<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant / /
Filed by a Party other than the Registrant /X/
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or 14a-12
EMERITUS CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
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- ----------------------------------------------------------------------------------------------------------------------------
PER UNIT PRICE OR OTHER
UNDERLYING VALUE OF PROPOSED
TITLE OF EACH CLASS OF AGGREGATE NUMBER OF TRANSACTION COMPUTED MAXIMUM
SECURITIES TO WHICH SECURITIES TO WHICH PURSUANT TO EXCHANGE AGGREGATE VALUE OF
TRANSACTION APPLIES TRANSACTION APPLIES ACT RULE 0-11 TRANSACTION TOTAL FEE PAID
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<S> <C> <C> <C> <C>
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</TABLE>
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
Amount Previously Paid: Filing Party:
Form, Schedule or
Registration Statement No.: Date Filed:
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<PAGE>
[LOGO]
April 12, 1999
Dear Shareholders:
You are cordially invited to attend the Annual Meeting of Shareholders of
Emeritus Corporation, a Washington Corporation, to be held on Wednesday, May 19,
1999, at 10:00 a.m. at the Columbia Winery, Milestone Room, 14030 N.E. 145th
Street, Woodinville, Washington 98072.
The business matters to be acted on at the meeting are described in the
accompanying Notice of Annual Meeting of Shareholders and Proxy Statement.
Your vote is very important. Whether or not you attend the meeting, your
shares should be represented and voted at the meeting. Therefore, I urge you to
mark, sign, date and promptly return the enclosed proxy. If you decide to attend
the meeting and wish to vote in person, you will still have the opportunity to
do so.
On behalf of the Board of Directors, I would like to express our
appreciation for your continued interest in the affairs of the Company.
Sincerely,
/s/ Dan Baty
Daniel R. Baty
Chairman of the Board and
Chief Executive Officer
<PAGE>
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD WEDNESDAY, MAY 19, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Emeritus
Corporation, a Washington Corporation (the "Company"), will be held on
Wednesday, May 19, 1999, at 10:00 a.m. at the Columbia Winery, Milestone Room,
14030 N.E. 145th Street, Woodinville, Washington 98072, for the following
purposes:
(1) To elect two directors into the Class III of the Company's
Board of Directors.
(2) To approve an amendment to the Company's 1995 Stock Incentive
Compensation Plan to increase the number of shares available
for issuance pursuant to the plan from 1,450,000 shares
to 1,850,000.
(3) To ratify the appointment of KPMG LLP as the Company's
independent public accountants for fiscal year 1999.
(4) To transact such other business as may come before the meeting
or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on March 26, 1999 as
the record date for the determination of shareholders entitled to notice of and
to vote at the meeting.
All shareholders are cordially invited to attend the meeting in person.
To ensure representation at the Annual Meeting, shareholders are urged to
mark, sign, date and return the enclosed proxy as promptly as possible, even if
they plan to attend the Annual Meeting. A return envelope, which requires no
postage if mailed in the United States, is enclosed for this purpose. Any
shareholder attending the Annual Meeting may vote in person even if such
shareholder has returned a proxy if the proxy is revoked in the manner set forth
in the accompanying Proxy Statement.
By Order of the Board of Directors
/s/ Dan Baty
Daniel R. Baty
Chairman of the Board and
Chief Executive Officer
Seattle, Washington
April 12, 1999
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WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, PLEASE MARK, SIGN, DATE AND RETURN
THE ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE. THIS WILL ENSURE THE PRESENCE
OF A QUORUM AT THE MEETING. PROMPTLY MARKING, SIGNING, DATING AND RETURNING YOUR
PROXY WILL SAVE THE COMPANY THE EXPENSE OF ADDITIONAL SOLICITATION. SENDING IN
YOUR PROXY WILL NOT PREVENT YOU FROM VOTING YOUR STOCK AT THE MEETING IF YOU
DESIRE TO DO SO, AS YOUR PROXY IS REVOCABLE AT YOUR OPTION.
- --------------------------------------------------------------------------------
<PAGE>
EMERITUS CORPORATION
--------------------------------
PROXY STATEMENT
--------------------------------
INFORMATION CONCERNING SOLICITATION AND VOTING
GENERAL
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Emeritus Corporation, a Washington Corporation (the
"Company"), of proxies for use at the Annual Meeting of Shareholders (the
"Annual Meeting") to be held on Wednesday, May 19, 1999, at 10:00 a.m. at the
Columbia Winery, Milestone Room, 14030 N.E. 145th Street, Woodinville,
Washington 98072, for the purposes set forth herein and in the accompanying
Notice of Annual Meeting of Shareholders. The principal executive offices of the
Company are located at 3131 Elliott Avenue, Suite 500, Seattle, Washington
98121. It is expected that this Proxy Statement and accompanying form of proxy
will be mailed to shareholders on or about April 12, 1999.
RECORD DATE AND OUTSTANDING SHARES
Holders of record of the Company's common stock (the "Common Stock") at the
close of business on March 26, 1999, are entitled to notice of and to vote at
the Annual Meeting. On that date there were 10,487,050 shares of Common Stock
outstanding.
REVOCABILITY OF PROXIES
Shares represented at the Annual Meeting by properly executed proxies in
the accompanying form will be voted at the Annual Meeting and, where the
shareholder giving the proxy specifies a choice, the proxy will be voted in
accordance with the shareholder's discretion. A proxy given for use at the
Annual Meeting may be revoked by the shareholder giving the proxy at any time
prior to the exercise of the powers conferred thereby. A proxy may be revoked
either by (a) filing with the Secretary of the Company prior to the Annual
Meeting, at the Company's principal executive offices, either a written
revocation or a duly executed proxy bearing a later date or (b) attending the
Annual Meeting and voting in person, regardless of whether a proxy has
previously been given. Presence at the Annual Meeting will not revoke the
shareholder's proxy unless shareholder votes in person.
QUORUM AND VOTING
Under Washington law and the Company's Articles of Incorporation, if a
quorum is present at the Annual Meeting, (a) the two nominees for election as
directors who receive the greatest number of votes cast for the election of
directors at the Annual Meeting by the shares present in person or represented
by proxy at the Annual Meeting and entitled to vote shall be elected directors,
and (b) the proposals to approve the allocation of additional shares for stock
options and to ratify the appointment of the accountants will be approved if the
votes cast in favor of such proposals by the shares present in person or
represented by proxy at the Annual Meeting and entitled to vote exceed the votes
cast against such proposals. Abstention from voting will have no effect on the
election of directors or the approval of the proposals since they will not
represent votes cast at the Annual Meeting for the purposes of electing
directors and voting on such proposals. Because brokers have discretion to vote
shares of Common Stock held on behalf of beneficial owners if no instructions
for voting such shares are received as to the matters to be voted upon at the
Annual Meeting, there will be no "broker nonvotes."
SOLICITATION OF PROXIES
Proxies will be solicited by certain of the Company's directors, officers
and regular employees, without payment of any additional compensation to them.
Proxies will be solicited by personal interview, mail and telephone. Any costs
relating to such solicitation of proxies will be borne by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of Common Stock for their expenses in forwarding
solicitation materials to such beneficial owners.
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes: Class I, Class II and
Class III. At the Annual Meeting, two Class III directors are to be elected to
hold office for a term of three years until the Company's annual meeting of
shareholders in 2002, and until his, each successor is elected and qualified.
The Board of Directors has no reason to believe that any of the nominees listed
below will be unable to serve as a director. If, however, any nominee becomes
unavailable, the proxies will have discretionary authority to vote for a
substitute nominee.
NOMINEES FOR ELECTION
CLASS III DIRECTORS (TERM TO EXPIRE IN 2002)
Daniel R. Baty (age 55), one of the Company's founders, has served as its
Chief Executive Officer and as a director since its inception in 1993 and became
Chairman of the Board in April 1995. Mr. Baty also has served as the Chairman of
the Board of Holiday Retirement Corp. ("Holiday"), an owner and operator of
independent-living communities, since 1987 and served as its Chief Executive
Officer from 1991 through September 1997. Since 1984, Mr. Baty has also served
as Chairman of the Board of Columbia-Pacific Group, Inc. ("Columbia Pacific")
and, since 1986, as Chairman of the Board of Columbia Pacific Management, Inc.
("Columbia Management"), both of which companies are wholly owned by Mr. Baty
and engaged in developing independent-living facilities and providing consulting
services for that market.
William E. Colson (age 57) has served as a director of the Company since
1995. Mr. Colson is a founder of Holiday and has been its President and Chief
Operating Officer since 1987. In September 1997, Mr. Colson became Chief
Executive Officer of Holiday.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
THE ELECTION OF THE DIRECTOR NOMINEES.
CONTINUING DIRECTORS
CLASS I DIRECTORS (TERM TO EXPIRE IN 2000)
Patrick Carter (age 53) has served as a director of the Company since
November 1995. Since 1985, Mr. Carter has been Chief Executive Officer and
Managing Director of Westminister Health Care Holdings, Plc., a publicly held
operator of skilled-nursing facilities in the United Kingdom.
Motoharu Iue (age 62) has served as a director of the Company since April
1995. Mr. Iue has served as Chairman of the Board of Sanyo North America
Corporation ("Sanyo") and President of Three Oceans Inc. ("Three Oceans") since
October 1996. Mr. Iue served as President of Sanyo and as Chairman of the Board
of Three Oceans and since 1992 has served as Chief Executive Officer of Sanyo
and Chief Executive Officer of Three Oceans. Three Oceans Inc. is a 3.7%
shareholder of the Company. Mr. Iue has been a director of Sanyo since 1977.
CLASS II DIRECTORS (TERM TO EXPIRE IN 2001)
Tom A. Alberg (age 59) has served as a director of the Company since
November 1995. Since January 1996, Mr. Alberg has been principal of Madrona
Investment Group, L.L.C., a private merchant banking firm. Mr. Alberg was
President and a director of LIN Broadcasting Corporation, a cellular telephone
company, from April 1991 to October 1995, and Executive Vice President of AT&T
Wireless Services, a provider of cellular telephone services, formerly McCaw
Cellular Communications, Inc., from July 1990 to October 1995. Mr. Alberg is
also a director of Active Voice Corporation, Amazon.com, Inc., Mosaix, Inc.,
Visio Corporation and Teledesic Corporation.
Raymond R. Brandstrom (age 46), one of the Company's founders, has served
as a director since its inception in 1993. From 1993 to February 1999, Mr.
Brandstrom also served as the Company's President and Chief Operating Officer.
From May 1992 to October 1996, Mr. Brandstrom served as President of Columbia
Pacific and Columbia Management, both of which companies are engaged in
developing independent-living facilities and providing consulting services for
that market. From May 1992 to May 1997, Mr. Brandstrom served as Vice President
and Treasurer of Columbia Winery, a company affiliated with Mr. Baty that is
engaged in the production and sale of still table wines.
<PAGE>
David T. Hamamoto (age 39) has served as a director of the Company since
November 1997. Mr. Hamamoto is a member of Northstar Capital Partners LLC
("NorthStar"), a real estate fund that he founded in July 1997. Between 1983 and
July 1997, Mr. Hamamoto was employed by Goldman Sachs, most recently as
co-founder and co-head of the Real Estate Principal Investment Area of the
Whitehall Funds. Mr. Hamamoto is also Co-Chairman, Co-Chief Executive Officer
and Co-President of Northstar Capital Investment Corporation, a private
investment firm.
INFORMATION ON COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Company has no Nominating Committee, and the full Board of
Directors selects nominees for election as directors.
The Compensation Committee establishes salaries, incentives and other forms
of compensation for directors, officers and other key employees of the Company,
administers the 1995 Stock Incentive Compensation Plan and recommends policies
relating to benefit plans. The Compensation Committee currently consists of
Messrs. Alberg, Carter and Iue. The Compensation Committee met four times in
1998.
The Audit Committee reviews the Company's accounting practices, internal
accounting controls and financial results and oversees the engagement of the
Company's independent auditors. The Audit Committee currently consists of
Messrs. Alberg and Carter. The Audit Committee did not meet in 1998.
During 1998, there were four meetings of the Board of Directors, and all
board members attended at least 75% of the meetings of the Board of Directors
and of each committee of which he was a member.
