-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TqMAD6hH/TfXSHW1texAEasAQOrQQ9NfNsKG8dUVx4jEPejqx7eBHz9bzOyd2wWP eGHywMxId3wbBamhG22C8A== 0001001604-98-000002.txt : 19980331 0001001604-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0001001604-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 32 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: EMERITUS CORP\WA\ CENTRAL INDEX KEY: 0001001604 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-NURSING & PERSONAL CARE FACILITIES [8050] IRS NUMBER: 911605464 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14012 FILM NUMBER: 98579304 BUSINESS ADDRESS: STREET 1: 3131 ELLIOTT AVENUE STREET 2: SUITE 500 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 206-298-2909 MAIL ADDRESS: STREET 1: MARKET PLACE ONE STREET 2: 2003 WESTERN AVE SUITE 660 CITY: SEATTLE STATE: WA ZIP: 98121-2162 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - ------------------------------------------------------------------------ FORM 10-K - ------------------------------------------------------------------------ (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the fiscal year ended December 31, 1997. OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-14012 EMERITUS CORPORATION (Exact name of registrant as specified in its charter) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 WASHINGTON 91-1605464 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 (Address of principal executive offices) (206) 298-2909 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - -------------------------------- -------------------------------- Common Stock, $.0001 par value American Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), (2) and has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark that there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Aggregate market value of voting stock held by non-affiliates of the registrant as of March 20, 1998 was $81,090,958. As of March 20, 1998, 10,483,050 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of Form 10-K (items 10-13) is incorporated herein by reference to the Registrant's definitive Proxy Statement relating to its 1998 Annual Meeting of Stockholders to be held on May 20, 1998. EMERITUS CORPORATION Index Part I Page No. Item 1. Description of Business.................................. 1 Item 2. Description of Property.................................. 16 Item 3. Legal Proceedings........................................ 20 Item 4. Submission of Matters to a Vote of Security Holders...... 20 Executive Officers of the Registrant..................... 20 Part II Item 5. Market for Registrant's Common Equity and Related 21 Stockholder Matters...................................... Item 6. Selected Financial Data.................................. 22 Item 7. Management's Discussion and Analysis of Financial 23 condition and Results of Operations...................... Item 8. Financial Statements and Supplementary Data.............. 31 Item 9. Changes in and Disagreements with Accountants on 31 Accounting and Financial Disclosure...................... Part III Item 10. Directors and Executive Officers of the Registrant....... 31 Item 11. Executive Compensation................................... 32 Item 12. Security Ownership of Certain Beneficial Owners and 32 Management............................................... Item 13. Certain Relationships and Related Transactions........... 32 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................. 32 PART I ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW AND BACKGROUND Emeritus Corporation ("Emeritus" or the "Company") is a long-term- care services company focused on operating residential-style assisted- living communities. Since its organization in 1993, the Company has achieved significant growth in revenues, primarily due to the acquisition and operation of residential communities. The Company believes it is one of the largest providers of assisted-living services in the United States. As of March 20, 1998, the Company held ownership, leasehold or management interests in 101 residential communities (the "Operating Communities") consisting of approximately 8,800 units with the capacity for 10,200 residents, located in 26 states. Of the 101 Operating Communities, 11 and 20 newly developed communities were opened during 1996 and 1997, respectively. Additionally, the Company completed construction on an expansion to an existing community during 1997. Subsequent to December 31, 1997, the Company entered into an agreement with an affiliate to provide management services for an independent- living community located in Ohio. The Company owns, has a leasehold interest in, management interest in or has acquired an option to purchase development sites for 26 new assisted-living communities (the "Development Communities"). Sixteen of the Development Communities are currently under construction, 14 of which are scheduled to open during 1998. The Company leases 77 of its residential communities, typically from a financial institution such as a Real Estate Investment Trust ("REIT"), owns 18 communities, manages or provides administrative services for five communities and has a partnership interest in one community. Additionally, the Company holds a 26.2% minority interest in Alert Care Corporation ("Alert"), an Ontario, Canada based owner and operator of 22 assisted-living communities consisting of approximately 1,250 units with a capacity of approximately 1,350 residents. See "- Strategic Relationships - Alert Relationship". Assuming completion of the Development Communities scheduled to open throughout 1998 and including the minority interest in Alert, the Company will own, lease, have an ownership interest in or manage 137 properties in 28 states and Canada, containing an aggregate of approximately 11,450 units with capacity of over 13,100 residents. There can be no assurance, however, that the Development Communities will be completed on schedule and will not be affected by construction delays, the effects of government regulation or other factors beyond the Company's control. See "Factors Affecting Future Results and Forward Looking Statements -Emphasis on Acquisitions; Difficulties of Integrating Acquisitions", "-Ability to Develop Additional Assisted-Living Communities", and "-Need for Additional Capital." The Company's management of assisted-living communities owned or leased by others has not been material to the Company's business or revenue. Emeritus was founded in July 1993 by Daniel R. Baty, Raymond R. Brandstrom and Frank A. Ruffo, Jr. to become a nationwide operator of assisted-living communities. During the 16 years prior to 1987, Mr. Baty, the Company's Chairman of the Board and Chief Executive Officer, served as the chief executive