<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
EMERITUS CORPORATION
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(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------------------------
(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.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(5) Total fee paid:
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[_] 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.
(1) Amount Previously Paid:
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<PAGE>
EMERITUS CORPORATION
----------------
Notice of Annual Meeting of Shareholders
To Be Held July , 2000
----------------
To the Shareholders of Emeritus Corporation
The annual meeting of shareholders of Emeritus Corporation will be held at
the Columbia Winery, 14030 N.E. 145th Street, Woodinville, Washington 98072 on
Monday, July , 2000 at 10:00 a.m., local time, and any adjournments thereof,
to consider and act upon the following matters:
1. To elect three directors into Class I and one director into Class II
of the Board of Directors.
2. To approve an amendment to the 1995 Stock Incentive Compensation Plan
to increase the number of shares available for issuance pursuant to the
plan from 1,850,000 to 2,250,000.
3. To consider and vote on a proposal to issue shares of the Emeritus
Common Stock on exercise of a warrant to purchase Common Stock and on
conversion of Series B Convertible Preferred Stock (the "Series B Stock"),
based on the conversion formula set forth in the Designation of Rights and
Preferences governing the Series B Stock. The Series B Stock has been
issued and sold under a Series B Convertible Stock Purchase Agreement dated
as of December 10, 1999 and will be issued in the future as dividends on
the Series B Stock.
4. To ratify the appointment of KPMG LLP as our independent public
accountants for fiscal year 2000.
5. To transact such other business as may properly come before the
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on June 7, 2000 as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the annual meeting and any adjournments or postponements thereof.
Shareholders are cordially invited to attend the annual meeting in person.
By Order of the Board of Directors
Daniel R. Baty
Chairman and Chief Executive Officer
Seattle, Washington
June , 2000
<PAGE>
EMERITUS CORPORATION
3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
----------------
PROXY STATEMENT
----------------
This proxy statement, which was first mailed to our shareholders on or about
June , 2000, is furnished to shareholders in connection with the solicitation
of proxies by the Board of Directors for the annual meeting of shareholders to
be held July , 2000, and any adjournments or postponements of the annual
meeting. You may revoke your proxy in writing at any time before it is
exercised by filing with our Secretary a written revocation or a duly executed
proxy bearing a later date. You may also revoke your proxy by attending the
annual meeting and voting in person. If the enclosed form of proxy is properly
executed and returned, it will be voted in accordance with the instructions
given, unless revoked.
As of June 7, 2000, the record date for the annual meeting, there were
10,079,112 shares of common stock, 25,000 shares of Series A Convertible
Redeemable Exchangeable Preferred Stock (the "Series A Stock") and 30,000
shares of Series B Convertible Preferred Stock (the "Series B Stock")
outstanding. Holders of common stock are entitled to one vote for each share.
Holders of Series A Stock are entitled to 27.5 votes for each share, or an
aggregate of 687,500 votes. Holders of Series B Stock are entitled to 138.5
votes per share, or an aggregate of 4,155,124 votes. Therefore the total number
of votes entitled to be cast at the annual meeting is 14,921,736 votes. Holders
of common stock, Series A Stock and Series B Stock representing a majority of
total votes entitled to be cast, present in person or represented by proxy,
will constitute a quorum.
Directors will be elected by a plurality of the votes present by proxy or in
person at the annual meeting. Shareholders are not entitled to cumulate votes
in the election of directors. Abstention from voting on the election of
directors will have no impact on the outcome of the election since no vote will
have been cast in favor of a nominee. The proposals to amend the 1995 Stock
Incentive Compensation Plan and ratify the appointment of the accountants will
be approved if the votes cast in favor of the proposals exceed the votes cast
against the proposal. Abstentions from voting on these proposals will have no
impact on the outcome since no vote will have been cast for or against the
proposal. There can be no broker nonvotes on either the election of the
directors or the approval of the proposals to amend the 1995 Stock Incentive
Compensation Plan and ratify the appointment of the accountants since brokers
who hold shares for the accounts of their clients have discretionary authority
to vote such shares with respect to these matters.
Under the rules of the American Stock Exchange, the proposal to approve the
issuance of common stock issuable on conversion of the Series B Stock and upon
exercise of the warrant will be approved if the votes cast in favor of the
proposal represent a majority of the total votes cast on the proposal.
Abstentions from voting and broker nonvotes on this proposal will have no
impact on the outcome since no vote will have been cast for or against the
proposal. Saratoga Partners IV, L.P. and its affiliates, the holders of the
warrant and of all of the outstanding Series B Stock, have advised us that they
will abstain from the vote since, as the holders of the warrant and Series B
Stock, they have a direct interest in the outcome of the vote. Certain officers
and directors of Emeritus and their affiliates, who collectively hold shares
representing approximately [38.8%] of the total votes entitled to be cast at
the annual meeting, have agreed to vote in favor of the proposal and have
executed irrevocable proxies to that effect.
We will bear the cost of soliciting proxies. Certain of our directors,
officers and regular employees, without additional compensation, will solicit
proxies personally or by telephone or telefax. In addition, we may reimburse
brokerage firms and other persons representing beneficial owners of shares of
Common Stock for their expenses in forwarding solicitation materials to such
beneficial owners.
We are not aware, as of the date hereof, of any matters to be voted upon at
the annual meeting other than as stated in the accompanying Notice of Annual
Meeting of Shareholders. The accompanying proxy gives
<PAGE>
discretionary authority to the persons named therein to vote the shares in
their best judgment if any other matters are properly brought before the annual
meeting.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes. One class is elected
each year by the shareholders. At the annual meeting, three directors will be
elected to serve for a term of three years, expiring on the date of the annual
meeting of shareholders in 2003, and one director will be elected to serve for
a term of two years, expiring on the date of the annual meeting of shareholders
in 2002. All of the nominees are currently directors. If elected, the nominees
will continue in office until a successor has been elected or until resignation
or removal in the manner provided by our Bylaws. The names of directors
nominated for the terms, as well as the directors whose terms will continue
after the annual meeting, are listed below.
Pursuant to a shareholders agreement dated as of October 24, 1997, Emeritus
and Mr. Baty have agreed to take all necessary action to elect a number of
directors selected by NorthStar Capital Partners LLC that would constitute at
least one-seventh of the entire Board. Mr. Hamamoto has been nominated under
the arrangement. Pursuant to another shareholders agreement dated as of
December 10, 1999, Emeritus and Mr. Baty have agreed to take all necessary
action to elect a number of directors selected by Saratoga Partners IV, L.P.
that would constitute not less than the percentage of the entire Board that
would equal Saratoga's percentage ownership of voting securities of Emeritus.
Saratoga is entitled to select at least two directors. Messrs. Niemiec and
Durkin have been nominated under this arrangement.
Nominees for Election
Class I Directors (terms to expire in 2003)
Patrick Carter (age 53) has served as a director of Emeritus since November
1995. From November 1985 until April 1999, Mr. Carter was Chief Executive
Officer and Managing Director of Westminster Health Care Holdings, Plc., a
publicly held operator of skilled-nursing facilities in the United Kingdom. He
currently serves on the Board of Directors of CBI Ltd., a private investment
company, and Monument Insurance Group Ltd., another private company where he is
also Chairman.
Motoharu Iue (age 63) has served as a director of Emeritus since April 1995.
Mr. Iue served as Chairman of the Board of Sanyo North America Corporation
("Sanyo NA"), a consumer electronics company, and President of Three Oceans
Inc. ("Three Oceans") from October 1996 until March 1999. Mr. Iue served as
President of Sanyo NA and as Chairman of the Board of Three Oceans from 1992
until March 1999, and also served as Chief Executive Officer of both of these
companies. He has been a director of Sanyo NA since 1977 and currently serves
on the board of both Sanyo Electric Co., Ltd. and Three Oceans. Three Oceans
Inc. is a 3.8% shareholder of Emeritus.
David W. Niemiec (age 50) has served as a director of Emeritus since December
30, 1999. Since September 1998, Mr. Niemiec has been a Managing Director of
Saratoga Management Company LLC, the manager of a group of private equity
investment funds operated under the name of Saratoga Partners. Prior to that he
worked at the investment banking firm of Dillon, Read & Co. Inc. beginning in
1974 and served as Vice Chairman from 1991 through September 1997, when the
firm was acquired by Swiss Bank Corporation. From September 1997 to February
1998, he was Managing Director of the successor firm, SBC Warburg Dillon Read
Inc.
Class II Director (term to expire in 2001)
Charles P. Durkin, Jr. (age 61) has served as a director of Emeritus since
December 30, 1999. Mr. Durkin is one of the founders of Saratoga Partners, a
private equity investment firm. Since Saratoga's formation as an independent
entity in September 1998, he has been a Managing Director of Saratoga
Management Company
2
<PAGE>
LLC, the manager of the Saratoga Partners funds. Prior to that from September
1997, he was a Managing Director of SBC Warburg Dillon Read Inc., the successor
entity to Dillon, Read & Co. Inc., where Mr. Durkin started his investment
banking career in 1966 and became a Managing Director in 1974.
Continuing Directors
Class II Directors (terms to expire in 2001)
Raymond R. Brandstrom (age 47), one of Emeritus's founders, has served as a
director since its inception in 1993 and as Vice Chairman of the Board since
March 1999. From 1993 to March 1999, Mr. Brandstrom also served as Emeritus's
President and Chief Operating Officer. Following the resignation of Kelly Price
in March 2000, Mr. Brandstrom was elected Vice President Finance, Chief
Financial Officer and Secretary of Emeritus. From May 1992 to October 1996, Mr.
Brandstrom served as President of Columbia Pacific Group, Inc. and Columbia
Management, Inc., both of which companies are wholly owned by Mr. Baty and 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 table wines.
David T. Hamamoto (age 40) has served as a director of Emeritus since
November 1997. Mr. Hamamoto is a member of NorthStar Capital Partners LLC, 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.
Class III Directors (terms to expire 2002)
Daniel R. Baty (age 56), one of Emeritus's founders, has served as its Chief
Executive Officer and as a director since its inception in 1993 and became
Chairman of the Board in April 1995. Mr. Baty also has served as the Chairman
of the Board of Holiday Retirement Corp. since 1987 and served as its Chief
Executive Officer from 1991 through September 1997. Since 1984, Mr. Baty has
also served as Chairman of the Board of Columbia Pacific Group, Inc. and, since
1986, as Chairman of the Board of Columbia Management, Inc.
William E. Colson (age 58) has served as a director of Emeritus since 1995.
Mr. Colson is a founder of Holiday Retirement Corp., a provider of residential
retirement communities, and has been its President and Chief Operating Officer
since 1987, and in September 1997, became its Chief Executive Officer.
Information on Committees of the Board of Directors and Meetings
The Board of Directors has established a compensation committee and an audit
committee. We have no nominating committee and the full Board selects nominees
for the election of directors.
Our compensation committee establishes salaries, incentives and other forms
of compensation for directors, officers and our other key employees,
administers the 1995 Stock Incentive Compensation Plan and recommends policies
relating to benefit plans. Our compensation committee currently consists of
Messrs. Carter (Chairman), Niemiec and Brandstrom and it held three meetings
during 1999.
Our audit committee reviews our accounting practices, internal accounting
controls and financial results and oversees the engagement of our independent
auditors. Our audit committee currently consists of Messrs. Carter, Niemiec and
Hamamoto (Chairman), and it held one meeting during 1999.
During 1999, there were six meetings of the Board of Directors, and all board
members, except Messrs. Colson and Iue, attended at least 75% of the meetings
of the Board of Directors and each committee on which he was a member.
3
<PAGE>
Director Compensation
We currently pay our nonemployee directors $500 for each board meeting or
committee meeting they attend and reimburse them for all reasonable expenses
incurred in connection with their attendance. In September 1995, we established
the Stock Option Plan for Nonemployee Directors. Under the plan, nonemployee
directors receive options to purchase 2,500 shares of our common stock at the
time of their initial election or appointment. In addition, each nonemployee
director automatically receives an option to purchase 2,000 shares of our
common stock immediately following each year's annual meeting of shareholders.
All options granted under the plan fully vest on the date of the annual
shareholders meeting that follows the date of grant, and expire 10 years after
the date of grant. The exercise price for these options is the fair market
value of our common stock on the grant date.
4
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table presents certain information with respect to compensation
we paid in the fiscal years ended December 31, 1997, 1998 and 1999 to our Chief
Executive Officer and to our other four most highly compensated officers as of
December 31, 1999:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
---------------------------------------------- ------------------------------
Securities
Name and Principal Other Annual Underlying All Other
Position Year Salary($) Bonus ($)(1) Compensation($)(2) Options(#) Compensation ($)(3)
------------------ ---- --------- ------------ ------------------ ---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Baty(4)....... 1999 -- -- 1,560 40,000 --
Chairman and Chief 1998 -- -- 264 204,000 --
Executive Officer 1997 -- -- 1,363 64,000 --
Kelly J. Price(5)....... 1999 164,532 40,000 1,560 20,000 --
Vice President, Finance 1998 150,629 22,500 1,696 75,250 --
and Chief Financial 1997 99,357 -- 1,363 44,000 --
Officer
Sarah J. Curtis(6)...... 1999 158,885 10,000 1,560 20,000 --
Vice President, Sales 1998 141,656 22,500 1,696 52,000 --
and Marketing 1997 87,708 -- 1,334 32,000 10,000
Gary S. Becker(7)....... 1999 134,846 15,000 5,750 20,000 --
Senior Vice President, 1998 115,812 18,000 6,000 43,500 --
Operations 1997 104,045 -- -- 28,500 --
Suzette McCanless(7).... 1999 134,929 10,000 6,000 20,000 --
Vice President, 1998 115,145 25,000 6,000 43,500 --
Operations--Eastern 1997 89,761 -- -- 28,500 --
Division
</TABLE>
--------
(1) Represents amounts earned for the respective calendar year under the
Company's corporate incentive plan which are paid in the first quarter of
the following year.
(2) Consists of amounts paid for parking fees and health club memberships.
(3) Consists of a $10,000 housing allowance in 1997 for Ms. Curtis.
(4) Mr. Baty is not a full time employee of Emeritus and is not currently paid
a salary by us. Of the 204,000 options granted in 1998, 164,000 were
granted in an exchange program pursuant to which 50,000 options granted in
each of 1995 and 1996 and 64,000 options granted in 1997 were cancelled.
(5) Of the 75,250 options granted in 1998, 55,250 were granted in an exchange
program pursuant to which 1,250 options granted in 1995, 10,000 options
granted in 1996, and 44,000 options granted in 1997 were cancelled. Mr.
Price resigned as an officer of the Company effective March 31, 2000.
(6) Of the 52,000 options granted in 1998, 32,000 were granted in an exchange
program pursuant to which 32,000 options granted in 1997 were cancelled.
(7) Of the 43,500 options granted in 1998, 28,500 were granted in an exchange
program pursuant to which 28,500 options granted in 1997 were cancelled.
5
<PAGE>
Option Grants in Last Fiscal Year
The following table presents certain information regarding options granted
during the fiscal year ended December 31, 1999 to the following executive
officers:
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Individual Grants Annual Rates
---------------------------------------------------------- of Stock
Number of Percent of Price Appreciation
Securities Total Options for
Underlying Granted to Option Term ($)(4)
Options Employees in Exercise Expiration ---------------------
Name Granted (#)(1) Fiscal Year(2) Price($/Share)(3) Date 5% 10%
---- -------------- -------------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel R. Baty.......... 40,000 8.7% 7.25 11/17/09 182,379 462,185
Kelly J. Price.......... 20,000 4.4% 7.25 11/17/09 91,190 231,093
Sarah J. Curtis......... 20,000 4.4% 7.25 11/17/09 91,190 231,093
Gary S. Becker.......... 20,000 4.4% 7.25 11/17/09 91,190 231,093
Suzette McCanless....... 20,000 4.4% 7.25 11/17/09 91,190 231,093
</TABLE>
--------
(1) The options have terms of 10 years and generally vest between 20% to 33%
per year beginning one year from the date of grant. The exercisability of
the options may accelerate if certain corporate transactions occur.
(2) We granted 459,750 stock options to employees in 1999.
(3) The option exercise price is equal to the closing price of our common stock
on the American Stock Exchange on the date of grant.
(4) Represents value of current-year grants assuming appreciation rates of 5%
and 10% per year over the 10-year option period. The actual value realized
may be greater or less than the potential realizable values set forth in
the table. The assumed rates of growth are prescribed by the SEC for
illustrative purposes only and are not intended to predict or forecast
future stock prices.
Fiscal Year-End Option Values
None of the following executive officers exercised options during the fiscal
year ended December 31, 1999. The following table presents certain information
regarding options held as of December 31, 1999 by each of the following
executive officers:
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
December 31, 1999(#) December 31, 1999($)(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel R. Baty.............. 108,933 135,067 -- --
Kelly J. Price.............. 22,467 72,783 -- --
Sarah J. Curtis............. 19,467 52,533 -- --
Gary S. Becker.............. 16,400 47,100 -- --
Suzette McCanless........... 16,400 47,100 -- --
</TABLE>
--------
(1) None of the options to purchase an aggregate of 538,250 shares held on a
combined basis by the executive officers named above were in-the-money at
the fiscal year-end based on the $6.50 closing price of the common stock on
the American Stock Exchange on December 31, 1999.
6
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The compensation committee of the Board consists of three non-employee
directors. The committee is responsible for establishing and administering our
executive compensation programs. Our objective is to pay competitively in order
to attract qualified executive personnel who best meet our needs; retain and
motivate these executives to achieve superior performances; link individual
compensation to individual and company performance; and align executives'
financial interests with those of our shareholders.
Executive compensation generally consists of three components: base salary,
cash bonuses, 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
Emeritus and in related industries, (b) the experience and contribution levels
of the individual executive officer, and (c) our 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 committee 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 performance of our stock.
Base Salaries. In 1999, base salaries were established as described above.
Stock Options. We grant stock options 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 33-1/3% 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. In 1999, we granted stock options to a total of 191 employees in
recognition of their dedication, commitment and hard work. After considering
the individual 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 executive officers. Four of our named
executives were awarded cash bonuses in March 2000 based on the committee's
assessment of their individual performances in 1999.
Our Chief Executive Officer, Mr. Baty, a founder of Emeritus, has a
significant equity position. As of March 31, 2000, Mr. Baty owned shares and
exercisable options representing approximately 35% of our common stock. Because
of his significant equity stake in Emeritus, Mr. Baty receives no base salary
or bonus. This compensation pattern was established prior to our initial public
offering and the committee has continued it, recognizing that the principal
compensation of Mr. Baty will be the interest value of his equity stake.
Section 162(m) of the Internal Revenue 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 our proxy statement. Certain
performance-based compensation that has been approved by shareholders is not
subject to the deduction limit. Our stock option plans are structured to
qualify options as performance-based compensation under Section 162(m). For
2000, the committee does not expect that there will be any nondeductible
compensation.
Compensation Committee
Patrick Carter (Chairman)
David W. Niemiec*
Raymond R. Brandstrom
* Mr. Niemiec has served on the committee since his election as of December
30, 1999 and did not actually participate in most of the decisions related
to 1999 executive compensation.
7
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total return on shares of our
common stock with the cumulative total return of the AMEX Market Value Index
and a peer group selected by us for the period beginning on November 21, 1995,
the first day of trading for our common stock, and ending on December 31, 1999,
the end of our last fiscal year.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG EMERITUS CORPORATION,
THE AMEX MARKET VALUE INDEX AND THE PEER GROUP
[STOCK PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Emeritus AMEX New Peer Old Peer
Corporation Market Group Group
----------- ------ -------- --------
<S> <C> <C> <C> <C>
November 21, 1995..................... 100 100 100 100
December 31, 1995..................... 78 105 100 106
December 31, 1996..................... 90 112 100 155
December 31, 1997..................... 85 136 182 202
December 31, 1998..................... 70 138 188 301
December 31, 1999..................... 43 179 52 268
</TABLE>
Assumes $100 invested in each share 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.