COMPENSATION OF DIRECTORS
Nonemployee directors currently receive $500 for each meeting of the Board
of Directors or committee of the Board of Directors that they attend. In
September 1995, the Company established the Stock Option Plan for Nonemployee
Directors, which provides that each nonemployee director who is initially
elected or appointed to the Board of Directors will, upon such election or
appointment, be automatically granted a fully vested option to purchase 2,500
shares of Common Stock. In addition, each nonemployee director is automatically
granted a fully vested option to purchase 2,000 shares of Common Stock
immediately following each year's annual meeting of shareholders.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to
compensation paid by the Company in the fiscal years ended December 31, 1996,
1997 and 1998 to the Company's Chief Executive Officer and to the other four
most highly compensated officers of the Company (the "Named Executive
Officers").
In October 1998, the Compensation Committee of the Board of Directors, in
an action ratified by the Board of Directors, approved a plan that allowed
officers and employees of the Company to exchange options with exercise prices
of $10.50 or greater for new options with exercise prices equal to the closing
price of the Common Stock on November 25, 1998 (the "Exchange Date"), which was
$9.8125. Under this exchange program, for every option of shares tendered for
cancellation, a new option was granted. New options will vest according to the
vesting schedule for the original options, except that such options can not be
exercised during a ninety (90) day blackout period, from the date new options
were granted (except in the case of retirement, disability, death or termination
by the Company without cause). New options will expire according to the
expiration of schedule for the original options and generally were granted as
incentive stock options for officers of the Company, and as nonqualified options
for other employees. The footnotes to the tables below will often refer to this
exchange program to further explain the context of the data reported. See also
"Option Exchanges" and "Report on Exchange Programs" below.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------------------------- --------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY (11) (3) OPTIONS (1)
- ----------------------------------- ------ ---------- ------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Baty (2)(6)............. 1998 $ - $ - $ 264 204,000 $ -
Chairman and Chief 1997 $ - $ - $1,363 64,000 $ -
Executive Officer 1996 $ - $ - $2,190 50,000 $ -
Raymond R. Brandstrom(7).......... 1998 $165,645 $ - $ 264 162,000 $ -
former President and Chief 1997 $100,000 $ - $1,363 57,000 $ -
Operating Officer 1996 $100,000 $ - $ 720 50,000 $ -
Gary D. Witte (4)(8).............. 1998 $194,101 $ 20,000 $ 264 127,000 $ -
Vice President, Operations 1997 $151,667 $ - $ 264 57,000 $ 9,167
1996 $ 18,552 $ - $ 110 50,000 $ 833
Kelly J. Price(9)................. 1998 $150,629 $ 22,500 $1,696 75,250 $ -
Vice President, Finance 1997 $ 99,357 $ - $1,363 44,000 $ -
Chief Financial Officer 1996 $ 76,554 $ - $ 982 10,000 $ -
Sarah J. Curtis (5)(10)........... 1998 $141,656 $ 22,500 $1,696 52,000 $ -
Vice President, Sales and 1997 $ 87,708 $ - $1,334 32,000 $10,000
Marketing
</TABLE>
- ----------
(1) Consists of $833 and $9,167 in housing allowances in 1996 and
1997, respectively, for Mr. Witte and a $10,000 housing allowance in
1997 for Ms. Curtis.
(2) Mr. Baty is not currently paid a salary by the Company. On April
17, 1995, the Company purchased investment securities in The Standish
Care Company (now Carematrix Corporation) from a corporation
wholly owned by Mr. Baty. Such investment securities were purchased
by the Company at Carematrix's original cost, which exceeded the
then current market value of such securities. The excess of the
cost to the Company over market value at the time of purchase was
$426,000 and was treated for financial reporting purposes as
compensation to Mr. Baty in 1995.
(3) Consists of amounts paid for parking fees and health club memberships.
(4) In November 1996, Mr. Witte was hired as the Company's Vice President,
Operations.
(5) In March 1997, Ms. Curtis was hired as the Company's Vice President,
Sales and Marketing.
(6) Of the 204,000 option shares granted in 1998, 164,000 were granted in
the exchange program pursuant to which 50,000 options granted in each
of 1995 and 1996 and 64,000 shares granted in 1997 were cancelled.
(7) Of the 162,000 option shares granted in 1998, 142,000 were granted in
the exchange program pursuant to which 35,000 options granted in 1995,
50,000 options granted in 1996, and 57,000 shares granted in 1997 were
cancelled.
(8) Of the 127,000 option shares granted in 1998, 107,000 were granted in
the exchange program pursuant to which 50,000 options granted in 1996
and 57,000 shares granted in 1997 were cancelled.
(9) Of the 75,250 option shares granted in 1998, 55,250 were granted
in the exchange program pursuant to which 1,250 options granted in
1995, 10,000 options granted in 1996, and 44,000 shares granted in
1997 were cancelled.
(10) Of the 52,000 option shares granted in 1998, 32,000 were granted in
the exchange program pursuant to which 32,000 options granted in 1997
were cancelled.
(11) Represents amounts earned for 1998 performance which were paid in
March 1999.
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1998 to the Named Executive
Officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(4) ($)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED(#)(1) FISCAL YEAR (2) ($/SHARE)(3) DATE 5% 10%
- ------------------------- --------------- ------------------- --------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Baty 40,000 2.8% $9.6250 11/18/08 $ 242,124 $ 613,591
64,000 (5) 4.4% $9.8125 11/20/07 $ 346,234 $ 852,791
50,000 (5) 3.5% $9.8125 11/21/06 $ 234,252 $ 561,073
50,000 (5) 3.5% $9.8125 12/12/05 $ 203,110 $ 474,620
Raymond R. Brandstrom 20,000 1.4% $9.6250 11/18/08 $ 121,062 $ 306,795
57,000 (5) 4.0% $9.8125 11/20/07 $ 308,365 $ 759,517
50,000 (5) 3.5% $9.8125 11/21/06 $ 258,124 $ 618,253
35,000 (5) 2.4% $9.8125 12/12/05 $ 171,156 $ 399,951
Gary D. Witte 20,000 4.3% $9.6250 11/18/08 $ 121,062 $ 306,795
57,000 (5) 4.0% $9.8125 11/20/07 $ 308,365 $ 759,517
50,000 (5) 3.5% $9.8125 11/21/06 $ 234,252 $ 561,073
Kelly J. Price 20,000 1.4% $9.6250 11/18/08 $ 121,062 $ 306,795
44,000 (5) 3.1% $9.8125 11/20/07 $ 238,036 $ 586,294
10,000 (5) 0.7% $9.8125 11/21/06 $ 46,850 $ 112,215
1,250 (5) 0.0% $9.8125 12/12/05 $ 5,078 $ 11,866
Sarah J. Curtis 20,000 1.4% $9.6250 11/18/08 $ 121,062 $ 306,795
22,000 (5) 1.6% $9.8125 11/20/07 $ 119,018 $ 293,147
10,000 (5) 0.7% $9.8125 3/3/07 $ 48,988 $ 118,316
</TABLE>
- ----------
(1) The options have terms of ten years and generally vest between 20% to 33%
per year commencing one year from the date of grant. Upon the occurrence
of certain corporate transactions, the exercisability of the options may
be accelerated.
(2) The Company granted 1,441,166 stock options to employees in 1998,
including 1,005,166 options granted in connection with the exchange
program.
(3) The option exercise price is equal to the closing price of the Common
Stock on the American Stock Exchange, Inc. on the date of grant.
(4) Future value of current-year grants assuming appreciation of 5% and 10%
per year over the 10-year option period. The actual value realized may be
greater or less than the potential realizable values set forth in the
table. The assumed rates of growth are prescribed by the Securities and
Exchange Commission (the "Commission") for illustrative purposes only and
are not intended to predict or forecast future stock prices.
(5) These shares were granted on the November 25, 1998 exchange program
pursuant to which the previously issued shares were cancelled. See
"Option Exchanges."
<PAGE>
FISCAL YEAR-END OPTION VALUES
None of the Named Executive Officers exercised options during the fiscal
year ended December 31, 1998. The following table sets forth certain information
regarding options held as of the end of such fiscal year by each of the Named
Executive Officers.
AGGREGATED OPTION EXERCISES IN 1998 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 (#) DECEMBER 31, 1998(1) ($)
----------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Daniel R. Baty 62,800 141,200 $47,100 $113,400
Raymond R. Brandstrom 52,400 109,600 $39,300 $ 85,950
Gary D. Witte 31,400 95,600 $23,550 $ 75,450
Kelly J. Price 13,550 61,700 $10,163 $ 50,025
Sarah J. Curtis 6,400 45,600 $ 4,800 $ 37,950
</TABLE>
- ----------
(1) Options to purchase an aggregate of 620,250 shares held on a combined
basis by the Named Executive Officers were in-the-money at the fiscal
year-end based on the $10.5625 closing price of the Common Stock on the
American Stock Exchange on December 31, 1998.
OPTION EXCHANGES
The following table provides information on exchanges of options held by
the Named Executive Officers during the past ten years.
<TABLE>
<CAPTION>
TEN-YEAR OPTION REPRICING
----------------------------------------------------------------------------------------------
LENGTH OF
NUMBER OF MARKET ORIGINAL
SECURITIES PRICE OF EXERCISE OPTION TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING AT
OPTIONS TIME OF TIME OF EXERCISE DATE OF
NAME DATE REPRICED REPRICING REPRICING PRICE (1) REPRICING
- --------------------------------- ------------ -------------- -------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Baty 11/25/98 50,000 $9.8125 $14.375 $9.8125 7.1 yrs
Chairman and Chief 11/25/98 50,000 $9.8125 $10.500 $9.8125 8 yrs
Executive Officer 11/25/98 64,000 $9.8125 $13.375 $9.8125 9 yrs
Raymond R. Brandstrom 11/25/98 35,000 $9.8125 $14.375 $9.8125 7.1 yrs
Former President and 11/25/98 50,000 $9.8125 $10.500 $9.8125 8 yrs
Chief Operating Officer 11/25/98 57,000 $9.8125 $13.375 $9.8125 9 yrs
Gary D. Witte 11/25/98 50,000 $9.8125 $10.500 $9.8125 8 yrs
Vice President, Operations 11/25/98 57,000 $9.8125 $13.375 $9.8125 9 yrs
Kelly J. Price 11/25/98 1,250 $9.8125 $14.375 $9.8125 7.1 yrs
Vice President, Finance 11/25/98 10,000 $9.8125 $10.500 $9.8125 8 yrs
Chief Financial Officer 11/25/98 44,000 $9.8125 $13.375 $9.8125 9 yrs
Sarah J. Curtis 11/25/98 10,000 $9.8125 $12.750 $9.8125 8.3 yrs
Vice President, Sales and 11/25/98 22,000 $9.8125 $13.375 $9.8125 9 yrs
Marketing
</TABLE>
(1) Options granted on November 25, 1998 have an exercise price equal to the
fair market value of the Company's Common Stock on November 25, 1998
based on the closing price of the Common Stock as quoted on the American
Stock Exchange.
<PAGE>
COMPENSATION COMMITTEE REPORT ON OPTION EXCHANGE PROGRAM
In October 1998, the Compensation Committee of the Board of Directors, in
an action ratified by the Board of Directors, approved a plan that allowed
officers and employees of the Company to exchange any options granted prior to
November 1, 1998 for new options with exercise prices equal to the closing price
of the Common Stock on the exchange date of November 25, 1998, which was
$9.8125. Under this exchange program, for every option tendered for
cancellation, a new option was granted. New options will vest according to the
vesting schedule for the original options, except that such options could not be
exercised during a ninety (90) day blackout period from the date new options
were granted (except in the case of retirement, disability, death or termination
by the Company without cause). New options will expire according to the
expiration schedule for the original options and generally were granted as
incentive stock options for officers of the Company, and as nonqualified options
for other employees.
Immediately prior to the Exchange Date of November 25, 1998, options to
purchase a total of approximately 1,441,166 shares were outstanding. Pursuant to
the exchange program, options to purchase a total of 1,005,166 shares were
exchanged for new options. In the exchange program, the Named Executive Officers
exchanged a total of 500,250 option shares.