officer of The Hillhaven Corporation ("Hillhaven"), one of the largest operators of skilled-nursing facilities in the United States. In 1986, Mr. Baty left Hillhaven to pursue opportunities in the independent-living market. In 1987, he became the chairman of the board and principal shareholder of Holiday Retirement Corp. ("Holiday"), one of the largest operators of independent-living communities in the United States and served as its chief executive officer from 1991 through September 1997. Mr. Brandstrom, the Company's President and Chief Operating Officer, and Mr. Ruffo, the Company's Vice President have worked with Mr. Baty in various financial, administrative and operating capacities for an aggregate of more than 40 years, including 12 years and 13 years, respectively, at Hillhaven. In November 1996, Gary D. Witte, joined the Company as Vice President, Operations. Prior to joining the Company, Mr. Witte last served as the Vice President of Operations, Southern Region for Vencor Inc. and previously for Hillhaven Corporation where he was involved in operating senior housing and related services for over 20 years. By December 31, 1994, the Company had acquired seven existing long- term facilities containing approximately 600 units. During 1995, the Company commenced an aggressive acquisition program, acquiring 16 existing long-term-care properties containing approximately 1,600 units, and entered into a joint venture in connection with the acquisition of one community containing approximately 20 units located in New Hampshire. In 1996, the Company continued its aggressive acquisition program acquiring 35 existing long-term-care properties containing approximately 2,700 units and entered into an agreement to provide management services for an independent-living community containing approximately 80 units. In addition, the Company commenced operations at 11 newly developed communities, eight developed by the Company and three developed by others, representing approximately 900 units. In 1997, the Company focused on its development program and commenced operations at 20 newly developed communities containing approximately 1,600 units. Also, the Company acquired seven existing long-term-care properties containing approximately 1,000 units and entered into an agreement to provide management services and administrative services for three communities containing approximately 200 units. The Company ended the fiscal year with 100 communities containing approximately 8,700 units. Subsequent to December 31, 1997, the Company entered into an agreement with an affiliate to provide management services for an 1 independent-living community located in Ohio, entered into four management agreements with a Holiday affiliate, whereby the Holiday affiliate will provide management services for four of the Company's newly developed communities located in Texas. As of March 20, 1998 the Company owns, leases or manages 101 Operating Communities containing approximately 8,800 units with capacity for 10,200 residents. The following table sets forth a summary of the Company's property interests.
As of December 31, ------------------------------------------------------------------------ 1994 1995 1996 1997 ---------------- ---------------- ----------------- ----------------- Buildings Units Buildings Units Buildings Units Buildings Units --------- ------ --------- ------ --------- ------- --------- ------- Owned 6 494 14 1,496 15 1,485 19 2,099 Leased 1 91 9 662 53 4,165 76 6,124 Managed - - - - 1 83 4 327 Joint Venture/Partnership - - 1 22 2 162 1 140 --------- ------ --------- ------ --------- ------- --------- ------- Sub Total 7 585 24 2,180 71 5,895 100 8,690 Annual Growth - % - % 243% 273% 196% 170% 41% 47% Pending Acquisitions 3 461 13 895 8 1,028 - - New Developments 9 720 26 2,112 27 2,296 26 2,483 Minority Interest - - - - 17 959 22 1,248 --------- ------ --------- ------ --------- ------- --------- ------- Total 19 1,766 63 5,187 123 10,178 148 12,421 --------- ------ --------- ------ --------- ------- --------- ------- Annual Growth - % - % 232% 194% 95% 96% 20% 22%
DEMOGRAPHICS AGING POPULATION The Company's target market, which is comprised of seniors, age 75 and older, is one of the fastest growing segments of the U.S. population and, according to the U.S. Census Bureau, is expected to increase from approximately 13.0 million in 1990 to over 16.8 million or approximately 31% by 2000. As the number of seniors age 75 and older continues to grow, the Company believes there will be a corresponding increase in the number of seniors who need assistance with activities of daily living. According to the U.S. General Accounting Office, over 7.0 million people in the United States in 1993 needed assistance with activities of daily living, which number is expected to double by 2020. The Company believes that assisted-living has become a more popular approach to providing long-term care for seniors, particularly in light of the increasing emphasis by both federal and state governments to contain long-term-care costs, limitations imposed in many states on construction of additional skilled-nursing facilities, which have generally increased the level of care needed by residents in such facilities and forced less acute seniors to seek alternative long-term- care arrangements, the relative affluence of the most elderly segment of the population and the decreasing availability of family care. The Company believes that its communities are attractive to those seniors who do not require 24-hour skilled-nursing care but do desire supervision and assistance with activities of daily living, and that the limited availability of governmental payment programs has created a strong and growing market demand for noninstitutional long-term-care services designed to fill the gap between independent-living facilities and skilled-nursing facilities. COST-CONTAINMENT PRESSURES In response to rapidly rising healthcare costs, governmental and private-pay sources have adopted cost containment measures that have encouraged reduced lengths of hospital stays. The federal government has acted to curtail increases in healthcare costs under Medicare by limiting acute-care hospital reimbursement for specific services to preestablished fixed amounts. Private insurers have begun to limit reimbursement for medical services in general to predetermined "reasonable charges", while managed-care organizations, such as health maintenance organizations, are attempting to limit hospitalization costs by negotiating for discounted rates for hospital services and by monitoring and reducing hospital use. In response, hospitals are discharging patients earlier and referring seniors, who may be too sick or frail to manage their lives unassisted, to skilled-nursing facilities where the cost of