levied by condominium
associations), ground rents, water and sewer rents other than normal utility
charges, excises, tax levies, fees (including, without limitation, license,
permit, inspection, authorization and similar fees), and all other charges
imposed by Governmental Authorities, in each case whether general or special,
ordinary or extraordinary, or foreseen or unforeseen, of every character in
respect of the Facility (including all interest and penalties thereon due to any
failure in payment by Manager), which at any time prior to, during or in respect
of the Term of the Management Agreement may be assessed or imposed on or in
respect of or be a Lien upon (a) Facility Entities' interest in the Facility,
(b) the Facility or any rent or income therefrom or any estate, right, title or
interest therein, or (c) any occupancy, operation, use or possession of, sales
from, or activity conducted on, or in connection with, the Facility or the
leasing or use of the Facility. Notwithstanding the foregoing, "Impositions"
shall not include: (1) any tax based on net income (whether denominated as a
franchise or capital stock or other tax) imposed on any Owners or Managers, (2)
any tax imposed with respect to the sale, exchange or other disposition of a
Facility or the proceeds thereof, or (3) any principal or interest on any
Mortgage; provided, however, the provisos set forth in clause (1) of this
sentence shall not be applicable to the extent that any real or personal
property tax, assessment, tax levy or charge pursuant to the first sentence of
this definition and which is in effect at any time during the Term hereof is
totally or partially repealed, and a tax, assessment, tax levy or charge set
forth in clause (1) is levied, assessed or imposed expressly in lieu thereof.
Improvements: the buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Initial Term: as defined in Section 2.1 of the Management Agreement.
Insurance Requirements: all terms of each insurance policy required to be
carried in this Agreement, or agreed to be carried by Owners and Managers, and
all orders, rules, regulations and other requirements of the National Board of
Fire Underwriters (or any other body exercising similar functions) applicable to
the Facilities or the operation thereof.
Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors Development and AL
Investors II and/or the membership interests of AL Investors Development in the
Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan
Agreement among AL II Holdings, AL Investors II, AL Investors Development and
the Facility Entities and Senior Housing Partners I, L.P. dated on or about the
same date hereof ("Initial Junior Loan").
A-7
<PAGE>
Land: the parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreements.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with a Facility, including, without limitation, any of
the foregoing which may (i) require repairs, modifications or alterations in or
to any Facility, (ii) in any way affect (adversely or otherwise) the use and
enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up,
containment, removal, remediation or other treatment of any Hazardous Substances
on, under or from any Facility. Without limiting the foregoing, the term "Legal
Requirements" includes all Environmental Laws and shall also include all Permits
and Contracts issued or entered into by any Governmental Authority, any
Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances.
Lending Group: Guaranty Federal Bank, F.S.B. in a debt facility referred to
herein as the Initial Senior Loan secured by the Facilities in the maximum
aggregate original principal balance of $31,600,000 (assuming all Facilities are
acquired by Owners and financed by Lending Group).
Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement
between Emeritus Corporation and AL Investors Development dated on or about the
same date hereof.
Lien: with respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected, other than the Mortgage.
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or which cannot be terminated without penalty or termination fee on sixty (60)
days notice or in which the provider of the goods or services is Emeritus or an
A-8
<PAGE>
Affiliate (except pursuant to Group Services approved in connection with an
Annual Plan).
Major Lease: Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which Emeritus or
an Affiliate is the lessee or lessor.
Managed Care Plans: all health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Management Fee: an amount equal to seven percent (7%) of Total Revenue for any
Facility, determined separately for each Facility, subject to the provisions of
Section 7.2 of the Management Agreement.
Medicaid: the medical assistance program established by Title XIX of the Social
Security Act (42 US C ss.ss. 1396 et seq.) and any statute succeeding thereto.
Medicare: the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
Mortgage: collectively, the terms and conditions of the Senior Loan and the
Junior Loan.
Mortgagee: the holder or beneficiary of a Mortgage and their respective
successors and assigns.
Operating Deficit and Operating Profit: for any period, the amount, if any, by
which Total Revenues for any Facility, determined separately for each Facility,
for that period is less than or exceeds, respectively, the sum of (i) Operating
Expenses and (ii) Fixed Operating Expenses for that period in each case
determined on a cash basis.
Operating Equipment: all dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Expenses: for any period, all reasonable costs and expenses of owning
and operating any Facility, determined separately for each Facility (which costs
and expenses do not include the Fixed Operating Expenses or the Excluded
Expenses) including the following:
A-9
<PAGE>
(a) The cost of all Operating Equipment and Operating Supplies placed in
use, with the exception of the Operating Equipment and Operating Supplies
initially supplied by the Facility Entities. The cost of maintaining and
operating the vans and buses for each Facility (but not any debt service or
lease payments which shall remain the sole expense of Emeritus).
(b) The Compensation of all employees working and employed by Managers at
the Facilities. The Compensation of Managers' or Emeritus' home office or
executive or other personnel not regularly employed at the Facilities shall not
be included in Operating Expenses or Fixed Operating Expenses, but reasonable
out-of-pocket travel expenses of Managers or Owners' executive personnel while
traveling to and from a Facility on business shall be reimbursable as an
Operating Expense; provided, however, that if such business travel relates to
business or properties other than with respect to the Facilities, then such
travel expenses shall be equitably prorated between such other business or
properties and the Facilities.
(c) The cost of all utilities including, without limitation, electricity,
water, gas, heat and other utilities, and office supplies and equipment, and
goods and services purchased under all Contracts, including leasing expenses in
connection with telephone and data processing equipment and such other equipment
as the parties hereto may agree upon in writing.
(d) The cost of repairs to and maintenance of the Facilities whether
performed by Facility employees or contracted to third parties.
(e) Insurance premiums for all insurance required under this Agreement and
self-insured losses and deductibles with respect to such insurance coverages
(but excluding premiums and self-insured losses and deductibles on property and
casualty insurance which are included in Fixed Operating Costs). Premiums on
policies for more than one year will be prorated over the period of insurance
coverage and premiums under blanket policies will be equitably allocated among
properties covered.
(f) All Impositions (except for real and Personal Property ad valorem taxes
and assessments which shall be a Fixed Operating Expenses).
(g) Except as otherwise provided in Section 6.1 of the Management
Agreement, legal fees and fees of any CPA for services directly related to the
operations of the Facilities (whether incurred by Owners or Managers).
(h) The costs and expenses of technical consultants and specialized
operational experts for specialized services in connection with non-recurring
work on operational, functional, design or construction problems and activities
whether incurred by Owner or Manager; provided, however, that if such costs and
expenses
A-10
<PAGE>
have not been included in the Annual Plan, the same shall be subject to approval
by Owner.
(i) All expenses for marketing the Facilities and all expenses of sales
promotion and public relations activities as set forth in the Annual Plan
(j) The cost of Group Services, as provided in Section 3.2.4 of the
Management Agreement.
(k) Bad debts or uncollectible amounts from residents of the Facilities.
(l) Refund of deposits to residents under Residency Agreements
(m) Owners' reasonable costs and expenses of administering, supervising,
and managing Owners' activities in connection with this Agreement and any
Mortgage, including Owners' reasonable cost and expense of preparing and filing
federal, state and local income tax returns and audits.
(n) All other reasonable expenses and charges incurred in the operation and
management of the Facilities to the extent set forth in the Annual Plan or
otherwise approved by the Owners or as otherwise set forth in the Agreement.
Operating Period: the period beginning with the Commencement Date and ending
upon the expiration of the Initial Term.
Operating Supplies: consumable items used in, or held in storage for use in (or
if the context so dictates, required in connection with), the operation of the
Facilities, including food, medical supplies, fuel, soap, cleaning materials,
and other similar consumable items.
Operating Year: the Operating Years shall coincide with and be identical with
the calendar years, except that the first Operating Year shall be the period
beginning on the Commencement Date and ending on the following December 31,
1999, and such long or short year, as applicable, shall constitute a full
Operating Year as used herein.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) in the ordinary course of business of refurbishing,
owning, operating or managing the Facilities, or the operation of any programs
or services in conjunction with the Facility and all renewals, replacement and
substitutions therefor with any Governmental Authority, Accreditation Body or
Third Party Payor or entered into with any third Person, excluding, however, any
A-11
<PAGE>
agreements pursuant to which money has been or will be borrowed or advanced, the
Leases, any agreement creating or permitting any Lien or other encumbrance on
title (except for the Permitted Exceptions), and any Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by Managers affecting a
Facility.
Overdue Rate: on any date, a rate of interest per annum equal to the greater of:
(i) a variable rate of interest per annum equal to one hundred twenty percent
(120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided,
however, in no event shall the Overdue Rate be greater than the maximum rate
then permitted under Legal Requirements.
Permits: collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents, agreements, contracts, contract rights, franchises, interim licenses,
permits and other authorizations of every nature whatsoever required by, or
issued under, applicable Legal Requirements relating or affecting a Facility or
the construction, development, maintenance, management, use or operation
thereof, or the operation of any programs or services in conjunction with the
Facility and all renewals, replacements and substitutions therefor, now or
hereafter required or issued by any Governmental Authority, Accreditation Body
or Third Party Payor to Owners or Managers.
Permitted Exceptions: (i) all encumbrances to title present at closing pursuant
to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii)
easements, restrictions on use, zoning laws and ordinances, rights of way and
other encumbrances and minor irregularities in title, whether now existing or
hereafter arising, which are approved by Owner and do not individually or in the
aggregate materially impair the use of any Facility.
Person: any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
Personal Property: all machinery, equipment, furniture, furnishings, vans,
buses, movable walls or partitions, computers or trade fixtures, goods,
inventory, supplies, the name of the Facility, and other personal or intangible
property used in the operation of the Facility, including, but not limited to,
all Operating Equipment, Furnishings and Equipment and Operating Supplies.
Notwithstanding the foregoing, title to the vans and buses shall remain in
Emeritus or Managers and be held in trust
A-12
<PAGE>
by them for the benefit of the respective Owner; provided that legal title to
the vans and buses shall be transferred to the respective Facility Entity upon
expiration or sooner termination of the Management Agreement as provided in
Section 9.6 of the Management Agreement.