Before implementation of the exchange program, approximately 68% of all
granted and outstanding options had exercise prices greater than current market
price of the Common Stock. Due to the significant percentage of "out of the
money" options, the Compensation Committee and the Board of Directors believed
that the retention value of the outstanding grants was significantly diminished
and that the exchange program was critical to the Company's ability to attract,
retain and motivate employees necessary to the Company's long-term success. The
Compensation Committee and Board of Directors felt that the exchange program
would help ensure that optionees will continue to have meaningful equity
incentives in the Company and, therefore, was in the best interests of the
Company.
Compensation Committee
Tom A. Alberg, Chair
Patrick Carter
Motoharu Iue
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board (the "Committee") consists of three
nonemployee directors. The Committee is responsible for establishing and
administering the Company's executive compensation programs. The objectives of
these programs are to pay competitively in order to attract qualified executive
personnel who best meet the Company's needs; retain and motivate these
executives to achieve superior performance; link individual compensation to
individual and company performance; and align executives' financial interests
with those of the Company's shareholders.
Executive compensation generally consists of two components: base salary
and long-term incentive awards. The Committee has established each executive's
compensation package by considering (a) the salaries of executive officers in
similar positions in companies in the same industry as the Company and in
related industries, (b) the experience and contribution levels of the individual
executive officer, and (c) the Company's financial performance. Companies used
as a reference for considering compensation levels include some but not all of
the companies constituting the peer group in the Stock Performance Graph. The
Company also relies on the recommendations of the Chief Executive Officer in
matters related to the individual performance of the other executive officers,
because the Committee believes that the Chief Executive Officer is the most
qualified to make this assessment. Base salaries for executive officers
generally are designed to be less than those paid by competitors in the
assisted-living industry. These lower base salaries are combined with stock
option grants so that a significant portion of the executives pay is tied to the
Company's performance.
BASE SALARIES. In 1998, base salaries were established as described above.
<PAGE>
STOCK OPTIONS. Stock options are granted to provide a long-term
incentive opportunity that is directly linked to shareholder value. They are
granted with an exercise price equal to the market value of the Common Stock
on the date of grant, and become exercisable in 20% annual increments
beginning one year after the date of grant. To encourage stock retention, all
options are granted as incentive stock options to the maximum extent possible
under the Internal Revenue Code of 1986, as amended (the "Code"). In 1998,
stock options were granted to a total of 177 employees of the Company in
recognition of their dedication, commitment and hard work. After considering
the performance of each executive, the Committee determined the number of
options to be granted to each executive officer.
ANNUAL INCENTIVES. To date, the Committee has not established a regular
annual incentive or bonus plan for the Company's executive officers. Three of
the Company's Named Executive were awarded a bonus in March 1999 based on 1998
performance.
The Company's Chief Executive Officer, Mr. Baty, a founder of the Company,
has a significant equity position in the Company. As of the record date, Mr.
Baty owned shares and exercisable options representing 32.0% of the Company's
Common Stock. Mr. Baty receives no base salary or bonus. The compensation
pattern was established prior to the Company's initial public offering and the
Committee has continued it, recognizing that the principal compensation of Mr.
Baty will be the increased value of his equity stake in the Company.
Section 162(m) of the Internal Revenue Code (the "Code") includes potential
limitations on the deductibility for federal income tax purposes of compensation
in excess of $1 million paid or accrued with respect to any of the executive
officers whose compensation is required to be reported in the Company's Proxy
Statement. Certain performance-based compensation that has been approved by
shareholders is not subject to the deduction limit. The Company's stock option
plans are structured to qualify options granted thereunder as performance-based
compensation under Section 162(m). For 1999, the Committee does not contemplate
that there will be any such nondeductible compensation.
Compensation Committee
Tom A. Alberg, Chair
Patrick Carter
Motoharu Iue
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return on shares of the
Company's Common Stock with the cumulative total return of the AMEX Market Value
Index and a peer group selected by the Company for the period beginning on
November 21, 1995, the first day of trading for the Company's Common Stock, and
ending on December 31, 1998, the end of the Company's last fiscal year.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
EMERITUS CORPORATION, THE AMEX MARKET VALUE INDEX AND THE PEER GROUP
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Emeritus AMEX New Old
Corporation Market Peer Group Peer Group
----------- ------ ---------- ----------
<S> <C> <C> <C> <C>
November 21, 1995 100 100 100 100
December 31, 1995 78 105 106 110
December 31, 1996 90 112 152 93
December 31, 1997 85 136 198 163
December 31, 1998 70 138 294 159
</TABLE>
Assumes $100 invested in each of the Common Stock, the AMEX Market Value
Index and the peer group, with all dividends reinvested. Stock price performance
shown above for the Common Stock is historical and not necessarily indicative of
future price performance.
Given the relatively recent emergence of the assisted living industry, the
Company revises its peer group from time to time to include those companies
which have entered the assisted living market. As the undustry begins to mature,
certain companies previously included in the Company's peer group will be
removed as they become acquired or as their focus of services shift away from
the assisted-living spectrum.
The new peer group consists of thirteen companies: Alternative Living
Services Inc., ARV Assisted Living, Inc., Assisted Living Concepts Inc.,
Carematrix Corp. (formerly The Standish Care Company), Greenbriar Corp., Regent
Assisted Living Inc., Sunrise Assisted Living Inc., Brookdale Living
Communities, Capital Senior Living, American Retirement Corp, AFLAC, Inc.,
Karrington Health Inc. and Balanced Care Corp.
The old peer group consists of eight companies primarily involved in the
provision of assisted-living services: Alternative Living Services Inc., ARV
Assisted Living, Inc., Assisted Living Concepts Inc., Atria Communities, Inc.,
Carematrix Corp. (formerly The Standish Care Company), Greenbriar Corp., Regent
Assisted Living Inc. and Sunrise Assisted Living Inc. The Company changed its
peer group by eliminating Atria Communities, Inc. as it was acquired by a
private company in 1998.
<PAGE>
CHANGE OF CONTROL ARRANGEMENTS
CHANGE OF CONTROL AGREEMENTS
The Company has entered into senior management employment agreements (the
"Agreements") with Messrs. Brandstrom, Witte, and Price and Ms. Curtis. The
Agreements provide certain benefits in the event that an executive's employment
is terminated by the Company for any reason other than death, "disability,"
"cause" or by an executive for "good reason" following a "change in control" (as
those terms are defined in the Agreements). Such benefits include (a) payment of
an amount equal to three times the sum of an executive's annual base salary and
target bonus for the current fiscal year (adjusted as set forth below); (b) any
payment necessary to offset certain tax obligations incurred as a result of such
salary and bonus payments; and (c) at the Company's option, either the
continuation of life insurance, disability, medical, dental and similar employee
benefits for three years following termination or a cash payment equal to the
present value of such welfare benefits. Whether or not an executive is
terminated following a change in control, he or she shall be entitled to the
following benefits: (a) an annual base salary no less than current market
salary; (b) an annual bonus equal to at least the average of the annual bonuses
paid in the two years preceding a change in control; and (c) continued
participation in employee benefit plans. On each anniversary, the Agreements are
automatically extended for another year, unless the Company otherwise notifies
the executive at least sixty days prior to such anniversary. Once a change in
control occurs, the Agreements remain in effect for three years from that date.
OPTION PLAN
In the event of (a) the merger or consolidation of the Company in which it
is not the surviving corporation or pursuant to which shares of Common Stock are
converted into cash, securities or other property (other than a merger in which
holders of Common Stock immediately before the merger have the same
proportionate ownership of the capital stock of the surviving corporation
immediately after the merger); (b) the sale, lease, exchange or other transfer
of all or substantially all of the Company's assets (other than a transfer to a
majority-owned subsidiary); or (c) the approval by the holders of Common Stock
of any plan or proposal for the Company's liquidation or dissolution (each, a
"Corporate Transaction"), each outstanding option under the Company's stock
option plan will automatically accelerate so that it will become 100% vested and
exercisable immediately before the Corporate Transaction, except that
acceleration will not occur if, in the opinion of the Company's accountants, it
would render unavailable "pooling of interest" accounting for the Corporate
Transaction and except to the extent that options are assumed by the successor
corporation. The vesting of such assumed options accelerates at the time an
optionee's employment is terminated by the Company for reasons other than
"cause" or by the optionee for "good reason" following a change of control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Baty currently serves as the Chairman of the Board and Chief Executive
Officer of the Company and also serves as the Chairman of the Board and is a 21%
owner of Holiday. Mr. Colson, a director of the Company is the President, Chief
Operating Officer and Chief Executive Officer and is a 34% owner of Holiday.
Columbia House I, Limited Partnership, ("Columbia House"), a Washington
limited partnership in which Mr. Baty indirectly controls the general partner
and holds an indirect 60% interest, develops, owns and leases low income senior
housing projects. The Company currently manages eight communities owned by
Columbia House and provides administrative services for another community. Under
these agreements, the Company provides certain administrative support, due
diligence and financial support services to Columbia House with respect to the
acquisition, development and administration of Columbia House communities. The
agreements have terms ranging from two to four years, with options to renew, and
provide for management fees ranging from 4% to 6% of gross operating revenues,
payable monthly for management agreements and fixed fees payable monthly for
administrative agreements. Fees earned under these agreements were $326,000 in
1998, of which $39,000 was receivable as of December 31, 1998. The Company also
had receivables of $590,000 due from Columbia House as of December 31, 1998
representing advances made on various Columbia House communities. Such advances
do not bear interest.
Prior to the Company's initial public offering in November 1995, Mr. Baty
had personally guaranteed much of the Company's third-party financing, including
mortgage debt and rental payments under leases. Certain of those guarantees
terminated when the underlying properties met certain loan-to-value standards or
debt-service coverage ratios and others
<PAGE>
terminated when properties were refinanced. Mr. Baty currently does not
guarantee any of the Company's mortgage financing.
In February 1998, the Company and XL Management Company L.L.C. ("XL
Management"), an affiliate of Holiday Retirement Corp., an owner and operator of
independent-living communities in which Messrs. Baty and Colson are principal
shareholders and executive officers, entered into four management agreements
whereby XL Management will provide management services relating to four newly
developed assisted-living communities located in Texas. The agreements consist
of initial terms of two years six months and management fees based on 6% of
gross revenues payable monthly. The Company will pay a bonus fee per community
to XL Management based on occupancy; one year after managing the communities, if
occupancy is between 75% and 89%, XL Management will receive a bonus fee of
$25,000 and if occupancy is 90% or greater the bonus fee will be $50,000. Fees
incurred under these agreements were $187,700 in 1998.
During 1995, Messrs. Baty and Brandstrom, the Company's two most senior
executive officers, CEO and former President, formed a New York general
partnership (the "Partnership") to facilitate the operation of assisted-living
communities in the state of New York, which generally requires that natural
persons be designated as the licensed operators of assisted-living communities.
The Company and the Partnership have entered into Administrative Services
Agreements that extend for the term of the underlying leases. The fees payable
to the Company under the Administrative Services Agreements have been
established at a level that would equal or exceed the profit of the community
operated efficiently at full occupancy and, unless reset by agreement of the
parties, will increase automatically on an annual basis in accordance with
changes in the Consumer Price Index. In addition, the Company has agreed to
indemnify the partners against losses and in exchange the partners have agreed
to assign any profits to the Company. As part of the general noncompetition
agreements of the CEO and President, each has agreed that, in the event he were
to cease to be a senior executive of the Company, he would transfer his interest
in the Partnership for a nominal charge to his successor at the Company or other
person designated by the Company. In February 1999, the President of the Company
ceased to be an officer of the Company and has agreed to transfer his ownership
in the Partnership for a nominal charge to his successor at the Company or other
person designated by the Company.