8
<PAGE>
Given the relatively recent emergence of the assisted living industry, we
revise our peer group from time to time to include companies that have entered
the assisted living market. As the industry begins to mature and consolidate,
we remove certain companies previously included in our peer group as they are
acquired or as their focus of services shifts away from the assisted-living
residences.
The new peer group consists of the following eight companies: Alternative
Living Service Inc.; American Retirement Corp.; ARV Assisted Living, Inc.;
Assisted Living Concepts Inc.; Brookdale Living Communities; Capital Senior
Living; Carematrix Corp.; and Sunrise Assisted Living Inc.
The old peer group consisted of the following thirteen companies primarily
involved in the provision of assisted-living services: AFLAC; Alternative
Living Service Inc.; American Retirement Corp.; ARV Assisted Living, Inc.;
Assisted Living Concepts Inc.; Balanced Care Corp.; Brookdale Living
Communities; Capital Senior Living; Carematrix Corp.; Greenbriar Corp.;
Karrington Health; Regent Assisted Living Inc.; and Sunrise Assisted Living
Inc. We changed our peer group from December 31, 1998 to December 31, 1999 as
follows: we eliminated AFLAC, which does not provide senior assisted-living
services as its primary business; Balance Care Corp., Karrington Health, and
Regent Assisted Living had changes in the status of their public holdings such
that they are no longer comparable to Emeritus. Greenbriar Corp. was eliminated
due to their relatively small operations in comparison to Emeritus.
CHANGE OF CONTROL ARRANGEMENTS
Employment Agreements. We have entered into a senior management employment
agreement with Ms. Curtis. The agreement provides certain benefits in the event
that we terminate her employment for any reason other than death, "disability,"
or "cause", or she terminates her employment for "good reason" following a
"change in control," as those terms are defined in the agreement. These
benefits include:
. payment of an amount equal to three times the sum of an annual base
salary specified in the agreement and target bonus for the current fiscal
year;
. any payment necessary to offset certain tax obligations incurred as a
result of such salary and bonus payments; and
. at our 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
benefits.
Following a change in control, for so long as her employment continues, she
will be entitled to an annual base salary no less than an amount established by
the agreement, which is intended to reflect a market salary and which is higher
than the executive's current salary, plus an annual bonus equal to at least the
average of the annual bonuses paid in the two years preceding a change in
control, and continued participation in employee benefit plans. On each
anniversary, the agreement is automatically extended for another year, unless
we otherwise notify Ms. Curtis at least 60 days prior to this anniversary. Once
a change in control occurs, the agreement remains in effect for three years
from that date.
Mr. Kelly, prior to his resignation as of March 31, 2000, had been a party to
an employment agreement identical to Ms. Curtis's agreement.
Option Plan. In the event of (a) the merger or consolidation of Emeritus 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 our 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 our liquidation or dissolution, each outstanding
option under our stock option plan will automatically accelerate so
9
<PAGE>
that it will become 100% vested and exercisable immediately before such
transaction, except that acceleration will not occur if, in the opinion of our
accountants, it would render unavailable "pooling of interest" accounting for
such 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 us for reasons other than
"cause" or by the optionee for "good reason" following a change of control.
CERTAIN TRANSACTIONS
Meditrust Transactions
In two separate transactions in the fall of 1998 and the spring of 1999, we
arranged for two investor groups to purchase an aggregate of 41 of our
operating communities and five communities under development for a total
purchase price of approximately $292.2 million. Of the 46 communities involved,
43 had been, or were proposed to be, leased to us by Meditrust Company LLC
under sale/leaseback financing arrangements and we had owned three. The first
purchase, consisting of 25 communities, which we will call the December
communities, was completed in December 1998 and the second purchase, consisting
of 21 communities, which we will call the March communities, was completed in
March 1999.
The investor groups involved in both purchases included parties affiliated
with us. Of the $168.0 million purchase price for the December investment,
$138.0 million was financed through a three-year first mortgage loan with an
independent third party and $30.0 million was financed through subordinated
debt and equity investments from the investor group. A group led by Holiday
provided approximately $5.1 million of the equity. This group included Holiday
as to a 40% interest, Columbia Pacific Master Fund '98 as to a 32% interest,
and Mr. Colson as to a 5% interest, with the remaining 23% interest being held
by individual third party investors. Columbia Pacific 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 the limited partners of Columbia
Pacific Master Fund receive a return of their investment plus a preferred
return.
Of the $124.2 million purchase price for the March investment, approximately
$99.6 million was financed through three-year first mortgage loans with
independent third parties and $24.6 million was financed through subordinated
debt and equity investments from the investor group. A group led by Holiday
provided approximately $4.9 million of the equity. This group included Holiday
as to a 40% interest, C.P. '99 Pool G.P. as to a 32% interest, and Mr. Colson
as to a 5% interest, with the remaining 23% interest being held by individual
third party investors. C.P. '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 and the other includes Mr.
Baty's family partnership as its 20% general partner.
The investor groups have retained us to manage all of the communities through
December 31, 2001. If we do not exercise the option to purchase the
communities, as described below, the investor group may require us to manage
the communities for up to twelve additional months. Under the arrangement, we
receive management fees equal to 5% of the gross revenues generated by the
facilities on the properties. We also are entitled to additional management
fees of 2% of the gross revenues, which will be accrued and paid out of cash
flow, provided that the communities have positive cash flow for three
consecutive months. Thereafter, if the cash flow is not positive for two
consecutive months, the 2% management fee will again be deferred until the
three-month standard is again met. The cash flow requirements are determined as
a group for the December communities, as a group for March operating
communities and individually for the March communities under development. We
have agreed to reimburse the December investment group for all losses greater
than $4.5 million sustained on the December communities prior to December 31,
2001. We have a similar reimbursement arrangement relating to the five
development communities acquired in the March investment; under this
arrangement, we are generally required to reimburse the investor group for any
losses greater than $500,000 at any of the five development communities. We do
not have any such arrangements for the 14 operating communities acquired in the
March investment. During 1999, we received $1.4 million in
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management fees for the December communities and $1.4 million in management
fees for the March communities. As of December 31, 1999, the December
communities had incurred $1.4 million in losses for which we are obligated to
reimburse the December investment group. We expect that we will be obligated
for further reimbursements during 2000. At December 31, 1999, we had not
incurred reimbursement obligations to the March investment group as a result of
losses from the development communities.
We have certain rights to acquire the communities purchased in the December
and March transactions. We have an option to purchase 22 of the December
communities as a group and we have an option to purchase all 21 of the March
communities as a group, both of which must be exercised by July 3, 2001. In
addition, if either of the investor groups requires Mr. Baty to purchase
certain of the communities, upon the conditions described below, we must
exercise our option within 60 days of receiving notice of this action or it
expires. We also have a right of first refusal through December 31, 2001 to re-
purchase the three December communities that we previously owned.
The option purchase prices for the December communities and the March
communities are determined under similar formulas which provide for the
repayment or payment of:
. the mortgage loans of $138.0 million and $99.6 million on such
communities;
. the investor groups' original debt and equity investments;
. an amount intended to provide the investor groups with an 18% rate of
return, compounded annually, on their original debt and equity
investments, less any cash distributions received;
. a fee generally equal to 2% of the investor groups' original debt and
equity investments, which for the March communities may be adjusted for
appreciation in our common stock; and
. the reasonable costs of the investor groups' dissolution and
liquidation.
As a condition to making the December and March investments, the investor
groups entered into agreements with Mr. Baty under which the investor groups
may require Mr. Baty to purchase certain of the December and March communities.
Under these agreements, the investor groups may require Mr. Baty to purchase
between six and eight of the December communities and between four and six of
the March communities, upon the occurrence of one of the following events:
. we do not provide notice of our intent to exercise our options to
purchase the December or March communities by July 3, 2001;
. we exercise an option to purchase the communities, but do not close the
transaction;
. we or one of our managers causes a default under the agreements which
govern the management of the December and March communities;
. Mr. Baty's net worth falls below a certain threshold or Mr. Baty fails
to provide certain reports relating to his net worth to the investor
groups;
. there is a change of control in our Board or ownership; or
. Mr. Baty ceases to be our chief executive officer.
If either of the investor groups requires Mr. Baty to purchase some of the
communities, Mr. Baty will also have the option to purchase all of the
communities owned by that investor group on the same terms under which we may
purchase the communities.
Baty Transactions
Columbia House is a Washington limited partnership in which Mr. Baty
indirectly controls the general partner and holds an indirect 60% interest. It
develops, owns and leases low-income senior housing projects.
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<PAGE>
We currently manage 11 communities owned by Columbia House. 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, as well as bonuses. We earned fees of $592,414 in
1999 under these agreements. Columbia House owed us $1,685,000 as of December
31, 1999, representing advances made to various Columbia House communities and
outstanding management and administrative fees. These advances do not bear
interest.
Prior to our initial public offering in November 1995, Mr. Baty had
personally guaranteed much of our third-party financing, including mortgage
debt and rental payments under leases. Many of those guarantees terminated when
the underlying properties met certain loan-to-value standards or debt-service
coverage ratios and others terminated when properties were refinanced. During
1999, Mr. Baty guaranteed our $5.0 million revolving credit facility until it
was retired in November 1999. From November 1999 until January 2000, we
borrowed amounts from Mr. Baty ranging from $1.0 million to $5.0 million on
terms reflecting his borrowing arrangements from a commercial bank. We
currently do not have any outstanding borrowings from Mr. Baty. Except as
otherwise described in this section, Mr. Baty currently does not guarantee any
of our mortgage financing.
During 1995, Messrs. Baty and Brandstrom formed Painted Post Partners, a New
York general 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.
We have entered into administrative services agreements with the partnership
for the term of the underlying leases. The administrative services agreements
provide for fees that would equal or exceed the profit of a 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, we have agreed to indemnify the partners
against losses and, in exchange, the partners have agreed to assign any profits
to us. As part of their general noncompetition agreements with us, each of
Messrs. Baty and Brandstrom has agreed that, in the event he ceases to be a
senior executive of Emeritus, he will transfer his interest in the partnership
for a nominal charge to his successor at Emeritus or other person designated by
us.
We have entered into noncompetition agreements with Messrs. Baty and
Brandstrom. These agreements provide that they will not compete with us,
directly or indirectly, in the ownership, operation or management of assisted
living communities anywhere in the United States and Canada during the terms of
their employment and for a period of two years following the termination of
their employment. The agreements also provide, however, that they may hold (1)
up to a 10% limited partnership interest in a partnership engaged in such
business, (2) less than 5% of the outstanding equity securities of a public
company engaged in such business, and (3) interests in the New York partnership
described above. These agreements do not limit Mr. Baty's current role with
Holiday. Mr. Baty has agreed, however, 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 separate ownership or other interest therein.
Other Community Transactions
In April 1998, we assigned our economic interest in a 172-unit assisted
living community located in Fairfield, California to a limited liability
company for $2.8 million in cash. Our economic interest consisted of a 67%
interest in the profits, losses and distributions of an operating limited
liability company that owns and operates the community, the right to receive
payments of principal and interest under a $2.4 million promissory note
evidencing a loan by us to the operating company and the obligation to make
additional capital contributions under the agreement establishing the operating
company. The limited liability company to which we assigned our economic
interest 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%. Mr. Baty's family
partnership is the 18.75% general partner in the first two pools and the third
pool includes Mr. Baty individually as its 18.75% general partner. We continue
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to manage the operation of the community pursuant to a management agreement and
to manage the affairs of the operating limited liability company. We receive
fees for these management activities equal to 5% of gross revenues of the
community. During 1999, we received $87,386 in management fees. At December 31,
1999, the limited liability company operating the community owed us $596,000,
representing funds advanced as working capital. These advances do not bear
interest. At the time we assigned our economic interest in this community, we
retained the right to repurchase our interest at the $2.8 million purchase
price plus a 9% per annum return. In January 2000, we repurchased 25% of our
original interest in the community for a total of $791,000.
In June 1998, we sold a 295-unit independent and assisted living facility
located in Texas to a partnership consisting of Columbia Pacific Master Fund,
as to a 99% interest and to Mr. Baty personally, as to a 1% limited partnership
interest. The purchase price for the facility was $6.8 million plus the
assumption of a first mortgage of $14.8 million, which was guaranteed by Mr.
Baty in connection with the transaction, and a release of Emeritus from the
mortgage obligations. The purchase price was paid as follows:
. cash in the amount of $4.5 million;
. a promissory note in the amount of $1.5 million, of which $1.0 million
was repaid in 1999, bearing interest at 9% per annum and maturing in 10
years; and
. an $800,000 promissory note bearing interest at 9% per annum, due on
demand.
In addition, in 1999 we loaned the partnership $450,000 for certain repairs,
which is evidenced by a demand promissory note bearing interest at 9% per
annum. We 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. We have the right
of first refusal in the event of the sale of the facility. For 1999, we
received $177,300 in management fees. At December 31, 1999, the partnership
owed us $1,801,000, representing advances for working capital. These advances
do not bear interest.
In June 1998, we sold a 30% general partnership interest in Cooper George
Partners Limited Partnership, a limited partnership in which we formerly held a
50% general partnership interest, to Columbia Pacific Master Fund.
Concurrently, Columbia Pacific Master Fund purchased a 19% limited partnership
interest from an independent investor who formerly held a 50% limited
partnership interest. Our remaining 20% interest was converted to a limited
partnership interest. Cooper George Partners 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 and distributions would
be shared 80% by Columbia Pacific Master Fund and 20% by us. 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 we received a
distribution of $580,000 consisting of 20% of the net proceeds of $2.9 million
resulting from the refinancing. We and Cooper George Partners 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. We have the right of first refusal in the event of the
sale of the facility. For 1999, we received $129,000 in management fees. At
December 31, 1999, Cooper George Partners owed us $493,000, representing
advances for working capital. These advances do not bear interest.
During 1999, we began to provide management services to four joint ventures
that opened new assisted living communities. Our management agreements have
terms ranging from two to four years, with options to renew, and provide for
management fees ranging from 5% to 6% of gross operating revenues, with a
minimum of $5,000 per month, payable monthly. Entities controlled by Mr. Baty
held interests in the joint ventures ranging from 50% to 62%. During 1999, we
received management fees of $78,000 under these management agreements. At
December 31, 1999, the joint ventures owed us collectively $678,000,
representing advances for working capital. These advances do not bear interest.
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Alert Care Transaction
In September 1999 Holiday loaned us $4.0 million on terms providing for
interest at 9% per annum. In consideration of the loan, we sold to Holiday
38.9% of the shares of capital stock we owned in Alert Care Corporation for our
cost. In November 1999, pursuant to an offer by a joint venture controlled by
Toronto Dominion Bank, we sold all of our remaining shares of Alert Care and
Holiday sold all of its shares of Alert Care. The terms of this offer gave the
investors in Alert Care, including us and Holiday, the option of continuing the
investment in Alert Care or accepting a fixed cash price. Both we and Holiday
elected to sell the investment for the cash price. Holiday was a non-
controlling minority investor in the purchasing joint venture. The loan from
Holiday was repaid in November 1999. As a result of these transactions, Holiday
recognized a gain on the sale of its shares of Alert Care of approximately
$365,000 and interest on the loan of approximately $46,000.
NorthStar Transaction
In October 1997, a group of institutional investors led by NorthStar Capital
Partners LLC, of which Mr. Hamamoto is a principal, purchased 25,000 shares of
Series A Convertible Exchangeable Redeemable Preferred Stock, representing
approximately 10% ownership of Emeritus, for $25 million. The Series A Stock is
entitled to a quarterly 9% dividend. Each share of Series A Preferred Stock is
convertible into that number of shares of common stock equal to $1,000, the
liquidation value of a share of Series A Preferred Stock, 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 our common stock. The
Series A Preferred Stock is also exchangeable into convertible debt at our
option. 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, Emeritus and Mr. Baty are required to take all necessary action to:
. elect one director selected by NorthStar;
. if NorthStar invests an additional $25 million in Emeritus, elect a
second additional director selected by NorthStar; and
. if the size of our board increases, 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 in control of NorthStar. All NorthStar transfers are
subject to our right of first refusal. In addition, if Mr. Baty sells shares of
common stock representing 50% or more of his ownership position, NorthStar is
entitled to participate in that sale on a pro rata basis. NorthStar has agreed
not to purchase any additional shares of our voting securities, from now until
18 months after it ceases to own 5% of the outstanding common stock on a fully
diluted basis.
During 1999, we did not pay currently the 9% dividend on the Series A Stock
and such dividends accumulated under the terms of the Series A Stock. In
January, 2000, we paid NorthStar $2,250,000 and in April 2000 paid an
additional $350,000, which represented all dividends in arrears.
See "Proposal to Approve the Issuance of Common Stock Issuable upon
Conversion of Series B Stock--Terms of the Series A Stock" for additional
information relating to the Series A Stock.
Other Transactions
In February 1998, we entered into four management agreements with XL
Management Company L.L.C., an affiliate of Holiday. Under these agreements, XL
Management will provide management services relating to four of our newly
developed assisted living communities in Texas. The agreements provide for
initial terms of
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30 months and management fees based on 6% of gross revenues, payable monthly.
XL Management earned fees of $316,000 under these agreements in 1999.
In April 1998, we entered into a joint venture with Sanyo Electric Co. Ltd.,
of Osaka, Japan, with which Mr. Iue is affiliated, to provide assisted-living
services in Japan. The joint venture, Sanyo Emeritus Corporation, has been
formed to provide a residential-based healthcare alternative for Japan's
growing elderly population. Sanyo Emeritus was initially capitalized with Y50
million, or $384,000 (U.S.), with Emeritus and Sanyo each providing half the
funds. The joint venture's first assisted-living community in Japan was opened
in December 1999.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table presents as of June 7, 2000, certain information with
respect to the beneficial ownership of our common stock and preferred stock (on
an as-converted basis) by
. each person that we know owns more than 5% of the common stock,
. each of our directors,
. each officer or former officer named in the compensation tables, and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with rules of the SEC and
includes shares over which the indicated beneficial owner exercises voting
and/or investment power. Shares of stock subject to options or warrants
currently exercisable or exercisable within 60 days are deemed outstanding for
computing the percentage ownership of the person holding the options, but are
not deemed outstanding for computing the percentage ownership of any other
person. Except as otherwise indicated, we believe the beneficial owners of the
common stock listed below, based on information furnished by them, have sole
voting and investment power with respect to the shares listed opposite their
names. Unless otherwise indicated, the following officers, directors and
shareholders can be reached at the principal offices of Emeritus.
The table presents the beneficial ownership of the preferred stock as converted
into common stock. NorthStar Capital Partners LLC owns 100% of the outstanding
Series A preferred stock, and Saratoga Partners IV, L.P. owns 100% of the
outstanding Series B preferred stock.
[Table appears on following page.]