providing care is lower than in a hospital. As a result, an increased number of discharged hospital patients are seeking skilled-nursing facility care. At the same time, skilled-nursing facility operators continue to focus on improving occupancy and expanding services to subacute patients requiring significantly higher levels of skilled-nursing care. Based on its experience, the Company estimates that between 25% to 40% of skilled-nursing facility patients 2 could be more appropriately cared for in a less institutional, less costly environment such as an assisted-living community. RESTRICTED SUPPLY OF NURSING FACILITY BEDS A majority of states have adopted certificate of need ("CON") or similar statues that generally require a state agency to determine that a need exists for new beds and that certain other criteria are also satisfied before construction of new nursing-facility beds commences, new services are provided or certain expenditures are made, the cost of which would be reimbursable either in whole or in part by one or more state-funded programs. The Company believes that this CON process tends to restrict the supply of skilled-nursing facility beds. The Company also believes that high construction costs, limitations on governmental reimbursement for the full costs of construction and start-up expenses also constrain growth in the supply of such facilities and beds. SENIOR AFFLUENCE AND REDUCED RELIANCE ON FAMILY CARE The Company's target market is comprised of middle- to upper-middle- income seniors who have accumulated some assets and receive income from investments and pensions, as well as from Social Security. The Company believes that many of these seniors have the economic resources to pay for an assisted-living alternative to traditional long-term care without financial assistance. Historically, the family has been the primary provider of senior care. The Company believes, however, that the increased percentage of women in the workforce and the increased mobility of society are reducing the family's role as the traditional caregiver for seniors, which trend will make it necessary for many seniors to look outside the family for assistance as they age. GROWTH STRATEGY The Company plans to expand its network of assisted-living communities by (a) developing new assisted-living communities and, (b) if attractive opportunities are available, acquisition of (i) existing assisted-living communities and (ii) properties that it believes can be effectively repositioned as assisted-living communities. The Company believes that there is significant demand for alternative long-term-care services that are positioned between the limited services offered by independent-living facilities and the more medical and institutional care offered by skilled-nursing facilities. A significant component of the Company's growth strategy has been the acquisition of existing senior housing facilities that either are currently operated as assisted-living communities or can be efficiently repositioned by the Company as assisted-living communities. The Company believes that the terms on which it has acquired its interest in the Operating Communities have generally been favorable and below the estimated replacement cost. There can be no assurance, however, that the Company's cost of acquiring appropriate properties will remain favorable as additional experienced and well-financed competitors enter the assisted-living market segment. See "Factors Affecting Future Results and Forward-Looking Statements - Emphasis on Acquisitions; Difficulty of Integrating Acquisitions and "-Need for Additional Capital" for a description of factors that could affect the Company's rate of acquisitions. The Company believes that the popularity of assisted-living as a long-term-care alternative is decreasing the number of existing long- term-care facilities that are available at attractive prices and that its growth may depend more on the successful development of new assisted- living communities. As a result, the Company has increasingly focused on the development of assisted-living communities, with a goal to open 10 to 15 per year. However, if attractive opportunities are made available, the Company will continue to acquire ownership or leasehold interests in existing long-term-care facilities. There can be no assurance that acquisitions or development will proceed at the rate currently expected by the Company as a result of such factors as availability of attractive properties or development sites, possibilities of over building, regulatory impediments, development and construction delays and availability of capital. In pursuing its growth strategy, the Company expects to face competition in the developing and acquiring of assisted-living communities. The Company believes that if the development of new assisted-living communities outpaces demand for those communities in certain markets, such markets may become saturated and that could have a material adverse effect on the Company's business, financial condition and results of operations, as well as, difficulties in obtaining attractive sites for developing. See "Factors Affecting Future Results and Regarding Forward-Looking Statements -Emphasis on Acquisition; Difficulties of Integrating Acquisitions", "-Ability to Develop Additional Assisted-living communities" and "-Need for Additional Capital" for other factors that could affect the Company's rate of development. 3 MARKET SELECTION PROCESS In selecting geographic markets for potential expansion, the Company considers such factors as a potential market's population, demographics and income levels, including the existing and anticipated future population of seniors who may benefit from the Company's services, the number of existing long-term-care facilities in the market area and the income level of the target population. While the Company does not apply its market selection criteria mechanically or inflexibly, it generally seeks to select assisted-living community locations that (a) are nonurban with populations of between 25,000 and 150,000 persons, (b) have residents who generally enjoy mid-level incomes compared to incomes generally realized in the region, (c) have a regulatory climate that the Company considers favorable toward development, and (d) are established and economically stable compared to newer, faster-growing areas. The Company has found that communities with these characteristics generally have a receptive population of seniors who desire and can afford the services offered in the Company's assisted- living communities. In part because of Mr. Baty's close relationship with Holiday, four of the sites currently under development or under consideration are near existing or proposed Holiday independent-living facilities. The Company believes