The Company has entered into noncompetition agreements with Messrs. Baty
and Brandstrom which provide that each of such persons will not compete,
directly or indirectly, with the Company in the ownership, operation or
management of assisted-living communities anywhere in the United States and
Canada during the term of such individual's employment and for a period of two
years following his termination of employment with the Company. The agreements
do provide, however, that such persons may hold (a) up to a 10% limited
partnership interest in a partnership engaged in such business, (b) less than 5%
of the outstanding equity securities of a public company engaged in such
business, and (c) interests in the Green Meadows-Painted Post community
described under "Painted Post Partners Transactions." Such agreements do not
limit Mr. Baty's current role with Holiday. Mr. Baty has agreed that if Holiday
operates or manages assisted-living communities, other than as a limited
component of independent-living communities consistent with its current
operations, he will not personally be active in the management, operation or
financing of such facilities nor will he hold any ownership or other interest
therein.
In January 1998, the Company made an investment in a partnership the
purpose of which was to construct seven to nine buildings dedicated to care of
persons afflicted with Alzheimer's disease or other forms of dementia. The
investment was in the form of a five-year debenture of up to $5 million (to be
drawn down over a 12 month period), bearing interest at 9% and convertible into
a 48% equity interest in the partnership. In September 1998, the Company
disposed of this investment to an investment group for a price $4.06 million
which was equal to the Company's total investment cost, including all amounts
advanced, transaction expenses and accrued and unpaid interest. The investment
group included Holiday as to a 45% interest, Mr. Colson, as to a 6% interest,
and Columbia Pacific Master Fund '98 ("Master Fund"), as to a 40% interest.
Master Fund is a limited partnership of which Mr. Baty's family partnership is
the general partner and shares in 40% of income and gains after a return of the
investment plus a preferred return to the limited partners.
In April 1998, the Company assigned its economic interest in a 172-unit
assisted living facility located in California to a limited liability company
(the "LLC") in exchange for $2.8 million which entitles the LLC to collect a
$2.4 million note due from the facility as well as the right to share in 67% of
the earnings of the facility. The LLC is comprised of a third party investor as
to a 25% interest and three investor pools with interests of 14.1%, 35.9% and
25%, respectively. Mr. Baty's family partnership is the 18.75% general partner
in the first two pools while the third pool includes Mr. Baty individually as
its 18.75% general partner. In addition, Mr. Brandstrom is a 4.5% limited
partner in all three pools.
In June 1998, the Company sold to a partnership consisting of Master
Fund and Mr. Baty personally (as to a 1% limited partnership interest) a
295-unit independent and assisted living facility located in Texas for a
purchase price of $6.75 million, plus assumption of a first mortgage in the
amount of $14.8 million (guaranteed by Mr. Baty in connection with the
<PAGE>
transaction) and a release of the Company from such mortgage. The purchase price
was paid (i) cash in the amount of $4.5 million (ii) convertible promissory
notes in the amount of $1.45 million, bearing interest at 9% per annum, maturing
in ten years and convertible at the Company's election into a 20% limited
partnership interest in the purchasing partnership and (iii) an $800,000
promissory note bearing interest at 9% per annum, due on demand. The Company is
required to advance up to $500,000 of operating losses, with such advances being
added to the principal balance of the convertible notes. The Company and the
partnership have entered into a management agreement for a five-year term, with
automatic two-year extensions, with management fees of 6% of gross revenue or
$10,000 per month, whichever is greater. The Company has the right of first
refusal in the event of the sale of the facility. For 1998, the Company received
$61,000 in management fees and has $85,000 in interest receivable under the
convertible notes. The principal amount of the convertible notes increased to
$347,000 as a result of advances for operating losses.
In June 1998, the Company sold to Master Fund a 30% general partner
interest in Cooper George Partners Limited Partnership (the "Partnership"), a
limited partnership in which the Company formerly held a 50% general partner
interest. Concurrently, Master Fund purchased a 19% limited partner interest
from an independent investor who formerly held a 50% limited partner interest.
The Company's remaining 20% interest was converted to a limited partnership
interest. The Partnership owns a 141-unit assisted living community in
Washington. The purchase price for the partnership interest was $1.05 million
payable in cash. In connection with the purchase, the partnership agreement was
modified to provide that profits, losses, distributions would be shared 80% by
Master Fund and 20% by the Company. Also in connection with the transaction, the
facility was refinanced through a $9.68 million first mortgage loan from
Deutsche Bank (guaranteed by Mr. Baty) and the Company received a distribution
of $580,000 consisting of 20% of the net proceeds of $2.9 million resulting from
the refinancing. The Company and the Partnership have entered into a management
agreement for a five-year term, with automatic two-year extensions, with
management fees of 6% of gross revenue or $10,000 per month, whichever is
greater. The Company has the right of first refusal in the event of the sale of
the facility. For 1998, the Company paid $60,000 in management fees.
In November 1998, the Company transferred its rights to purchase from
Meditrust Company, LLC ("Meditrust") 22 facilities that were owned by Meditrust
and leased to the Company, for a purchase price equal to Meditrust's total cost
plus 1%, and agreed to sell an additional three properties (the 25 total
properties, the "AL I Properties") to an investor group ("AL Investors"),
consisting of an independent institutional investor and parties affiliated with
Holiday (the "Holiday Group"), including Messrs. Colson and Baty. The Holiday
Group includes Holiday as to a 40% interest, Master Fund as to a 32% interest,
Mr. Colson as to a 5% interest with 23% of the remaining interest being held by
individual third party investors. AL Investors completed the purchase of the AL
I Properties on December 31, 1999 for a price of $168 million, which was
financed through a three-year first mortgage loan of $138 million and $30
million in equity and subordinated debt from the investors of AL Investors. The
Holiday Group contributed $5.1 million in equity. The Company and AL Investors
entered into a Management Agreement and Option to Purchase providing that the
Company will manage the AL I Properties for a three-year term, with management
fees of 7% of gross revenue, of which 5% will be paid currently and 2% will be
accrued and paid out of cash flow, provided that the AL I Properties as a group
have positive cash flow for three consecutive months (thereafter, if the cash
flow is not positive for two consecutive months, the currently paid management
fee will return to 5% until the three-month standard is again met). The Company
is also responsible for funding directly operating losses of the AL I Properties
in excess of $4.5 million. Until December 31, 2001, the Company has a right of
first refusal to purchase the three previously owned communities and an option
to purchase the 22 previously leased communities as a group for a price equal to
AL Investors' cost of the AL I Properties, plus a 2% fee and an amount computed
to provide AL Investors an 18% internal rate of return on its invested capital
(the equity and subordinated debt investments in AL Investors) compounded
annually. If the option is not exercised, then AL Investors has the right to
require Mr. Baty to purchase six of the AL I Properties at preestablished prices
based on an allocation of the aggregate purchase price of all of the AL I
Properties. If there is a change of control of the Company, the number of AL I
Properties subject to this right is increased to eight and the right is
exercisable immediately upon the change of control. If the Company exercises its
option to purchase the AL II Properties (as defined below) but not the AL I
Properties, the number of AL I Properties subject to this right would be
increased from eight to ten (12 if there is a change of control). If the right
is exercised by AL Investors, Mr. Baty also has the right to exercise the
Company's option to purchase the AL I Properties (unless the Company exercises
such option following a change in control). Since the transaction was closed at
the end of 1998, no management fees were paid under the agreements during 1998.
In January 1999, the Company assigned its rights to purchase from Meditrust
("Meditrust") 14 facilities that were owned by Meditrust and leased to the
Company (the Operating Properties") and five facilities under development that
were to be owned by Meditrust and leased to the Company (the "Development
Properties" and together with the Operating Properties,
<PAGE>
the "AL II Properties"), to an investor group ("AL II"), consisting of an
independent institutional investor and parties affiliated with Holiday (the
"Holiday Group"), including Messrs. Colson and Baty, for a purchase price equal
to Meditrust's total cost plus 1%. The Holiday Group includes Holiday as to a
40% interest, C.P. `99 Pool G.P. ("99 Pool") as to a 32% interest, Mr. Colson as
to a 5% interest with 23% of the remaining interest being held by individual
third party investors. 99 Pool is a general partnership which is comprised of
two 50% limited partnerships, the first of which includes Mr. Baty's family
partnership as its 40% general partner while the other has Mr. Baty's family
partnership as its 20% general partner. AL II completed the purchase of the
Operating Properties on March 29, 1999 for a price of $85 million, which was
financed through a three-year first mortgage loan of $68 million and $17 million
in equity and subordinated debt from the investors of AL II. The Holiday Group
contributed $3.7 million in equity and is obligated to contribute an additional
$1.2 million. The Development Properties are to be purchased individually 30
days following completion of construction and issuance of the certificate of
occupancy and are separately financed through a $30.5 million mortgage
commitment with respect to mortgage financing that matures December 31, 2001.
The Company and AL II entered into a Management Agreement and Option to Purchase
providing that the Company will manage the AL II Properties for a three-year
term, with management fees of 7% of gross revenue, of which 5% will be paid
currently and 2% will be accrued and paid out of cash flow provided that the
Operating Properties as a group (and the Development Properties, determined on
an individual basis) have positive cash flow for three consecutive months
(thereafter, if the cash flow is not positive for two consecutive months, the
currently paid management fee will return to 5% until the three-month standard
is again met). The Company is also responsible for funding directly operating
losses of the Development Properties in excess of $2.4 million (determined
individually based on an allocation of the aggregate amount). Until December 31,
2001, the Company has an option to purchase the AL II Properties as a group for
a price equal to AL II's cost of the AL II Properties, plus a 2% fee and an
amount computed to provide AL II an 18% internal rate of return on its invested
capital (the equity and subordinated debt investments) compounded annually. If
the option is not exercised, then AL II has the right to require Mr. Baty to
purchase four of the Properties at preestablished prices based on an allocation
of the aggregate purchase price of all of the AL II Properties. If there is a
change of control of the Company, the number of AL II Properties subject to this
right is increased to six and the right is exercisable immediately upon the
change of control. If the Company exercises the option to purchase the AL I
Properties but not the AL II Properties, the number of AL II Properties subject
to this right is increase to eight (10 if there is a change of control). If the
right is exercised by AL II, Mr. Baty has the right to exercise the Company's
option to purchase the AL II Properties (unless the Company exercises such
option following a change in control). Since the transaction was closed in 1999,
no management fees were paid under the agreements during 1998.
CERTAIN TRANSACTIONS
In April 1998, the Company entered into a joint venture with Sanyo Electric
Co. Ltd., ("Sanyo") of Osaka, Japan, with which Mr. Iue is affiliated, to
provide assisted-living services in Japan. The joint venture, Sanyo Emeritus
Corporation ("Sanyo Emeritus"), has been formed to provide a residential based
health care alternative for Japan's growing elderly population. Sanyo Emeritus
was initially capitalized with Y50 million ($384,000 U.S.), with the Company and
Sanyo each providing half the funds. The joint venture's first assisted-living
community in Japan is under construction and is anticipated to open in late
1999.
In October 1997, a group of institutional investors led by NorthStar
Capital Partners LLC ("NorthStar"), of which Mr. Hamamoto is a principal,
purchased 25,000 shares of Series A Convertible Exchangeable Redeemable
Preferred Stock (the "Series A Preferred Stock"), representing approximately 10%
ownership in the Company for $25 million (the "NorthStar Transaction"). Each
share of Series A Preferred Stock is convertible into that number of shares of
the Company's Common Stock equal to the liquidation value of a share of Series A
Preferred Stock ($1,000) divided by the conversion price of $18.20 per share.
Currently the Series A Preferred Stock is convertible into an aggregate of
1,373,626 shares of Common Stock. The Series A Preferred Stock is also
exchangeable into convertible debt at the option of the Company. The conversion
price is subject to adjustment in the event of stock dividends, stock
subdivisions and combinations, and extraordinary distributions. The Series A
Preferred Stock has a mandatory redemption date of October 24, 2004.