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<TABLE>
<CAPTION>
Shares of Emeritus
Common Stock
----------------------
Amount and
Nature of
Beneficial Percent of
Ownership Class
---------- ----------
Name and Address
----------------
<S> <C> <C>
Daniel R. Baty(1)(2)................................. 3,668,766 36.0%
c/o Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, WA 98121
Raymond R. Brandstrom(3)............................. 444,042 4.4%
Gary S. Becker(4).................................... 20,126 *
Kelly J. Price(5).................................... 90,980 *
Sarah J. Curtis(6)................................... 21,667 *
Motoharu Iue(7)(8)................................... 393,500 3.9%
Suzette McCanless(4)................................. 19,763 *
Patrick Carter(8).................................... 68,500 *
William E. Colson(8)(9).............................. 18,500 *
David Hamamoto(10)(11)............................... 1,380,126 6.4%
David W. Niemiec(12)................................. 5,241,832 34.0%
Charles P. Durkin, Jr.(12)........................... 5,241,832 34.0%
Sirach Capital Management(13)........................ 701,000 6.9%
3323 One Union Square 600 University Street Seattle,
WA 98101
B.F., Limited Partnership(2)......................... 29.3% 2,948,450
3131 Elliott Avenue, Suite 500 Seattle, WA 98121
NorthStar Capital Partners LLC(11)................... 6.4% 1,373,626
299 Park Avenue, 33rd Floor New York, New York 10022
Saratoga Partners IV, L.P.(14)....................... 34.0% 5,239,332
535 Madison Avenue New York, NY 10022
All directors and executive officers as a group (13 10,655,095 65.4%
persons)(2)(7)(9)(11)(14)(15).......................
</TABLE>
--------
* Less than 1%.
(1) Includes 2,948,450 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 108,936 shares.
(2) 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, 1999 on Schedule 13-D.
(3) Includes options exercisable within 60 days for the purchase of 87,467
shares.
(4) Includes options exercisable within 60 days for the purchase of 19,400
shares.
(5) Includes options exercisable within 60 days for the purchase of 31,267
shares.
(6) Includes options exercisable within 60 days for the purchase of 21,467
shares.
(7) Includes 385,000 shares held by Three Oceans, Inc. a U.S. affiliate of
Sanyo, a publicly traded Japanese company. Mr. Iue is a former executive
and current director of U.S. affiliates of Sanyo. Mr. Iue disclaims
beneficial ownership of shares of Common Stock held by Three Oceans.
(8) Includes options exercisable within 60 days for the purchase of 8,500
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 6,500
common shares.
(11) The 1,373,626 shares are convertible Series A preferred stock held by
NorthStar Capital Partners LLC, of which Mr. Hamamoto is a principal. (See
"Item 13. Certain Relationships and Related Transactions--NorthStar
Transaction.") NorthStar Capital Partners LLC owns 100% of the Series A
preferred stock. The Series A preferred stock currently votes with both
the Series B preferred stock and
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the common stock, and is entitled to 687,500 votes. This represents
approximately 6.4% of the voting power of currently outstanding Emeritus
common and preferred stock.
(12) Includes 4,197,472 shares issuable upon conversion of Series B preferred
stock currently held by, and 1,000,000 shares of common stock issuable
upon exercise of warrants to be issued on or before August 8, 2000 to,
Saratoga Partners, of which Messrs. Niemiec and Durkin are principals.
(See "Significant Transactions--Saratoga Relationship.") Saratoga
Partners owns 100% of the outstanding Series B preferred stock. Also
includes 41,860 shares (as-converted) that represent unpaid dividends on
the Series B preferred stock. The Series B preferred stock currently
votes with both the Series A preferred stock and the common stock on an
as-converted basis, which represents approximately 28% of the voting
power of the currently outstanding Emeritus common and preferred stock.
Also includes options exercisable within 60 days for the purchase of
2,500 shares.
(13) 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.
(14) Represents 4,197,472 shares that are issuable upon conversion of Series B
preferred stock, and 41,860 shares, on an as-converted basis, of unpaid
dividends on such series B preferred stock. Also includes 1,000,000
shares of common stock issuable upon exercise of warrants to be issued to
Saratoga Partners on or before August 8, 2000. The Series B preferred
stock currently votes with both the Series A preferred stock and the
common stock, on an as-converted basis.
(15) Includes options exercisable within 60 days for the purchase of 339,537
shares.
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PROPOSAL TO AMEND THE 1995 STOCK INCENTIVE
COMPENSATION PLAN
In February 2000, the Board of Directors adopted, subject to shareholder
approval, an amendment to increase the number of shares of Common Stock in the
1995 Stock incentive Compensation Plan from an aggregate maximum of 1,850,000
shares to 2,250,000 shares. As of June 7, 2000, 736,596 shares (including the
additional shares that are the subject of this proposal) were available for
grant of new awards under the Incentive Plan. The total number of shares
subject to outstanding awards under all of our plans, plus the number of shares
available for new award grants under all such plans, will be approximately
2,395,150 shares, or 23.8% of our total outstanding common stock, if the
amendment is approved.
The Incentive Plan, as amended, is attached to this proxy statement as
Appendix A.
The Board of Directors Recommends a Vote FOR Approval of the Amendment to the
Incentive Plan
Description of the Incentive Plan
Purpose. The purpose of the Incentive Plan is to enhance the long term value
of our shareholders by offering opportunities to our employees, directors,
officers, consultants, agents, advisors and independent contractors to
participate in our growth and success, and to encourage them to remain with us
and acquire and maintain stock ownership.
Eligibility to Receive Awards. Awards may be granted under the Incentive Plan
to employees, directors, and officers of Emeritus and its subsidiaries selected
by the plan administrator. Awards may also be granted to consultants, agents,
advisors and independent contractors who provide services to Emeritus and its
subsidiaries. Approximately 280 individuals currently 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 granted 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 Emeritus 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 2,250,000 shares of Common Stock are available for
issuance under the Incentive Plan. Shares issued pursuant to the Incentive Plan
are 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) are again
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 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 us 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 administers the Incentive Plan
and has 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.
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<PAGE>
Terms and Conditions of Stock Option Grants. Options granted under the
Incentive Plan may be incentive stock options or non qualified stock options.
The per share option price for each option granted under the Incentive Plan is
determined by the plan administrator, but cannot be less than 100% of the fair
market value of the underlying shares of common stock on the date of grant for
incentive stock options and not less than 85% of the fair market value on the
date of grant for nonqualified stock options. 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.
Each option is 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 becomes exercisable in three equal annual
installments beginning one year after the date of grant. The plan administrator
also determines the circumstances under which an option is exercisable in the
event the optionee ceases to provide services to Emeritus or one of its
subsidiaries. If not so established, options generally are 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 terminates
automatically if the optionee's services are terminated for cause, as that term
is defined in the Incentive Plan.
Stock Appreciation Rights. A stock appreciation right 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. Stock appreciation rights
may be issued on a stand-alone basis or in tandem with options. For stock
appreciation rights granted in tandem with options, the exercise price is the
same as the option exercise price and once a tandem stock appreciation right is
exercised, the related option terminates. Stand-alone stock appreciation rights
have such terms as the plan administrator establishes, but are not less than
85% of the fair market value of the common stock on the date the right is
granted, and the term of the right, if not otherwise established by the plan
administrator, is for 10 years from the date of the grant. The appreciation
distribution for stock appreciation rights is 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 stock
appreciation rights.
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 determines. Restrictions may include forfeiture rights in our
favor.
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
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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 is 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. We may require an award holder to pay to us any applicable
withholding taxes that we are 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, we 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 terminated by us
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 Emeritus, 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 our shareholders 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 our 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 1999, options to purchase an aggregate of
120,000 common shares were granted under the Incentive Plan to all executive
officers as a group at an average exercise price of $7.25, and options to
purchase an aggregate of 324,750 common shares were granted under the Incentive
Plan to all other employees as a group (including officers who are not
executive officers) at an average exercise price of $7.40. Options granted
under the Incentive Plan during 1999 to the named executive officers are set
forth under "Executive Compensation--Option Grants in Last Fiscal Year." No
options were granted under the Incentive Plan during 1999 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
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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. An optionee will not have any income at the time an
incentive stock option is granted. When an optionee exercises an incentive
stock option while employed by us or one of our 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 either within one year from the date of exercise
or 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 incentive stock option is exercised (or, if less, the
sales proceeds) over the option price. Any additional gain will be capital
gain. If an incentive stock option 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.
We are not entitled to a tax deduction as the result of the grant or exercise
of an incentive stock option. If the optionee has ordinary income taxable as
compensation as a result of a disqualifying disposition, we are 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.
Nonqualified Stock Options. An optionee will not have any income at the time
a nonqualified stock option is granted. When an optionee exercises a
nonqualified stock option, 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 deduction to us 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 Exchange. 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 us.
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PROPOSAL TO APPROVE THE ISSUANCE OF COMMON STOCKISSUABLE UPON CONVERSION OF
SERIES B PREFERRED STOCK AND UPON EXERCISE OF WARRANT TO PURCHASE COMMON STOCK
Background
On December 10, 1999, we entered into an agreement to sell 40,000 shares of
our Series B Preferred Stock to Saratoga Partners IV, L.P. and investors
related to Saratoga for a purchase price of $1,000 per share. On December 30,
1999, we completed the sale of 30,000 shares of Series B Stock, and we agreed
to complete the sale of the remaining 10,000 shares during the first quarter of
2000. Each share of Series B Stock is convertible into the number of shares of
common stock equal to the stated value of $1,000 divided by an initial
conversion price of $7.22. The conversion price is subject to adjustment as
described below. The 30,000 outstanding shares of Series B Stock are initially
convertible into 4,155,124 shares of common stock based on the current
conversion price.
Our net proceeds from the sale of all 40,000 shares of the Series B Stock
were to be approximately $38.6 million, after fees and expenses of the
transaction estimated at $1.4 million. The purchase agreement and related
documents provided that, of these proceeds, we would use $18.5 million to $20.5
million to purchase 16 assisted living communities that are currently managed
by us, $4.2 million to $4.9 million to purchase three communities that are
currently leased by us and $.4 million to $1.4 million to purchase one
community from a third party. We agreed to use these proceeds in these
acquisitions by June 30, 2000, with the remaining $13.2 million to $16.9
million of the proceeds to be available for general corporate purposes. The
purchase agreement and related documents provided that if we did not use at
least $23.0 million in these acquisitions, we would place $35.0 million, less
the amount of proceeds so used, in a separate bank account and would obtain
Saratoga's prior consent to the use of these funds.
Under a modification letter agreement dated May 15, 2000, we changed our
agreements with Saratoga to (i) cancel the sale of the remaining 10,000 shares
of Series B Stock, (ii) remove all restrictions and requirements relating to
the use of proceeds received from the sale of the original 30,000 shares and
(iii) on or before August 8, 2000, issue to Saratoga a seven-year warrant to
purchase 1.0 million shares of our common stock at an exercise price of $4.30
per share (with such shares approved for listing on the American Stock
Exchange) or, in the alternative, to pay Saratoga in cash the sum of $5.0
million plus any profit that exists in the warrant at August 8, 2000.
The terms of the Series B Stock and related agreements were more favorable to
us than the terms of other preferred stock financings which were potentially
available to us at the time we negotiated the Series B Stock transaction. In
addition, throughout 1999 we had reviewed, with the assistance of our
investment banker, a variety of private and public financing possibilities. We
believed that the sale of Series B Stock to Saratoga was the best alternative
available and that additional capital was important to us and in the best
interests of the shareholders. We also believed, in view of our cash needs, the
status of the proposed acquisitions and the restrictions on the use of our cash
contained in the original Saratoga documents, that the modification letter
agreement was in the best interests of the shareholders and provides us with
greater flexibility for our operations and possible acquisition transactions.
As a result of the modification letter agreement, we are not limited in how
we use the proceeds of the sale of the 30,000 shares of Series B Stock and we
have therefore added the proceeds to our working capital for general corporate
purposes. We may, however, pursue the acquisitions originally contemplated on a
different schedule and different terms and conditions.
Reason for Shareholder Approval
Rule 713 of the American Stock Exchange requires shareholder approval of a
transaction involving the sale or issuance by a company of common stock, or
securities convertible into common stock, equal to 20% or
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more of the common stock, or 20% or more of the voting power, outstanding
before such issuance for less than the greater of book or market value of the
common stock at the time of the transaction. On December 10, 1999, the date
that we entered into the agreement to sell the Series B Stock to Saratoga, the
closing price of our common stock on the American Stock Exchange was $6.0625.
Although this price is below the Series B Stock's initial conversion price of
$7.22, it is possible that future adjustments of the conversion price of the
Series B Stock resulting from additional issuances of common stock could reduce
the effective conversion price below $6.0625. The American Stock Exchange has
listed all of the shares of common stock issuable on conversion of the Series B
Stock at the initial conversion price of $7.22 per share and for any future
adjustments that would reduce the price to, but not below, $6.0625 per share.
Rule 713 would, however, require shareholder approval for the issuance of any
additional shares on conversion of the Series B Stock. To ensure the listing of
all shares issuable on conversion of the Series B Stock, whether the conversion
price is above or below $6.0625 per share, we have submitted the proposal to
the shareholders. We believe that shareholder approval of the proposal will
satisfy the requirements of Rule 713 for all future circumstances.
If the shareholders fail to approve the proposal at the shareholders meeting
or, if the conversion price is later reduced to less than $6.0625 per share and
the shareholders fail to approve the proposal within 180 days after such event,
the Designation of Rights and Preferences of the Series B Stock provides that
the dividend rate on the Series B Stock would be increased from 6% to 12% per
annum until January 1, 2004 and from 7% to 14% per annum thereafter and would
be payable entirely in cash. In addition, the holders of Series B Stock would
have the option to require us to purchase their then outstanding shares of
Series B Stock. Because it is unlikely that we would have sufficient cash to
redeem the Series B Stock if required to do so, the failure to obtain the
shareholder approval under these circumstances could deplete all of our
available cash and thus materially impair our ability to continue to operate
our business.
The warrants contain adjustment provisions, similar to those applicable to
the Series B Stock, reducing the exercise price if we issue additional share of
our common stock at a price below $4.30 per share. Accordingly, it is also
possible that future adjustments resulting from additional issuances of stock
could reduce the exercise price of the warrants below $3.875, the closing price
of our common stock on the American Stock Exchange on May 15, 2000, the date of
the modification letter agreement. Under the modification letter agreement, we
are required to issue the warrants, with the underlying common stock listed on
the American Stock Exchange, prior to August 8, 2000. The American Stock
Exchange has advised us that the issuance of common stock on exercise of the
warrants must be approved by the shareholders prior to their issuance because
of the additional issuances that could result in the future as a result of the
adjustment provisions. If the shareholders fail to adopt the proposal and the
warrants are not issued, then we would be required to pay Saratoga in cash $5.0
million plus any profit existing in the warrants at August 8, 2000. We do not
believe that our cash resources would permit us to make this payment.
The Designation of Rights and Preferences of the Series B Stock, the related
shareholders' agreement and the modification letter agreement (together with
the form of warrant) are attached as Appendixes B, C and D. The following is a
summary of terms and conditions of the Designation and shareholders' agreement,
as modified by the modification letter agreement and warrant. Reference is made
to the full texts of these documents for a more complete description of the
terms and conditions of the transaction. Capitalized terms used herein and not
defined hereby have the meanings ascribed to them in the Designation and
shareholders' agreement.
TERMS OF THE SERIES B STOCK AND RELATED AGREEMENTS
The terms of the financing arrangements with Saratoga are set forth in the
Designation and related agreements, including the shareholders agreement. The
Series B Stock is subject to the prior rights and preferences of the Series A
Stock.
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Dividends
The holders of the Series B Stock are entitled to receive quarterly dividends
payable in a combination of cash and additional shares of Series B Stock. From
issuance to January 1, 2004, the dividend rate will be 6% of the stated value
of $1,000, of which 2% is payable in cash and 4% is payable in Series B Stock
at the rate of one share of Series B Stock for every $1,000 of dividend. After
January 1, 2004, the dividend rate will be 7%, of which 3% is payable in cash
and 4% is payable in Series B Stock. Dividends accumulate, whether or not
declared or paid. Prior to January 1, 2007, however, if the cash portion of the
dividend is not paid, the cumulating cash portion of the dividend will increase
to 7% until the unpaid cash dividends have been fully paid or until January 1,
2007, whichever first occurs. The dividends must be paid or declared and set
aside for payment prior to any payment or declaration of dividends on, or
purchase or redemption of, any common stock or any other class of preferred
stock junior to the Series B Stock.
The rights of the holders of Series B Stock to receive dividends are subject
to the prior rights of the holders of Series A Stock.
Conversion
The holders of the Series B Stock have the right at any time to convert each
share of Series B Stock into a number of shares of common stock equal to the
stated value of $1,000 divided by the conversion price.
The conversion price is currently $7.22 per share. If, however, we declare
any dividend or distribution on our common stock, or split, combine or
reclassify our common stock, the conversion price will be proportionately
adjusted so that each holder of Series B Stock will be entitled to receive the
same number of shares of common stock upon conversion as if such conversion
occurred prior to the event requiring the adjustment. Similarly, if we merge
with another entity or sell substantially all of our assets, the holders of the
Series B Stock will be entitled to convert each share of Series B Stock into
the consideration, whether it consists of stock, other securities or property,
which that holder would have been entitled to receive had that holder converted
its holdings of Series B Stock to common stock immediately prior to the merger
or asset sale.
The conversion price will also be adjusted pursuant to a weighted average
formula if we issue additional shares of common stock, or securities
convertible into or exercisable for common stock, at a price less than the then
current conversion price. According to the formula, the conversion price would
be adjusted to an amount equal to the quotient obtained by dividing (a) the
number of shares of common stock outstanding on a fully diluted basis
immediately prior to the issuance of additional common stock multiplied by the
then effective conversion price, plus the aggregate consideration received for
the new issuance, by (b) the number of shares of common stock outstanding on a
fully diluted basis immediately following the new issuance. There are limited
exceptions to this adjustment for stock options and warrants in certain
situations.
As a result of the formula, the Series B Stock could convert to common stock
at a rate that is below the current conversion price of $7.22 per share. The
Series B Stock could also convert at a rate that is also below $6.0625 per
share, which was the closing price of the common stock on the American Stock
Exchange on December 10, 1999, the date that we entered into the agreement with
Saratoga.
Redemption
After January 10, 2003, we can redeem all, but not less than all, of the
Series B Stock at $1,000 per share, plus unpaid dividends, if the closing price
of the common stock on the American Stock Exchange is at least 175% of the then
conversion price for 30 consecutive trading days ending not more than 10 days
prior to the date we notify the holders of the redemption.
If there is a change in control of Emeritus, each holder of Series B Stock
has the right to require us to purchase all or a portion of the Series B Stock
owned by such holder for the stated value of $1,000 per share. The holder may
exercise this right during 45 days after notification of the change in control.
A change in control means (a) a person or group acquiring securities that would
entitle such person or group to elect a majority of the Board of Directors, (b)
persons who are currently directors, or who are selected by those
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directors, ceasing to constitute a majority of the Board of Directors, or (c)
the sale of all or substantially all of our assets.
If the shareholders fail to approve the proposal at the shareholders meeting
or, if the conversion price is later reduced to less than $6.0625 per share and
the shareholders fail to approve the proposal within 180 days after such event,
the Designation of Rights and Preferences of the Series B Stock provides that
each holder of Series B Stock will have the right to require us to purchase all
or a portion of the Series B Stock owned by such holder for the stated value of
$1,000 per share, plus accrued and unpaid dividends. Each holder can exercise
this right unless we obtain the shareholder approval required by the American
Stock Exchange, at which time the right would terminate as to any then
outstanding shares of Series B Stock.