that Mr. Baty's relationship with Holiday has provided, and will continue to provide, the Company with opportunities to locate new development sites near existing Holiday independent-living facilities and enable the Company to gain knowledge that will allow it to select advantageous development sites. ACQUISITIONS The Company has acquired, and plans to continue to acquire, if attractive opportunities are made available, existing assisted-living communities. The Company expects that, where an existing assisted- living community has been well managed, has a stable occupancy and financial performance and has in place a program of assisted-living services comparable to those provided by the Company, the average per- unit acquisition cost will generally be higher than for facilities that require repositioning. The Company further expects, however, that the expenditures otherwise associated with repositioning a facility will not be as great, and that the anticipated time to achieve stabilized occupancy and target resident mix will typically be shorter. Sixty-five of the Company's 101 Operating Communities, containing 5,800 units, were previously operated by others as assisted-living communities before their acquisition by the Company. Of these, 11 required significant repositioning. Six of the Company's 101 Operating Communities, containing approximately 400 units, were previously operated as independent-living facilities. Under their prior owners, these properties often reflected varying combinations of operating deficiencies, unstable occupancy and deferred maintenance, which the Company believes enabled it to acquire the properties at favorable prices. The Company typically implements operating policies and procedures in assisted-living communities previously operated as independent-living facilities to (a) stabilize the resident population at appropriate levels with seniors who desire, and have adequate resources for, the services offered in an assisted- living environment and (b) aggressively market a broad array of assisted- living services that can be provided on a basis consistent with the Company's goal of maximizing the community's profitability. Repositioning an acquired independent-living facility as an assisted- living community generally requires approximately 12 to 24 months and may require obtaining new or additional licenses, instituting policies and procedures that implement the Company's assisted-living philosophy, offering additional services typically provided by assisted-living communities and improving the property to facilitate the provision of those services and addressing deferred maintenance issues. The changes typically involved in repositioning a facility are designed to increase the facility's overall occupancy rate and to gradually alter the resident mix so as to attract residents who can more readily use and afford the additional services offered by the Company. In certain circumstances the Company has acquired, and may continue to acquire, independent-living and skilled-nursing facilities that for various reasons it does not reposition as assisted-living communities. These acquisitions will, however, generally be incidental to the Company's overall focus on assisted-living communities, and the Company will typically seek over time to divest itself of the ownership or operation of properties that are inconsistent with its assisted-living focus. There can be no assurance however, that the Company will successfully operate such independent-living or skilled-nursing facilities in the interim, that it will be able to locate qualified purchasers or operators of such facilities or that the terms on which it transfers ownership or operation of such facilities will be advantageous to the Company. At December 31, 1997, the Company operated 15 properties or portions of properties, consisting of 1,300 units, as independent living communities. Also, at December 31, 1997, the Company owned one and leased three skilled-nursing communities, consisting of approximately 100 units, three which are operated by the Company and one which is operated by an independent third party. 4 DEVELOPMENT To further address the market need for assisted-living communities and to anticipate growing competition for attractively priced acquisition targets, the Company initiated a program of developing new assisted-living communities in 1994. In 1996 and 1997, the Company commenced operations on 11 and 20 newly developed communities, respectively. Of the 11 developed in 1996, three were acquired by the Company and developed by others. The Company currently owns, has a leasehold interest in, management interest in or has acquired an option to purchase the development sites for 26 of the Development Communities. The Company currently anticipates opening 10 to 15 Development Communities in 1998 and expects that its development program will enable it to open approximately 10 to 15 newly developed assisted-living communities in 1999. See "Factors Affecting Future Results and Regarding Forward-Looking Statements Ability to Develop Additional Assisted-living Communities" and "Need for Additional Capital" for a description of factors that could affect the Company's rate of development. The Company intends to develop assisted-living communities generally ranging in size from 50 to 150 units, consisting of an aggregate of approximately 30,000 to 80,000 square feet, which are located on sites typically ranging from three to five acres. Unit sizes range from 350 to 500 square feet. The Company estimates that the development cost of most of it assisted-living communities will generally be approximately $60,000 to $95,000 per unit, depending on local variations in land and construction cost. The Company intends to develop new assisted-living communities by using a combination of in-house development personnel and experienced third-party project managers and by acquiring newly constructed communities from developers under "turnkey" purchase and sale agreements. Where the Company hires an outside developer, it plans to retain the right to approve all aspects of the development, including, among other things, site selection, plans and specifications, the proposed construction budget and the general contractor. The Company generally requires outside general contractors to post a performance completion bond for each community under development. Typically, the general contractor will be responsible for cost overruns and will be required to build each residence to completion within a predetermined maximum construction period. The Company expects that the average construction time for a typical assisted-living community will be approximately 8 to 12 months, depending on the number of units. Once a site is developed, the Company estimates that it will