Primary Intended Use: the use of the Facility as an assisted living facility
and such ancillary uses as are permitted by applicable Legal Requirements and
may be necessary in connection therewith or incidental thereto.
Prime Rate: the variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors.
Provider Agreements: all participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of Owners or Managers in
connection with the operation of the Facility relating to any right of payment
or other claim arising out of or in connection with participation in any Third
Party Payor Program.
Put and Purchase Agreement: that certain Put and Purchase Agreement between
Daniel Baty and AL II Holdings dated on or about the same date hereof.
Residency Agreement: all contracts, agreements and consents executed by or
on behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Debt is evidenced by that certain Loan Agreement between
AL Investors Development (and the Facility Entities) and Guaranty Federal Bank,
F.S.B. dated on or about the same date hereof ("Initial Senior Loan").
Third Party Payor Programs: collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield,
Managed Care Plans, other private insurance plans and employee assistance
programs.
Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
A-13
<PAGE>
Title Company: First American Title Insurance Company.
Total Revenues: collectively, but without duplication all revenues generated by
reason of the operation of any Facility, determined separately for each
Facility, directly or indirectly received by any Facility Entity or Managers,
including, without limitation, all resident revenues received or receivable for
the use of, or otherwise by reason of, all rooms, units and other facilities
provided, deposits received from residents under Residency Agreements, meals
served, services performed, space or facilities leased pursuant to the Leases or
goods sold on or from the Facility, all amounts from Third Party Payors, and all
revenues from all ancillary services provided at or relating to any Facility;
provided, however, that Total Revenues shall not include:
(a) federal, state or local sales, use, gross receipts and excise taxes and
any tax based upon or measured by said Total Revenues which is added to or made
a part of the amount billed to the resident or other recipient of such services
or goods, whether included in the billing or stated separately, which is paid to
the Governmental Authority;
(b) proceeds from sale of capital assets, including the sale of the
Facility and proceeds therefrom other than sale of Furnishings and Equipment in
the ordinary course of business;
(c) proceeds of any insurance other than business interruption insurance;
(d) proceeds of any financing or capital contributions to Owners;
(e) interest or earnings on the Reserve Account;
(f) any Award resulting from Condemnation;
(g) any other income or proceeds from any source other than in the ordinary
course of business of the Facility.
Except as otherwise specifically indicated, all references to Section and
Subsection numbers refer to Sections and Subsections of this Agreement, and all
references to Exhibits refer to the Exhibits attached hereto. The words
"herein," "hereof", "hereunder", "hereinafter", and words of similar import
refer to this Agreement as a whole and not to any particular Section or
Subsection hereof unless the context otherwise requires.
A-14
<PAGE>
EXHIBIT B
TO GUARANTY OF MANAGEMENT AGREEMENT
AND SHORTFALL FUNDING AGREEMENT
(AL II - 5 Development Facilities)
Owner's Deficit Contribution
<TABLE>
<CAPTION>
Facility Maximum
Owner's Deficit Contribution
<S> <C>
Loyalton of Flagstaff $400,000
Loyalton of Phoenix $500,000
Loyalton of Hagerstown $500,000
Loyalton of Lakewood $500,000
Loyalton of Staunton $500,000
</TABLE>
B-1
<PAGE>
PUT AND PURCHASE AGREEMENT
(AL II Holdings - 14 Operating Facilities
and 5 Development Facilities)
1. PARTIES. This Put and Purchase Agreement ("Agreement") is entered into as of
March ______, 1999 by and between Daniel R. Baty, individually and on behalf of
his marital community ("Obligor") and AL II Holdings LLC, a Delaware limited
liability company ("AL II Holdings"), AL Investors II LLC, a Delaware limited
liability company ("AL Investors II") and AL Investors Development LLC, a
Delaware limited liability company ("AL Investors Development"). AL Investors II
is executing this Agreement for itself and as the sole managing member on behalf
of fourteen (14) of the Facility Entities which will own an Operating Facility
or in cases where the Facility Entity is a limited partnership, as sole managing
member on behalf of the general partner thereof, and AL Investors Development is
executing this Agreement for itself and as the sole managing member on behalf of
five (5) of the Facility Entities which will own a Development Facility, all as
set forth on and identified on Exhibit A ("Facility Entities" and each a
"Facility Entity"). All capitalized terms not otherwise defined herein shall
have the meaning set forth in Exhibit A.
2. FACTS
2.1 Acquisition of Facilities. Concurrently herewith:
(a) AL Investors II and/or its Affiliates are entering into the following
agreements to acquire the fourteen (14) Operating Facilities:
(i) Purchase and Sale Agreement ("Operating Facilities Purchase
Agreement") with Meditrust Company LLC, successor by merger to Meditrust
Acquisition Corporation (collectively "Meditrust") relating to the acquisition
of the fourteen (14) Operating Facilities identified on Exhibit A (collectively,
the "Operating Facilities").
(ii) Supplemental Purchase Agreement ("Operating Facilities
Supplemental Agreement") with Emeritus Corporation ("Emeritus") and certain of
its Affiliates relating to certain additional terms and conditions in connection
with the purchase of the Operating Facilities.
(iii) Management Agreement with Option to Purchase with Emeritus,
Emeritus Management I LP, Emeritus Management LLC and certain other Emeritus
Affiliates (collectively "Managers") ("AL II Operating Management Agreement")
pursuant to which the Managers will manage the Operating Facilities and pursuant
to which Emeritus has the option to purchase the Operating Facilities
("Operating Purchase Option") as more particularly set forth therein.
-1-
<PAGE>
(iv) Guaranty of Management Agreement ("Operating Facilities Guaranty
Agreement") with Emeritus pursuant to which Emeritus guarantees the obligations
of Managers under the AL II Operating Management Agreement as more particularly
set forth therein.
(v) Licensing Indemnity Agreement for Operating Facilities.
(b) AL Investors Development and/or its Affiliates are entering into the
following agreements:
(i) Purchase and Sale Agreement ("Development Facilities Purchase
Agreement") with Meditrust relating to the acquisition of the five (5)
Development Facilities identified on Exhibit A (collectively, the "Development
Facilities").
(ii) Supplemental Purchase Agreement ("Development Facilities
Supplemental Agreement") with Emeritus and certain of its Affiliates relating to
certain additional terms and conditions in connection with the purchase of the
Development Facilities.
(iii) Management Agreement with Option to Purchase with Emeritus,
Emeritus Management I LP, Emeritus Management LLC and certain other Emeritus
Affiliates (collectively "Managers") ("AL II Development Management Agreement")
pursuant to which the Managers will manage the Development Facilities and fund
certain Operating Deficits of the Facilities and pursuant to which Emeritus has
the option to purchase the Development Facilities (together with the Operating
Purchase Option, the "Purchase Options") as more particularly set forth therein.
(iv) Guaranty of Management Agreement and Shortfall Funding Agreement
("Development Facilities Guaranty Agreement") with Emeritus pursuant to which
Emeritus guarantees the obligations of Managers under the AL II Development
Management Agreement and agrees to fund certain Operating Deficits of the
Facilities as more particularly set forth therein.
(v) Licensing Indemnity Agreement for the Development Facilities.
Collectively, the above-referenced agreements in (a) and (b) are referred to
herein as the "Related Agreements" and the Operating Facilities Purchase
Agreement, the Development Facilities Purchase Agreement, the Operating
Facilities Supplemental Agreement, and the Development Facilities Supplemental
Agreement are collectively referred to herein as the "Purchase Agreements." The
Operating Facilities and the Development Facilities are collectively referred to
herein as the
-2-
<PAGE>
Facilities. The AL II Development Management Agreement and the AL II Operating
Management Agreement are collectively referred to herein as the Management
Agreements.
2.2 Financing of the Facilities. In connection with the Purchase Agreements, AL
Investors II and AL Investors Development have each created a Facility Entity
for the purpose of taking title to each Facility pursuant to the Purchase
Agreements. The fourteen (14) Operating Facilities to be purchased by the
Facility Entities pursuant to the Purchase Agreements will close simultaneously
and be financed in part by the Initial Senior Loan/Operating Facilities and the
Initial Junior Loan. The five (5) Development Facilities may close as they are
completed and be financed in part by the Initial Senior Loan/Development
Facilities and the Initial Junior Loan.
2.3 Consideration. Obligor acknowledges that he is an officer and major
shareholder of Emeritus and as such he is directly and materially benefited by
AL II Holdings and its Affiliates entering into the Related Agreements. Obligor
acknowledges that Emeritus is the parent company of the Affiliates of Emeritus
that previously leased the Facilities from Meditrust and owned the Facilities
and is the parent company of the Managers that will manage the Facilities, and
as such, Emeritus is directly and materially benefited by AL II Holdings, AL
Investors II, AL Investors Development and the Facility Entities entering into
the Related Agreements. In consideration of AL II Holdings and its Affiliates
entering into the Related Agreements, the mutual covenants herein, and for other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Obligor has entered into this Agreement. Obligor acknowledges and
agrees that AL II Holdings and its Affiliates would not have entered into the
Related Agreements without Obligor having executed and delivered this Agreement.
3. PUT OF FACILITIES
3.1 Exercise of Put. AL II Holdings and the applicable Facility Entities shall
have the right to require Obligor to purchase certain of the Facilities
specified by AL II Holdings and the applicable Facility Entities as provided
below and upon the terms and conditions of this Agreement upon the occurrence of
any of the following events ("Triggering Events" and each a "Triggering Event"):
(a) If Emeritus has not exercised both of the Purchase Options (as defined
in the Management Agreements) to purchase all of the Facilities on or before one
hundred eighty (180) days prior to expiration of the Initial Term of the
Management Agreements as provided for in Section 13 of the Management
Agreements.
(b) If Emeritus timely exercises both of the Purchase Options (as defined
in the Management Agreements) to purchase all of the Facilities but
-3-
<PAGE>
thereafter fails to close either or both in accordance with the terms of the
Management Agreements, time being of the essence with respect to such purchase.