Liquidation Rights
If we dissolve, liquidate or wind-up our affairs, the holders of Series B
Stock are entitled to receive, before any payment or distribution is made to
the holders of common stock or any other class of preferred stock ranking
junior to the Series B Stock, out of our assets available for distribution, the
stated value of $1,000 per share and all accrued and unpaid dividends to and
including the date of payment to the holder. In the event our assets available
for distribution to the holders of Series B Stock are insufficient to permit
payment in full of all amounts owing to the holders, then all of such assets
shall be distributed proportionately among the holders of the Series B Stock to
the exclusion of the holders of common stock or any other class of junior
preferred stock.
The liquidation rights of the holders of Series B Stock are subject to the
prior rights of the holders of Series A Stock.
Voting and Board of Directors
Each share of Series B Stock is entitled to a number of votes equal to the
number of shares of common stock into which it is convertible. Except as
required by law or as described below, the Series B Stock votes with the common
stock and Series A Stock as a single voting group.
We may not amend or alter the rights and preferences of the Series B Stock so
as to adversely affect the Series B Stock without the consent of the holders of
a majority of the outstanding shares of Series B Stock. In addition, we may not
increase the number of authorized shares of preferred stock or create another
series of preferred stock ranking prior to or pari passu with the Series B
Stock without the consent of the holders of at least 75% of the outstanding
Series B Stock.
Under the shareholders agreement, Saratoga is entitled to board
representation at a percentage of the entire Board of Directors, rounded up to
the nearest whole director, that is represented by the voting power of the
Series B Stock owned by Saratoga and its related investors. The shareholders
agreement also provides for a minimum of two Saratoga directors. Saratoga is
currently entitled to designate three of eight members of the Board, although
it has advised us that it will designate only two at this time. Saratoga's
right to designate directors terminates if Saratoga has sold more than 50% of
its initial investment and its remaining shares represent less than 5% of
outstanding shares of common stock on a fully diluted basis or it is unable to
exercise independent control over its shares.
Under the Designation, whenever the cash dividends have not been paid for six
consecutive quarters, Saratoga may designate one director in addition to the
other directors that it is entitled to designate under the shareholders
agreement.
Other Terms
The shareholders agreement provides that neither Saratoga nor Mr. Baty is
permitted to purchase voting securities in excess of a defined limit. That
limit for Saratoga and its affiliates is 110% of the number of shares
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of common stock (assuming conversion of the Series B Stock) owned by Saratoga
and its related investors immediately after the completion of the financing,
plus the Series B Stock (or underlying common stock) issuable as dividends on
the Series B Stock. That limit for Baty is the greater of 110% of the shares of
common stock owned by Baty as of December 10, 1999 or 100% of the Saratoga
ownership described in the preceding sentence. These restrictions will
terminate 18 months after the date on which Saratoga and its related investors
cease to hold securities representing 5% of the shares of common stock on a
fully diluted basis.
The shareholders agreement provides that if Mr. Baty contemplates selling 30%
or more of the Common Stock he owns, Saratoga and its related investors would
have the right to participate in the sale on a proportionate basis.
Pursuant to a registration rights agreement, Saratoga and its related
investors have the right to two demand registrations, one of which may be a
shelf registration effective for one year, and unlimited piggyback
registrations, subject to marketing restrictions imposed by underwriters.
Pursuant to an investment agreement, commencing January 1, 2007, (a) the
holders of the Series B Stock have the right to elect a number of directors
(together with other directors selected pursuant to the Designation and the
shareholders agreement) that would be one director less than a majority of the
Board and (b) we will retain Saratoga Management Company LLC to provide
management and advisory services to evaluate our strategy relating to
shareholder value, real estate and corporate financing and other strategic
initiatives, at an annual fee of $3.2 million. These rights and obligations
will terminate at such time that the Series B Stock is converted or redeemed.
Modification Letter Agreement and Warrants
Pursuant to the modification letter agreement, we are required to issue to
Saratoga on or before August 8, 2000 warrants to purchase 1,000,000 shares of
common stock at an exercise price of $4.30 per share or, in the alternative, to
pay Saratoga in cash the sum of $5.0 million plus any profit that exists in the
warrant at August 8, 2000. The term of the warrants is seven years.
The exercise price is currently $4.30 per share. If, however, we declare any
dividend or distribution on our common stock, or split, combine or reclassify
our common stock, the exercise price will be proportionately adjusted so that
each holder of warrants will be entitled to receive the same number of shares
of common stock upon exercise as if such exercise occurred prior to the event
requiring the adjustment. Similarly, if we merge with another entity or sell
substantially all of our assets, the holders of the warrants will be entitled,
on exercise the warrants, to purchase the consideration, whether it consists of
stock, other securities or property, which that holder would have been entitled
to receive had that holder exercised its warrants immediately prior to the
merger or asset sale.
The exercise price will also be adjusted pursuant to a weighted average
formula if we issue additional shares of common stock, or securities
convertible into or exercisable for common stock, at a price less than the then
current exercise price. According to the formula, the exercise price would be
adjusted to an amount equal to the quotient obtained by dividing (a) the number
of shares of common stock outstanding on a fully diluted basis immediately
prior to the issuance of additional common stock multiplied by the then
effective exercise price, plus the aggregate consideration received for the new
issuance, by (b) the number of shares of common stock outstanding on a fully
diluted basis immediately following the new issuance. There are limited
exceptions to this adjustment for stock options and warrants in certain
situations.
Terms of Series A Stock
The Series B Stock is junior in rank to, and subject to the rights and
preferences of, the Series A Stock, which is summarized below.
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Dividends. The holders of the Series A Stock are entitled to receive
quarterly dividends at the rate of 9% of the stated value of $1,000, payable in
cash. If we are in default in the payment of dividends or the performance of
our obligations under the Series A Stock the dividend rate increases to 11%
during such period. If we are in arrears in the payment of dividend for six
consecutive quarters, the dividend rate is compounded quarterly. If we are in
arrears in the payment of dividends, we may not declare or pay dividends or
make other distributions on the common stock or purchase any common stock or
series of preferred stock junior to the Series A Stock, which would include the
Series B Stock.
Conversion. The holders of the Series A Stock have the right at any time to
convert each share of Series A Stock into a number of shares of Common Stock
equal to the stated value of $1,000 divided by the conversion price. The
conversion price is currently $18.20 per share, but is subject to adjustment in
the event of stock dividends or splits relating to the common stock and in the
event of a merger or sale of substantially all of our assets.
Redemption. We are obligated to redeem the Series A Stock on October 24,
2004. After October 24, 2001, we can redeem all, or any portion, of the Series
A Stock at 105% of the stated value of $1,000 per share, plus unpaid dividends,
if the closing price of the common stock on the American Stock Exchange is at
least 130% of the then conversion price for 20 trading days out of any 40
consecutive trading days ending not more than five days prior to the date we
notify the holders of the redemption. If there is a change in control of
Emeritus, each holder of Series A Stock has the right to require us to purchase
all or a portion of the Series A Stock owned by the holder at 101% of the
stated value of $1,000 per share. The holder may exercise this right during 45
days after notification of the change in control. A change in control means (a)
a person or group acquiring securities that would entitle such person or group
to elect a majority of the Board of Directors, (b) persons who are currently
directors, or who are selected by those directors, ceasing to constitute a
majority of the Board of Directors, or (c) the sale of all or substantially all
of our assets.
Liquidation Rights. If we dissolve, liquidate or wind-up our affairs, the
holders of Series A Stock are entitled to receive, before any payment or
distribution is made to the holders of common stock or any other class of
preferred stock ranking junior to the Series A Stock, including the Series B
Stock, out of our assets available for distribution, the stated value of $1,000
per share and all accrued and unpaid dividends to and including the date of
payment to the holder. In the event our assets available for distribution to
the holders of Series A Stock are insufficient to permit payment in full of all
amounts owing to the holders, then all of such assets shall be distributed
proportionately among the holders of the Series A Stock to the exclusion of the
holders of common stock or any other class of junior preferred stock, including
the Series B Stock.
Voting. Each share of Series A Stock is entitled to a number of votes equal
to 50% of the number of shares of common stock into which it is convertible.
Except as required by law or as described below, the Series A Stock votes with
the common stock and Series B Stock as a single voting group. We may not amend
or alter the rights and preferences of the Series A Stock so as to adversely
affect the Series A Stock without the consent of the holders of a majority of
the outstanding Series A Stock. In addition, until October 24, 2001 we may not,
without the approval of the NorthStar directors, create another series of
preferred stock ranking senior to or pari passu with the Series A Stock or
declare or pay dividends on the common stock.
Board of Directors. Under a shareholders agreement, NorthStar, the initial
purchaser of the Series A Stock, is entitled to board representation of not
less than one-seventh of the entire Board of Directors, rounded up to the
nearest whole director. NorthStar's right to designate directors terminates if
NorthStar has sold any of its initial investment and its remaining shares
represent less than 5% of outstanding common stock on a fully diluted basis,
there is a change of control of NorthStar or NorthStar is unable to exercise
independent control over its shares. Under the Designation, whenever the cash
dividends have not been paid for six consecutive quarters, NorthStar may
designate one director in addition to the other directors that it is entitled
to designate under the shareholders agreement.
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Other Terms. NorthStar is not permitted to purchase additional voting shares
of Emeritus. This restriction will terminate 18 months after the date on which
NorthStar ceases to hold securities representing 5% of common stock on a fully
diluted basis. If Mr. Baty contemplates selling 50% or more of the common stock
he owns, NorthStar has the right to participate in the sale on a proportionate
basis. NorthStar has the right to two demand registrations, which may be shelf
registrations effective for one year, and unlimited piggyback registrations,
subject to marketing restrictions imposed by underwriters.
PROPOSAL FOR RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected KPMG LLP, independent public accountants,
to continue as our independent auditors for the fiscal year ending December 31,
2000. 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 THERATIFICATION OF KPMG LLP AS OUR
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Officers and directors of the Company and persons who own more than ten
percent of the Company's stock are required to report to the Securities and
Exchange Commission their ownership and changes in ownership of the Company's
stock. Regulations of the Commission require us to disclose to our shareholders
those filings that were not made on time. Based solely on our review of copies
of the reports received by us, or written representations received from
reporting persons that no such forms were required for those persons, we
believe that, during fiscal year 1999, our officers and directors complied with
all applicable filing requirements, with the exception of three Form 3 Initial
Statements of Beneficial Ownership that were inadvertently filed late by three
of our executives.
SHAREHOLDER PROPOSALS
Shareholder proposals intended for inclusion in the proxy materials for the
Company's 2001 annual meeting of shareholders must be received in writing by
the Company not later than , 2001.
Such proposals should be directed to the Corporate Secretary, Emeritus
Corporation, 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121.
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ANNUAL REPORT
A copy of our 1999 Annual Report, which includes our Annual Report on Form
10-K for the fiscal year ended December 31, 1999, accompanies this proxy
statement.
SOLICITATION OF PROXIES
This solicitation is made on behalf of our Board of Directors. Proxies may be
solicited by officers, directors, and regular supervisory and executive
employees of Emeritus, none of whom will receive any additional compensation
for their services. In addition, ChaseMellon Shareholder Services, LLC will
help us solicit proxies for a fee of approximately $7,500, plus reasonable
expenses. Solicitations of proxies may be made personally, or by mail,
telephone, telegraph, facsimile, or messenger. We will pay persons holding
shares of Common Stock in their names or in the names of nominees, but not
owning such shares beneficially, such as brokerage houses, banks, and other
fiduciaries, for the expense of forwarding the soliciting materials to their
principals. We will pay all the costs of solicitation of proxies.
By order of the Board of Directors
Daniel R Baty,
Chairman of the Board and Chief
Executive Officer
Seattle, Washington
June , 2000
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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 $.01 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;
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(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
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benefits at least equal (in terms of benefit levels and/or reward
opportunities) to those provided for under each employee benefit plan,
program 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 services 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 descent 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.
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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.
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.
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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 2,250,000 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.
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
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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 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 Percent of Total Option That Is Vested
the Option Grant Date and Exercisable
------------------------------------------------- --------------------------------------
<S> <C>
After 1 year....................... 33 1/3%
After 2 years...................... 33 1/3%
After 3 years...................... 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
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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 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 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.
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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.
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 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.
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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.
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.
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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 class 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
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<PAGE>
any change in the 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 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.
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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 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 employee.
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.
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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.
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.
Adopted by the Board on September 26, 1995 and approved by the Company's
shareholders on September 28, 1995. Amended and restated by the Board on April
7, 1998. Amendments to Sections 4.1 and 4.2 of the Plan approved by the
Company's shareholders on May 20, 1998.
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APPENDIX B
DESIGNATION
OF RIGHTS AND PREFERENCES
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
EMERITUS CORPORATION
A series of Preferred Stock of Emeritus Corporation (the "Company") is hereby
designated with the rights, preferences, privileges and limitations set forth
below.
1. Designation and Amount.
The shares of such series shall be designated "Series B Convertible Preferred
Stock" (the "Series B Preferred Stock"), $.0001 par value, with a stated value
of $1,000 per share and the number of shares constituting the Series B
Preferred Stock shall be 70,000.
The Company shall from time to time in accordance with the laws of the state
of Washington increase the authorized amount of the Series B Preferred Stock if
at any time the number of shares of Series B Preferred Stock remaining unissued
and available for issuance shall not be sufficient to permit the payment of
Series B Preferred Stock dividends in accordance with Section 2 hereof.
The Series B Preferred Stock shall rank junior to the Company's Series A
Convertible Exchangeable Redeemable Preferred Stock (the "Series A Preferred
Stock") as provided herein.
2. Dividends.
(a) Initial Rate and Payment. Subject to the rights of the holders of the
Series A Preferred Stock or any other holders of outstanding shares of
preferred stock having a preferential right to dividends ranking superior
to the rights of the holders of record of shares of Series B Preferred
Stock, the holders of record of shares of the Series B Preferred Stock,
when and as declared by the Board of Directors out of any assets legally
available therefor, shall be entitled to receive cumulative dividends at
the rate per annum and per share equal to the Initial Accrual Rate (as
defined below) times the stated value per share of the Series B Preferred
Stock. Such dividends shall be payable quarterly in arrears on January 1,
April 1, July 1 and October 1 of each year ("Dividend Payment Dates")
commencing April 1, 2000, until the earlier to occur of (i) the date of any
conversion or redemption of the Series B Preferred Stock (but only with
respect to those shares of Series B Preferred Stock so converted or
redeemed) or (ii) January 1, 2004 (the "First Adjustment Date"). For
purposes of this Section 2, "Initial Accrual Rate" shall mean 6.0% per
annum, of which 2.0% per annum shall be payable in cash and 4.0% per annum
shall be payable by the issuance of shares of Series B Preferred Stock at a
rate of .001 shares per $1.00 of such dividend.
(b) Final Rate and Payment. Commencing on January 1, 2004 and until the
date of any conversion or redemption of the Series B Preferred Stock (but
only with respect to those shares of Series B Preferred Stock so converted
or redeemed), the holders of record of shares of the Series B Preferred
Stock, when and as declared by the Board of Directors out of any assets
legally available therefor, shall be entitled to receive cumulative
dividends at the rate per annum and per share equal to the Final Accrual
Rate (as defined below) times the stated value per share of the Series B
Preferred Stock. Such dividends shall be payable quarterly in arrears on
Dividend Payment Dates, commencing April 1, 2004. For purposes of this
Section 2, "Final Accrual Rate" shall mean 7.0% per annum, of which 3.0%
per annum shall be payable in cash and 4.0% per annum shall be payable by
the issuance of shares of Series B Preferred Stock at a rate of .001 shares
per $1.00 of such dividend.
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(c) Increase in Accrual Rate. Dividends on outstanding Series B Preferred
Stock shall accrue from the date of original issuance of such Series B
Preferred Stock. If the holders of record of shares of the Series B
Preferred Stock do not receive on a Dividend Payment Date the full
dividends provided for above, (i) such dividends shall cumulate, whether or
not earned or declared, and (ii) for the period from the first issuance of
the Series B Preferred Stock until December 31, 2006, whenever, at any time
or times, the cash dividend portion of the Initial Accrual Rate or the
Final Accrual Rate, as the case may be, for any quarter shall not be paid,
the cumulating dividend rate of the cash portion of the Initial Accrual
Rate or Final Accrual Rate, as the case may be, shall be increased to 7.0%
per annum and shall be payable entirely in cash, commencing at the time
such cash dividend was due and payable and ending when the unpaid cash
dividends have been paid or January 1, 2007, whichever first occurs. The
amount of any dividends "accrued" on any share of the Series B Preferred
Stock at any date shall be calculated as the amount of any unpaid dividends
accumulated to and including the date as of which the calculation is made,
whether or not earned or declared. In lieu of issuing fractional shares in
connection with the payment of dividends in additional shares of Series B
Preferred Stock, the Company, at its option, may round any such fractional
share up to the next whole share of Series B Preferred Stock or pay cash in
the amount equal to the portion of the dividend attributable to such
fractional share.
(e) Restricted Payments; Dividend Arrearages. So long as any of the
shares of Series B Preferred Stock are outstanding, no dividends shall be
paid or declared, nor any distribution be made, on the Company's Common
Stock, par value $.0001 per share ("Common Stock"), nor shall any shares of
Common Stock, or any other security junior to the Series B Preferred Stock,
be acquired by the Company for consideration other than consideration
constituting capital stock of the Company, unless all dividends then
payable on the Series B Preferred Stock shall have been paid or declared
and payment thereof provided for.
3. Liquidation Rights.
(a) Subject to the rights of the holders of the Series A Preferred Stock
or any other holders of outstanding shares of preferred stock having a
preferential right to dividends ranking superior to the rights of the
holders of record of shares of Series B Preferred Stock, in the event of
any liquidation, dissolution or winding up of the Company, either voluntary
or involuntary (a "Liquidation"), the holders of the Series B Preferred
Stock shall be entitled to receive a preferential amount equal to $1,000
for each share of Series B Preferred Stock then held by them (subject to
adjustment in the event of any stock dividend, stock split, stock
distribution or combination with respect to such shares) (the "Liquidation
Preference") plus an amount equal to any accrued but unpaid dividends,
prior and in preference to any such distribution to the holders of the
Common Stock or any other class or series of the Company's capital stock
ranking junior as to liquidation rights to the Series B Preferred Stock;
provided, however, that such rights shall accrue to the holders of Series B
Preferred Stock only in the event that the Company's payments with respect
to the liquidation preferences of the holders of the Series A Preferred
Stock and the holders of any other capital stock of the Company, if any,
ranking senior as to liquidation rights to the Series B Preferred Stock are
fully met. Upon receipt of payment of the Liquidation Preference, plus an
amount equal to any accrued unpaid dividends as set forth in the preceding
sentence, the holders of the Series B Preferred Stock shall have no further
rights to participate in any remaining assets of the Company. If upon the
occurrence of a Liquidation the assets and funds thus distributed among the
holders of the Series B Preferred Stock and the holders of any preferred
stock ranking pari passu with the Series B Preferred Stock shall be
insufficient to permit the payment to such holders of the full preferential
amount to which such holders are entitled, then the entire assets of the
Company legally available for distribution shall be distributed among the
holders of the Series B Preferred Stock and the holders of any preferred
stock ranking pari passu with the Series B Preferred Stock in proportion to
the full preferential amount each such holder is otherwise entitled to
receive.
(b) A reorganization, consolidation or merger of the Company with or into
any other corporation or corporations, or a sale of all or substantially
all of the assets of the Company, shall not be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 3.
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4. Redemption.
(a) Optional Redemption.
(i) At any time on or after January 10, 2003, the Company may redeem
in whole, but not in part, the Series B Preferred Stock then
outstanding, if the Sale Price (as defined below) of the Common Stock
in its principal trading market is at least 175% of the then effective
Conversion Price (as defined below) in effect for 30 consecutive
Trading Days ending not more than ten Trading Days prior to the date
the notice of redemption is mailed at the redemption price per share
equal to 100% of the Liquidation Preference, together with any accrued
and unpaid dividends on such shares. The Company shall effect each such
redemption pro rata according to the number of shares of Series B
Preferred Stock held by each holder thereof.