take approximately 12 to 24 months for the assisted-living community to achieve a stabilized level of occupancy. To the extent the Company acquires newly developed communities from a developer on a "turnkey" basis, it intends to enter into a purchase and sale agreement whereby the Company, subject to construction of the facility to the Company's preapproved standards and satisfaction of typical purchase and sale contingencies for the Company's benefit, will commit to purchase the facility upon completion at a fixed price equal to the total development costs plus a development fee. In some instances, the Company may agree to allow a developer that has sufficient experience operating long-term-care facilities to open a newly developed community and operate the community until it achieves a certain occupancy level, at which time the Company would acquire the community at a price that reflects the reduced lease-up risk. MANAGEMENT AGREEMENTS From time to time, the Company has entered into agreements whereby it manages or provides administrative services for assisted-living communities and independent-living communities owned or leased by others. The agreements have terms ranging from two to four years, with options to renew, and provide for management fees ranging from 4% to 6% of gross operating revenues, payable monthly for management agreements and fixed fees of $4,000 payable monthly for administrative agreements. Acorn Service Corporation ("Acorn"), a subsidiary of the Company, currently manages four communities containing approximately 300 units and provides administrative services for one community containing approximately 100 units ("Managed Communities"). The Managed Communities are owned by Columbia House I, Limited Partnership ("Columbia House"), which is partially owned indirectly by the Company's Chairman and Chief Executive Officer. See "Strategic Relationships - Columbia House Relationship." The Company currently plans to have continuing involvement with Columbia House as well as management interests in communities with respect to the joint venture between the Company and Sanyo Electric Co., Ltd. ("Sanyo"), of Osaka, Japan and Aurora Bay Investments, L.L.C. ("Aurora Bay"), all of which will be managed by Acorn. See "Strategic Relationships -Sanyo Relationship and Aurora Bay Relationship. Management and administrative services agreements and the Managed Communities owned or leased by others are not currently material to the Company's overall business or revenue. 5 STRATEGIC RELATIONSHIPS HOLIDAY RELATIONSHIP Twenty-eight of the Company's Operating Communities and two of its Development Communities are located near existing or proposed independent-living facilities operated by Holiday. The Company believes that its focus on expanding in locations near Holiday facilities will often enable it to gauge the need for its services in a particular market by evaluating Holiday's operating performance, and that successful Holiday facilities will generally reflect the combination of criteria required for a successful assisted-living community. In addition, the Company believes that, as a result of Mr. Baty's close relationship with Holiday, opportunities may arise for (a) development of assisted-living communities on sites near existing or proposed Holiday independent-living facilities and (b) joint marketing programs for attracting residents to the Company's assisted-living communities and Holiday's independent-living facilities, depending on the level of services required. Generally, the Company and Holiday have no written agreement or formal understanding concerning their relationship, and there can be no assurance that opportunities for such development or joint marketing programs will arise and that the Company's and Holiday's interests will be compatible in the future. In February 1998, however, the Company and a Holiday affiliate entered into four management agreements whereby the Holiday affiliate will provide management services relating to four newly developed assisted-living communities located in Texas. The agreements consist of initial terms of two years six months and management fees based on 6% of gross revenues payable monthly. The Company will pay a bonus fee per community to the Holiday affiliate based on occupancy; one year after managing the communities, if occupancy is between 75% and 89%, the Holiday affiliate will receive a bonus fee of $25,000 and if occupancy is 90% or greater the bonus fee will be $50,000. Mr. Baty and Mr. Colson, a director of the Company are the principal shareholders, directors and senior executive officers of Holiday, and substantially all the independent-living facilities operated by Holiday are owned by partnerships controlled by Messrs. Baty and Colson and in which they have varying financial interests. PAINTED POST PARTNERS RELATIONSHIP During 1995, the Company's two most senior executive officers, CEO and President, formed a New York general partnership (the "Partnership") to facilitate the operation of assisted-living communities in the state of New York, which generally requires that natural persons be designated as the licensed operators of assisted-living communities. The Company and the Partnership have entered into Administrative Services Agreements that extend for the term of the underlying leases. The fees payable to the Company under the Administrative Services Agreements have been established at a level that would equal or exceed the profit of the community operated efficiently at full occupancy and, unless reset by agreement of the parties, will rise automatically on an annual basis in accordance with changes in the Consumer Price Index. In addition, the Company has agreed to indemnify the partners against losses and in exchange the partners have agreed to assign any profits to the Company. As a part of the general noncompetition agreements of the CEO and President, each has agreed that in the event he were to cease to be a senior executive of the Company, he would transfer his interest in the Partnership for a nominal charge to his successor at the Company or other person designated by the Company. ALERT RELATIONSHIP In November 1996, the Company agreed to purchase up to 6,888,466 shares of convertible preferred stock of Alert, an Ontario, Canada based owner and operator of assisted-living communities at prices ranging from $0.67 to $0.74 per share (Cdn). In addition, the Company acquired an option to purchase an additional 4,000,000 shares of convertible preferred stock at an exercise price of $1.00 per share (Cdn), as well as an option to purchase from Eclipse Capital Management ("Eclipse"), the majority shareholder of Alert, and certain other shareholders of Alert, 9,050,000 currently issued and outstanding shares of common stock of Alert and 950,000 