(c) If there should be an Event of Default under the terms of either or
both of the Management Agreements by Emeritus or Managers.
(d) If Obligor has failed to satisfy the requirements of Section 3.11
below.
(e) If there has been a Change in Control not approved in writing by AL II
Holdings and the Initial Junior Lender, which approval may be given or withheld
in their sole discretion.
Obligor shall give written notice of the occurrence of any Triggering Event to
AL II Holdings, but failure to give such notice shall not affect Obligor's
obligations under this Agreement. Upon occurrence of any one or more of the
Triggering Events, AL II Holdings may require Obligor to purchase four (4) of
the Facilities with respect to Triggering Events (a), (b), (c) and (d) and six
(6) of the Facilities with respect to Triggering Event (e), all on the terms and
conditions of this Agreement. The designation of which four (4) or six (6)
Facilities Obligor shall be obligated to purchase shall be in AL II Holdings'
sole, absolute and unfettered discretion and may be selected from the Operating
Facilities, the Development Facilities, or both. Obligor acknowledges that such
designations are likely to include those Facilities that are least desirable or
of the lowest relative value. AL II Holdings shall provide written notification
to Obligator ("Put Notice") specifying the Facilities Obligor is required to
purchase ("Put Facilities" and each a "Put Facility"), the purchase price for
each Put Facility calculated in accordance with Section 3.4, and the amount of
the Deposit required by Section 3.5. AL II Holdings may give the Put Notice to
Obligor at any time after the Triggering Event but in any event prior to sixty
(60) days after the later of: (a) AL II Holdings has acquired actual knowledge
that a Triggering Event has occurred, pursuant to written notice from Obligor or
otherwise, or (b) one hundred eighty (180) days prior to the expiration of
Initial Term of the Management Agreements. The closing on this purchase by
Obligor on the Put Facilities shall occur within ninety (90) days after the
delivery of the Put Notice to Obligor ("Put Purchase Date"). Obligor shall be
absolutely and unconditionally obligated to purchase the Put Facilities in
accordance with the Put Notice on the Put Purchase Date. In the event that
Emeritus has exercised the Purchase Option pursuant to the terms of the AL
Management Agreement, but has not exercised the Purchase Options pursuant to the
Management Agreements, then the number of Put Facilities which AL II Holdings
shall be entitled to designate pursuant to this Section shall be increased by
four (4), i.e., AL II Holdings shall be entitled to require Obligor to purchase
eight (8) of the Facilities with respect to Triggering Events (a), (b), (c) and
(d) and ten (10) of the Facilities with respect to Triggering Event (e).
-4-
<PAGE>
3.2 Option in Favor of Obligor. If AL II Holdings has delivered the Put Notice
to Obligor, Obligor shall also be deemed to have an option to purchase from AL
II Holdings and the Facility Entities all, but not less than all, of the
Facilities (which includes all of the Operating Facilities and the Development
Facilities) then owned by AL II Holdings and the Facility Entities on the same
terms, conditions and purchase price set as set forth in Section 13 of the
Management Agreements (Obligor's Option"), provided that Obligor exercises
Obligor's Option by written notice and deposit given to AL II Holdings not later
than twenty (20) days after receipt of the Put Notice pursuant to Section 3.1(a)
or 3.1(b), and not later than sixty (60) days after receipt of the Put Notice
pursuant to Section 3.1(c), 3.1(d) or 3.1(e). Upon exercise of Obligor's Option
pursuant to this Section, Obligor shall nonetheless remain obligated to deliver
the full amount of the deposit set forth in Section 3.5 below, and shall
additionally be obligated to deposit the amount set forth in Section 13.2 of the
Management Agreements. Failure to give such notice and deposit within such
twenty (20) day or sixty (60) day period shall automatically terminate Obligor's
Option. Notwithstanding the Obligor's Option, the Put Notice shall remain
effective until such time that Obligor exercises the Obligor's Option to
purchase all the Facilities then owned by the AL II Holdings and the Facility
Entities and closes such purchase pursuant to Obligor's Option, except that the
time period to close the purchase of the Put Facilities shall be extended until
ten (10) days after the date on which Obligor's Option is required to close. The
terms and conditions for such purchase and the closing thereof shall be pursuant
to the provisions of Section 13 of the Management Agreements, which are
incorporated herein by this reference. If Obligor fails to close the purchase
pursuant to Obligor's Option, then Obligor shall forfeit its deposit made
pursuant to Section 13.2 of the Management Agreements, and such amount shall not
be credited against Obligor's continuing obligation to purchase the Put
Facilities. Obligor's Option under this Section 3.2 following a Put Notice shall
be subordinate to the rights of Emeritus under the Emeritus Purchase Options
pursuant to Section 13 of the Management Agreements if Emeritus timely exercises
and closes such purchase.
3.3 Title. If a Put Notice is provided to Obligor in accordance with the terms
hereof, each Put Facility shall be conveyed on the Put Purchase Date, or the
next Business Day thereafter, by a quit claim deed ("Deed") subject to all
Permitted Exceptions and other Liens, easements or matters of record (except
only for any Mortgage) and all matters arising through or with the consent of
Managers or Emeritus, a quit claim bill of sale and assignment as to all
Personal Property and a quit claim assignment of all Leases, Contracts and
Permits. The form of all such quit claim deeds and assignments shall be as
specified by AL II Holdings or Facility Entities and consistent with Legal
Requirements for conveyances in the jurisdiction in which each Put Facility is
located. Transfer of all Permits to Obligor or his designee in accordance with
Legal Requirements for each Put Facility shall be the sole responsibility and
cost of Obligor. Other than an obligation to reasonably
-5-
<PAGE>
cooperate (at no material out-of-pocket cost) in such transfer, AL II Holdings
or the Facility Entities shall have no liability or responsibility for the
adequacy or completeness of any transfer of the Permits. No delay in
transferring the Permits shall delay the closing of the purchase of the Put
Facilities by Obligor except only for such necessary time required with all due
diligence to obtain reissuance or transfer of the Permits, but not beyond sixty
(60) days. If such Permits have not been reissued or transferred by such date,
then Obligor shall be deemed to be in default of his obligation to purchase the
Put Facilities and shall be liable for damages as set forth in Section 3.10.
3.4 Calculation of Purchase Price. The price to be paid by Obligor for the
acquisition of each Put Facility shall mean the amount calculated in accordance
with Exhibit B (the "Purchase Price"). AL II Holdings' calculation of the
Purchase Price shall be final, absent bad faith. The Purchase Price shall be a
net Purchase Price to be received by the respective Facility entity for each
Facility without deduction for due diligence, transfer taxes, title insurance or
other closing costs, all of which shall be paid by Obligor. Neither AL II
Holdings nor the Facility Entities shall bear any closing costs or prorations of
any kind or nature including, without limitation, with respect to real property
taxes, water or sewer charges, utilities or other operating expenses or income.
3.5 Deposit. Within seven (7) days after delivery of the Put Notice to Obligor,
Obligor shall deliver a cash deposit to AL II Holdings in an amount equal to
five percent (5%) of the aggregate Purchase Price for the Put Facilities
(together with all interest earned thereon, the "Deposit"). The Deposit shall be
deposited in a money market or similar interest-bearing account with a
commercial bank selected by AL II Holdings. The Deposit shall be credited
against the Purchase Price. Obligor expressly acknowledges that the Deposit is
not the limit of Obligor's liability and does not otherwise constitute
liquidated damages in the event of a default by Obligor in the purchase of the
Put Facilities as more fully set forth in Section 3.10 below.
3.6 Payment of Purchase Price. The Purchase Price for each Put Facility shall be
paid by Obligor at the Time of Closing in good funds.
3.7 Place and Time of Closing. If the Put Notice is given to Obligor, the
closing shall occur and the Deed for each Put Facility shall be delivered to
Title Company at 12:00 o'clock noon (P.S.T.) on the Put Purchase Date ("Time of
Closing"). It is agreed that time is of the essence with respect to all matters
relating to the purchase of the Put Facilities by Obligor pursuant to a Put
Notice. AL II Holdings, the Facility Entities and Obligor shall execute such
escrow instructions and other documents as may be customary and reasonably
requested by the Title Company in order to close the purchase of the Put
Facilities in accordance with this Agreement.
-6-
<PAGE>
3.8 Condition of Put Facilities. The Put Facilities and each of them shall be
purchased by Obligor "AS IS" and "WHERE IS" as of the Time of Closing. Without
limiting the generality of the foregoing, neither AL II Holdings, AL Investors
II, AL Investors Development, nor the Facility Entities make and shall not make
any representations or warranties, express or implied, with respect to, and
shall have no liability for: (i) the condition of the Put Facilities or any
Improvements thereon or the suitability, habitability, merchantability or
fitness of the Put Facilities; (ii) compliance with any Legal Requirements;
(iii) the presence of any Hazardous Substances in or about the Put Facilities,
including without limitation asbestos or urea-formaldehyde, or the presence of
any Hazardous Substances on or under the Land associated with any Put Facility;
(iv) the accuracy or completeness of any plans and specifications, reports, or
other materials provided to Obligor; or (v) any other matter relating to the Put
Facilities, including, without limitation, the title thereto or the condition,
value or operating results or prospects thereof. Without limiting the generality
of the foregoing, neither AL II Holdings, AL Investors II, AL Investors
Development, nor the Facility Entities shall have any liability to Obligor with
respect to the condition, value or operating results or prospects of the Put
Facilities under common law, or under any Legal Requirements and Obligor hereby
waives any and all claims which Obligor have or may have against AL II Holdings,
AL Investors II, AL Investors Development and/or Facility Entities with respect
to the condition of the Put Facilities. Obligor assumes the responsibility and
risks of all defects and conditions, including such defects and conditions, if
any, that cannot be observed by inspection or examination of records. Obligor
shall indemnify, defend, and hold harmless AL II Holdings, AL Investors II, AL
Investors Development and/or Facility Entities from and against all claims and
liabilities of any type or kind arising out of or related to the Put Facilities,
from and after the Time of Closing, it being intended that AL II Holdings, AL
Investors II, AL Investors Development and Facility Entities shall have no
liability from and after the Time of Closing with respect to the Put Facilities.