Pursuant to a Shareholders Agreement entered into in connection with this
investment, the Company and Mr. Baty are required to take all necessary action
(a) to elect one director selected by NorthStar, (b) at such time as NorthStar
invests an additional $25 million in the Company, to elect a second additional
director selected by NorthStar, and (c) if the size of the Board is increased,
to elect additional directors so that NorthStar's representation shall not be
less than one-seventh of the entire Board. These rights terminate in certain
events relating to NorthStar's sale of capital stock or a change of control of
NorthStar. NorthStar may not transfer any of the Preferred Stock for one year
and thereafter such transfers are subject to the Company's right of first
refusal. In addition, if Mr. Baty sells shares of Common Stock representing 50%
or more of his
<PAGE>
ownership position, NorthStar is entitled to participate in such sale on a pro
rata basis. NorthStar has agreed not to purchase any additional voting
securities of the Company, such agreement to expire 18 months after NorthStar
ceases to own 5% of the outstanding Common Stock on a fully diluted basis.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership of Common Stock and other
equity securities of the Company with the Commission. Officers, directors and
greater than 10% shareholders are required by Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no forms were
required for those persons, the Company believes that during the 1998 fiscal
year all filing requirements applicable to its officers, directors and greater
than 10% beneficial owners were complied with by such persons, except the
following two forms: Form 4 of Gary D. Witte and Form 5 of Daniel R. Baty which
were both filed approximately two months late due to an administrative
oversight.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 19, 1999, certain information
with respect to the beneficial ownership of Common Stock by (a) each person
known by the Company to beneficially own more than 5% of the Common Stock, (b)
each director and director nominee of the Company, (c) each of the Named
Executive Officers, and (d) all directors and executive officers of the Company
as a group. Except as otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole voting and investment power with respect to
such shares.
<TABLE>
<CAPTION>
COMMON STOCK
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP CLASS
<S> <C> <C>
Daniel R. Baty(1) (5) ............................. 3,369,930 31.9%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom(6) .......................... 408,975 3.9%
Gary D. Witte(7) .................................. 38,850 *
Kelly J. Price(12) ................................ 72,900 *
Sarah J. Curtis(13) ............................... 8,600 *
Motoharu Iue(2) ................................... 391,500 3.7%
Tom A. Alberg(8) .................................. 30,500 *
Patrick Carter(8) ................................. 6,500 *
William E. Colson(8)(9) ........................... 16,500 *
David Hamamoto(11) ................................ 4,500 *
Nicholas Company, Inc.(3) ......................... 1,443,800 13.8%
700 North Water Street
Milwaukee, WI 53202
<PAGE>
Sirach Capital Management.(4) ..................... 701,000 6.7%
3323 One Union Square
600 University Street
Seattle, WA 98101
B.F., Limited Partnership (5) ..................... 2,919,950 27.8%
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
All directors and executive officers as a group (10
persons)(1)(2)(9)(10)......................... 4,348,755 40.7%
</TABLE>
- ----------
* Less than 1%.
(1) Includes 2,919,950 shares held by B.F., Limited Partnership., of which
Columbia Pacific, a company wholly owned by Mr. Baty, is the general
partner and of which Mr. Baty is a limited partner. Also includes options
exercisable within 60 days for the purchase of 62,800 shares.
(2) Includes 385,000 shares held by Three Oceans, a U.S. affiliate of Sanyo,
a publicly traded Japanese company. Mr. Iue is an executive of U.S.
affiliates of Sanyo. Mr. Iue disclaims beneficial ownership of shares of
Common Stock held by Three Oceans. Also includes options exercisable
within 60 days for the purchase of 6,500 shares.
(3) Includes 621,000 shares held by Nicholas II, Inc., a Maryland
corporation. Albert O. Nicholas, president, director and majority
shareholder of Nicholas Company, Inc., may be deemed to have indirect
beneficial ownership over the shares, based upon publicly available
information reported as of December 31, 1998 on Schedule 13-G.
(4) Sirach Capital Management may be deemed to have voting and dispositive
power over the shares, based upon publicly available information reported
as of December 31, 1998 on Schedule 13-G.
(5) B.F., Limited Partnership may be deemed to have voting and dispositive
power over the shares, based upon publicly available information as
reported as of December 31, 1998 on Schedule 13-G.
(6) Includes options exercisable within 60 days for the purchase of 52,400
shares.
(7) Includes options exercisable within 60 days for the purchase of 31,400
shares.
(8) Includes options exercisable within 60 days for the purchase of 6,500
shares.
(9) Includes 10,000 shares held by Holiday Retirement, Corp., of which Mr.
Colson is the principal shareholder and Chief Executive Officer.
(10) Includes options exercisable within 60 days for the purchase of 199,050
shares.
(11) Includes options exercisable within 60 days for the purchase of 4,500
shares.
(12) Includes options exercisable within 60 days for the purchase of 13,550
shares.
(13) Includes options exercisable within 60 days for the purchase of 8,400
shares.
PROPOSAL TO AMEND THE 1995 STOCK INCENTIVE
COMPENSATION PLAN
1995 STOCK INCENTIVE COMPENSATION PLAN
GENERAL. The purpose of the 1995 Stock Incentive Compensation Plan (the
"Incentive Plan") is to enhance the long-term shareholder value of the Company
by offering opportunities to employees, directors, officers, consultants,
agents, advisors and independent contractors providing services to the Company
to participate in the Company's growth and success, and to encourage them to
remain in the service of the Company and its subsidiaries and to acquire and
maintain stock ownership in the Company.
PROPOSED AMENDMENTS. In March 1999, the Board of Directors adopted, subject
to shareholder approval, an amendment to increase the number of shares of Common
Stock in the Incentive Plan from an aggregate maximum of 1,450,000 to 1,850,000
shares. As of March 29, 1999, 454,384 shares were available for the grant of new
awards under the
<PAGE>
Incentive Plan. The total number of shares subject to outstanding awards under
all of the Company's plans, plus the number of shares available for new award
grants under all such plans, is approximately 16.5% of the Company's total
outstanding Common Shares.
The Incentive Plan, as amended, is attached to this Proxy Statement as
Appendix A and is incorporated herein by reference.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF
THE AMENDMENT TO THE INCENTIVE PLAN.
DESCRIPTION OF THE INCENTIVE PLAN
ELIGIBILITY TO RECEIVE AWARDS. Awards may be granted under the Incentive
Plan to those employees, directors, and officers of the Company and its
subsidiaries that the Plan Administrator from time to time selects. Awards may
also be granted to consultants, agents, advisors and independent contractors who
provide services to the Company and its subsidiaries. Approximately 375
individuals are eligible to receive awards under the Incentive Plan.
AWARDS. The Incentive Plan provides for grants of stock options, stock
appreciation rights, stock awards (including restricted stock), other
stock-based awards and dividend equivalent rights. Awards may be made singly, in
combination or in tandem so that the settlement or payment of one automatically
reduces or cancels the other. Awards may also be made in combination or in
tandem with, as alternatives to, or as the payment form for, grants or rights
under any other employee or compensation plan of the Company or in substitution
for, or by the assumption of, awards issued under plans of an acquired entity.
STOCK SUBJECT TO THE INCENTIVE PLAN. Subject to adjustment as provided in
the Incentive Plan, a maximum of 1,850,000 shares of Common Stock will be
available for issuance under the Incentive Plan. Shares issued pursuant to the
Incentive Plan will be drawn from authorized but unissued shares. Any shares of
Common Stock subject to an award that subsequently cease to be subject to the
award (other than because of exercise or settlement of the award in stock) will
again be available for issuance in connection with future grants of awards under
the Incentive Plan.
Subject to adjustment as provided in the Incentive Plan, no more than
300,000 shares of Common Stock may be subject to awards of options or stock
appreciation rights ("SARs") under the Incentive Plan to any one participant in
a single fiscal year, to the extent required for compliance with Section 162(m)
of the Code. Section 162(m) precludes the Company from taking a tax deduction
for compensation payments to certain executives in excess of $1 million, unless
such payments qualify for the "performance-based" exemption from the $1 million
limitation.
ADMINISTRATION. A committee or committees appointed by the Board and
consisting of at least two members of the Board will administer the Incentive
Plan (the "Plan Administrator") and will have the authority to determine all
matters relating to awards under the Incentive Plan, including the persons to
whom awards are granted, the type of awards, the number of shares of Common
Stock subject to an award, and all terms, conditions, restrictions and
limitations of awards. The Plan Administrator, in its sole discretion, may
accelerate the exercisability of or waive any or all of the restrictions and
conditions applicable to any award.
TERMS AND CONDITIONS OF STOCK OPTION GRANTS. Options granted under the
Incentive Plan may be incentive stock options ("ISOs") or nonqualified stock
options ("NSOs"). The per share option price for each option granted under the
Incentive Plan will be determined by the Plan Administrator, but will be not
less than 100% of the fair market value of the underlying shares of Common Stock
on the date of grant for ISOs and not less than 85% of the fair market value on
the date of grant for NSOs. For purposes of the Incentive Plan, "fair market
value" means the closing price, or if there is no closing price, the mean
between the high and low sale price of shares of Common Stock on the American
Stock Exchange on the day the option is granted.
The Plan Administrator has broad discretion to determine the terms and
conditions under which options are exercisable, but under no circumstances may
an option have a term exceeding ten years from the date it is granted. The
exercise price for shares purchased under options may be paid in cash or by
check, or, unless the Plan Administrator determines otherwise at any time, by a
combination of cash, check, shares of Common Stock which have been held for at
least six months, or delivery of a properly executed exercise notice, together
with irrevocable instructions to a broker. The Plan Administrator may also
permit payment by a full-recourse promissory note or other forms of
consideration.
<PAGE>
Each option will be exercisable according to a vesting schedule determined
by the Plan Administrator. If no vesting schedule is set forth in the instrument
evidencing the option, the option will become exercisable in three equal annual
installments beginning one year after the date of grant. The Plan Administrator
will also determine the circumstances under which an option will be exercisable
in the event the optionee ceases to provide services to the Company or one of
its subsidiaries. If not so established, options generally will be exercisable
for three years after termination of services as a result of retirement, early
retirement, disability or death and for three months after all other
terminations, but in no event later than the remaining term of the option. In
the event of an optionee's death, an option may be exercised, to the extent the
option is exercisable upon the optionee's death, by the personal representative
of the optionee's estate within three years of the date of death, but in no
event later than the remaining term of the option. An option will terminate
automatically if the optionee's services are terminated for cause, as that term
is defined in the Incentive Plan.
SARS. An SAR gives its holder the right to receive an appreciation
distribution from the Company equal to the difference between the value of the
Common Stock subject to the right at the time of exercise and the exercise price
of the right. SARs may be issued on a stand-alone basis or in tandem with
options. For SARs granted in tandem with options, the exercise price will be the
same as the option exercise price and once a tandem SAR is exercised, the
related option terminates. Stand-alone SARs will have such terms as the Plan
Administrator establishes, but will not be less than 85% of the fair market
value of the Common Stock on the date the right was granted, and the term of the
right, if not otherwise established by the Plan Administrator, will be for 10
years from the date of grant. The appreciation distribution for SARs will be
paid in shares of Common Stock, cash or any combination of shares and cash, as
the Plan Administrator may determine. Unless otherwise provided by the Plan
Administrator, the provisions of the Incentive Plan regarding exercisability of
options after the termination of a holder's services shall apply equally, to the
extent applicable, to SARs.
STOCK AWARDS. The Plan Administrator is authorized to make awards
(including awards of restricted stock) of Common Stock to participants on such
terms and conditions and subject to such restrictions, if any (whether based on
performance standards, periods of service or otherwise), as the Plan
Administrator may determine. Restrictions may include forfeiture rights in favor
of the Company.
OTHER STOCK-BASED AWARDS. The Plan Administrator has the discretion to
authorize any other stock-based awards consistent with the purpose of the
Incentive Plan.
DIVIDEND EQUIVALENT RIGHTS. Any awards under the Incentive Plan may, in the
Plan Administrator's discretion, earn Dividend Equivalent Rights that entitle
the holder to be credited with an amount equal to the cash or stock dividends or
other distributions that would have been paid on the shares of Common Stock
covered by such award had such shares been issued and outstanding on the
dividend record date. The Plan Administrator is authorized to establish such
rules and procedures governing the crediting of Dividend Equivalent Rights as it
deems necessary or appropriate.
TRANSFERABILITY. Except to the extent permitted by the Plan Administrator
in its sole discretion and by Section 422 of the Code, no award will be
assignable or otherwise transferable by the holder other than by will or the
laws of descent and distribution, and during the holder's lifetime, the award
may be exercised only by the holder.