(ii) For purposes of this statement of designation, the date of any
redemption pursuant to subsection 4(a)(i) is hereinafter referred to as
the "Redemption Date." For purposes of this statement of designation,
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed is open for the
transaction of business or, if the Common Stock is not listed or
admitted to trading on any national securities exchange, a day on which
any New York Stock Exchange member firm is open for the transaction of
business; the "Sale Price" of Common Stock shall be the reported
closing price of the Common Stock on the principal national securities
exchange on which the Common Stock is listed or admitted to trading or,
if the Common Stock is not listed or admitted to trading on any
national securities exchange, the last reported sale price of the
Common Stock on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq"), or, in the case no such sale
price is so reported on such day, the closing bid price quotation
therefor on the Nasdaq, or, in case no such quotation is available, the
price determined in the good faith judgment of the Board of Directors
of the Company (irrespective of the accounting treatment thereof).
(b) Redemption Procedures.
(i) For purposes of this statement of designation, the applicable
redemption price per share at a Redemption Date is hereinafter referred
to as the "Redemption Price." At least 20 but not more than 60 days
prior to any Redemption Date, written notice shall be mailed, first
class, postage prepaid, to each holder of record of Series B Preferred
Stock to be redeemed, at his or its post office address last shown on
the records of the Company, notifying such holder of the number of
shares so to be redeemed, calling upon such holder to surrender to the
Company, in the manner and at the place designated, its certificate or
certificates representing the shares to be redeemed (such notice is
hereinafter referred to as the "Redemption Notice") and stating the
Redemption Price for such shares to be redeemed. On or prior to each
Redemption Date, each holder of Series B Preferred Stock to be redeemed
shall surrender its certificate or certificates representing such
shares to the Company, in the manner and at the place designated in the
Redemption Notice, and thereupon the Redemption Price of such shares,
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. From and after the Redemption Date,
unless there shall have been a default in payment of the Redemption
Price, all rights of the holders of the Series B Preferred Stock
designated for redemption in the Redemption Notice as holders of Series
B Preferred Stock of the Company (except the right to receive the
Redemption Price without interest upon surrender of their certificate
or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be transferred on the books of the Company
or be deemed to be outstanding for any purpose whatsoever.
(ii) Neither failure to mail a Redemption Notice, nor any defect
therein or in the mailing thereof, to any particular holder shall
affect the sufficiency of the notice or the validity of the proceedings
for redemption with respect to any other holder. Any Redemption Notice
mailed in the manner herein provided shall be conclusively presumed to
have been duly given whether or not the holder receives the notice.
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<PAGE>
(iii) If the Redemption Notice has been given pursuant to this
Section 4 and any holder of shares of Series B Preferred Stock to be
redeemed shall, prior to the close of business on the Redemption Date,
give written notice to the Company pursuant to Section 7(c) of the
conversion or any or all of the shares to be redeemed held by the
holder, then the redemption shall not become effective as to the shares
to be converted and the conversion shall become effective as provided
in Section 7(c), whereupon any funds deposited by the Company, or on
its behalf, with a paying agent or segregated and held in trust by the
Company for the redemption of such shares shall (subject to any right
of the holder of such shares to receive the dividend payable thereon as
provided in Section 7 below) immediately upon such conversion be
returned to the Company or, if then held in trust by the Company, shall
be discharged from the trust.
(c) No other Permitted Redemptions; No Defaults; Retirement.
(i) Except as expressly provided in paragraph (a) of this Section 4,
the Company shall have no right to redeem the shares of Series B
Preferred Stock.
(ii) No redemption shall be effected pursuant to this Section 4 if
the effect of same would be to cause an event of default (or which,
with notice, lapse of time or both would constitute an event of
default) under the terms of any Indebtedness of the Company. For
purposes of this statement of designation, "Indebtedness" of the
Company as of any date shall mean and include all material recourse
indebtedness for money borrowed of the Company or evidenced by notes,
bonds, debentures or similar evidences of indebtedness of the Company.
5. Voting Rights.
(a) Each issued and outstanding share of Series B Preferred Stock shall
be entitled to receive notice of each meeting of the shareholders of the
Company and at each such meeting shall be entitled to the number of votes
equal to (i) $1,000, divided by (ii) the then effective Conversion Price
with respect to any and all matters presented to the shareholders of the
Company for their action or consideration. Except as provided by law or by
the provisions of subsection (b) below, holders of Series B Preferred Stock
shall vote together with the holders of Common Stock as a single voting
group.
(b) (i) Whenever, at any time or times, cash dividends shall be in
arrears in an amount equal to six full consecutive quarterly dividends, the
holders of the outstanding Series B Preferred Stock shall have the
exclusive right, voting separately as a class, to elect one director of the
Company at any meeting of shareholders of the Company called for the
purpose of electing directors. Upon the vesting of such right of the
holders of the Series B Preferred Stock, any applicable number of directors
of the Company set forth in the Restated Articles of Incorporation or
Restated Bylaws of the Company, as determined pursuant thereto, shall
automatically be increased by one and the vacancy so created shall be
filled immediately by vote of the holders of a majority of the outstanding
Series B Preferred Stock as hereinabove set forth. Such right of the
holders of the Series B Preferred Stock, voting separately as a class, to
elect one member of the Board of Directors of the Company as aforesaid
shall continue until such time as all cash dividends accumulated on the
Series B Preferred Stock shall have been paid in full, at which time such
right shall terminate, subject to revesting in the event of each and every
subsequent default of the character above mentioned.
(ii) Upon any termination of the right of the holders of the Series B
Preferred Stock as a class to vote for directors as herein provided,
the term of office of any director then in office elected by the
holders of Series B Preferred Stock voting pursuant to this Section 5
as a class shall terminate immediately.
(iii) If the office of any director elected by the holders of the
Series B Preferred Stock voting as a class becomes vacant by reason of
death, resignation, retirement, disqualification, removal from office
or otherwise, the holders of the Series B Preferred Stock voting
separately as a class may elect a successor who shall hold office for
the unexpired term in respect of which such vacancy occurred. Whenever
the term of office of the Director elected by the holders of the Series
B Preferred Stock
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<PAGE>
voting as a class shall end and the special voting powers vested in the
holders of the Series B Preferred Stock as herein provided shall have
expired, the number of directors shall be such a number as may be
provided for in the Restated Articles of Incorporation or Restated
Bylaws of the Company, or determined pursuant thereto, irrespective of
any increase made pursuant to the foregoing provisions.
(c) The Company shall not amend, alter or repeal the preferences,
including by way of any merger or consolidation, special rights or other
powers of the Series B Preferred Stock so as to affect adversely the Series
B Preferred Stock, without the written consent or affirmative vote of the
holders of at least a majority of the then outstanding aggregate number of
shares of Series B Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a voting
group.
(d) Notwithstanding the foregoing clause (c), the Company shall not
increase the number of authorized shares of preferred stock or create
another series of the preferred stock, in each case ranking prior to or
pari passu with the Series B Preferred Stock as to dividends or as to
distribution of assets, without the written consent or affirmative vote of
the holders of at least 75% of the then outstanding aggregate number of
shares of Series B Preferred Stock, given in writing or by vote at a
meeting, consenting or voting (as the case may be) separately as a voting
group.
6. Conversion. The holders of the Series B Preferred Stock shall have
conversion rights as follows (the "Series B Conversion Rights"):
(a) Optional Conversion. Each share of Series B Preferred Stock may be
converted at any time, and from time to time, at the option of the holder
thereof, in the manner hereinafter provided, into such number of shares of
fully-paid and nonassessable shares of Common Stock as shall equal (i) the
Liquidation Preference per share of Series B Preferred Stock divided by
(ii) the then effective Series B Conversion Price (as defined below);
provided, however, that upon any redemption of any Series B Preferred Stock
or any liquidation of the Company, the right of conversion, if not sooner
exercised, shall terminate at the close of business on the business day
preceding the date fixed for such redemption or for the payment of any
amounts distributable on liquidation to the holders of Series B Preferred
Stock.
(b) Conversion Price. The initial conversion price (the "Series B
Conversion Price") shall be equal to $7.22 per share, subject to adjustment
as provided in Section 7.
(c) Conversion Mechanics.
(i) In order to exercise the conversion privilege, the holder of any
Series B Preferred Stock to be converted shall surrender his or its
certificate or certificates therefor to the principal office of the
transfer agent for the Series B Preferred Stock (or if no transfer
agent is at the time appointed, then the Company at its principal
office), and shall give written notice to the Company at such office
that the holder elects to convert the Series B Preferred Stock
represented by such certificates, or any number thereof. Such notice
shall also state the name or names (with address) in which the
certificate or certificates for shares of Common Stock which shall be
issuable on such conversion shall be issued, subject to any restriction
on transfer relating to shares of the Series B Preferred Stock or
shares of Common Stock upon conversion thereof. If so required by the
Company, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Company, duly authorized in writing. The
"Conversion Date" for any such conversion shall be the date of receipt
by the transfer agent (or by the Company if the Company serves as its
own transfer agent) of the certificates and notice of conversion. As
soon as practicable after receipt of such notice and the surrender of
the certificate or certificates for Series B Preferred Stock as
aforesaid, the Company shall cause to be issued and delivered at such
office to such holder, or on his or its written order, a certificate or
certificates for the number of full shares of Common Stock issuable on
such conversion in accordance with the provisions hereof and cash as
provided in paragraph (ii) of this Section 6(c) in respect of any
fraction of a share of Common Stock otherwise issuable upon such
conversion.
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(ii) The Company shall not issue fractions of shares of Common Stock
upon conversion of Series B Preferred Stock or scrip in lieu thereof.
If any fraction of a share of Common Stock would, except for the
provisions of this paragraph (ii), be issuable upon conversion of any
Series B Preferred Stock, the Company shall in lieu thereof pay to the
person entitled thereto an amount in cash equal to the current value of
such fraction, calculated to the nearest one-thousandth (1/1000) of a
share, to be computed (1) if the Common Stock is listed on any national
securities exchange on the basis of the last closing price of the
Common Stock on such exchange (or the quoted closing bid price if there
shall have been no sales) on the Conversion Date, or (2) if the Common
Stock shall not be listed, on the basis of the last reported sale price
of the Common Stock as reported by Nasdaq, or its successor, on the
Conversion Date and if there is not such a last reported sale price, on
the basis of the fair market value per share as determined by the Board
of Directors of the Company.
(iii) The Company shall at all times when the Series B Preferred
Stock shall be outstanding reserve and keep available out of its
authorized but unissued stock, for the purposes of effecting the
conversion of the Series B Preferred Stock, such number of its duly
authorized shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding Series B
Preferred Stock.
(iv) All shares of Series B Preferred Stock which shall have been
surrendered for conversion as herein provided shall no longer be deemed
to be outstanding and all rights with respect to such shares, including
the rights, if any, to receive notices, to vote and to receive accrued
and unpaid dividends, shall forthwith cease and terminate except only
the right of the holder thereof to receive shares of Common Stock in
exchange therefor.
7. Anti-dilution Provisions. The Series B Conversion Price shall be subject
to adjustment from time to time as follows:
(a) Issuances of Additional Stock.
(i) If the Company shall issue any Additional Stock (as defined
below) without consideration or for a consideration per share less than
the Series B Conversion Price in effect immediately prior to the
issuance of such Additional Stock, the Series B Conversion Price upon
such issuance (except as otherwise provided in this Section 7(a) shall
be adjusted (unless such adjustment is waived by written agreement of
the holders of a majority of the outstanding shares of Series B
Preferred Stock), to a price equal to the quotient obtained by dividing
the total computed under clause (A) below by the total computed under
clause (B) below as follows:
(A) an amount equal to the sum of (1) the result obtained by
multiplying the number of shares of Common Stock deemed outstanding
immediately prior to such issuance (which shall include the actual
number of shares outstanding plus all shares issuable upon the
conversion or exercise of all outstanding convertible securities,
warrants and options) by the Series B Conversion Price then in
effect, and (2) the aggregate consideration, if any, received by the
Company upon the issuance of such Additional Stock;
(B) the number of shares of Common Stock of the Company
outstanding immediately after such issuance (including the shares
deemed outstanding as provided above).
(ii) No adjustment of the Series B Conversion Price shall be made in
an amount less than $.01 per share, provided that any adjustments which
are not required to be made by reason of this sentence shall be carried
forward and shall be taken into account in any subsequent adjustment
made to the Series B Conversion Price. Except as provided in
subsections 7(a)(v)(C) and (D) below, no adjustment of the Series B
Conversion Price shall have the effect of increasing the Series B
Conversion Price above the Series B Conversion Price in effect
immediately prior to such adjustment.
(iii) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid before
deducting any discounts, commissions or other expenses allowed, paid or
incurred by the Company for any underwriting or otherwise in connection
with its issuance and sale.
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(iv) In the case of the issuance of Common Stock for consideration in
whole or in part other than cash, the consideration other than cash
shall be deemed to be its fair value as determined by the Board
irrespective of any accounting treatment.
(v) In the case of the issuance of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into
or exchangeable for Common Stock, or options to purchase or rights to
subscribe for such convertible or exchangeable securities (which
options, rights, convertible or exchangeable securities are not
excluded from the definition of Additional Stock), the following
provisions shall apply:
(A) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at
the time such options or rights were issued for a consideration
equal to the consideration (determined in the manner provided in
Sections 7(a)(iii) and (iv) above) received by the Company upon the
issuance of such options or rights plus the minimum purchase price
provided in such options or rights for the Common Stock covered
thereby, but no further adjustment to the Series B Conversion Price
shall be made for the actual issuance of Common Stock upon the
exercise of such options or rights in accordance with their terms;
(B) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such convertible or
exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such
securities were issued or such options or rights were issued for a
consideration equal to the consideration received by the Company for
any such securities and related options or rights, plus the
additional consideration, if any, to be received by the Company upon
the conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be
determined in the manner provided in Sections 7(a)(iii) and (iv)
above), but no further adjustment to the Series B Conversion Price
shall be made for the actual issuance of Common Stock upon the
conversion or exchange of such securities in accordance with their
terms;
(C) if such options, rights or convertible or exchangeable
securities by their terms provide, with the passage of time or
otherwise, for any increase in the consideration payable to the
Company, or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the
Series B Conversion Price computed upon the original issue thereof,
and any subsequent adjustments based thereon, shall, upon such
increase or decrease becoming effective, be recomputed to reflect
such increase or decrease with respect to such options, rights and
securities not already exercised, converted or exchanged prior to
such increase or decrease becoming effective, but no further
adjustment to the Series B Conversion Price shall be made for the
actual issuance of Common Stock upon the exercise of any such
options or rights or the conversion or exchange of such securities
in accordance with their terms;
(D) upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or
exchangeable securities, the Series B Conversion Price shall
promptly be readjusted to such Series B Conversion Price as would
have been obtained had the adjustment which was made upon the
issuance of such options, rights or securities or options or rights
related to such securities been made upon the basis of the issuance
of only the number of shares of Common Stock actually issued upon
the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or
rights related to such securities; and
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(E) if any such options or rights shall be issued in connection
with the issue and sale of other securities of the Company, together
comprising one integral transaction in which no specific
consideration is allocated to such options or rights by the parties
thereto, such options or rights shall be deemed to have been issued
for such consideration as determined in good faith by the Board.
(vi) "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to Section 7(a)(v)) by the
Company after December 10, 1999 other than
(A) Common Stock issued pursuant to a transaction described in
Section 7(b) or (c);
(B) up to 600,000 shares in the aggregate of Common Stock and
options or warrants therefor, issued (i) to directors, officers,
employees or consultants of the Company pursuant to a stock option,
stock purchase or other equity incentive plan or agreement approved
by the Board of Directors of the Company, (ii) upon the repricing of
options pursuant to a plan to reprice such stock options, stock
purchase or other equity incentive plans or agreements where such
repricing has been approved by the Board of Directors of the
Company, (iii) to financial institutions or lessors in connection
with commercial credit arrangements, real property or other
financing arrangements or similar transactions approved by the Board
of Directors, and (iv) to vendors or suppliers of the Company
pursuant to an agreement approved by the Board of Directors of the
Company;
(C) Common Stock issued or issuable upon conversion of Series A
Preferred Stock or Series B Preferred Stock;
(D) Common Stock issuable upon commitments to issue Common Stock
outstanding on December 30, 1999; and
(E) Such additional securities that are designated as excluded
from the definition of Additional Stock by the written consent of
holders of a majority of the outstanding Series B Preferred Stock;
(b) Stock Dividends. In case shares of Common Stock are issued after the
Initial Issuance Date as a dividend or other distribution on any class of
capital stock of the Company, the Conversion Price shall be reduced by
multiplying the Conversion Price by a fraction of which the numerator shall
be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution.
(c) Subdivisions and Combinations. In case outstanding shares of Common
Stock shall be subdivided into a greater number of shares of Common Stock
or combined into a smaller number of shares of Common Stock, the Conversion
Price shall be reduced (in the event of a subdivision) or increased (in the
event of a combination), by multiplying the Conversion Price by a fraction
of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date immediately preceding the
effective date of such subdivision or combination and the denominator shall
be the number of shares of Common Stock outstanding immediately after such
subdivision or combination becomes effective.
(d) Extraordinary Dividends, etc. In case the Company distributes, as
dividends or otherwise, to any holders of its capital stock evidences of
its indebtedness or assets (excluding any dividend or distribution which is
permitted by Section 2 hereof and excluding regular quarterly cash
dividends on the Common Stock not in excess of 5% of the Conversion Price
as adjusted from time to time per share per annum), the Conversion Price
shall be reduced, effective immediately after the record date for the
determination of shareholders entitled to receive such distribution, by
multiplying the Conversion Price by a fraction of which the numerator shall
be (x) the Fair Market Value per share of the Common Stock less (y) the
Fair Market Value of such distribution, and the denominator shall be the
Fair Market Value per share of the Common Stock.
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As used in this Section 7, "Fair Market Value" means:
(i) in the case of securities for which a public market exists, the
average, computed over the 30 trading days preceding the date as of
which valuation is required, of (A) each day's closing price for such
securities as reported by the principal national securities exchange on
which such securities are listed, (B) if such securities are not traded
on a national securities exchange, each day's mean of the closing bid
and ask prices for such securities as reported by the Nasdaq National
Market System, (C) if such securities are not traded over such exchange
or System, each day's mean of the closing bid and ask prices for such
securities as reported by Nasdaq, and (D) if such securities are not
traded on any such exchange or System or reported by Nasdaq, each day's
mean of the closing bid and ask prices as reported by the National
Quotation Bureau; and
(ii) in the case of securities for which no public market exists and
in all other cases, as determined in the good faith judgment of the
Board of Directors of the Company (irrespective of the accounting
treatment thereof).
(e) Reorganization, Reclassification, Merger and Consolidation. In case
of any capital reorganization or any reclassification of the capital stock
of the Company (other than a subdivision or combination of its outstanding
shares of Common Stock) or in case of the consolidation or merger of the
Company with another corporation or the sale of all or substantially all of
the assets of the Company, each share of Series B Preferred Stock shall
thereafter be convertible into the number of shares of stock or other
securities or property of the Company, or of the successor corporation
resulting from such consolidation or merger, as the case may be, to which
the Common Stock deliverable upon conversion of such share of Series B
Preferred Stock would have been entitled upon such capital reorganization,
reclassification of capital stock, consolidation or merger or sale of
assets; and, in any such case, appropriate adjustments (as determined by
the Board of Directors of the Company) shall be made consistent with the
application of the provisions herein set forth with respect to rights and
interests thereafter of the holders of the Series B Preferred Stock, to the
end that the provisions set forth herein (including the specified change in
and other adjustments of the Conversion Price) shall thereafter be
applicable, as near as reasonably may be, in relation to any shares or
other property thereafter deliverable upon the conversion of the Series B
Preferred Stock.