3.9 Use of Purchase Price to Clear Title. To enable the respective Facility
Entities to make the conveyance as provided in this Section 3, AL II Holdings
and the Facility Entities may, at the Time of Closing, use the Purchase Price or
any portion thereof to clear the title of any Mortgage, provided that all
instruments so procured are recorded contemporaneously with the Closing or
reasonable arrangements are made for recording subsequent to the Time of Closing
in accordance with customary conveyancing practices.
3.10 Obligor's Default. If AL II Holdings delivers the Put Notice to Obligor and
Obligor fails to consummate the purchase of the Put Facilities in accordance
with the terms hereof for any reason other than the Facility Entities' willful
and unexcused refusal to deliver the Deed and other assignments provided for
herein, AL Holdings or Facility Entities shall have the option to either (a) sue
for specific performance compelling Obligor to purchase the Put Facilities as
required by this Agreement or (b) to sue for damages which shall be measured by
the
-7-
<PAGE>
difference between the aggregate Purchase Price for the Put Facilities and the
then fair market value of the Put Facilities, less the transaction costs
(including seller's share of any adjustments and prorations) anticipated to be
incurred by AL II Holdings or the Facility Entities in connection with the sale
of the Put Facilities to a third party, all as determined by AL II Holdings. AL
II Holdings determination of the fair market value shall be final, absent bad
faith or an unreasonable determination.
3.11 Net Worth Covenants of Obligor. Prior to the execution of this Agreement,
Obligor has delivered to AL II Holdings his signed statement of personal net
worth ("Net Worth Statement") dated as of December 31, 1998. Obligor agrees to
update this Net Worth Statement semi-annually and to deliver to AL II Holdings
each updated Net Worth Statement promptly following its preparation, together
with a signed letter from Obligor certifying its accuracy. In the event that (a)
the net worth of the Obligor shown on his Net Worth Statement falls below Fifty
Million Dollars ($50,000,000), or (b) Obligor fails to deliver his Net Worth
Statement as set forth above, then within thirty (30) days Obligor shall deliver
to AL II Holdings a letter of credit in the amount of Three Million Dollars
($3,000,000), in form and substance and from a financial institution meeting AL
II Holdings' reasonable satisfaction and drawable solely upon AL II Holdings'
statement that a default under this Agreement has occurred (the "Letter of
Credit"), to secure the timely performance of Obligor under this Agreement. In
no event shall the Letter of Credit constitute liquidated damages or otherwise
limit Obligor's liability hereunder. Failure to satisfy the terms of this
Section 3.11 shall be a Triggering Event as set forth in Section 3.1(d) above.
4. [Intentionally Deleted]
5. CONSENTS AND WAIVERS
5.1 Consent to Modification of Obligations. Without affecting, diminishing or
otherwise impairing the liability of Obligor hereunder and without notice to or
consent of Obligor, AL II Holdings, its Affiliates, and the Facility Entities
may from time to time grant renewals, extensions, indulgences, releases and
discharges to any Person liable for any obligations under the Related Agreements
(collectively, the "Obligations") and may take security for payment or
performance of such Obligations, and may release any or all security or refrain
from perfecting any interest in any security granted by any guarantor or other
Person liable for any of the Obligations. AL II Holdings, its Affiliates and the
Facility Entities, may amend or modify the Obligations or any document or
instrument executed to evidence the Obligations and otherwise may deal with any
Person liable for any of the Obligations, without notice to or consent of
Obligor, and without affecting, diminishing, or otherwise impairing the
liability of Obligor under this Agreement.
-8-
<PAGE>
5.2 Consent to Waivers. AL II Holdings, its Affiliates or Facility Entities may
from time to time consent to any action or non-action of any Person liable for
any of the Obligations, which, in the absence of such consent, violates or may
violate the provisions of the Related Agreement or any other instrument
otherwise executed in connection with the Obligations, and such consent may be
granted by AL II Holdings, its Affiliates or Facility Entities, without notice
to or consent of Obligor and without in any manner affecting, diminishing, or
impairing the liability of Obligor under this Agreement. No waiver,
modification, extension, forbearance, or delay on the part of AL II Holdings,
its Affiliates or Facility Entities with respect to the Obligations or with
respect to any document, instrument or agreement evidencing such Obligations,
securing repayment of such Obligations or otherwise executed in connection with
the Obligations, and no act or thing which might, but for this provision of this
Agreement, be deemed a legal or equitable discharge of a surety, shall operate
to release the obligations of Obligor under this Agreement, and no delay on the
part of AL II Holdings, its Affiliates or Facility Entities in exercising any of
its options, powers, or rights under this Agreement, or any partial or single
exercise thereof shall constitute a waiver of any other rights hereunder.
5.3 Continued Effectiveness of Agreement. This Agreement shall continue to be
effective, or be reinstated, as the case may be, if at any time payment of all
or any part of the Obligations is rescinded or otherwise must be returned by AL
II Holdings, its Affiliates or Facility Entities upon the insolvency,
bankruptcy, or reorganization of the Managers, Emeritus, Obligor or any other
Person all as though such payment to AL II Holdings, its Affiliates or Facility
Entities had not been made.
5.4 Change in Form and Powers. No change in the name, purposes, capitalization,
ownership, form or organization of Managers, Emeritus, any Affiliate of
Emeritus, or any other Person shall in any way affect, diminish, or otherwise
impair the liability of Obligor under this Agreement. AL II Holdings, its
Affiliates or Facilities Entities shall not be obligated to inquire into the
powers of the Managers, Emeritus, any Affiliate of Emeritus, or any other Person
notwithstanding that any of the Obligations may be in excess of the powers of
the Managers, Emeritus, any Affiliate of Emeritus, or any other Person.
5.5 Effect of Certain Laws. Notwithstanding the provisions of the laws of any
state, this Agreement shall remain in full force and effect and no invalidity,
irregularity, or unenforceability (by reason of any bankruptcy or similar law,
any other law or any order of any Governmental Authorities thereof purporting to
reduce, amend, or otherwise affect any liability or obligation of the Managers
or Emeritus or any Affiliate of Emeritus) and no release or discharge of the
Managers, Emeritus, any Affiliate of Emeritus, or rejection of any of the
Related Agreements by any of the parties thereto other than AL II Holdings, its
Affiliates or Facility Entities, or any trustee, receiver or similar official on
behalf of such parties
-9-
<PAGE>
(whether pursuant to 11 U.S.C. Section 365 or otherwise), in any receivership,
bankruptcy, liquidation, winding-up, reorganization or other proceedings shall
affect, diminish, or otherwise impair or otherwise be a defense to this
Agreement. If Emeritus or any Emeritus Affiliate is stayed by any bankruptcy or
other proceeding with respect to exercising its option to purchase the
Facilities under the Management Agreements, it shall not prevent AL II Holdings,
its Affiliates or Facility Entities from delivering a Put Notice to Obligor as a
result of the occurrence of any Triggering Event, or if the Triggering Event
would have occurred, but for the effect of the stay created by the bankruptcy or
other proceeding, and enforcing the obligations of Obligor to purchase the Put
Facilities pursuant to such Put Notice.
5.6 No Conditions to Agreement. This Agreement is absolute and unconditional and
has been delivered free of any conditions and no representations have been made
to Obligor affecting or limiting the liability of Obligor under this Agreement.
This Agreement is in addition to and not in substitution for any agreement of
Obligor, in the Related Agreements or in any other document or instrument
executed by Obligor agreeing to perform all or any part of the Obligations.
5.7 Certain Waivers by Obligor. Obligor agrees that no release, delay,
compromise, indulgence, or other action or failure to act by AL II Holdings, its
Affiliates or Facility Entities with respect to any other Person liable for any
of the Obligations shall in any manner affect, diminish or impair the liability
of Obligor under this Agreement.
5.8 Survival. This Agreement shall survive expiration or sooner termination of
any of the Related Agreements. Without limiting the generality of the foregoing,
no termination of any of the Related Agreements, whether in whole or in part, or
whether by any of the parties thereto, shall terminate any obligation of Obligor
to purchase the Put Facilities pursuant to a Put Notice or the Emeritus
Facilities pursuant to the Purchase Notice and the terms of this Agreement.
6. ARBITRATION
At the sole election of AL II Holdings, any claim or dispute between the
parties, under this Agreement or otherwise, shall be determined by arbitration
in Portland, Oregon under the American Arbitration Association (AAA) Commercial
Arbitration rules with Expedited Procedures in effect on the date hereof, as
modified by this Agreement. There shall be one arbitrator selected by the
parties within seven (7) days of the arbitration demand or if not, then pursuant
to the AAA rules, who shall be an attorney licensed to practice law in the State
of Washington but residing in Portland with at least fifteen (15) years
commercial law experience. Any issue about whether a claim is covered by this
Agreement shall be determined by the arbitrator. At the request of either party
made not later than thirty (30) days after the arbitration demand, the parties
agree to submit the dispute to
-10-
<PAGE>
nonbinding mediation which shall not delay the arbitration hearing date. There
shall be no substantive motions or discovery, except the arbitrator shall
authorize such discovery as may be necessary to insure a fair hearing, which
shall be held within sixty (60) days of the demand; and concluded within two (2)
days. These time limits are not jurisdictional. The arbitrator shall apply
substantive law and may award injunctive relief or any other remedy available
from a judge including attorney fees and costs to the prevailing party, but
shall not have the power to award punitive damages.