currently issued and outstanding shares of Class A non-voting stock of Alert both at an exercise price of $3.25 per share (Cdn). Each Preferred Share is convertible into one common share or one Class A nonvoting share, at the holder's election; the Preferred Shares are immediately convertible into Class A nonvoting shares but are not immediately convertible into common shares and are so convertible only after the controlling persons of Alert have transferred to others (which could include the Company) not less than 10 million shares of common or Class A nonvoting shares (as of March 20, 1998 there are approximately 23.8 million such shares outstanding) and such controlling persons are relieved of certain guarantees of indebtedness. As of December 31, 1996, the Company had purchased and held 2,577,692 shares of preferred stock for a total investment of $1,800,000 (Cdn) or $1,331,000 (US). In 1997, the Company purchased an additional 5,010,774 shares of preferred stock increasing its ownership to 7,588,466 shares or $4,111,000 (US). As of December 31, 1997, the 6 Company's total investment in Alert represents on an as-converted basis approximately 24.2% of the outstanding common and Class A nonvoting shares taken together. This represents approximately 41.9% of the common shares (assuming no Class A nonvoting share are converted into common shares) and approximately 36.3% of the Class A nonvoting shares (assuming no common shares are converted into Class A nonvoting shares). In January 1998, the Company purchased an additional 850,000 shares of preferred stock resulting in an ownership interest of 8,438,466 shares or 26.2%. Alert has entered into an exclusive management agreement to manage the Company's future assisted-living communities in Ontario. Eclipse, through its wholly-owned subsidiary, Eclipse Construction Inc., develops and constructs retirement homes for Alert on a contract basis. Under the agreement, Eclipse has entered into an exclusive development agreement with the Company and Alert to develop their future construction projects in Ontario. No communities have been developed under these agreements as of March 20, 1998. COLUMBIA HOUSE RELATIONSHIP Columbia House I, Limited Partnership ("Columbia House"), a Washington limited partnership in which Mr. Baty, the Company's Chairman and Chief Executive Officer indirectly controls the general partner and holds an indirect 60% interest, develops, owns and leases low income senior housing projects. The Company has entered into five agreements with Columbia House to provide certain administrative support, due diligence and financial support services to Columbia House with respect to the acquisition, development and administration of Columbia House communities. The Company currently manages four communities containing approximately 300 units and provides administrative services for one community containing approximately 100 units. See "Growth Strategy - Management Agreements." The Company may in the future manage other communities owned or leased by Columbia House. SANYO RELATIONSHIP In February 1998, the Company entered into a joint venture with Sanyo to provide assisted living services in Japan. The joint venture, Sanyo Emeritus Corporation, has been formed to provide a residential based health care alternative for Japan's growing elderly population. The Company will be initially capitalized with Y50 million, with each company providing half the funds. The joint venture is expected to complete its first assisted living project in Japan by the year 2000. Similar to the United States, the elderly population in Japan is experiencing dramatic growth. The Japanese Government expects that by the year 2020, 27% of the Japanese population will be over 65 years of age. In 1999, the Japanese Government is changing the current reimbursement system and the Company expects that assisted-living services will be an integral part of this new system thereby offering Japan's elderly greater flexibility in making their health care choices. AURORA BAY RELATIONSHIP In January 1998, the Company entered into a $5.0 million credit agreement with Aurora Bay, a limited liability company that acquires, develops and operates Alzheimer's special care facilities to provide room, board, and personal care services primarily to elderly persons afflicted with Alzheimer's disease. Advances are evidenced by a convertible promissory note (the "Convertible Note"), which is due in January 2003 and accrues interest at 9.0% per annum. The Convertible Note is convertible, at the Company's option, into a 48% equity interest in Aurora Bay. The conversion rights will lapse if not exercised by the Company on or prior to the maturity date of the Convertible Note. The arrangement allows Aurora Bay to borrow up to $5.0 million to develop Alzheimer's facilities. In January 1998, the Company advanced $535,000 to Aurora Bay for the first Alzheimer development located in Lubbock, Texas. Under this agreement, the Company expects Aurora Bay to develop eight to ten buildings, averaging 30 units per building with the capacity of 56 residents per building over the next three years. Funding for these buildings is expected to occur over the next 18 to 24 months. This relationship will allow for Aurora Bay to acquire, develop and operate Alzheimer's communities and the Company to become a significant owner of multiple Alzheimer's communities, with the opportunity of obtaining financial and strategic growth in the Alzheimer's industry without taking resources away from the development and operations of assisted-living communities. NORTHSTAR RELATIONSHIP In October 1997, NorthStar Capital Partners LLC ("NorthStar"), a private investment group with financial backing from a Union Bank of Switzerland Securities affiliate and Quantum Realty Partners, a fund advised by Soros Fund Management LLC, invested $25.0 million in the Company through the purchase of 25,000 shares of Series A Convertible Exchangeable Redeemable Preferred Stock (the "Series A Preferred Stock"), representing approximately 10% ownership in the Company. Each share of Series A Preferred Stock is convertible into that number of shares of the Company's Common Stock equal to the liquidation value of a share of Series A Preferred Stock ($1,000) divided by the conversion price of $18.20 per share. Currently the Series A Preferred Stock is 7 convertible into an aggregate of 1,373,626 shares of Common Stock. The Series A Preferred Stock is also exchangeable into convertible debt at the option of the Company. The conversion price is subject to adjustment in the event of stock dividends, stock subdivisions and combinations, and extraordinary distributions. The Series A Preferred Stock has a mandatory redemption date of October 24, 2004. OPERATIONS The senior housing services