WITHHOLDING. The Company may require an award holder to pay to the Company
any applicable withholding taxes that the Company is required to withhold with
respect to the grant, exercise, payment or settlement of any award. The
withholding tax may be paid in cash or, subject to the Incentive Plan and
applicable law, the Plan Administrator may permit the holder to satisfy such
obligations by the withholding or delivery of shares of Common Stock.
LOANS, LOAN GUARANTEES AND INSTALLMENT PAYMENTS. Subject to applicable
statutes and regulations, the Company may extend credit, arrange credit,
guarantee obligations, and otherwise aid award holders with financing their
purchases of Common Stock pursuant to an award.
CORPORATE TRANSACTION. Except as otherwise provided in an instrument
evidencing the award, in the event of certain corporate transactions (as defined
in the Incentive Plan), each option or stock award that is at the time
outstanding will automatically accelerate so that each such award becomes,
immediately prior to such corporate transaction, 100% vested, unless the award
is assumed or replaced by the successor corporation. Any awards that are assumed
or replaced in the corporate transaction and do not otherwise accelerate at that
time will be accelerated in the event the holder's employment or services
subsequently terminate within two years following the corporate transaction,
unless the employment or services are
<PAGE>
terminated by the Company for cause or by the holder voluntarily without good
reason, as those terms are defined in the Incentive Plan.
FURTHER ADJUSTMENT OF AWARDS. The Plan Administrator has the discretion,
exercisable at any time before a sale, merger, consolidation, reorganization,
liquidation or change in control of the Company, as defined by the Plan
Administrator, to take such further action as it determines to be necessary or
advisable, and fair and equitable to a holder, with respect to awards.
AMENDMENT AND TERMINATION. The Incentive Plan may be suspended or
terminated by the Board or by the shareholders of the Company at any time. The
Board may amend the Incentive Plan, as it deems advisable, provided that, to the
extent required by Section 422 of the Code or any applicable law or regulation,
any amendment that would increase the number of shares available under the
Incentive Plan, modify the class of persons eligible to receive options or
otherwise require shareholder approval must be approved by the Company s
shareholders.
NEW PLAN BENEFITS.
Since awards under the Incentive Plan are discretionary, total awards that
may be granted for the current fiscal year are not determinable until completion
of the year. During 1998, options to purchase an aggregate of 620,250 common
shares, including 500,250 options granted under the exchange program, were
granted under the Incentive Plan to all executive officers of the Company as a
group at an average exercise price of $9.78, and options to purchase an
aggregate of 820,916 common shares, including 504,916 options granted under the
exchange program, were granted under the Incentive Plan to all other employees
of the Company as a group (including officers who are not executive officers) at
an average exercise price of $9.74. Options granted under the Incentive Plan
during 1998 to the named executive officers are set forth under "Option Grants
in Last Fiscal Year." No options were granted under the Incentive Plan during
1998 to directors or nominees who are not also executive officers of the
Company.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the federal income tax consequences of
the Incentive Plan based on current provisions of the Code, which are subject to
change. Any such changes could be applied on a retroactive basis and could
adversely alter the consequences discussed herein. The summary does not cover
any state or local tax consequences of participation in the Incentive Plan and
does not address issues related to the tax consequences of any individual
participant. Participants are urged to consult with their tax advisors regarding
the effect of participation in the Incentive Plan based on their particular
circumstances.
INCENTIVE STOCK OPTIONS ("ISOs"). An optionee will not have any income at
the time an ISO is granted. When an optionee exercises an ISO while employed by
the Company or one of its subsidiaries or within three months (one year in the
case of disability) after termination of employment, no ordinary income will be
recognized by the optionee at that time. (However the excess (if any) of the
fair market value of the shares acquired upon such exercise over the option
price is a preference item that may cause the optionee to be subject to an
"alternative minimum tax.") If the shares acquired upon exercise are not
disposed of within either one year from the date of exercise and two years from
the date of grant of the option, the excess (if any) of the sales proceeds over
the aggregate option price of such shares will be mid-term or long-term capital
gain eligible for favorable rates under the Code. If the shares are sold prior
to the expiration of such periods (a "disqualifying disposition"), the optionee
will recognize ordinary income in the year of the disqualifying disposition
equal to the excess of the fair market value of the shares at the time the ISO
is exercised (or, if less, the sales proceeds) over the option price. Any
additional gain will be capital gain. If an ISO is exercised by the optionee
more than three months (one year in the case of disability) after termination of
employment, the tax consequences are the same as those described below for
nonqualified stock options.
The Company is not entitled to a tax deduction as the result of the grant
or exercise of an ISO. If the optionee has ordinary income taxable as
compensation as a result of a disqualifying disposition, the Company will be
entitled to a deduction at the same time and in the same amount as the optionee,
assuming that the deduction is not otherwise disallowed by the Code.
NONQUALIFED STOCK OPTIONS ("NSOs"). An optionee will not have any income at
the time an NSO is granted. When an optionee exercises an NSO, the difference
between the option price and the fair market value of the shares on the date of
exercise will be ordinary income (subject to payroll taxes and tax withholding)
to the optionee and will be allowed as a
<PAGE>
deduction to the Company for federal income tax purposes, assuming that the
deduction is not otherwise disallowed by the Code. When an optionee disposes of
shares acquired by exercise of the option, any amount received in excess of the
market value of the shares on the date of exercise will be treated as long-term,
mid-term or short-term capital gain, depending upon the holding period of the
shares. If the amount received is less than the market value of the shares on
the date of exercise, the loss will be treated as long-term or short-term
capital loss, depending upon the holding period of the shares.
STOCK-FOR-STOCK EXCHANGES. Additional special rules apply if the exercise
price for an option is paid for in shares previously owned by the optionee
rather than in cash. Participants considering the use of previously owned shares
to pay the exercise price of an option should consult their tax advisors.
STOCK APPRECIATION RIGHTS. Generally, when a participant exercises an SAR,
the amount of cash and the fair market value of the shares received will be
ordinary income (subject to payroll taxes and tax withholding) to the
participant and will be allowed as a deduction for federal income taxes purposes
to the Company.
<PAGE>
PROPOSAL FOR RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected KPMG LLP, independent public
accountants, to continue as independent auditors of the Company for the fiscal
year ending December 31, 1999. KPMG LLP has audited the accounts since July 28,
1995. The Board of Directors is submitting its selection of KPMG LLP to the
shareholders for ratification.
A representative of KPMG LLP is expected to be present at the Annual
Meeting, with the opportunity to make a statement, if the representative so
desires, and is expected to be available to respond to appropriate questions
from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF
KPMG LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS.
OTHER BUSINESS
The Board of Directors does not intend to present any business at the
Annual Meeting other than as set forth in the accompanying Notice of Annual
Meeting of Shareholders, and has no present knowledge that any others intend to
present business at the Annual Meeting. If, however, other matters requiring the
vote of the shareholders properly come before the Annual Meeting or any
adjournment or postponement thereof, the persons named in the accompanying form
of proxy will have discretionary authority to vote the proxies held by them in
accordance with their judgment as to such matters.
SHAREHOLDER PROPOSALS
Shareholder proposals intended for inclusion in the proxy materials for the
Company's 1999 Annual Meeting of Shareholders must be received in writing by the
Company not later than December 10, 1999.
Such proposals should be directed to the Corporate Secretary, Emeritus
Corporation, 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121.
ANNUAL REPORT
A copy of the Company's 1998 Annual Report, which includes the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
accompanies this Proxy Statement.
By Order of the Board of Directors
/s/ Dan Baty
Daniel R. Baty
Chairman of the Board and
Chief Executive Officer
Seattle, Washington
April 12, 1999
<PAGE>
Appendix A
EMERITUS CORPORATION
AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE
The purpose of the Emeritus Corporation 1995 Stock Incentive Plan (the
"Plan") is to enhance the long-term profitability and shareholder value of
Emeritus Corporation, a Washington corporation (the "Company"), by offering
incentives and rewards to those employees, directors, officers, consultants,
agents, advisors and independent contractors of the Company and its Subsidiaries
(as defined in Section 2 below) who are key to the Company's growth and success,
and to encourage them to remain in the service of the Company and its
Subsidiaries and to acquire and maintain stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 AWARD
"Award" means an award or grant made to a Participant pursuant to the Plan,
including, without limitation, awards or grants of Options, Stock Appreciation
Rights, Stock Awards, Other Stock-Based Awards or any combination of the
foregoing (including any Dividend Equivalent Rights granted in connection with
such Awards).
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive and binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock, par value $.0001 per share, of the
Company.
2.6 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
(a) Approval by the holders of the Common Stock of any merger
or consolidation of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the
Common Stock are converted into cash, securities or other property,
other than a merger of the Company in which the holders of the Common
Stock immediately prior to the merger have substantially the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger;
<PAGE>
(b) Approval by the holders of the Common Stock of any sale,
lease, exchange or other transfer in one transaction or a series of
related transactions of all or substantially all of the Company's
assets other than a transfer of the Company's assets to a
majority-owned subsidiary (as the term "subsidiary" is defined in
Section 8.3 of the Plan) of the Company; or
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company.
2.7 DISABILITY
"Disability" means "disability" as that term is defined for purposes of the
Company's Group Life, Disability Income, Medical and Dental Plan or other
similar successor plan applicable to salaried employees.
2.8 DIVIDEND EQUIVALENT RIGHT
"Dividend Equivalent Right" means an Award granted under Section 12 of the
Plan.
2.9 EARLY RETIREMENT
"Early Retirement" means retirement as that term is defined by the Plan
Administrator from time to time for purposes of the Plan.
2.10 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.11 FAIR MARKET VALUE
"Fair Market Value" means the closing price, or if there is no closing
price, the mean between the high and low sale price of shares of Common Stock on
the American Stock Exchange on the day the option is granted or, if no Common
Stock was traded on such date, on the next succeeding day on which Common Stock
is so traded.
2.12 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the
Holder's reasonable judgment, represents a substantial reduction of the
status, title, position or responsibilities as in effect immediately
prior thereto; the assignment to the Holder of any duties or
responsibilities that, in the Holder's reasonable judgment, are
inconsistent with such status, title, position or responsibilities; or
any removal of the Holder from or failure to reappoint or reelect the
Holder to any of such positions, except in connection with the
termination of the Holder's employment for Cause, for Disability or as
a result of his or her death, or by the Holder other than for Good
Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Company's requiring the Holder (without the Holder's
consent) to be based at any place outside a 35-mile radius of his or
her place of employment prior to a Corporate Transaction, except for
reasonably required travel on the Company's business that is not
materially greater than such travel requirements prior to the Corporate
Transaction;
(d) the Company's failure to (i) continue in effect any
material compensation or benefit plan (or the substantial equivalent
thereof) in which the Holder was participating at the time of a
Corporate Transaction, including, but not limited to, the Plan, or (ii)
provide the Holder with compensation and benefits at least equal (in
terms of benefit levels and/or reward opportunities) to those provided
for under each employee benefit plan, program
<PAGE>
and practice as in effect immediately prior to the Corporate Transaction
(or as in effect following the Corporate Transaction, if greater);
(e) any material breach by the Company of any provision of
the Plan; or
(f) any purported termination of the Holder's employment or
service for Cause by the Company that does not comply with the terms of
the Plan.
2.13 GRANT DATE
"Grant Date" means the date designated in a resolution of the Plan
Administrator as the date an Award is granted. If the Plan Administrator does
not designate a Grant Date in the resolution, the Grant Date shall be the date
the Plan Administrator adopted the resolution.
2.14 HOLDER
"Holder" means: (a) the Participant to whom an Award is granted; (b) for a
Holder who has died, the personal representative of the Holder's estate, the
person(s) to whom the Holder's rights under the Award have passed by will or by
the applicable laws of default and distribution or the beneficiary designated in
accordance with Section 14; or (c) the person(s) to whom an Award has been
transferred in accordance with Section 14.
2.15 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 of the Plan with the intention that it qualify as an "incentive
stock option" as that term is defined in Section 422 of the Code.
2.16 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 of the Plan other than an Incentive Stock Option.
2.17 OPTION
"Option" means the right to purchase Common Stock granted under Section 7
of the Plan.