7. MISCELLANEOUS
7.1 Notices. Any notice, demand, offer, approval or other writing required or
permitted pursuant to this Agreement shall be in writing, furnished in duplicate
and shall be transmitted by hand delivery, facsimile, certified mail, return
receipt requested, or Federal Express or another nationally recognized overnight
courier service which provides evidence of delivery, postage prepaid, as
follows:
If to AL Holdings, its Affiliates
or Facility Entities: AL II Holdings LLC
c/o Bruce D. Thorn
2250 McGilchrist Street SE, Suite 200
Salem, Oregon 97302
Facsimile: (503)375-7644
Telephone: (503)370-7071 ext. 7143
With copies to: Foster Pepper & Shefelman PLLC
1111 Third Avenue, Suite 3400
Seattle, Washington 98101
Attn: Gary E. Fluhrer
Facsimile: (206)447-9700
Telephone: (206)447-4400
Senior Housing Partners I, L.P.
c/o Mr. Noah Levy
Two Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
Facsimile: (770) 399-5363
Telephone: (770) 395-8606
-11-
<PAGE>
Goodwin Proctor & Hoar LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109-2881
Attn: Minta Kay
Facsimile: (617) 227-8591
Telephone: (617) 570-1877
Prudential Real Estate Investors
8 Campus Drive
Parsippany, New Jersey 07054
Attn: Joan Hayden
Facsimile: (973)683-1788
Telephone: (973)683-1772
If to Obligor: c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, Washington 98121-1031
Attn: Mr. Daniel Baty
Facsimile: (206)301-4500
Telephone: (206)301-4507
With copies to: Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, Washington 98121-1031
Attn: President
Facsimile: (206)301-4500
Telephone: (206)298-2909
Any party shall have the right to change the place to which such notice shall be
given or add additional parties to receive notices by similar notice sent in
like manner to all other parties hereto. Any notice, if sent by overnight
courier service, shall be deemed delivered on the earlier of the date of actual
delivery or the next business day and if delivered by hand delivery or facsimile
shall be deemed delivered on the date of the actual delivery and if sent by
mail, shall be deemed delivered on the earlier of the third day following
deposit with the U.S. Postal Service or actual delivery. Any notice sent by
facsimile shall also be sent on the same business day by overnight courier or
mail as set forth above.
7.2 Governing Law. This Agreement has been executed and delivered to AL II
Holdings, its Affiliates or Facility Entities in the State of Washington.
Obligor agrees that the law of the State of Washington (exclusive of principles
of conflicts of law) shall be applicable for the purpose of construing this
Agreement, determining the validity hereof and enforcing the same. Obligor
hereby consents to the jurisdiction of the courts of the State of Washington or
to any
-12-
<PAGE>
federal court sitting in the State of Washington. AL II Holdings may enforce any
or all of the provisions of this Agreement directly against Obligor and
Obligor's marital community in the State of Washington or any other jurisdiction
in which Obligor does business or at its option may enforce this Agreement on
behalf of any Facility Entity in the state in which such Put Facility is
located.
7.3 No Waiver. No delay or omission to exercise any right, power or remedy
accruing to AL II Holdings, its Affiliates or the Facility Entities upon any
breach or default of Obligor shall impair such rights, powers or remedies of AL
II Holdings or its Affiliates or Facility Entities, nor shall it be construed to
be a waiver of any such breach or default, or of any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring.
7.4 Assignment. AL II Holdings reserves the right to transfer or assign any or
all of their right, title and interest under this Agreement, including
assignment to any Mortgagee. Obligor shall not assign this Agreement in whole or
in part to any Person without AL II Holdings or Facility Entity's prior written
consent, which may be withheld in AL II Holdings' sole, absolute and unfettered
discretion.
7.5 Captions. Any captions applied to the sections of this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any of the provisions of this Agreement.
7.6 Invalidity. If any term, condition or provision of this Agreement shall be
held invalid for any reason, such offending term, condition or provision shall
be stricken therefrom, and the remainder shall not be affected.
7.7 Entire Agreement. This Agreement constitutes the complete and final
expression of the entire agreement between the parties pertaining to the subject
matter hereof. This Agreement may be amended only by a written instrument
executed by Obligor and AL II Holdings.
7.8 Binding Effect. This Agreement shall inure to the benefit of AL II Holdings
and the Facility Entities, their respective successors and assigns, and shall be
binding upon Obligor and its respective permitted successors and assigns, as the
case may be. This Agreement may be terminated only by means of a written
document duly executed by Obligor and AL II Holdings. The parties agree that AL
Investors II, AL Investors Development and the Facility Entities are intended
third party beneficiaries of this Agreement.
7.9 Legal Expenses. In the event of any default, or in the event that any
dispute arises relating to the interpretation, enforcement or performance of
this Agreement, the prevailing party shall be entitled to all reasonable fees
and
-13-
<PAGE>
expenses incurred in connection therewith, including but not limited to fees of
attorneys, accountants, appraisers, consultants, expert witnesses, arbitrators,
mediators and court reporters. Without limiting the generality of the foregoing,
the prevailing party shall pay all such costs and expenses incurred in
connection with: (a) arbitration or other alternative dispute resolution
proceedings, trial court actions and appeals; (b) bankruptcy or other insolvency
proceedings of Obligor, (c) all claims, counterclaims, cross-claims and defenses
asserted in any of the foregoing whether or not they arise out of or are related
to this Agreement; (d) all preparation for any of the foregoing; and (e) all
settlement negotiations with respect to any of the foregoing.
7.10 Jury Trial Waiver. OBLIGOR, AL II HOLDINGS, ITS AFFILIATES AND FACILITY
ENTITIES HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR
COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF
OR IN ANY WAY RELATED TO THIS AGREEMENT.
DATED this ______________ day of March, 1999.
OWNER: AL II HOLDINGS LLC, a Delaware limited
liability company for itself and as sole
managing member on behalf of each of AL
Investors II LLC and AL Investors
Development LLC
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
AL INVESTORS DEVELOPMENT LLC, a Delaware
limited liability company, for itself and as
sole managing member on behalf of each of
the Facility Entities which owns a
Development Facility
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
-14-
<PAGE>
AL INVESTORS II LLC, a Delaware limited
liability company, for itself and as sole
managing member on behalf of each of the
Facility Entities which owns an Operating
Facility, or in cases where the Facility
Entity is a limited partnership, as sole
managing member on behalf of the general
partner of such Facility Entity
By /s/ Norman L. Brenden
Name: Norman L. Brenden
Its: Manager
OBLIGOR:
/s/ Daniel R. Baty
Daniel R. Baty, individually and
on behalf of his marital community
-15-
<PAGE>
EXHIBIT A
TO PUT AND PURCHASE AGREEMENT
(AL II Holdings - 14 Operating Facilities
and 5 Development Facilities)
Certain Defined Terms
AL II Holdings: AL II Holdings LLC, a Delaware limited liability company, which
is the sole member of AL Investors II and AL Investors Development
AL Investors II: AL Investors II LLC, a Delaware limited liability company
AL Investors Development: AL Investors Development LLC, a Delaware limited
liability company
AL II Development Management Agreement: That certain Management Agreement with
Option to Purchase dated on or about the same date as this Put and Purchase
Agreement, among AL Investors Development and Emeritus Corporation and its
Affiliates relating to the management of up to five (5) assisted living
facilities. "Management Agreement" as used herein shall mean the AL II Operating
Management Agreement if the Facility in question is being managed pursuant to
the AL II Operating Management Agreement, or the AL II Development Management
Agreement if the Facility in question is being managed pursuant to the AL II
Development Management Agreement.
AL II Operating Management Agreement: That certain Management Agreement with
Option to Purchase dated on or about the same date as this Put and Purchase
Agreement, among AL Investors II and Emeritus Corporation and its Affiliates
relating to the management of fourteen (14) assisted living facilities.
"Management Agreement" as used herein shall mean the AL II Operating Management
Agreement if the Facility in question is being managed pursuant to the AL II
Operating Management Agreement, or the AL II Development Management Agreement if
the Facility in question is being managed pursuant to the AL II Development
Management Agreement.
AL Management Agreement: That certain Management Agreement With Option to
Purchase dated December 30, 1998 Among AL Investors LLC and Emeritus Corporation
and its Affiliates relating to the management of twenty-five (25) assisted
living facilities.
Affiliate: with respect to any Person (i) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, (ii) any other Person that owns, beneficially, directly or indirectly,
five percent (5%) or more of the outstanding capital stock, shares or equity
interests of such Person or (iii) any officer, director, employee, general
partner or trustee of such Person, or any
A-1
<PAGE>
other Person controlling, controlled by, or under common control with, such
Person (excluding trustees and Persons serving in a fiduciary or similar
capacity who are not otherwise an Affiliate of such Person). For the purposes of
this definition, "control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
through the ownership of voting securities, partnership interests or other
equity interests.
Agency Account: The Agency Account to be maintained for each Facility for
payment of Fixed Operating Expenses and Operating Expenses as described in
Section 8.1 of the Management Agreements.
Annual Plan(s): as defined in Section 4.2 of the Management Agreements.
Award: all compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
Base Management Fee: as defined in Section 7.1 of the Management Agreements.
Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to
pay debts as they become due; or applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian or makes a general
assignment for the benefit of creditors, or in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is appointed and
is not discharged within sixty (60) days after such appointment; or an order for
relief is entered or a petition is filed under Title 11, United States
Bankruptcy Code, with respect to any of them; or any other bankruptcy,
reorganization, debt arrangement, or other case or proceeding under any
bankruptcy or insolvency law, now or hereafter in effect, is commenced with
respect to any of them.
Business Day: any day which is not a Saturday or Sunday or a public holiday
under the laws of the United States of America or the State of Washington.
Capital Improvements: as defined in Section 12 of the Management Agreements.
Cash Available for Distribution: on any date the amount contained in the Agency
Accounts (as defined in Section 8.1 of the Management Agreements), minus an
amount (to be retained in the Agency Accounts) equal to any reasonably projected
Operating Deficit for the succeeding 30 days, taking into account all Operating
Expenses and Fixed Operating Expenses and all anticipated Total Revenues during
such 30-day period.
A-2
<PAGE>
Casualty: the damage or destruction by act of God or otherwise of any portion of
any Facility which Owner reasonably estimates would cost more than $50,000 to
repair or restore.