(f) Notice of Adjustments. Whenever the Conversion Price is adjusted as
provided in this Section 7, the Company shall forthwith file with the
transfer agent for the Common Stock a statement signed by the chief
financial officer for the Company stating that the Conversion Price shall
be the price as adjusted pursuant to Section 7. Such statement shall
include a statement of the then current total amount of Fully Diluted
Common Shares and the total amount of Fully Diluted Common Shares issued
after the Closing Date. Whenever the Conversion Price is so adjusted, the
Company shall cause written notice thereof to be mailed to the holders of
record of the outstanding Series B Preferred Stock within 20 days of such
adjustment.
(g) Notice of Events. In case:
(i) the Company shall declare any dividend payable in stock upon its
Common Stock or make any distribution (other than cash dividends or
distributions) to the holders of its Common Stock;
(ii) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or any
other rights;
(iii) of any capital reorganization or reclassification of the
capital stock of the Company (other than a subdivision or combination
of its outstanding shares of Common Stock), or of any consolidation or
merger to which the Company is a party and for which approval of any
shareholders of the Company is required or of the sale of all or
substantially all of the assets of the Company; or
(iv) of the Liquidation or voluntary or involuntary dissolution of
the Company,
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then, and in any one of said cases, the Company shall cause at least ten days'
prior notice to be mailed to the holders of record of the outstanding Series B
Preferred Stock as of the date on which the books of the Company shall close,
or a record be taken for such stock dividend, distribution or subscription
rights or the date on which such reorganization, reclassification,
consolidation, merger, sale, Liquidation or dissolution is expected to become
effective. Such notice shall also specify the date as of which holders of
Common Stock of record shall participate in said dividend, distribution or
subscription rights, or the date as of which it is expected that holders of
capital stock shall be entitled to exchange their shares for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, Liquidation or dissolution.
(h) If, as a result of an adjustment to the Conversion Price in
accordance with Section 7 the Series B Conversion Price is less than
$6.0625 per share (the "Triggering Adjustment"), the Company shall:
(i) with respect to up to 2,070,072 shares of Common Stock, issue up
to such number of shares in the event holders elect to convert the
Series B Preferred Stock;
(ii) with respect to shares in excess of 2,070,072 shares of Common
Stock (such excess shares being referred to herein as the ("Additional
Shares"), obtain either
(A) written confirmation from the American Stock Exchange
("Exchange Confirmation") that the approval of the shareholders of
the Company is not required under American Stock Exchange Rule 713
(or any successor rule) prior to the issuance of any of the
Additional Shares (or if the Common Stock is not then listed on the
American Stock Exchange, such written confirmation shall be obtained
from the principal market on which the Common Stock is then listed
for trading) and a copy of such Exchange Confirmation shall be
delivered to the holders by the Company, or
(B) shareholder approval for the issuance of the Additional Shares
(the "Shareholder Approval") as required by American Stock Exchange
Rule 713 (or any successor rule), or
(C) if the Common Stock is not listed on the American Stock
Exchange or other national securities exchange or trading market, a
written opinion of counsel experienced in securities law matters to
the effect that shareholder approval is not required prior to the
issuance of the Additional Shares upon conversion of the Series B
Preferred Stock (the "Opinion").
(i) The Company will use its reasonable best efforts to obtain
shareholder approval for the issuance of the Additional Shares at its next
regularly scheduled annual meeting of shareholders. In the alternative, if
such Shareholder Approval is not obtained or if the Exchange Confirmation
or Opinion, as the case may be, is not obtained within 180 days following
the Triggering Adjustment, then following such 180 day period,
(i) the Initial Accrual rate or the Final Accrual Rate, as the case
may be, shall be increased to 12% and 14% per annum, as the case may
be, the amount of such increase to be payable in cash, and
(ii) the holders of the Series B Preferred Stock shall have the
option to require the company to repurchase all or a portion of the
Series B Preferred Stock, at a price equal to the Liquidation
Preference, with dividends calculated at the accrual rate determined
from the date following the expiration of the 60-day period referred to
above in accordance with paragraph (i)(i). The option to have the
Series B Preferred Stock repurchased pursuant to this paragraph (i)(ii)
may be exercised by a holder by executing and delivering to the Company
a notice substantially in the form attached to the Series B Preferred
Stock certificate. The repurchase date for shares to be repurchased
shall be the 10th day following the date on which shares of Series B
Preferred Stock are delivered to the Company for repurchase pursuant to
this paragraph (i)(ii).
(j) Notwithstanding the provisions of paragraph (i), if the Company
obtains the Exchange Confirmation, Shareholder Approval or Opinion
contemplated by paragraph (a)(ii) and the Series B Preferred Stock remains
outstanding and no conversion requiring the issuance of any of the
Additional Shares has been requested, the Initial Accrual Rate or the Final
Accrual Rate, as the case may be, shall be
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reduced to the respective rates set forth in Section 2 and the right of the
holders to require the Company to repurchase the Series B Preferred Stock
set forth in paragraph (i)(ii) shall cease, in each case immediately upon
delivery of the Exchange Approval or Opinion to the holders or upon the
Shareholder Approval being obtained and written notice thereof being given
to the holders, as the case may be.
(k) At the election of the holders of the Series B Preferred Stock, the
remedies provided in paragraph (i) upon the occurrence of a Triggering
Adjustment may be waived at any time. In the event of such a waiver, the
Series B Conversion Price shall not be the price per share giving rise to
the Triggering Adjustment, but shall instead be a price of not less than
$6.0625 per share and the restriction on the number of shares of Common
Stock issuable upon conversion of the Series B Preferred Stock set forth in
paragraph (a)(i) shall not apply. Waiver of the remedies set forth in
paragraph (b) may be made by the holders by executing and delivering to the
Company a waiver and notice of election to convert all of the Series B
Preferred Stock substantially in the forms attached to the Series B
Preferred Stock certificate.
8. Special Right of Redemption Upon Change in Control.
(a) If a Change in Control (as defined below) should occur with respect
to the Company, each holder of shares of the Series B Preferred Stock shall
have the right, at the holder's option, for a period of 45 days after the
mailing of a notice by the Company that a Change in Control has occurred,
to require the Company to repurchase all, or any portion, of such holder's
shares of the Series B Preferred Stock for a price per share equal to 100%
of the Liquidation Preference thereof (the "Repurchase Price").
(b) If a Change in Control shall occur, then, as soon as practicable and
in any event within 30 days after the occurrence of such Change in Control,
the Company shall mail to each registered holder of a share of Series B
Preferred Stock a notice setting forth details regarding the special right
of the holders to have their shares of Series B Preferred Stock repurchased
as a result of such Change in Control (the "Special Right Notice"). A
holder of a share of Series B Preferred Stock must exercise such repurchase
right within the 45 day period after the mailing of the Special Right
Notice by the Company or such special right shall expire. The repurchase
date for shares so repurchased shall be the 45th day after the mailing of
the Special Right Notice. Exercise of such repurchase right shall be
irrevocable and no dividend on the shares of Series B Preferred Stock
tendered for repurchase shall accrue from and after the repurchase date.
(c) The Special Right Notice shall state: (i) the event constituting the
Change in Control, (ii) the last date upon which holders may submit shares
of Series B Preferred Stock for repurchase, (iii) the Repurchase Price,
(iv) the Conversion Price then in effect under Section 6 and the continuing
conversion rights, if any, under Section 6, (v) the name and address of any
paying agent and conversion agent, (vi) that exercise of such conversion
right shall be irrevocable and no dividends on shares of Series B Preferred
Stock tendered for conversion shall accrue from and after the conversion
date, and (vii) that the consideration to be received shall be delivered
within five business days after the last date upon which holders may submit
Series B Preferred Stock for conversion.
(d) As used herein, a "Change in Control," means (i) the acquisition by
any person, entity or "group," within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")
(including, without limitation for this purpose, Daniel R. Baty or any
person or entity controlled by Daniel R. Baty) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
securities that would entitle such person, entity or group to appoint or
elect a majority of the Board of Directors of the Company; or (ii)
individuals, who, as of the initial Issuance Date, constitute the Board (as
of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person
becoming a director subsequent to the Initial Issuance Date whose election,
or nomination for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising the Incumbent
Board shall be, for purposes of this definition, considered as though such
person were a member of the Incumbent Board; or (iii) the sale of all or
substantially all of the assets of the Company which does not also result
in the continued operation or management of such assets by the Company.
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9. No Reissuance of Series B Preferred Stock.
All shares of Series B Preferred Stock acquired by the Company by reason of
redemption, exchange, conversion, purchase or otherwise shall be retired as
Series B Preferred Stock (and the number of authorized shares of Series B
Preferred Stock shall be decreased to reflect such retirement) and the retired
shares shall resume the status which they had prior to the adoption of this
resolution fixing the number of shares of Series B Preferred Stock.
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APPENDIX C
SHAREHOLDERS' AGREEMENT
SHAREHOLDERS' AGREEMENT, dated as of December 30, 1999 (the "Agreement"), by
and among Emeritus Corporation, a Washington corporation (the "Company"),
Daniel R. Baty and B.F., Limited Partnership (collectively, "Baty"), Saratoga
Partners IV, L.P., a Delaware limited partnership ("Saratoga") and certain
other investors who will become a party to this Agreement by execution of the
Joinder Agreement attached hereto as Exhibit A (the "Saratoga Co-Investors"
and, together with Saratoga and all successors and assignees by Saratoga
pursuant to Section 5.4, the "Saratoga Group").
RECITALS:
A. The Company and Saratoga are parties to a Series B Preferred Stock
Purchase Agreement, dated as of December 10, 1999, between the Company, as
seller, and Saratoga, as purchaser (the "Purchase Agreement"), pursuant to
which the Company is issuing and Saratoga is acquiring 40,000 shares of the
Company's Series B Convertible Preferred Stock, par value $.0001 per share (the
"Series B Preferred Stock").
B. The parties hereto desire to provide for, among other things, certain
matters relating to the management of the Company, the ownership and transfer
of the Series B Preferred Stock and the rights and remedies of Saratoga.
AGREEMENT:
The parties agree as follows:
Article I
Definitions
Definitions. The following terms, as used herein, have the following
meanings:
"Affiliate" means, as to any Person, any other Person directly or indirectly
Controlling, Controlled by or under direct or indirect common Control with such
Person.
"Baty" is defined in the first paragraph of this Agreement.
"Capital Stock" means the Series B Preferred Stock and any Common Stock into
which the Series B Preferred Stock is convertible.
"Change of Control" means, as to any Person, a change, shift or transfer of
Control with respect to such Person (including any change in the Control of any
entity Controlling such Person).
"Common Stock" means the common stock, par value $.0001 per share, of the
Company.
"Company" is defined in the first paragraph of this Agreement.
"Control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of securities, partnership interests or by
contract, assignment or otherwise. The terms "Controlling" and "Controlled"
shall have meanings correlative to the foregoing.
"Designation" means that certain statement of rights and preferences and
other characteristics of the Series B Preferred Stock pursuant to which the
Series B Preferred Stock was authorized by the Company.
<PAGE>
"Initial Saratoga Directors" shall mean Charles P. Durkin, Jr. and David W.
Niemiec.
"1933 Act" means the Securities Act of 1933, as amended.
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Person" means an individual, a corporation, a partnership, an association, a
trust or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Saratoga" is defined in the first paragraph of this Agreement.
"Saratoga Directors" shall mean the Initial Saratoga Directors and any person
chosen by Saratoga to be added to the Company's Board of Directors as a
separate class to be designated by Saratoga as provided for herein.
"Series B Preferred Stock" is defined in Recital A of this Agreement.
"Subsidiaries" means, with respect to any Person, (i) a corporation, a
majority of whose capital stock with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by a Subsidiary of such Person or by such Person and a
Subsidiary thereof or (ii) any other Person (other than a corporation) in which
such Person, a Subsidiary thereof or such Person and a Subsidiary thereof,
directly or indirectly, at the date of determination thereof has at least a
majority ownership interest.
"Tag-Along Sale" is defined in Section 2.2(a) of this Agreement.
"Tag-Along Sale Date" is defined in Section 2.2(b) of this Agreement.
"Transfer" means any direct or indirect transfer, sale, conveyance, pledge,
hypothecation or other disposition, including, without limitation, any of the
foregoing which occurs by virtue of any Change of Control.
Article II
Saratoga Transfers: Tag-Along Rights
Section 2.1. Saratoga Transfers.
The Saratoga Group will not, in one transaction or a series of transactions,
Transfer 25% or more of its Capital Stock to any Person (including its
Affiliates) or group (as that term is defined in Section 13(d)(3) of the 1934
Act) unless such Person or group, as a condition to closing such Transfer,
shall enter into an agreement reasonably satisfactory to the Company to be
bound by the provisions of Article IV of this Agreement; provided, however,
that any Person or group who acquires and beneficially owns less than 5% of the
total outstanding shares of Common Stock of the Company shall not be required
to enter into such agreement.
Section 2.2. Tag-Along Provisions.
(a) If at any time Baty shall receive and determine to accept any offer from
any Person to purchase or otherwise transfer for value, in one transaction or a
series of transactions, shares of Common Stock representing 30% or more of the
Common Stock then owned by Baty (a "Tag-Along Sale"), then Baty shall afford
the Saratoga Group the opportunity to participate in such Tag-Along Sale in the
manner set forth in this Section 2.2.
(b) Baty shall provide the Saratoga Group with written notice of the proposed
Tag-Along Sale that sets forth the number of shares of Common Stock proposed to
be sold, the price at which they are to be sold, and any other terms or
conditions of the offer, not more than 60 days nor less than 20 days before the
proposed date of the Tag-Along Sale (the "Tag-Along Sale Date").
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(c) The Saratoga Group shall have the right to cause Baty to condition the
Tag-Along Sale on the simultaneous purchase by the purchaser of such number of
shares of Capital Stock beneficially owned by the Saratoga Group, whether such
purchaser purchases Preferred Stock or Common Stock issuable upon conversion of
the Preferred Stock, as the Saratoga Group shall designate in a written notice
to Baty no less than 10 days after the notice given in accordance with Section
2.2(b); provided, however, that the Saratoga Group may not so designate for
purchase a number of shares of Common Stock greater than the number of shares
determined as follows: the total number of shares offered to be purchased in
the Tag-Along Sale shall be multiplied by a fraction, the numerator of which is
the number of shares owned by the Saratoga Group and the denominator of which
is the sum of the number of shares owned by the Saratoga Group plus the number
of shares owned by Baty. The number of Baty shares to be sold pursuant to the
Tag-Along Sale shall be reduced by the number of shares which the Saratoga
Group elects to sell as permitted by the foregoing calculation. The purchase
price for each share of the Company's Capital Stock to be sold by the Saratoga
Group in the Tag-Along Sale and the terms of such purchase shall be the same as
those applicable to Baty. The number of shares owned by the Saratoga Group
shall be determined as if the Preferred Stock were converted into Common Stock
in accordance with its terms.
(d) Each member of the Saratoga Group shall be allowed to designate for sale
a number of shares equal to its percentage of ownership of the total number of
shares owned by the Saratoga Group multiplied times the total number of shares
the Saratoga Group may sell pursuant to the Tag-Along Sale; provided, that if a
member or members of the Saratoga Group declines to participate in such Tag-
Along Sale, each participating member of the Saratoga Group may designate for
sale additional shares in a percentage equal to its percentage of ownership of
the total number of shares owned by the Saratoga Group until all of the Shares
allowed to be sold under Section 2.2(c) are offered for sale or all members of
the Saratoga Group decline to participate in the sale of such additional
shares.
Section 2.3. Transfers to Comply with Laws. Notwithstanding any contrary
provision herein, the Saratoga Group may not Transfer or offer to Transfer any
shares of Capital Stock (or solicit any offers to Transfer any shares of
Capital Stock), except in compliance with the 1933 Act, as amended, and rules
and regulations promulgated thereunder and in compliance with any applicable
state securities laws and rules and regulations promulgated thereunder.
Article III
Board Of Directors; Corporate Governance
Section 3.1. Board of Directors. (a) From and after the date hereof, the
Company and Baty shall take all such action as may be necessary to increase the
number of directors comprising the Company's Board of Directors so as to allow
for the nomination and election of the Saratoga Directors at the times and as
specified below:
(i) as soon as practicable after the execution of this Agreement, the
Initial Saratoga Directors shall be added to the Company's Board of
Directors; and
(ii) from time to time, at Saratoga's request, additional Saratoga
Directors shall be added to the Company's Board of Directors so as to
maintain Saratoga's board representation at a percentage of the entire
Board of Directors (rounded up to the nearest whole director) that is not
less than the percentage of total voting power of the Company's equity
securities attributable to the Series B Preferred Stock owned by the
Saratoga Group, provided, however, the number of Saratoga Directors shall
not be less than two, subject to Section 3.1(b).
(b) Saratoga's right to have one or more Saratoga Directors added to the
Company's Board of Directors will terminate if (i) (x) it has sold of record in
excess of 50% of its initial investment in the Capital Stock and (y) the
remaining shares of Capital Stock held by Saratoga represents less than 5% of
the outstanding Common Stock (on a fully diluted basis), or (ii) Saratoga is
unable to exercise independent voting control over the shares of Capital Stock
owned by it.
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<PAGE>
(c) The right of Saratoga to designate individuals to serve on the Company's
Board of Directors granted by this Section 3.1 shall be in addition to the
rights of holders of Series B Preferred Stock to designate and elect members to
the Company's Board of Directors in the event of certain failures to pay
accrued and unpaid dividends set forth in the Designation.
Section 3.2. Corporate Governance. For so long as Saratoga retains the power
to vote the shares comprising at least 50% of its initial investment,
(a) approval by the Company's Board of Directors will be required for all
material decisions, including, but not limited to, the following:
(i) any financing, acquisition or development by the Company or its
Subsidiaries or the incurrence by the Company or any of its Subsidiaries of
any indebtedness in an amount in the aggregate exceeding $15 million for
each unrelated transaction.
(ii) the liquidation, dissolution, winding up or voluntary filing of a
petition for bankruptcy of the Company or any of its Subsidiaries;
(iii) a sale or other disposition of all or substantially all of the
assets of the Company, other than to any of its Subsidiaries;
(iv) the merger or consolidation of the Company, other than any such
merger or consolidation between or among any of the Company (so long as the
Company shall be the surviving corporation) and any Subsidiary of the
Company;
(v) the entry by the Company or a Subsidiary into any material
transaction with an Affiliate;
(vi) the issuance of any voting equity security of the Company, other
than upon conversion of any convertible securities of the Company
outstanding on the date hereof or issued pursuant to the Company's stock
compensation plans in effect on the date hereof; and
(vii) the declaration of any dividends with respect to the Common Stock,
or establishment of any Common Stock repurchase program.
(b) approval by Saratoga will be required to use the proceeds from the sale
of the Series B Preferred Stock for any purpose other than that specified in
Section 6.3 of the Purchase Agreement.