industry encompasses a broad range of accommodations and healthcare services that are provided primarily to seniors. For seniors who require limited services, home-based care, either in their own or a family member's home, offers a viable option for assistance on an "as required" basis. For seniors who are interested in community housing, retirement centers and independent- living facilities offer support services that are often limited to meals, housekeeping and laundry. As a senior's need for assistance increases, care in an assisted-living community is often preferable and more cost-effective than care at home or in a facility that does not regularly provide the required services. Care in an assisted-living community also offers residents a comfortable residential environment, particularly when compared to the institutional setting often associated with a skilled-nursing facility. Residents typically enter an assisted- living community when other facilities are no longer able to provide the level of services required. Under the Company's operating approach, seniors reside in a single- or double-occupancy residential unit for a monthly fee that is based on each resident's overall service needs. The Company believes that its focus on residential assisted-living communities allows seniors to maintain a more independent lifestyle than is possible in the more medical and institutional environment of skilled- nursing facilities. The Company also believes that certain of its services, such as assisting residents with their activities of daily living (including bathing, dressing, personal hygiene, grooming, ambulating and eating) and providing health-related assistance (including supervising residents' medication and monitoring certain health conditions), are attractive to many seniors who are inadequately served by independent-living facilities. Generally, residents of assisted-living communities require higher levels of care than residents of independent-living facilities, but require lower levels of care than residents of skilled-nursing facilities. STRATEGY Using its management's expertise in operating long-term-care facilities, the Company seeks to provide high-quality services in its assisted-living communities while at the same time increasing operating margins primarily by (a) increasing occupancy levels through extensive marketing efforts to area hospitals, independent-living facilities and other referral sources, including joint marketing efforts with Holiday that are designed to attract residents to communities operated by the Company or Holiday, depending on the level of services required; (b) encouraging residents to remain longer at the Company's communities by offering them a range of service options that will keep pace with their needs as they age; (c) increasing revenues through modifications in rate structures, where appropriate; and (d) identifying opportunities to create operating efficiencies and reduce costs. MARKETING AND REFERRAL RELATIONSHIPS The Company's operating strategy is designed to integrate its assisted-living communities into the continuum of healthcare providers in the geographic markets in which it operates. One objective of this strategy is to enable residents who require additional healthcare services to benefit from the Company's relationships with local hospitals, home healthcare agencies and skilled-nursing facilities in order to obtain the most appropriate level of care. Thus, the Company seeks to establish relationships with local hospitals (including through joint marketing efforts, where appropriate) and home healthcare agencies, alliances with visiting nurses associations and, on a more limited basis, priority transfer agreements with local, high-quality skilled-nursing facilities. In addition to benefiting residents, the implementation of this operating strategy has strengthened and expanded the company's network of referral sources. Of the Company's 101 Operating Communities and 26 Development Communities, 30 are located in markets or proposed markets in which Holiday also operates its independent-living facilities. The Company believes that its assisted-living communities will offer an attractive alternative for Holiday residents as they age and require more extensive services. The Company and Holiday do not have any formal understanding or written agreement regarding joint marketing programs. As a result, there can be no assurance that joint marketing programs envisioned with Holiday will be effected. Furthermore, there can be no assurance that, if effected, such joint marketing programs will be successful in attracting additional residents to the Company's assisted-living communities or that the Company's and Holiday's interest will be compatible in the future. See "-Strategic Relationships" and "Certain Transactions". 8 RESIDENT-SERVICE PROGRAMS The Company's assisted-living communities offer residents a supportive, "home-like" setting and assistance with activities of daily living. Residents of the Company's communities are typically unable to live alone, but do not require the 24-hour care provided in skilled- nursing facilities. Services provided to the Company's residents are designed to respond to their individual needs and to improve their quality of life, are available 24 hours a day to meet both anticipated and unanticipated resident needs, and generally include three meals per day, housekeeping and grounds keeping and building maintenance services. Available support services include personal and routine nursing care, social and recreational services, transportation and special services. Personal services include bathing, dressing, personal hygiene, grooming, ambulating and eating assistance. Health-related services, which are made available and provided according to the resident's individual needs and state regulatory requirements, may include assistance with taking medication, skin care and injections, as well as healthcare monitoring. Organized activities are available for social interaction and entertainment. Special services include banking, shopping and pet care. The Company provides its residents service options through its FlexAssist living program, which employs a detailed individual assessment and service-planning process that responds to each resident's assistance needs. All residents are offered the same categories of care at four different levels. An individual resident's level of care is determined by the degree of assistance he/she requires in each of the categories. The more assistance required, the higher the level of care. The categories of care include orientation to person/place/time, behavior management, socialization, activities and transportation, medication, continence, bathing, dressing, grooming, ambulation, dining assistance, dietary