2.18 OTHER STOCK-BASED AWARD
"Other Stock-Based Award" means an Award granted under Section 11 of the
Plan.
2.19 PARTICIPANT
"Participant" means an individual who is a Holder of an Award or, as the
context may require, any employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary who has been designated
by the Plan Administrator as eligible to participate in the Plan.
2.20 PLAN ADMINISTRATOR
"Plan Administrator" means any committee of the Board designated to
administer the Plan under Section 3.1 of the Plan.
2.21 RESTRICTED STOCK
"Restricted Stock" means shares of Common Stock granted under Section 10 of
the Plan the rights of ownership of which are subject to restrictions prescribed
by the Plan Administrator.
<PAGE>
2.22 RETIREMENT
"Retirement" means retirement as of the individual's normal retirement date
under a company's profit sharing, savings or other similar plan applicable to
salaried employees, or as otherwise established by the Plan Administrator.
2.23 STOCK APPRECIATION RIGHT
"Stock Appreciation Right" means an Award granted under Section 9 of the
Plan.
2.24 STOCK AWARD
"Stock Award" means an Award granted under Section 10 of the Plan.
2.25 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by a committee or committees (which term
includes subcommittees) appointed by, and consisting of two or more members of,
the Board (the "Plan Administrator"). If and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, the Board shall
consider in selecting the Plan Administrator and the membership of any committee
acting as Plan Administrator, with respect to any persons subject or likely to
become subject to Section 16 of the Exchange Act, the provisions regarding (a)
"outside directors" as contemplated by Section 162(m) of the Code and (b)
"nonemployee directors" as contemplated by Rule 16b-3 under the Exchange Act.
The Board may delegate the responsibility for administering the Plan with
respect to designated classes of eligible Participants to different committees,
subject to such limitations as the Board deems appropriate. Committee members
shall serve for such term as the Board may determine, subject to removal by the
Board at any time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 15.1 of the
Plan, a maximum of 1,850,000 shares of Common Stock shall be available for
issuance under the Plan. Shares issued under the Plan shall be drawn from
authorized and unissued shares or shares now held or subsequently acquired by
the Company as treasury shares.
<PAGE>
4.2 INDIVIDUAL AWARD LIMIT
Subject to adjustment from time to time as provided in Section 15.1, not
more than 300,000 shares of Common Stock may be made subject to Awards of
Options or Stock Appreciation Rights under the Plan to any individual
Participant in any one fiscal year of the Company, such limitation to be applied
in a manner consistent with the requirements of, and only to the extent required
for compliance with, the exclusion from the limitation on deductibility of
compensation under Section 162(m) of the Code.
4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for or settled in shares) shall again be
available for issuance in connection with future grants of Awards under the
Plan. Shares that are subject to tandem Awards shall be counted only once.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers and key employees
(including directors who are also employees) of the Company and its Subsidiaries
as the Plan Administrator from time to time selects. Awards may also be made to
consultants and agents who provide services to the Company and its Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards may
include, but are not limited to, Incentive Stock Options, Nonqualified Stock
Options, Stock Appreciation Rights, Stock Awards, Other Stock-Based Awards and
Dividend Equivalent Rights. Awards may be made singly, in combination or in
tandem so that the settlement or payment of one automatically reduces or cancels
the other. Awards may also be made in combination or in tandem with, as
alternatives to, or as the payment form for, grants or rights under any other
employee or compensation plan of the Company.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other entities ("Acquired Entities") (or
the parent of the Acquired Entity) and the new Award is substituted, or the old
award is assumed, by reason of a merger, consolidation, acquisition of property
or of stock, reorganization or liquidation (the "Acquisition Transaction"). In
the event that a written agreement pursuant to which the Acquisition Transaction
is completed is approved by the Board and said agreement sets forth the terms
and conditions of the substitution for or assumption of outstanding awards of
the Acquired Entity, said terms and conditions shall be deemed to be the action
of the Plan Administrator without any further action by the Plan Administrator,
except as may be required for compliance with Rule 16b-3 under the Exchange Act,
and the persons holding such Awards shall be deemed to be Participants and
Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall
<PAGE>
not be less than 100% of the Fair Market Value of the Common Stock on the Grant
Date with respect to Incentive Stock Options and not less than 85% of the Fair
Market Value of the Common Stock on the date such Option is granted with respect
to Nonqualified Stock Options.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option, the Option shall vest and become exercisable according to
the following schedule, which may be waived or modified by the Plan
Administrator at any time:
<TABLE>
<CAPTION>
Period of Holder's Continuous Employment or
Service With the Company or Its Subsidiaries
From the Option Grant Date Percent of Total Option That Is Vested and Exercisable
- --------------------------------------------------------------- -----------------------------------------------------------------
<S> <C>
After 1 year 33 1/3%
After 2 year 33 1/3%
After 3 year 33 1/3%
</TABLE>
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5 of the Plan. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than 100 shares at any one time (or the lesser number of remaining
shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check, or, unless the Plan Administrator in its sole
discretion determines otherwise, either at the time the Option is granted or at
any time before it is exercised, a combination of cash and/or check (if any) and
one or both of the following alternative forms: (a) tendering (either actually
or, if and so long as the Common Stock is registered under Section 12(b) or
12(g) of the Exchange Act, by attestation) Common Stock already owned by the
Holder for at least six months (or any shorter period necessary to avoid a
charge to the Company's earnings for financial reporting purposes) having a Fair
Market Value on the day prior to the exercise date equal to the aggregate Option
exercise price or (b) if and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, delivery of a properly executed
exercise notice, together with irrevocable instructions, to (i) a brokerage firm
designated by the Company to deliver promptly to the Company the aggregate
amount of sale or loan proceeds to pay the Option exercise price and any
withholding tax obligations that may arise in connection with the exercise and
(ii) the Company to deliver the certificates for such purchased shares directly
to such brokerage firm, all in accordance with the regulations of the Federal
Reserve Board. In addition, to the extent permitted by the Plan Administrator in
its sole discretion, the exercise price for shares purchased under an Option may
be paid, either singly or in combination with one or more of the alternative
forms of payment authorized by this Section 7.5, by (y) a full-recourse
promissory note delivered pursuant to Section 16 or (z) such other consideration
as the Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the
<PAGE>
following terms and conditions, which may be waived or modified by the Plan
Administrator at any time. In case of termination of the Holder's employment or
services other than by reason of death or Cause, the Option shall be
exercisable, to the extent of the number of shares purchasable by the Holder at
the date of such termination, only: (a) within three years after the date of
termination of the Holder's employment or services if such termination is
coincident with Retirement, Early Retirement at the Company's request or
Disability or (b) within three months after the date of termination of the
Holder's employment or services if such termination of the Holder's employment
or services is for any reason other than Retirement, Early Retirement at the
Company's request or Disability, but in no event later than the remaining term
of the Option. Any Option exercisable at the time of the Holder's death may be
exercised, to the extent of the number of shares purchasable by the Holder at
the date of the Holder's death, by the personal representative of the Holder's
estate entitled thereto at any time or from time to time within three years
after the date of death, but in no event later than the remaining term of the
Option. In case of termination of the Holder's employment or services for Cause,
the Option shall automatically terminate upon first notification to the Holder
of such termination, unless the Plan Administrator determines otherwise. If a
Holder's employment or services with the Company are suspended pending an
investigation of whether the Holder shall be terminated for Cause, all the
Holder's rights under any Option likewise shall be suspended during the period
of investigation. Any portion of an Option that is not exercisable on the date
of termination of the Holder's employment or services shall terminate on such
date unless the Plan Administrator determines otherwise. A transfer of
employment or services between or among the Company and its Subsidiaries shall
not be considered a termination of employment or services. Unless the Plan
Administrator determines otherwise, a leave of absence approved in accordance
with Company procedures shall not be considered a termination of employment or
services, except that with respect to Incentive Stock Options such leave of
absence shall be subject to any requirements of Section 422 of the Code.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock Options
shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the event
the Participant holds two or more such Options that become exercisable for the
first time in the same calendar year, such limitation shall be applied on the
basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If a Participant owns 10% or more of the total voting power of all classes
of the Company's stock, then the exercise price per share of an Incentive Stock
Option shall not be less than 110% of the Fair Market Value of the Common Stock
on the Grant Date and the Option term shall not exceed five years.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3 of the Plan, "parent corporation" and
"subsidiary corporation" shall have the meanings attributed to those terms for
purposes of Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
An Option designated as an Incentive Stock Option must be exercised within
three months after termination of employment for reasons other than death to
qualify for Incentive Stock Option tax treatment, except that in the case of
termination of employment due to Disability, such Option must be exercised
within one year after such termination.
<PAGE>
SECTION 9. STOCK APPRECIATION RIGHTS
9.1 GRANT OF STOCK APPRECIATION RIGHTS
The Plan Administrator may grant a Stock Appreciation Right separately or
in tandem with a related Option.
9.2 TANDEM STOCK APPRECIATION RIGHTS
A Stock Appreciation Right granted in tandem with a related Option will
give the Holder the right to surrender to the Company all or a portion of the
related Option and to receive an appreciation distribution (in shares of Common
Stock or cash or any combination of shares and cash, as the Plan Administrator
shall determine at any time) in an amount equal to the Fair Market Value for the
date the Stock Appreciation Right is exercised over the exercise price per share
of the right, which shall be the same as the exercise price of the related
Option. A tandem Stock Appreciation Right will have the same other terms and
provisions as the related Option. Upon and to the extent a tandem Stock
Appreciation Right is exercised, the related Option will terminate.
9.3 STAND-ALONE STOCK APPRECIATION RIGHTS
A Stock Appreciation Right granted separately and not in tandem with an
Option will give the Holder the right to receive an appreciation distribution in
an amount equal to the excess of the Fair Market Value for the date the Stock
Appreciation Right is exercised over the per share exercise price of the right.
A stand-alone Stock Appreciation Right will have such terms as the Plan
Administrator may determine, except that the per share exercise price of the
right must be at least equal to 85% of the Fair Market Value on the Grant Date
and the term of the right, if not otherwise established by the Plan
Administrator, shall be 10 years from the Grant Date.
9.4 EXERCISE OF STOCK APPRECIATION RIGHTS
Unless otherwise provided by the Plan Administrator in the instrument that
evidences the Stock Appreciation Right, the provisions of Section 7.6 of the
Plan relating to the termination of a Holder's employment or services shall
apply equally, to the extent applicable, to the Holder of a Stock Appreciation
Right.
SECTION 10. STOCK AWARDS
10.1 GRANT OF STOCK AWARDS
The Plan Administrator is authorized to make Awards of Common Stock to
Participants on such terms and conditions and subject to such restrictions, if
any (whether based on performance standards, periods of service or otherwise),
as the Plan Administrator shall determine, which terms, conditions and
restrictions shall be set forth in the instrument evidencing the Award. The
terms, conditions and restrictions that the Plan Administrator shall have the
power to determine shall include, without limitation, the manner in which shares
subject to Stock Awards are held during the periods they are subject to
restrictions and the circumstances under which forfeiture of Restricted Stock
shall occur by reason of termination of the Holder's services.
10.2 ISSUANCE OF SHARES
Upon the satisfaction of any terms, conditions and restrictions prescribed
in respect to a Stock Award, or upon the Holder's release from any terms,
conditions and restrictions of a Stock Award, as determined by the Plan
Administrator, the Company shall release, as soon as practicable, to the Holder
or, in the case of the Holder's death, to the personal representative of the
Holder's estate or as the appropriate court directs, the appropriate number of
shares of Common Stock.
10.3 WAIVER OF RESTRICTIONS
Notwithstanding any other provisions of the Plan, the Plan Administrator
may, in its sole discretion, waive the forfeiture period and any other terms,
conditions or restrictions on any Restricted Stock under such circumstances and
subject to such terms and conditions as the Plan Administrator shall deem
appropriate.
<PAGE>
SECTION 11. OTHER STOCK-BASED AWARDS
The Plan Administrator may grant other Awards under the Plan pursuant to
which shares of Common Stock (which may, but need not, be shares of Restricted
Stock pursuant to Section 10 of the Plan) are or may in the future be acquired,
or Awards denominated in stock units, including ones valued using measures other
than market value. Such Other Stock-Based Awards may be granted alone or in
addition to or in tandem with any Award of any type granted under the Plan and
must be consistent with the Plan's purpose.