Article IV
Standstill Provisions
Section 4.1. Restrictions of Certain Actions
(a) Neither the Saratoga Group nor Baty will, nor will the Saratoga Group or
Baty permit their respective Affiliates to, singly or as part of a partnership,
limited partnership, syndicate or other group (as those terms are defined in
Section 13(d)(3) of the 1934 Act), directly or indirectly acquire, offer to
acquire, or agree to acquire, by purchase, gift or otherwise, any voting
securities of the Company, so that after such purchase Baty's or the Saratoga
Group's ownership of the Company would, (i) in the case of the Saratoga Group,
exceed 110% of the number of shares of Common Stock beneficially owned by the
Saratoga Group immediately following the consummation of the transactions
described in the Purchase Agreement plus the shares of Series B Preferred Stock
(or the underlying Common Stock once converted) issued to the Saratoga Group as
stock dividends (which aggregate number shall be appropriately adjusted
pursuant to the antidilution provisions of the Series B Preferred Stock) and
(ii) in the case of Baty, the greater of: (x) exceed 110% of the number of
shares of Common Stock beneficially owned by Baty immediately following
execution of the Purchase Agreement or (y) exceed 100% of the number of shares
of Common Stock beneficially owned by the Saratoga Group immediately following
the consummation of the transactions described in the Purchase Agreement plus
the
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<PAGE>
shares of Series B Preferred Stock (or the underlying Common Stock once
converted) issued to the Saratoga Group as stock dividends (which aggregate
number shall be appropriately adjusted pursuant to the antidilution provisions
of the Series B Preferred Stock). For purposes of this Section 4.1, Saratoga's
ownership of voting securities shall be determined as if the shares of
Preferred Stock were converted to Common Stock in accordance with their terms.
The acquisition by Baty of voting securities as contemplated by this Section
shall constitute an acquisition of securities for the purpose of making any
determination of whether a Change of Control (as defined in Section 8 of the
Certificate of Designation of the Series B Preferred Stock)has occurred
pursuant to the Certificate of Designation of the Series B Preferred Stock.
(b) If the Saratoga Group or Baty, as the case may be, or any of their
respective Affiliates owns or requires any voting securities in violation of
this Agreement, such voting securities shall immediately be disposed of to
persons who are not Affiliates of the Saratoga Group or Baty, as the case may
be, but only in compliance with the provisions of this Agreement; provided,
that the Company may also pursue any other available remedy to which it may be
entitled as a result of such violation.
(c) Saratoga and Baty, as the case may be, will cause any Person (including
its Affiliates) or group (as that term is defined in Section 13(d)(3) of the
1934 Act) acquiring Capital Stock from the saratoga Group or Baty, as the case
may be, representing more than 25% of their respective beneficial ownership
interests as of the date hereof to agree to be bound by provisions similar to
those contained in this Article IV; provided, however, that any Person or group
who acquires and beneficially owns less than 5% of the total outstanding shares
of Common Stock of Company shall not be required to enter into such agreement.
(d) The provisions of this Article IV will terminate 18 months after the date
on which the Saratoga Group ceases to hold capital Stock representing 5% of the
outstanding Common Stock (on a fully diluted basis).
Article V
Miscellaneous
Section 5.1. Legends. Each certificate evidencing any of the Series B
Preferred Stock shall bear a legend substantially as follows:
The shares represented by this certificate are subject to the terms and
conditions of a certain Shareholders' Agreement dated as of December 30,
1999, as at any time amended, which Shareholders' Agreement contains, among
other things, certain restrictions on the transfer of such shares and
restrictions on acquiring additional securities of the Company. A copy of
such Shareholders' Agreement is on file at the principal executive office
of the Company and will be furnished to the holder of this certificate upon
request and without charge.
Section 5.2. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including facsimile or similar writing)
and shall be given to such party at its address or facsimile number set forth
on the signature pages hereof or such other address or facsimile number as such
party may hereafter specify for the purpose by notice to the party sending the
communication. Each such notice, request or other communication shall be
effective (i) if given by facsimile, when such facsimile is transmitted to the
facsimile number specified in this Section and receipt is confirmed, (ii) if
given by mail, 72 hours after such communication is deposited in the mail
registered or certified, return receipt requested, with postage prepaid,
addressed as aforesaid, or (iii) if given by any other means, when delivered at
the address specified in this Section.
Section 5.3. Amendments and Waivers. Any provision of this Agreement may be
amended if, but only if, such amendment is in writing and is signed by all of
the parties hereto. Any provision of this Agreement may be waived if, but only
if, such waiver is in writing and is signed by each of the parties hereto.
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<PAGE>
Section 5.4. Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided, however, that no assignment of
rights under this Agreement will be valid unless made in connection with a
contemporaneous Transfer of Capital Stock which is not prohibited by this
Agreement; and provided further, that an assignee executes and delivers to the
Company a joinder agreement substantially in the form of Exhibit A hereto
(whereupon such assignee shall be subject to the terms of, and be entitled to
the rights and benefits of, this Agreement without any further signature or
acknowledgment of the other parties to this Agreement). The Company may not
assign or otherwise transfer any of its rights or obligations under this
Agreement.
Section 5.5. Captions. The captions of this Agreement are included for
convenience of reference only, do not constitute a part hereof and shall be
disregarded in the construction hereof.
Section 5.6. Counterparts; Effectiveness. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
Section 5.7. GOVERNING LAW. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAWS.
(b) THE COMPANY HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE NOW OR
HEREAFTER TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
(c) Upon breach or default by the Company with respect to any obligation
hereunder, Saratoga (or its agents) shall be entitled to protect and enforce
their rights at law, or in equity or by other appropriate proceedings for
specific performance of such obligation, or for an injunction against such
breach or default, or in aid of the exercise of any power or remedy granted
hereby or thereby or by law.
Section 5.8 Submission to Jurisdiction; Venue
(a) Any legal action or proceeding with respect to this Agreement may be
brought in the courts of the State of New York or of the United States for the
Southern District of New York, and, by execution and delivery of this
Agreement, the Company hereby irrevocably accepts for itself and in respect of
its property, generally and unconditionally, the nonexclusive jurisdiction of
the aforesaid courts. The Company further irrevocably consents to the service
of process out of any of the aforementioned courts in any such action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to CT Corporation Systems at its address at 1633 Broadway, New
York, New York 10019, such service to become effective 30 days after such
mailing. Nothing herein shall affect the right of any party to serve process in
any other manner permitted by law or to commence legal proceedings or otherwise
proceed against the Company in any other jurisdiction.
(b) The Company hereby irrevocably waives any objection which it may now or
hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Agreement brought in the
courts referred to in clause (a) above and hereby further irrevocably waives
and agrees not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an inconvenient forum.
Section 5.9. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement, or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
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<PAGE>
Section 5.10. Headings. The Article and Section headings used or contained in
this Agreement are for convenience of reference only and shall not affect the
construction of this Agreement.
Section 5.11. No Reliance. Each party hereto acknowledges that it has
obtained separate advice with respect to the legal, tax and accounting
consequences of the transactions contemplated by this Agreement, and that it
has neither sought nor relied upon any such advice from any other party hereto
or any such party's Affiliates.
Section 5.12. Entire Agreement. This Agreement and agreements executed in
connection herewith constitute the entire agreement among the parties with
respect to the subject matter hereof, and, as of the date hereof, there are no
promises or undertakings with respect thereto relative to the subject matter
hereof not expressly set forth or referred to herein or therein.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
Emeritus Corporation
By: /s/ Kelly J. Price
____________________________
Name: Kelly J. Price
Title: Vice President of Finance
Emeritus Corporation
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121
Attn: Kelly J. Price
Telephone: (206) 298-2909
Telecopier: (206) 301-4500
Daniel Baty
/s/ Daniel R. Baty
_______________________________
Daniel R. Baty
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121
Telephone: (206) 298-2909
Telecopier: (206) 301-4500
B.F., Limited Partnership
By Columbia-Pacific Group, Inc.
General Partner
By: /s/ Daniel R. Baty
____________________________
Name: Daniel R. Baty
Title: Chairman
B.F., Limited Partnership
3131 Elliot Avenue, Suite 500
Seattle, Washington 98121
Attn: Daniel R. Baty
Telephone: (206) 298-2909
Telecopier: (206) 301-4500
Saratoga Partners IV, L.P.
By: Saratoga Associates IV LLC,
as General Partner
By: Saratoga Management Company LLC,
as Manager
By: /s/ David Niemiec
____________________________
Name: David Niemiec
Title:
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<PAGE>
APPENDIX D
Saratoga Partners IV, L.P.
Saratoga Coinvestment IV LLC
Saratoga Management Company LLC
c/o Saratoga Management Company LLC
535 Madison Avenue
New York, New York 10022
May 15, 2000
Emeritus Corporation
3131 Elliott Avenue, Suite 500
Seattle, Washington 98121
Attn.: Raymond R. Brandstrom
Re: Emeritus Corporation--Series B Preferred Stock Purchase Agreement
Gentlemen:
This letter will confirm our agreement with respect to certain matters
concerning the Series B Preferred Stock Purchase Agreement, dated as of
December 10, 1999 (the "Purchase Agreement") by and between Emeritus
Corporation ("Emeritus") and Saratoga Partners IV, L.P. ("Saratoga"), pursuant
to which Saratoga, Saratoga Management Company LLC, as attorney-in-fact, and
Saratoga Coinvestment IV LLC (collectively, the "Saratoga Group") have agreed
to purchase, on the terms and conditions set forth therein, shares of the
Series B Convertible Preferred Stock, par value $.0001 per share with a stated
value of $1,000 per share of Emeritus. Capitalized terms used herein but not
defined shall have the meanings assigned to such terms in the Purchase
Agreement. In consideration for the agreement of Emeritus to issue the Warrants
described in paragraph 4.a, below, Emeritus and the Saratoga Group mutually
agree as follows:
1. The Purchase Agreement is hereby amended as follows:
a. Section 6.3 of the Purchase Agreement is hereby deleted in its
entirety.
b. Emeritus waives its right to sell and the Saratoga Group waives their
right to purchase the 10,000 Preferred Shares not purchased at the Initial
Closing. Any and all obligations of the Saratoga Group to purchase the
remaining 10,000 Preferred Shares in the Second Closing or to participate
in the Second Closing are hereby terminated.
c. Any and all obligations of Emeritus pursuant to Section 6.7 of the
Purchase Agreement are hereby deemed to have been terminated as of the
First Closing.
2.a. The Saratoga Group waives their right to receive additional dividends
pursuant to Section 7(i)(i) of the Certificate of Designation for the period
June 27, 2000 to August 8, 2000 and will forebear until August 8, 2000 from
exercising their remedies under Section 7(i)(ii) of the Certificate of
Designation and under that certain letter dated December 30, 1999 (as modified
by the letter dated May 5, 2000) (the "Letter Agreements") if Emeritus does not
satisfy the requirements set forth in such Section 7(i) of the Certificate of
Designation by June 27, 2000.
b. The Saratoga Group constituting all of the holders of the Series B
Preferred Stock hereby consents, pursuant to Section 7(a)(vi)(E) of the
Certificate of Designation, to the exclusion of the Warrants described in
paragraph 4.a., below from the definition of Additional Stock, as such term
is defined in the Certificate of Designation.
<PAGE>
3. Notwithstanding the foregoing, if Emeritus receives written confirmation
from the American Stock Exchange ("Exchange Confirmation") that the approval of
the shareholders of Emeritus is not required under American Stock Exchange Rule
712 (or any successor rule) as a condition to listing all of the shares of
Common Stock initially issuable on conversion of the Series B Stock and the
Warrants (or if the Common Stock is not then listed on the American Stock
Exchange, such written confirmation shall be obtained from the principal market
on which the Common Stock is then listed for trading) and a copy of such
Exchange Confirmation is delivered to the holders by Emeritus, Emeritus'
obligation under the Letter Agreements, as modified by paragraph 2 above, to
obtain the approval of shareholders pursuant to American Stock Exchange Rule
712 (or any successor rule) shall be terminated and there shall not exist any
Triggering Adjustment, as such term is defined in Section 7(h) of the
Designation based upon the absence of a shareholder approval in accordance with
such Rule 712. This paragraph shall not diminish or otherwise affect the
continuing obligations of Emeritus pursuant to paragraphs 2 and 3 of the
December 30, 1999 letter or pursuant to Section 7(h), (i) and (j) of the
Designation.
4. Emeritus agrees to:
a. issue to the respective members of the Saratoga Group in such amounts
as shall be designated by Saratoga warrants (the "Warrants") to purchase an
aggregate of 1,000,000 shares of Common Stock of Emeritus, such Warrants
having a term of seven years from the date of issuance and an exercise
price of $4.30 per share, the Warrants to be substantially in the form, and
containing the terms, attached hereto as Exhibit A. Emeritus further agrees
to take such action as may be necessary or appropriate to have the shares
of Common Stock issuable upon exercise of the Warrants listed on the
American Stock Exchange, including without limitation if required by
American Stock Exchange rules using its best efforts to obtain a favorable
shareholder vote for the issuance of the shares of Common Stock upon
exercise of the Warrants prior to August 8, 2000. The Warrants shall be
issued within 14 days of the date of this letter (subject to the following
proviso); provided that, in the event the rules of the American Stock
Exchange require shareholder approval for the issuance of the shares of
Common Stock upon exercise of the Warrants, the Warrants shall be issued
within 7 days following the obtaining of such approval. Emeritus agrees the
shares of Common Stock issuable upon exercise of the Warrants shall be
included as Registrable Securities under the Registration Rights Agreement
and the holders (including the transferees, successors and assigns of the
initial holders) of the Warrants shall be entitled to all of the benefits
and be subject to all of the restrictions of the Registration Rights
Agreement; or
b. In the event that Emeritus does not issue the Warrants for any reason,
including without limitation an election by Emeritus to not issue the
Warrants, within the applicable time period provided in paragraph 4.a
above, Emeritus shall pay to the Saratoga Group within three business days
of the expiration of the applicable time period, by wire transfer of
immediately available funds to a bank account designated by Saratoga the
sum of (x) $5 million cash, plus (y) if on the last day on which the
Warrants were required to be issued the closing sales price per share of
the Common Stock of Emeritus is in excess of $4.30 per share, an additional
amount in cash calculated as the difference between $4.30 per share and the
closing sale price of Emeritus Common Stock per share on the last day on
which the Warrants were required to be issued times 1,000,000.
5. Except with respect to the amendment of the Purchase Agreement set forth
in paragraph 1, above, and the waiver set forth in paragraph 2, above, this
letter is without prejudice to the respective rights of the Saratoga Group and
Emeritus under the Purchase Agreement and Shareholders' Agreement, all of which
rights are hereby expressly reserved.
6. This letter shall be binding on the parties hereto and their successors
and assigns.
If the foregoing is consistent with your understanding of our agreement,
please execute a copy of this letter enclosed for such purpose in the space
provided below and return one copy to us whereupon this letter
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<PAGE>
shall constitute a binding agreement between us.
Very truly yours,
Saratoga Partners IV, L.P.
By: Saratoga Associates IV LLC,
its General Partner
By: Saratoga Management Company LLC,
its Manager
By: /s/ David Niemiec
____________________________
Name:
Title:
Saratoga Coinvestment IV LLC,
By: Saratoga Management Company LLC,
as Managing Member
By: /s/ David Niemiec
____________________________
Name:
Title:
Saratoga Management Company
LLC, as Attorney-in-Fact
By: /s/ David Niemiec
____________________________
Name:
Title:
AGREED TO AND ACCEPTED
as of the date first written above:
EMERITUS CORPORATION
By: /s/ Ray Brandstrom
___________________________
Name:
Title:
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<PAGE>
EXHIBIT A
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR QUALIFIED
UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE
DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT IS IN EFFECT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE
STATE SECURITIES LAWS.
EMERITUS CORPORATION
Warrant for the Purchase of Shares of Common Stock
No. [ ] [ ] Shares
FOR VALUE RECEIVED, EMERITUS CORPORATION (the "Issuer"), a Delaware
corporation, hereby certifies that [] or its registered assigns (the "Holder")
is entitled, subject to the provisions of this Warrant (this "Warrant"), to
purchase from the Issuer, at any time or from time to time during the Exercise
Period, as hereinafter defined, an aggregate of [[ ([]) fully paid and
nonassessable shares of Common Stock at a purchase price per share equal to the
Exercise Price. The number of Warrant Shares to be received upon the exercise of
this Warrant is subject to adjustment from time to time as hereinafter set
forth.
Section 1. Definitions. The following additional terms, as used herein,
have the following respective meanings:
"Affiliate" means, with respect to any Person, any other Person which
directly or indirectly controls, or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including,
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise).
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of common stock and preferred stock of such Person; (ii) with respect to any
Person that is not a corporation, any and all partnership, membership or other
equity interests of such Person; and (iii) any rights, warrants or options
exchangeable for or convertible into any of the foregoing.
<PAGE>
"Common Stock" means the authorized Common Stock, par value $.01 per share,
of the Issuer.
"Current Market Price" per share of Common Stock means on any record date
the average of the current market value, determined as set forth below, of
Common Stock for the 20 trading days prior to the date in question in the case
of clauses (i) and (ii) below.
(i) If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such an exchange, the
current market value shall be the last reported sale price of the
Common Stock on such exchange on such trading day or if no such sale
is made on such day, the mean of the closing bid and asked prices for
such day on such exchange; or
(ii) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the
last bid and asked prices reported on such trading day (A)by the
Nasdaq Stock Market or (B)if reports are unavailable under clause (A)
above by the National Quotation Bureau Incorporated; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the
current market value shall be such value as is reasonably determined
in good faith by the Board of Directors of the Issuer.
"Exercisability Date" means the first day on or after which the Warrant has
been issued.
"Exercise Period" means the period from and including the Exercisability
Date to and including 5:00 p.m. (New York City time) on the seventh anniversary
of the date hereof (or if such day is not a Business Day, the next succeeding
Business Day).
"Exercise Price" means an amount equal to $4.30 per share of Common Stock.
"Person" means any natural person, partnership, limited liability company,
joint venture, firm, corporation, association, trust or any organized group of
persons whether incorporated or not.
"Warrant Shares" means the shares of Common Stock and any other securities
or property issuable or deliverable upon exercise of this Warrant, as adjusted
from time to time.
Section 2. Exercise of Warrant. This Warrant may be exercised in whole or
in part, at any time or from time to time, during the Exercise Period, by
presentation and surrender hereof to the Issuer at its principal office at the
address set forth on the signature page hereof (or at such other address as the
Issuer may hereafter notify the Holder in writing), or at the office of its
stock transfer agent or warrant agent, if any, with the Purchase Form annexed
hereto duly executed and accompanied by proper payment of that portion of the
Exercise Price represented by the number of shares of Common
<PAGE>
Stock specified in such form being exercised. Such payment may be made, at the
option of the Holder, either (a)by cash, certified or bank cashier's check or
wire transfer in an amount equal to the product of (i)the Exercise Price times
(ii)the number of shares of Common Stock as to which this Warrant is being
exercised or (b)by receiving from the Issuer the number of Warrant Shares equal
to (i)the number of Warrant Shares as to which this Warrant is being exercised
minus (ii)the number of Warrant Shares having a value, based on the Current
Market Price on the trading day immediately prior to the date of such exercise,
equal to the product of (x)the Exercise Price times (y)the number of shares of
Common Stock as to which this Warrant is being exercised. If this Warrant should
be exercised in part only, the Issuer shall, upon surrender of this Warrant,
execute and deliver a new Warrant evidencing the rights of the Holder thereof to
purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt
by the Issuer of this Warrant and the Purchase Form annexed hereto, together
with the applicable portion of the Exercise Price, at such office, in proper
form for exercise, the Holder shall be deemed to be the holder of record of the
Warrant Shares, notwithstanding that the stock transfer books of the Issuer
shall then be closed or that certificates representing such Warrant Shares shall
not then be actually delivered to the Holder. The Issuer shall pay any and all
documentary stamp or similar issue taxes payable in respect of the issue of the
Warrant Shares. The Issuer shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance or delivery
of certificates representing Warrants or Warrant Shares in a name other than
that of the Holder at the time of surrender for exercise, and, until the payment
of such tax, shall not be required to issue such Warrant Shares.