Change of Control: shall mean the occurrence of any one of the following events
with respect to Emeritus:
(a) any Person or group of Persons (within the meaning of Rule 13d-5 under
the Act as defined below) other than Emeritus, any of its subsidiaries, or any
trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of Emeritus or any of its subsidiaries, together
with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2
under the Securities Exchange Act of 1934, as amended (the "Act")) of such
Person or group, shall become the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Act), directly or indirectly, of securities of Emeritus
representing a greater percentage than that then owned by Daniel R. Baty,
together with all "affiliates" and "associates" of Daniel R. Baty (as defined
above) of either (A) the combined voting power of Emeritus' then outstanding
securities having the right to vote in an election of Emeritus' Board of
Directors ("Voting Securities") or (B) the then outstanding shares of Stock of
Emeritus; or
(b) Persons who, as of the date hereof, constitute Emeritus' Board of
Directors (the "Incumbent Directors") cease for any reason, including, without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority of the Board, provided that any
person becoming a director of Emeritus subsequent to the date hereof whose
election or nomination for election was approved by a vote of at least a
majority of the Incumbent Directors shall, for purposes of this Plan, be
considered an Incumbent Director; or
(c) the stockholders of Emeritus shall approve (A) any consolidation or
merger of Emeritus or any subsidiary where the shareholders of Emeritus,
immediately prior to the consolidation or merger, would not, immediately after
the consolidation or merger, beneficially own (as such term is defined in Rule
13d-3 under the Act), directly or indirectly, shares representing a majority of
the voting shares of the corporation issuing cash or securities in the
consolidation or merger (or of its ultimate parent corporation, if any), (B) any
sale, lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of all or
substantially all of the assets of Emeritus or (C) any plan or proposal for the
liquidation or dissolution of Emeritus; or
(d) other than by reason of death or legal disability, Daniel Baty ceases
to be the chief executive officer of Emeritus.
A-3
<PAGE>
Change of Control with respect to any Manager shall mean the occurrence of any
event whereby 100% of the ownership interests in such Manager are no longer
owned by Emeritus.
Closing: the date of closing with respect to any Facility under the Purchase
Agreements.
Code: the Internal Revenue Code of 1986, as amended.
Commencement Date: as defined in Section 2.1 of the Management Agreements.
Compensation: the direct salaries and wages paid to, or accrued for the benefit
of, any employee working and employed at each Facility together with all
reasonably customary fringe benefits payable to, or accrued for the benefit of
such employee, including employer's contribution under FICA., unemployment
compensation, or other employment taxes, pension fund contributions, workmen's
compensation, group life and accident and health insurance premiums, and other
reasonable employee benefits customary in the industry.
Condemnation: with respect to any Facility or any interest therein or right
accruing thereto or use thereof (i) the exercise of the power of condemnation,
whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary
sale or transfer to any Condemnor under threat of condemnation.
Condemnor: any public or quasi-public authority, or private corporation or
individual, having the power of condemnation.
Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary
Contracts and Major Contracts.
CPA: The certified public accountants retained to provide necessary accounting
services for the Facility or Owner, the selection of which shall be subject to
approval by Owner.
Date of Taking: the date the Condemnor has the right to possession of the
property being condemned.
Environmental Laws: means all federal, state, and local laws, ordinances and
regulations and standards, rules, policies and other governmental requirements,
administrative rulings, and court judgments and decrees in effect now or in the
future and including all amendments, that relate to Hazardous Materials and
apply to the Facilities or to the Land and/or the Improvements. Hazardous
Materials Laws include, but are not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the
Resource
A-4
<PAGE>
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic
Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33
U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, and their state analogs.
Excluded Expenses: depreciation, amortization and other non-cash expenses; items
to be provided or paid for at Owner's or Managers' sole expense as provided
herein; costs and expenses resulting from or required to cure any matter or
defect which constitutes a breach of warranty, representation or indemnity under
the Purchase Agreements, the Licensing Agreement, or the Management Agreement
which cost or expense shall be the sole responsibility of the breaching party;
unreasonable or excessive charges or expenses.
Escrow Holder: First American Title Insurance Company.
Extension Term: as defined in Section 2.2 of the Management Agreements.
Facility or Facilities: Each of the assisted living facilities, including the
Land, Improvements, and Personal Property associated therewith, located in the
city and state as set forth below which are acquired by a Facility Entity and
made subject to the Management Agreements:
<TABLE>
<CAPTION>
Facility City State Units Beds Facility LLC and LP
Name
<S> <C> <C> <C> <C> <C>
Colonial Park
Club Sarasota FL 90 110 AL Investors II
Sarasota LLC
Park Club of
Fort Myers Fort Myers FL 90 100 AL Investors II
Fort Myers LLC
Park Club of
Oakbridge Lakeland FL 77 94 AL Investors II
Lakeland LLC
Park Club of
Brandon Brandon FL 89 110 AL Investors II
Brandon LLC
Highland Hills Pocatello ID 49 57 AL Investors II
Pocatello LLC
Ridge Wind Chubbuck ID 110 96 AL Investors II
Chubbuck LLC
Lakewood Inn Coeur d'Alene ID 73 109 AL Investors II
Coeur D'Alene
The Pines of
Tewksbury Tewksbury MA 49 50 AL Investors II
Tewksbury LLC
Meadowbrook Ontario OR 53 82 AL Investors II
Ontario LLC
Anderson Place Anderson SC 127 84 AL Investors II
Anderson LLC
Elmbrook Estates Lubbock TX 79 100 Lubbock AL
Investors II LP
Fairhaven Estates Bellingham WA 98 110 AL Investors II
Bellingham LLC
Hearthstone Moses Lake WA 50 100 AL Investors II
Moses Lake LLC
Evergreen Lodge Federal Way WA 84 92 AL Investors II
Federal Way LLC
</TABLE>
<TABLE>
<CAPTION>
Facility City State Units Beds Facility LLC and LP
Name
<S> <C> <C> <C> <C> <C>
Loyalton of
Flagstaff Flagstaff AZ 61 61 AL Investors
Development Flagstaff
LLC
Loyalton of
Phoenix Phoenix AZ 100 101 AL Investors
Development Phoenix
LLC
Loyalton of
Hagerstown Hagerstown MD 101 101 AL Investors
Development
Hagerstown LLC
Loyalton of
Lakewood Lakewood NY 83 83 AL Investors
Development Lakewood
LLC
Loyalton of
Staunton Staunton VA 101 101 AL Investors
Development Staunton
LLC
</TABLE>
A-5
<PAGE>
Facility Accounts: as defined in Section 8.1 of the Management Agreements.
Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set
forth opposite the name of each Facility above and their respective successors
or assigns.
Fixed Operating Expenses: for any period, all fixed costs and expenses of
owning, and operating the Facilities in the aggregate except where the
Management Agreements expressly provide that Fixed Operating Expenses shall be
determined for each Facility to the extent such costs and expenses are not
included in Operating Expenses, including but not limited to (a) Managers' Base
Management Fee (excluding the amount of any Accrued Management Fee accrued
during such period); (b) all amounts to be paid into the Reserve Account and the
cost of Capital Improvements approved by Owners not funded from the Reserve
Account; (c) the debt service on account of the Senior Loan; (d) the real and
personal property ad valorem taxes and assessments; and (e) all costs and
expenses of all property and casualty insurance on or in respect of the
Facilities provided for herein and the amount of all self-insured losses or
deductibles. Fixed Operating Expenses shall not include the Excluded Expenses.
Furnishings and Equipment: all furniture, furnishings, beds, equipment, food
service equipment, apparatus and other personal property used in (or if the
context so dictates, required in connection with), the operation of each
Facility, other than Operating Equipment, Operating Supplies and fixtures
attached to and forming part of the Improvements.
GAAP: means generally accepted accounting principles applied on a consistent
basis.
Governmental Authorities: Collectively, all agencies, authorities, bodies,
boards, commissions, courts, instrumentalities, legislatures, and offices of any
nature whatsoever of any government, quasi-government unit or political
subdivision, whether with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence which exercises
jurisdiction over any Facility.
Group Service: as defined in Section 3.2.4 of the Management Agreements.
Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum
products and compounds containing them, including gasoline, diesel fuel and oil;
explosives; flammable materials, radioactive materials; polychlorinated
biphenyls ("PCBs") and compounds containing them; lead and lead-based paint;
asbestos or asbestos-containing materials in any form that is or could become
friable; underground storage tanks, whether empty or containing any substance;
A-6
<PAGE>
any substance the presence of which on any Facility is prohibited by any
federal, state or local authority; any substance that requires special handling;
and any other material, or substance now or in the future defined as a
"hazardous substance," "hazardous material," hazardous waste," "toxic
substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning
of any Environmental Law. Provided, however, Hazardous Substances shall not
include the safe and lawful use and storage of quantities of (i) pre-packaged
supplies, medical waste, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable Facilities, (ii) cleaning
materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by occupants of any Facility; and (iii)
petroleum products used in the operation and maintenance of motor vehicles from
time to time located on the Facilities' parking areas, so long as all of the
foregoing are used, stored, handled, transported and disposed of in compliance
with Environmental Laws.
Impositions: collectively, all taxes (including, without limitation, all capital
stock and franchise taxes of AL Investors II, AL Investors Development, AL II
Holdings, or any Facility Entity, all ad valorem, property, sales and use,
single business, gross receipts, transaction privilege, rent or similar taxes),
assessments (including, without limitation, all assessments for public
improvements or benefits, whether or not commenced or completed prior to the
date hereof and assessments levied by condominium associations), ground rents,
water and sewer rents other than normal utility charges, excises, tax levies,
fees (including, without limitation, license, permit, inspection, authorization
and similar fees), and all other charges imposed by Governmental Authorities, in
each case whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Facility (including all
interest and penalties thereon due to any failure in payment by Manager), which
at any time prior to, during or in respect of the Term of the Management
Agreement may be assessed or imposed on or in respect of or be a Lien upon (a)
Facility Entities' interest in the Facility, (b) the Facility or any rent or
income therefrom or any estate, right, title or interest therein, or (c) any
occupancy, operation, use or possession of, sales from, or activity conducted
on, or in connection with, the Facility or the leasing or use of the Facility.