SECTION 12. DIVIDEND EQUIVALENT RIGHTS
Any Awards under the Plan may, in the Plan Administrator's discretion, earn
Dividend Equivalent Rights. In respect of any Award that is outstanding on the
dividend record date for Common Stock, the Participant may be credited with an
amount equal to the cash or stock dividends or other distributions that would
have been paid on the shares of Common Stock covered by such Award had such
covered shares been issued and outstanding on such dividend record date. The
Plan Administrator shall establish such rules and procedures governing the
crediting of Dividend Equivalent Rights, including the timing, form of payment
and payment contingencies of such Dividend Equivalent Rights, as it deems are
appropriate or necessary.
SECTION 13. LOANS, LOAN GUARANTEES AND INSTALLMENT PAYMENTS
To assist a Holder (including a Holder who is an officer or director of the
Company) in acquiring shares of Common Stock pursuant to an Award granted under
the Plan, the Plan Administrator may authorize, either at the Grant Date or at
any time before the acquisition of Common Stock pursuant to the Award, (a) the
extension of a loan to the Holder by the Company, (b) the payment by the Holder
of the purchase price, if any, of the Common Stock in installments, or (c) the
guarantee by the Company of a loan obtained by the grantee from a third party.
The terms of any loans, installment payments or guarantees, including the
interest rate and terms of repayment, will be subject to the Plan
Administrator's discretion. Loans, installment payments and guarantees may be
granted with or without security. The maximum credit available is the purchase
price, if any, of the Common Stock acquired plus the maximum federal and state
income and employment tax liability that may be incurred in connection with the
acquisition.
SECTION 14. ASSIGNABILITY
No Option, Stock Appreciation Right, Other Stock-Based Award or Dividend
Equivalent Right granted under the Plan may be assigned, pledged or transferred
by the Holder other than by will or by the laws of descent and distribution, and
during the Holder's lifetime, such Awards may be exercised only by the Holder or
a permitted assignee or transferee of the Holder (as provided below).
Notwithstanding the foregoing, and to the extent permitted by Section 422 of the
Code, the Plan Administrator, in its sole discretion, may permit such
assignment, transfer and exercisability and may permit a Holder of such Awards
to designate a beneficiary who may exercise the Award or receive compensation
under the Award after the Holder's death; provided, however, than any Award so
assigned or transferred shall be subject to all the same terms and conditions
contained in the instrument evidencing the Award.
SECTION 15. ADJUSTMENTS
15.1 ADJUSTMENT OF SHARES
In the event that at any time or from time to time a stock dividend, ,stock
split, spin-off, combination or exchange of shares, recapitalization, merger,
consolidation, distribution to shareholders other than a normal cash dividend,
or other change in the Company's corporate or capital structure results in (a)
the outstanding shares, or any securities exchanged therefor or received in
their place, being exchanged for a different number or class of securities of
the Company or of any other corporation or (b) new, different or additional
securities of the Company or of any other corporation being received by the
holders of shares of Common Stock of the Company, then the Plan Administrator,
in its sole discretion, shall make such equitable adjustments as it shall deem
appropriate in the circumstances in (i) the maximum number of and kind of
securities subject to the Plan as set forth in Section 4.1 of the Plan, (ii) the
maximum number and kind of securities that may be made subject to Awards to any
individual Participant as set forth in Section 4.2 of the Plan, and (iii) the
number and kind of securities that are subject to any outstanding Award and the
per share price of such securities, without any change in the
<PAGE>
aggregate price to be paid therefor. The determination by the Plan Administrator
as to the terms of any of the foregoing adjustments shall be conclusive and
binding. Notwithstanding the foregoing, a Corporate Transaction shall not be
governed by this Section 15.1 but shall be governed by Section 15.2
15.2 CORPORATE TRANSACTION
Except as otherwise provided in the instrument that evidences the Award, in
the event of any Corporate Transaction, each Option, Stock Appreciation Right or
Stock Award that is at the time outstanding shall automatically accelerate so
that each such Award shall, immediately prior to the specified effective date
for the Corporate Transaction, become 100% vested, except that such acceleration
will not occur if in the opinion of the Company's accountants it would render
unavailable "pooling of interest" accounting for a Corporate Transaction that
would otherwise qualify for such accounting treatment. All such Awards shall
terminate and cease to remain outstanding immediately following the consummation
of the Corporate Transaction, except to the extent assumed by the successor
corporation or its parent corporation. Any such Awards that are assumed or
replaced in the Corporate Transaction and do not otherwise accelerate at that
time shall be accelerated in the event the Holder's employment or services
should subsequently terminate within two years following such Corporate
Transaction, unless such employment or services are terminated by the Company
for Cause or by the Holder voluntarily without Good Reason. Notwithstanding the
foregoing, no Incentive Stock Option shall become exercisable pursuant to this
Section 15.2 without the Holder's consent, if the result would be to cause such
Option not to be treated as an Incentive Stock Option (whether by reason of the
annual limitation described in Section 8.1 of the Plan or otherwise).
15.3 FURTHER ADJUSTMENT OF AWARDS
Subject to Section 15.2 of the Plan, the Plan Administrator shall have the
discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Participants, with respect to
Awards. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, Awards so as to provide for earlier, later, extended or
additional time for exercise, payment or settlement or lifting restrictions,
differing methods for calculating payments or settlements, alternate forms and
amounts of payments and settlements, and other modifications, and the Plan
Administrator may take such actions with respect to all Participants, to certain
categories of Participants or only to individual Participants. The Plan
Administrator may take such action before or after granting Awards to which the
action relates and before or after any public announcement with respect to such
sale, merger, consolidation, reorganization, liquidation or change in control
that is the reason for such action.
15.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
SECTION 16. WITHHOLDING OF TAXES
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant, exercise, payment or settlement of any Award. In such instances, the Plan
Administrator may, in its discretion and subject to the Plan and applicable law,
permit the Holder to satisfy withholding obligations, in whole or in part, by
paying cash, by electing to have the Company withhold shares of Common Stock or
by transferring shares of Common Stock to the Company, in such amounts as are
equivalent to the Fair Market Value of the withholding obligation.
SECTION 17. AMENDMENT AND TERMINATION OF PLAN
17.1 AMENDMENT OF PLAN
The Plan may be amended by the shareholders of the Company. The Board may
also amend the Plan in such respects as it shall deem advisable; however, to the
extent required for compliance with Section 422 of the Code or any applicable
law or regulation, shareholder approval will be required for any amendment that
will (a) increase the total number of shares as to
<PAGE>
which Options may be granted or that may be used in payment of Stock
Appreciation Rights, Other Stock-Based Awards or Dividend Equivalent Rights
under the Plan or that may be issued as Restricted Stock, (b) materially modify
the class of persons eligible to receive Awards, (c) materially increase the
benefits accruing to Participants under the Plan, or (d) otherwise require
shareholder approval under any applicable law or regulation.
17.2 TERMINATION OF PLAN
The shareholders or the Board may suspend or terminate the Plan at any
time. The Plan will have no fixed expiration date; provided, however, that no
Incentive Stock Options may be granted more than 10 years after the Plan's
effective date.
17.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent of
the Holder of any Award under the Plan, alter or impair any rights or
obligations under any Award theretofore granted under the Plan.
SECTION 18. GENERAL
18.1 NOTIFICATION
The Plan Administrator shall promptly notify a Participant of an Award, and
a written grant shall promptly be executed and delivered by or on behalf of the
Company.
18.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
Neither the Plan, participation in the Plan as a Participant nor any action
of the Plan Administrator taken under the Plan shall be construed as giving any
Participant or employee of the Company any right to be retained in the employ of
the Company or limit the Company's right to terminate the employment or services
of the Participant or employees.
18.3 REGISTRATION
The Company shall be under no obligation to any Participant to register for
offering or resale under the Securities Act of 1933, as amended, or register or
qualify under state securities laws, any shares of Common Stock, security or
interest in a security paid or issued under, or created by, the Plan. The
Company may issue certificates for shares with such legends and subject to such
restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
18.4 NO RIGHTS AS A SHAREHOLDER
No Option, Stock Appreciation Right or Other Stock-Based Award shall
entitle the Holder to any dividend (except to the extent provided in an Award of
Dividend Equivalent Rights), voting or other right of a shareholder unless and
until the date of issuance under the Plan of the shares that are the subject of
such Awards, free of all applicable restrictions.
18.5 COMPLIANCE WITH LAWS AND REGULATIONS
It is the Company's intention that, so long as any of the Company's equity
securities are registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, the Plan shall comply in all respects with Rule 16b-3 under the Exchange
Act, and, if any Plan provision is later found not to be in compliance with such
Rule, the provision shall be deemed null and void, and in all events the Plan
shall be construed in favor of its meeting the requirements of Rule 16b-3.
Notwithstanding anything in the Plan to the contrary, the Board, in its sole
discretion, may bifurcate the Plan so as to restrict, limit or condition the use
of any provision of the Plan to Participants who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Participants. Additionally, in
interpreting and applying the provisions of the Plan, any Option granted as an
Incentive Stock Option pursuant to the Plan shall, to the extent permitted by
law, be construed as an "incentive stock option" within the meaning of Section
422 of the Code.
<PAGE>
18.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
18.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 19. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the Board,
so long as it is approved by the Company's shareholders at any time within 12
months of such adoption.
<PAGE>
[FRONT]
EMERITUS CORPORATION
PROXY FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 19, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoint(s) Daniel R. Baty, as the proxy with
full power of substitution and hereby authorizes him to represent and to vote as
designated below all the shares of Common Stock of Emeritus Corporation held of
record by the undersigned on March 26, 1999 at the 1999 Annual Meeting of
Shareholders to be held at the Columbia Winery, Milestone Room, 14030 N.E. 145th
Street, Woodinville, Washington 98072, at 10:00 a.m. on Wednesday, May 19, 1999,
with authority to vote upon the following matters and with discretionary
authority as to any other matters that may properly come before the meeting or
any adjournment or postponement thereof:
1. ELECTION OF DIRECTORS Election of the following nominees to serve as
directors in the class indicated and for the term
indicated until their successors are elected and
qualified:
<TABLE>
<CAPTION>
<S> <C> <C>
Class III (term expiring 2002): Daniel R. Baty William E. Colson
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
/ / FOR all nominees / / WITHHOLD AUTHORITY / / WITHHOLD AUTHORITY to vote for the following: to vote for all nominees
--------------------------------------------
(write the name(s) of the nominee(s) in this space)
</TABLE>
Unless otherwise directed, all votes will be apportioned equally
between those persons for whom authority is given to vote.
2. AMENDMENT OF THE 1995 STOCK INCENTIVE COMPENSATION PLAN
<TABLE>
<CAPTION>
<S> <C> <C>
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
3. RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANY'S INDEPENDENT
PUBLIC ACCOUNTANTS FOR FISCAL YEAR 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
IMPORTANT--PLEASE DATE AND SIGN ON THE OTHER SIDE
[BACK]
In their discretion, the proxies are authorized to vote upon such other
business as may properly be brought before the meeting or any adjournment or
postponement thereof. This Proxy, when properly executed, will be voted in the
manner directed herein by the undersigned. IF NO DIRECTION IS MADE, THIS PROXY
WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR" ALL THE OTHER ITEMS.
The undersigned acknowledges receipt from the Company prior to the
execution of this Proxy of a Notice of Annual Meeting of Shareholders and a
Proxy Statement dated April 12, 1999.
Please sign below exactly as your name appears on your stock
certificate. When shares are held jointly, each person must
sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. An
authorized person should sign on behalf of corporations,
partnerships and associations and give his or her title.
Date , 1998
--------------------------------------------
----------------------------------------------------
Signature
----------------------------------------------------
Signature if jointly held
YOUR VOTE IS IMPORTANT. PROMPT RETURN OF
THIS PROXY CARD WILL HELP SAVE THE EXPENSE / / I plan to attend the Annual
OF ADDITIONAL SOLICITATION EFFORTS. Meeting