Section 3. Due Authorization; Reservation of Shares. (a) The Issuer
represents and warrants that this Warrant has been duly authorized, executed and
delivered by the Issuer and is a valid and binding agreement of the Issuer and
entitles the Holder hereof or its assignees to purchase Warrant Shares upon
payment to the Issuer of the Exercise Price applicable to such shares. The
Issuer hereby agrees that at all times there shall be reserved for issuance and
delivery upon exercise of this Warrant all shares of its Common Stock or other
shares of capital stock of the Issuer from time to time issuable upon exercise
of this Warrant. All such shares shall be duly authorized and, when issued upon
such exercise and paid for, shall be validly issued, fully paid and
nonassessable, free and clear of all liens, security interests, charges and
other encumbrances or restrictions on sale and free and clear of all preemptive
rights.
(b) Assuming the veracity of the Holder's representations in Section 10(a)
hereof, the Issuer represents and warrants that the execution and delivery by it
of this Warrant do not require any action by or in respect of the Issuer (other
than those that have been taken) or filing with any governmental body, agency or
official and do not contravene or constitute a default under or violation of
(i)any provision of applicable law or regulation, (ii)the certificate of
incorporation or bylaws of the Issuer, or (iii)any material agreement, judgment,
injunction, order, decree or other instrument binding upon the Issuer.
(c) The Issuer represents that the shares of Common Stock initially
issuable upon exercise of this Warrant have been approved for listing on the
American Stock Exchange, subject only to notice of issuance.
<PAGE>
Section 4. Fractional Shares. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Issuer shall pay to the Holder an amount in cash equal to such fraction
multiplied by the Current Market Price of such fractional share.
Section 5. Exchange, Transfer, Assignment or Loss of Warrant. This
Warrant is exchangeable, without expense, at the option of the Holder, upon
presentation and surrender hereof to the Issuer for other Warrants of different
denominations, entitling the Holder or Holders thereof to purchase in the
aggregate the same number of Warrant Shares. Subject to Section 10 hereof, the
Holder of this Warrant shall be entitled to assign its interest in this Warrant
in whole or in part to any person or persons. Upon surrender of this Warrant to
the Issuer, with the Assignment Form annexed hereto duly executed and funds
sufficient to pay any transfer tax, the Issuer shall, without charge, execute
and deliver a new Warrant or Warrants in the name of the assignee or assignees
named in such instrument of assignment and, if the Holder's entire interest is
not being assigned, in the name of the Holder, and this Warrant shall promptly
be canceled. This Warrant may be divided or combined with other Warrants that
carry the same rights upon presentation hereof at the office of the Issuer,
together with a written notice specifying the names and denotations in which new
Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as
used herein includes any Warrants into which this Warrant may be divided or for
which it may be exchanged. Upon receipt by the Issuer of evidence satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant, and (in the
case of loss, theft or destruction) of reasonably satisfactory indemnification,
and upon surrender and cancellation of this Warrant, if mutilated, the Issuer
shall execute and deliver a new Warrant of like tenor and date.
Section 6. Rights of the Holder. The Holder shall not, by virtue hereof,
be entitled to any rights of a stockholder in the Issuer, either at law or
equity, and the rights of the Holder are limited to those expressed in this
Warrant; provided, however, that the Holder shall be entitled to receive all
Distributions and Distribution Rights in respect of Common Stock as though this
Warrant had been exercised.
Section 7. Anti-dilution Provisions and Other Adjustments; Purchase Right.
The number of Warrant Shares which may be purchased upon the exercise hereof
shall be subject to change or adjustment as follows:
(a) Issuances of Additional Stock.
-----------------------------
(i) If the Issuer shall issue any Additional Stock (as defined below)
without consideration or for a consideration per share less than the Exercise
Price in effect immediately prior to the issuance of such Additional Stock, the
Exercise Price upon such issuance (except as otherwise provided in this Section
7(a) shall be adjusted (unless such adjustment is waived by written agreement of
the holders of a majority of the outstanding Warrants), to a price equal to the
quotient obtained by dividing the total computed under clause(A) below by the
total computed under clause(B) below as follows:
<PAGE>
(A) an amount equal to the sum of (1)the result obtained by
multiplying the number of shares of Common Stock deemed outstanding immediately
prior to such issuance (which shall include the actual number of shares
outstanding plus all shares issuable upon the conversion or exercise of all
outstanding convertible securities, warrants and options) by the Exercise Price
then in effect, and (2)the aggregate consideration, if any, received by the
Issuer upon the issuance of such Additional Stock;
(B) the number of shares of Common Stock of the Issuer
outstanding immediately after such issuance (including the shares deemed
outstanding as provided above).
(ii) No adjustment of the Exercise Price shall be made in an amount
less than $.01 per share, provided that any adjustments which are not required
to be made by reason of this sentence shall be carried forward and shall be
taken into account in any subsequent adjustment made to the Exercise Price.
Except as provided in subsections 7(a)(v)(C) and (D) below, no adjustment of the
Exercise Price shall have the effect of increasing the Exercise Price above the
Exercise Price in effect immediately prior to such adjustment.
(iii) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid before deducting any
discounts, commissions or other expenses allowed, paid or incurred by the Issuer
for any underwriting or otherwise in connection with its issuance and sale.
(iv) In the case of the issuance of Common Stock for consideration in
whole or in part other than cash, the consideration other than cash shall be
deemed to be its fair value as determined by the Board of Directors of the
Issuer irrespective of any accounting treatment.
(v) In the case of the issuance of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock, or options to purchase or rights to subscribe for
such convertible or exchangeable securities (which options, rights, convertible
or exchangeable securities are not excluded from the definition of Additional
Stock), the following provisions shall apply:
(A) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to subscribe for
Common Stock shall be deemed to have been issued at the time such options or
rights were issued for a consideration equal to the consideration (determined in
the manner provided in Sections 7(a)(iii) and (iv) above) received by the Issuer
upon the issuance of such options or rights plus the minimum purchase price
provided in such options or rights for the Common Stock covered thereby, but no
further adjustment to the Exercise Price shall be made for the actual issuance
of Common Stock upon the exercise of such options or rights in accordance with
their terms;
(B) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable
<PAGE>
securities and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such options or rights
were issued for a consideration equal to the consideration received by the
Issuer for any such securities and related options or rights, plus the
additional consideration, if any, to be received by the Issuer upon the
conversion or exchange of such securities or the exercise of any related options
or rights (the consideration in each case to be determined in the manner
provided in Sections 7(a)(iii) and (iv) above), but no further adjustment to the
Exercise Price shall be made for the actual issuance of Common Stock upon the
conversion or exchange of such securities in accordance with their terms;
(C) if such options, rights or convertible or exchangeable
securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Issuer, or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Exercise Price computed upon the original issue thereof,
and any subsequent adjustments based thereon, shall, upon such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
with respect to such options, rights and securities not already exercised,
converted or exchanged prior to such increase or decrease becoming effective,
but no further adjustment to the Exercise Price shall be made for the actual
issuance of Common Stock upon the exercise of any such options or rights or the
conversion or exchange of such securities in accordance with their terms;
(D) upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Exercise Price shall promptly be readjusted to such Exercise Price as would have
been obtained had the adjustment which was made upon the issuance of such
options, rights or securities or options or rights related to such securities
been made upon the basis of the issuance of only the number of shares of Common
Stock actually issued upon the exercise of such options or rights, upon the
conversion or exchange of such securities or upon the exercise of the options or
rights related to such securities; and
(E) if any such options or rights shall be issued in connection
with the issue and sale of other securities of the Issuer, together comprising
one integral transaction in which no specific consideration is allocated to such
options or rights by the parties thereto, such options or rights shall be deemed
to have been issued for such consideration as determined in good faith by the
Board of Directors of the Issuer.
(vi) "Additional Stock" shall mean any shares of Common Stock issued
(or deemed to have been issued pursuant to Section 7(a)(v)) by the Issuer after
May 12, 2000 other than
(A) Common Stock issued pursuant to a transaction described in
Section 7(b) or (c);
(B) up to 600,000 shares in the aggregate of Common Stock and
options or warrants therefor, issued (i) to directors, officers, employees or
consultants of the Issuer pursuant to a stock option, stock purchase or other
equity incentive plan or agreement approved by the Board of
<PAGE>
Directors of the Issuer, (ii) upon the repricing of options pursuant to a plan
to reprice such stock options, stock purchase or other equity incentive plans or
agreements where such repricing has been approved by the Board of Directors of
the Issuer, (iii) to financial institutions or lessors in connection with
commercial credit arrangements, real property or other financing arrangements or
similar transactions approved by the Board of Directors, and (iv) to vendors or
suppliers of the Issuer pursuant to an agreement approved by the Board of
Directors of the Issuer;
(C) Common Stock issued or issuable upon conversion of Series A
Preferred Stock or Series B Preferred Stock;
(D) Common Stock issuable upon commitments to issue Common Stock
outstanding on May 12, 2000; and
(E) Such additional securities that are designated as excluded
from the definition of Additional Stock by the written consent of holders of a
majority of the outstanding Warrants;
(b) Stock Dividends. In case shares of Common Stock are issued after the
date of original issuance of the Warrant as a dividend or other distribution on
any class of capital stock of the Issuer, the Exercise Price shall be reduced by
multiplying the Exercise Price by a fraction of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on the
date fixed for such determination and the denominator shall be the sum of such
number of shares and the total number of shares constituting such dividend or
other distribution.
(c) Subdivisions and Combinations. In case outstanding shares of Common
Stock shall be subdivided into a greater number of shares of Common Stock or
combined into a smaller number of shares of Common Stock, the Exercise Price
shall be reduced (in the event of a subdivision) or increased (in the event of a
combination), by multiplying the Exercise Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the date immediately preceding the effective date of such
subdivision or combination and the denominator shall be the number of shares of
Common Stock outstanding immediately after such subdivision or combination
becomes effective.
(d) Extraordinary Dividends, etc. In case the Issuer distributes, as
dividends or otherwise, to any holders of its Capital Stock evidences of its
indebtedness or assets (excluding regular quarterly cash dividends on the Common
Stock not in excess of 5% of the Exercise Price as adjusted from time to time
per share per annum and excluding dividends due and payable on the Issuer's
Series A Preferred Stock and Series B Preferred Stock), the Exercise Price shall
be reduced, effective immediately after the record date for the determination of
shareholders entitled to receive such distribution, by multiplying the Exercise
Price by a fraction of which the numerator shall be (x) the Fair Market Value
per share of the Common Stock less (y) the Fair Market Value of such
distribution, and the denominator shall be the Fair Market Value per share of
the Common Stock.
As used in this Section 7, "Fair Market Value" means:
<PAGE>
(i) in the case of securities for which a public market exists, the
average, computed over the 30 trading days preceding the date as of which
valuation is required, of (A) each day's closing price for such securities as
reported by the principal national securities exchange on which such securities
are listed, (B) if such securities are not traded on a national securities
exchange, each day's mean of the closing bid and ask prices for such securities
as reported by the Nasdaq National Market System, (C) if such securities are not
traded over such exchange or System, each day's mean of the closing bid and ask
prices for such securities as reported by Nasdaq, and (D) if such securities are
not traded on any such exchange or System or reported by Nasdaq, each day's mean
of the closing bid and ask prices as reported by the National Quotation Bureau;
and
(ii) in the case of securities for which no public market exists and
in all other cases, as determined in the good faith judgment of the Board of
Directors of the Issuer (irrespective of the accounting treatment thereof).
(e) Reorganization, Reclassification, Merger and Consolidation. In case
of any capital reorganization or any reclassification of the capital stock of
the Issuer (other than a subdivision or combination of its outstanding shares of
Common Stock) or in case of the consolidation or merger of the Issuer with
another corporation or the sale of all or substantially all of the assets of the
Issuer, each Warrant shall thereafter be convertible into the number of shares
of stock or other securities or property of the Issuer, or of the successor
corporation resulting from such consolidation or merger, as the case may be, to
which the Common Stock deliverable upon exercise of such Warrants would have
been entitled upon such capital reorganization, reclassification of capital
stock, consolidation or merger or sale of assets; and, in any such case,
appropriate adjustments (as determined by the Board of Directors of the Issuer)
shall be made consistent with the application of the provisions herein set forth
with respect to rights and interests thereafter of the holders of the Warrants,
to the end that the provisions set forth herein (including the specified change
in and other adjustments of the Exercise Price) shall thereafter be applicable,
as near as reasonably may be, in relation to any shares or other property
thereafter deliverable upon the exercise of the Warrants.
(f) Notice of Events. In case:
(i) the Issuer shall declare any dividend payable in stock upon its
Common Stock or make any distribution (other than cash dividends or
distributions) to the holders of its Common Stock;
(ii) the Issuer shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or any other
rights;
(iii) of any capital reorganization or reclassification of the
capital stock of the Issuer (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation or merger to which
the Issuer is a party and for which approval of any shareholders of the Issuer
is required or of the sale of all or substantially all of the assets of the
Issuer; or
(iv) of the liquidation or voluntary or involuntary dissolution of
the Issuer,
<PAGE>
then, and in any one of said cases, the Issuer shall cause at least ten days'
prior notice to be mailed to the holders of record of the outstanding Warrants
as of the date on which the books of the Issuer shall close, or a record be
taken for such stock dividend, distribution or subscription rights or the date
on which such reorganization, reclassification, consolidation, merger, sale,
liquidation or dissolution is expected to become effective. Such notice shall
also specify the date as of which holders of Common Stock of record shall
participate in said dividend, distribution or subscription rights, or the date
as of which it is expected that holders of capital stock shall be entitled to
exchange their shares for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, liquidation or
dissolution.
Section 8. Officers' Certificate. Whenever the Exercise Price of the
Warrants is adjusted as required by the provisions of Section 7, the Issuer
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office an officers' certificate stating that the Exercise Price
shall be the price as adjusted pursuant to Section 7 and shall set forth in
reasonable detail the facts requiring such adjustment and the manner of
computing such adjustment. Each such officers' certificate shall be signed by
the chairman, president or chief financial officer of the Issuer and by the
secretary or any assistant secretary of the Issuer. Absent manifest error, the
officers' certificate shall be conclusive evidence that the adjustment is
correct. Each such officers' certificate shall be made available at all
reasonable times for inspection by the Holder or any holder of a Warrant
executed and delivered pursuant to Section 5 hereof and the Issuer shall,
forthwith after each such adjustment, mail a copy, by certified mail, of such
certificate to the Holder or any such holder.
Section 9. Transfer Restrictions.
(a) Compliance with Securities Act. The Holder, by acceptance hereof,
agrees that this Warrant, and the Warrant Shares to be issued upon exercise
hereof are being acquired for investment and that such holder will not offer,
sell or otherwise dispose of this Warrant, or any Warrant Shares except under
circumstances which will not result in a violation of the Securities Act or any
applicable state securities laws. Upon exercise of this Warrant, unless the
Warrant Shares being acquired are registered under the Securities Act and any
applicable state securities laws or an exemption from such registration is
available, the holder hereof shall confirm in writing that the Warrant Shares so
purchased are being acquired for investment and not with a view toward
distribution or resale in violation of the Securities Act and shall confirm such
other matters related thereto as may be reasonably requested by the Issuer. This
Warrant and all Warrant Shares issued upon exercise of this Warrant (unless
registered under the Securities Act and any applicable state securities laws)
shall be stamped or imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
QUALIFIED UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED, SOLD
OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION STATEMENT IS IN EFFECT
OR PURSUANT TO AN AVAILABLE
<PAGE>
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE
SECURITIES LAWS.
Said legend shall be removed by the Issuer, upon the request of the
Holder, at such time as the restrictions on the transfer of the applicable
security shall have terminated.
(b) Disposition of Warrant or Warrant Shares. Each certificate
representing this Warrant or Warrant Shares thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to ensure compliance with such laws, unless in the
aforesaid opinion of counsel for Holder, such legend is not required in order to
ensure compliance with such laws. The Issuer may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
Section 10. Market Stand-Off. The Holder of this Warrant hereby agrees
that, during the period of duration (up to, but not exceeding, 90 days, but
which in any event shall not be a longer period than the shortest period
applicable to other shareholders of the Issuer who are subject to a similar
provision or impose any transfer restriction on the Holder which is not imposed
on any other shareholder of the Issuer) specified by the Issuer and an
underwriter of Common Stock or other equity securities of the Issuer, following
the effective date of a registration statement of the Issuer filed under the
Securities Act, it shall not, to the extent requested by the Issuer and such
underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to donees who agree to be similarly
bound) any securities of the Issuer held by it at any time during such period
except Common Stock included in such registration. In order to enforce the
foregoing covenant, the Issuer may impose stop-transfer instructions with
respect to the securities of Holder until the end of such period, and Holder
agrees that, if so requested, Holder will execute an agreement in the form
provided by the underwriter containing terms which are essentially consistent
with the provisions of this Section.
Section 11. Listing on Securities Exchanges. The Issuer shall use all
its best efforts to list on each national securities exchange, if any, on which
any Common Stock may at any time be listed, subject to official notice of
issuance upon the exercise of this Warrant, and shall use its best efforts to
maintain such listing, so long as any other shares of its Common Stock shall be
so listed, all shares of Common Stock from time to time issuable upon the
exercise of this Warrant; and the Issuer shall use its best efforts to so list
on each national securities exchange, and shall use all reasonable efforts to
maintain such listing of, any other shares of capital stock of the Issuer
issuable upon the exercise of this Warrant if and so long as any shares of
capital stock of the same class shall be listed on such national securities
exchange by the Issuer. Any such listing shall be at the Issuer's expense.
Section 12. Governing Law. This Warrant shall be construed and enforced
in accordance with, and the rights of the parties shall be governed by, the laws
of the State of New York, excluding choice-of-law principles of the law of such
state that would require the application of the laws of a jurisdiction other
than such state.
<PAGE>
IN WITNESS WHEREOF, the Issuer has duly caused this Warrant be executed
by and attested by its duly authorized officers and to be dated as of [ ], 2000.
EMERITUS CORPORATION
By:
-------------------------------
Name:
Title:
Attest:
By:
-------------------------------
Name:
Title:
Address:
3131 Elliot Avenue
Suite 500
Seattle, Washington 98121
Attention: Raymond R. Brandstrom
Telecopier Number: (206) 298-2909
Telephone: (206) 301-4500
<PAGE>
PURCHASE FORM
Dated _________, __
The undersigned hereby irrevocably elects to exercise the within Warrant
to the extent of purchasing _____ shares of Common Stock and hereby makes
payment of _____ in payment of the exercise price thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name
----------------------------------------------------------
(please typewrite or print in block letters)
Address
--------------------------------------------------------
Signature
------------------------------------------------------
ASSIGNMENT FORM
FOR VALUE RECEIVED, ___________________________________ hereby sells, assigns
and transfers unto
Name
----------------------------------------------------------
(please typewrite or print in block letters)
Address
--------------------------------------------------------
its right to purchase _____ shares of Common Stock
represented by this Warrant and does hereby
irrevocably constitute and appoint ___________
Attorney, to transfer the same on the books of the
Issuer, with full power of substitution in the
premises.
Date
---------------, ----
Signature
------------------------