Notwithstanding the foregoing, "Impositions" shall not include: (1) any tax
based on net income (whether denominated as a franchise or capital stock or
other tax) imposed on any Owners or Managers, (2) any tax imposed with respect
to the sale, exchange or other disposition of a Facility or the proceeds
thereof, or (3) any principal or interest on any Mortgage; provided, however,
the provisos set forth in clause (1) of this sentence shall not be applicable to
the extent that any real or personal property tax, assessment, tax levy or
charge pursuant to the first sentence of this definition and which is in effect
at any time during the Term hereof is totally or partially repealed, and a tax,
assessment, tax levy or charge set forth in clause (1) is levied, assessed or
imposed expressly in lieu thereof.
A-7
<PAGE>
Improvements: the buildings, structures (surface and sub-surface) and other
improvements now or hereafter located on the Land.
Initial Term: as defined in Section 2.1 of the Management Agreements.
Insurance Requirements: all terms of each insurance policy required to be
carried in this Agreement, or agreed to be carried by Owners and Managers, and
all orders, rules, regulations and other requirements of the National Board of
Fire Underwriters (or any other body exercising similar functions) applicable to
the Facilities or the operation thereof.
Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage,
pledge, and related security instruments against, among other things, the
membership interests of AL II Holdings in AL Investors II and in AL Investors
Development and in the Facility Entities. Initially, the Junior Loan is
evidenced by that certain Loan Agreement among AL II Holdings, AL Investors II,
AL Investors Development and its Affiliates and Senior Housing Partners I, L.P.
dated on or about the same date hereof ("Initial Junior Loan").
Land: the parcel or parcels of land on which each of the Facilities is situated,
together with all rights of ingress and egress thereto and parking associated
therewith as legally described in the Purchase Agreements.
Leases: Collectively, the Ordinary Leases and Major Leases.
Legal Requirements: collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and assisted living licensing statutes,
ordinances, by-laws, codes, rules and regulations), whether now or hereafter
enacted, promulgated or issued by any Governmental Authority, Accreditation Body
or Third Party Payor affecting a Facility Entity or any Facility or the
ownership, construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof or the operation of any programs or
services in connection with a Facility, including, without limitation, any of
the foregoing which may (i) require repairs, modifications or alterations in or
to any Facility, (ii) in any way affect (adversely or otherwise) the use and
enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up,
containment, removal, remediation or other treatment of any Hazardous Substances
on, under or from any Facility. Without limiting the foregoing, the term "Legal
Requirements" includes all Environmental Laws and shall also include all Permits
and Contracts issued or entered into by any Governmental Authority, any
Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances.
Lending Group: GMAC Commercial Mortgage in a debt facility referred to
herein as the Initial Senior Loan secured by the Operating Facilities in the
maximum
A-8
<PAGE>
aggregate original principal balance of $68,000,000 and Guaranty Federal Bank
F.S.B. in a debt facility referred to herein as the Initial Senior Loan secured
by the Development Facilities in the maximum aggregate original principal
balance of $31,600,000.
Licensing Indemnity Agreement: those certain Licensing Indemnity Agreements
between Emeritus Corporation and AL Investors II and AL Investors Development
dated on or about the same date hereof.
Lien: with respect to any real or personal property, any mortgage, mechanics' or
materialmen's lien, pledge, collateral assignment, hypothecation, charge,
security interest, title retention agreement, levy, execution, seizure,
attachment, garnishment or other encumbrance of any kind in respect of such
property which secures or is intended to secure the payment of money, whether or
not inchoate, vested or perfected, other than the Mortgage.
Major Contracts: Any contract for the purchase of goods or services or any other
agreement which requires payments in excess of $50,000 per year for any Facility
or which cannot be terminated without penalty or termination fee on sixty (60)
days notice or in which the provider of the goods or services is Emeritus or an
Affiliate (except pursuant to Group Services approved in connection with an
Annual Plan).
Major Lease: Any Lease which has a noncancellable term in excess of one year or
a rental payment in excess of $10,000 per year or pursuant to which Emeritus or
an Affiliate is the lessee or lessor.
Managed Care Plans: all health maintenance organizations, preferred provider
organizations, individual practice associations, competitive medical plans, and
similar arrangements.
Management Agreements: the AL II Development Management Agreement and the AL II
Operating Management Agreement.
Management Fee: the amounts set forth in Section 7.1 and 7.2 of the Management
Agreements.
Medicaid: the medical assistance program established by Title XIX of the Social
Security Act (42 US C ss.ss. 1396 et seq.) and any statute succeeding thereto.
Medicare: the health insurance program for the aged and disabled established by
Title XVIII of the Social Security Act (42 USC ss.ss. 1395 et seq.) and any
statute succeeding thereto.
A-9
<PAGE>
Mortgage: collectively, the terms and conditions of the Senior Loan and the
Junior Loan.
Mortgagee: the holder or beneficiary of a Mortgage and their respective
successors and assigns.
Operating Deficit and Operating Profit: for any period, the amount, if any, by
which Total Revenues for that period is less than or exceeds, respectively, the
sum of (i) Operating Expenses and (ii) Fixed Operating Expenses for that period
in each case determined on a cash basis.
Operating Equipment: all dishes, glassware, bed coverings, towels, silverware,
uniforms and similar items used in, or held in storage for use in (or if the
context so dictates, required in connection with) the operation of the
Facilities.
Operating Expenses: for any period, all reasonable costs and expenses of owning
and operating the Facilities in the aggregate except where the Agreement
expressly provides that Operating Expenses shall be determined for each Facility
(which costs and expenses do not include the Fixed Operating Expenses or the
Excluded Expenses) including the following:
(a) The cost of all Operating Equipment and Operating Supplies placed in
use, with the exception of the Operating Equipment and Operating Supplies
initially supplied by the Facility Entities. The cost of maintaining and
operating the vans and buses for each Facility (but not any debt service or
lease payments which shall remain the sole expense of Emeritus.
(b) The Compensation of all employees working and employed by Managers at
the Facilities. The Compensation of Managers' or Emeritus' home office or
executive or other personnel not regularly employed at the Facilities shall not
be included in Operating Expenses or Fixed Operating Expenses, but reasonable
out-of-pocket travel expenses of Managers or Owners' executive personnel while
traveling to and from a Facility on business shall be reimbursable as an
Operating Expense; provided, however, that if such business travel relates to
business or properties other than with respect to the Facilities, then such
travel expenses shall be equitably prorated between such other business or
properties and the Facilities.
(c) The cost of all utilities including, without limitation, electricity,
water, gas, heat and other utilities, and office supplies and equipment, and
goods and services purchased under all Contracts, including leasing expenses in
connection with telephone and data processing equipment and such other equipment
as the parties hereto may agree upon in writing.
(d) The cost of repairs to and maintenance of the Facilities whether
performed by Facility employees or contracted to third parties.
A-10
<PAGE>
(e) Insurance premiums for all insurance required under this Agreement and
self-insured losses and deductibles with respect to such insurance coverages
(but excluding premiums and self-insured losses and deductibles on property and
casualty insurance which are included in Fixed Operating Costs). Premiums on
policies for more than one year will be prorated over the period of insurance
coverage and premiums under blanket policies will be equitably allocated among
properties covered.
(f) All Impositions (except for real and Personal Property ad valorem taxes
and assessments which shall be a Fixed Operating Expenses).
(g) Except as otherwise provided in Section 6.1 of the Management
Agreements, legal fees and fees of any CPA for services directly related to the
operations of the Facilities (whether incurred by Owners or Managers).
(h) The costs and expenses of technical consultants and specialized
operational experts for specialized services in connection with non-recurring
work on operational, functional, design or construction problems and activities
whether incurred by Owner or Manager; provided, however, that if such costs end
expenses have not been included in the Annual Plan, the same shall be subject to
approval by Owner.
(i) All expenses for marketing the Facilities and all expenses of sales
promotion and public relations activities as set forth in the Annual Plan
(j) The cost of Group Services, as provided in Section 3.2.4 of the
Management Agreement.
(k) Bad debts or uncollectible amounts from residents of the Facilities.
(l) Refund of deposits to residents under Residency Agreements
(m) Owners' reasonable costs and expenses of administering, supervising,
and managing Owners' activities in connection with this Agreement and any
Mortgage, including Owners' reasonable cost and expense of preparing and filing
federal, state and local income tax returns and audits.
(n) All other reasonable expenses and charges incurred in the operation and
management of the Facilities to the extent set forth in the Annual Plan or
otherwise approved by the Owners or as otherwise set forth in the Agreement.
Operating Period: the period beginning with the Commencement Date and ending
upon the expiration of the Initial Term.
A-11
<PAGE>
Operating Supplies: consumable items used in, or held in storage for use in (or
if the context so dictates, required in connection with), the operation of the
Facilities, including food, medical supplies, fuel, soap, cleaning materials,
and other similar consumable items.
Operating Year: the Operating Years shall coincide with and be identical with
the calendar years, except that the first Operating Year shall be the period
beginning on the Commencement Date and ending on the following December 31,
1999, and such long or short year, as applicable, shall constitute a full
Operating Year as used herein.
Ordinary Contracts: All agreements and contracts to purchase goods and services
(excluding Major Contracts) in the ordinary course of business of refurbishing,
owning, operating or managing the Facilities, or the operation of any programs
or services in conjunction with the Facility and all renewals, replacement and
substitutions therefor with any Governmental Authority, Accreditation Body or
Third Party Payor or entered into with any third Person, excluding, however, any
agreements pursuant to which money has been or will be borrowed or advanced, the
Leases, any agreement creating or permitting any Lien or other encumbrance on
title (except for the Permitted Exceptions), and any Major Contract.
Ordinary Leases: Collectively, all subleases, licenses, use agreements,
equipment leases, concession agreements, tenancy at will agreements and other
occupancy agreements (but excluding any Residency Agreement, Facility Lease or
Major Lease), whether oral or in writing, entered into by Managers affecting a
Facility.
Overdue Rate: on any date, a rate of interest per annum equal to the greater of:
(i) a variable rate of interest per annum equal to one hundred twenty percent
(120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided,
however, in no event shall the Overdue Rate be greater than the maximum rate
then permitted under Legal Requirements.
Permits: collectively, all permits, licenses, approvals, qualifications, rights,
variances, permissive uses, accreditation, certificates, certifications,
consents, agreements, contracts, contract rights, franchises, interim licenses,
permits and other authorizations of every nature whatsoever required by, or
issued under, applicable Legal Requirements relating or affecting a Facility or
the construction, development, maintenance, management, use or operation
thereof, or the operation of any programs or services in conjunction with the
Facility and all renewals, replacements and substitutions therefor, now or
hereafter required or issued by any Governmental Authority, Accreditation Body
or Third Party Payor to Owners or Managers.
Permitted Exceptions: (i) all encumbrances to title present at closing pursuant
to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii)
easements,
A-12
<PAGE>
restrictions on use, zoning laws and ordinances, rights of way and other
encumbrances and minor irregularities in title, whether now existing or
hereafter arising, which are approved by Owner and do not individually or in the
aggregate materially impair the use of any Facility.
Person: any individual, corporation, general partnership, limited partnership,
joint venture, stock company or association, company, bank, trust, trust
company, land trust, business trust, unincorporated organization, unincorporated
association, Governmental Authority or other entity of any kind or nature.
Personal Property: all machinery, equipment, furniture, furnishings, vans,
buses, movable walls or partitions, computers or trade fixtures, goods,
inventory, supplies, the name of the Facility, and other personal or intangible
property used in the operation of the Facility, including, but not limited to,
all Operating Equipment, Furnishings and Equipment and Operating Supplies.
Notwithstanding the foregoing, title to the vans and buses shall remain in
Emeritus or Managers and be held in trust by them for the benefit of the
respective Owner; provided that legal title to the vans and buses shall be
transferred to the respective Facility Entity upon expiration or sooner
termination of the Management Agreement as provided in Section 9.6 of the
Management Agreement.
Primary Intended Use: the use of the Facility as an assisted living facility and
such ancillary uses as are permitted by applicable Legal Requirements and may be
necessary in connection therewith or incidental thereto.
Prime Rate: the variable rate of interest per annum from time to time set forth
in the Wallstreet Journal as the prime rate of interest and in the event that
the Wallstreet Journal no longer publishes a prime rate of interest, then the
Prime Rate shall be deemed to be the variable rate of interest per annum which
is the prime rate of interest or base rate of interest from time to time
announced by any major bank or other financial institution reasonably selected
by AL Investors.
Provider Agreements: all participation, provider and reimbursement agreements or
arrangements, if any, in effect for the benefit of Owners or Managers in
connection with the operation of the Facility relating to any right of payment
or other claim arising out of or in connection with participation in any Third
Party Payor Program.
Put and Purchase Agreement: that certain Put and Purchase Agreement between
Daniel Baty and AL II Holdings dated on or about the same date hereof.
Residency Agreement: all contracts, agreements and consents executed by or on
behalf of any resident or other Person seeking services at the Facility,
including, without limitation, assignments of benefits and guarantees.
A-13
<PAGE>
Senior Loan: any indebtedness incurred by Owners which is secured by any
mortgage, deed of trust and related security instruments against a Facility.
Initially, the Senior Debt for the Operating Facilities is evidenced by that
certain Loan Agreement between AL Investors II and its Affiliates and GMAC
Commercial Mortgage Corporation dated on or about the same date hereof ("Initial
Senior Loan/Operating Facilities") and the Senior Loan for the Development
Facilities is evidenced by that certain Loan Agreement between AL Investors
Development and its Affiliates and Guaranty Federal Bank, F.S.B. for itself and
as agent for the Lenders defined therein dated on or about the same date hereof
("Initial Senior Loan/Development Facilities").
Third Party Payor Programs: collectively, all third party payor programs in
which the Emeritus Entities presently or in the future may participate,
including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield,
Managed Care Plans, other private insurance plans and employee assistance
programs.
Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue
Shield, private insurers and any other Person which presently or in the future
maintains Third Party Payor Programs.
Title Company: First American Title Insurance Company.
Total Revenues: collectively, but without duplication all revenues generated by
reason of the operation of the Facilities in the aggregate, except where the
Agreement expressly provides that Total Revenues shall be determined for each
Facility, directly or indirectly received by any Facility Entity or Managers,
including, without limitation, all resident revenues received or receivable for
the use of, or otherwise by reason of, all rooms, units and other facilities
provided, deposits received from residents under Residency Agreements, meals
served, services performed, space or facilities leased pursuant to the Leases or
goods sold on or from the Facility, all amounts from Third Party Payors, and all
revenues from all ancillary services provided at or relating to any Facility;
provided, however, that Total Revenues shall not include:
(a) federal, state or local sales, use, gross receipts and excise taxes and
any tax based upon or measured by said Total Revenues which is added to or made
a part of the amount billed to the resident or other recipient of such services
or goods, whether included in the billing or stated separately, which is paid to
the Governmental Authority;
(b) proceeds from sale of capital assets, including the sale of the
Facility and proceeds therefrom other than sale of Furnishings and Equipment in
the ordinary course of business,;
(c) proceeds of any insurance other than business interruption insurance;
A-14
<PAGE>
(d) proceeds of any financing or capital contributions to Owners;
(e) interest or earnings on the Reserve Account;
(f) any Award resulting from Condemnation;
(g) any other income or proceeds from any source other than in the ordinary
course of business of the Facility.
Except as otherwise specifically indicated, all references to Section and
Subsection numbers refer to Sections and Subsections of this Agreement, and all
references to Exhibits refer to the Exhibits attached hereto. The words
"herein," "hereof", "hereunder", "hereinafter", and words of similar import
refer to this Agreement as a whole and not to any particular Section or
Subsection hereof unless the context otherwise requires.
A-15
<PAGE>
EXHIBIT B
TO PUT AND PURCHASE AGREEMENT
(AL II Holdings - 14 Operating Facilities
and 5 Development Facilities)
Determination of Purchase Price
"Cash Account" means an account maintained with respect to each Facility with an
initial balance of zero, which shall be increased from time to time by any net
proceeds from refinancing such Facility after repayment of its allocable Senior
Loan, and deduction of refinancing costs and reserves, and thereafter decreased
from time to time by any Owner's Deficit Contribution pursuant to the Management
Agreements which is not financed by the proceeds of a Senior Loan, but which
shall not be less than zero.
The "Investment Account" for a Facility shall initially be the allocated Equity
as shown on Exhibit C. The Investment Account shall be increased from time to
time by (a) additional amounts contributed by AL II Holdings or its Affiliates
with respect to such Facility to pay for Operating Deficits after the Cash
Account balance, if any, for such Facility has been reduced to zero, (b) amounts
contributed by AL II Holdings or its Affiliates to the Facility Entity to reduce
the Senior Loan allocated to such Facility, (c) any proceeds of AL II Holdings,
its Affiliates or other Facility Entities applied by the Senior Lender, if
applicable, to reduce the Senior Loan allocated to such Facility, and (d) as
January 1 of each year, the Investment Return as defined below accrued during
the prior calendar year with respect to such Facility.
The "Investment Return" means an eighteen percent (18%) per annum rate of return
which shall accrue on a daily basis on the balance of the Investment Account, as
adjusted from time to time as set forth above.
The "Purchase Price" for a Put Facility shall equal the amount, determined as of
the Put Purchase Date, that is required to repay in full the Senior Loan
allocated to such Facility (including all prepayment penalties and other charges
incurred on such repayment) plus any outstanding Operating Deficit Loan
allocated to such Facility (as defined in the Management Agreements), plus the
Investment Account of such Facility, plus the Investment Return accrued on the
Investment Account for such Facility for the current year through the Put
Purchase Date, plus an amount equal to two percent (2%) of the initial
Investment Account for such Facility, less the Cash Account balance, if any, for
such Facility. The Purchase Price for all Put Facilities shall equal the sum of
the Purchase Prices for each Put Facility calculated as set forth above.
B-1
<PAGE>
EXHIBIT C
TO PUT AND PURCHASE AGREEMENT
(AL II Holdings - 14 Operating Facilities
and 5 Development Facilities)
<TABLE>
<CAPTION>
FACILITY EQUITY
<S> <C>
Colonial Park Club $1,662,000
Park Club of Fort Myers $ 836,000
Park Club of Oakbridge $1,422,000
Park Club of Brandon $1,217,000
Highland Hills $ 737,000
Ridge Wind $ 963,000
Lakewood Inn $1,518,000
The Pines of Tewksbury $1,162,000
Meadowbrook $ 648,000
Anderson Place $2,277,000
Elmbrook Estates $1,169,000
Fairhaven Estates $ 797,000
Hearthstone $1,300,000
Evergreen Lodge $1,292,000
Loyalton of Flagstaff $1,112,000
Loyalton of Phoenix $1,555,000
Loyalton of Hagerstown $1,741,000
Loyalton of Lakewood $1,488,000
Loyalton of Staunton $1,734,000
</TABLE>
C-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF 3/31/99 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
3/31/1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,075
<SECURITIES> 3,037
<RECEIVABLES> 2,698
<ALLOWANCES> 532
<INVENTORY> 294
<CURRENT-ASSETS> 24,387
<PP&E> 137,091
<DEPRECIATION> 9,666
<TOTAL-ASSETS> 180,290
<CURRENT-LIABILITIES> 30,980
<BONDS> 158,927
25,000
0
<COMMON> 1
<OTHER-SE> (50,937)
<TOTAL-LIABILITY-AND-EQUITY> 180,290
<SALES> 0
<TOTAL-REVENUES> 34,179
<CGS> 0
<TOTAL-COSTS> 34,214
<OTHER-EXPENSES> (304)
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 3,225
<INCOME-PRETAX> (2,956)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,956)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,956)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