assistance, housekeeping, laundry, medical management and miscellaneous (which consists of diabetic management, PRN medication, transfer, simple treatment, oxygen set up/maintenance and prosthesis). All residents pay the base rate plus the rate for one of the levels of care. The base rate includes apartment rent, three meals per day, weekly housekeeping, changing of bed and bath linens, utilities (excluding telephone), scheduled transportation, social and recreational activities and an emergency call system. The Company believes that its emphasis on quality and continuity of service will enable it to increase its communities' occupancy rates, thereby enhancing revenues. By creating a long-term-care environment that maximizes resident autonomy and provides individualized service programs, the Company seeks to attract seniors at an earlier state of their search for long-term-care, before they need the higher-level care provided in a skilled-nursing facility. By providing programs that are designed to offer residents a range of service options as their needs change, the Company seeks to achieve greater continuity of care, enabling seniors to "age in place" and thereby maintain their residency for a longer time period. The Company also believes that the physical configuration of its facilities, combined with its level of service, contributes to resident satisfaction and allows seniors residing at the Company's communities to maintain an appropriate level of autonomy. RATE STRUCTURE The Company believes that its residents' average monthly charges are approximately 55% to 65% of the average monthly charge for residents receiving nursing care in private rooms at unskilled-nursing facilities due in part to the less labor-intensive services required by seniors who comprise the Company's target market. The Company initially experimented with a menu-based system of charges for the services offered at its communities. However, it has shifted to its FlexAssist program, a tiered service structure based on the number and frequency of activities of daily living with which a resident needs assistance. SERVICE REVENUE SOURCES The Company currently and for the foreseeable future expects to rely primarily on its residents' ability to pay the Company's charges from their own or familial resources. Although care in an assisted- living community is typically less expensive than in a skilled-nursing facility, the Company believes generally only seniors with income or assets meeting or exceeding the regional median can afford to reside in the Company's communities. Inflation or other circumstances that adversely affect seniors' ability to pay for services such as those provided by the Company could have an adverse effect on the Company's business or operations. For example, if the Company were unable to attract residents able to pay for its services, it would have to modify its business strategy of relying primarily on the private-pay market and be forced to rely more on the limited number of governmental reimbursement programs. Furthermore, the federal government does not currently provide any reimbursement for the type of assisted-living services provided by the Company. Although some states have reimbursement programs in place, in many cases the level of reimbursement is insufficient to cover the total costs of delivering the level of care that the Company currently provides. 9 The Company currently serves a limited number of residents who are eligible for subsidies in the form of additional Supplemental Security Insurance ("SSI") payments and were residing at a facility when it was acquired by the Company. SSI, a federal recipient assistance program that is administered primarily at the state level, provides financial assistance to indigent persons requiring placement in a residential-care facility. Qualifications are generally similar to those of Medicaid, and the Company is subject to various regulatory and governmental reimbursement policies. Net revenues from state reimbursement programs for the years 1996 and 1997 accounted for less than 10% of the Company's operating revenues for such years. Payments to the Company under state reimbursement programs in which the Company participates are currently sufficient to cover virtually all the operating (but not financing) costs allocable to the Company's participating residents. As third party reimbursement programs continue to grow in certain states (Washington, Texas, Massachusetts), the Company will pursue reimbursement from the third party, if appropriate, given the level of care provided to its residents. However, there can be no assurance that the Company will continue to improve its private-pay mix or that it will not in the future become more dependent on governmental reimbursement programs. ADMINISTRATION AND COST CONTAINMENT The Company has recruited experienced key employees from several established operators in the long-term-care services field and believes that it has assembled the administrative, development and financial personnel that will enable it to manage its growth and operating strategies effectively. In 1996, the Company restructured its operations department through the recruiting of individuals with strong backgrounds in the senior housing industry. In November 1996, the Company hired Gary D. Witte as its Vice President, Operations whose background consists of over 20 years experience in the industry and in March 1997, the Company hired a Sarah Curtis as its Vice President, Sales and Marketing with over 15 years experience in the industry. The Company also recruited individuals with a strong background in senior housing for its regional director positions. In addition the Company has developed the internal procedures, policies and standards it believes are necessary for effective operation and management of its residential communities. The Company provides management support services to each of its residential communities, including establishment of operating standards, recruiting, training, and financial and accounting services. The Company has established Central, Eastern and Western Operational Divisions. Each division is headed by a director who reports to the Company's Chief Operating Officer and its Vice President, Operations. The divisions contain two to eight operational regions for the Mid Atlantic states, Arizona, California, Florida, New York and Texas. Each operational region is headed by a regional director who provides supervisory oversight for each of the communities in their respective regions. Day to day community operations are supervised by an on-site administrator who, in certain jurisdictions, must satisfy certain licensing requirements. To contain costs and maximize operating efficiency, the Company employs an integrated structure of management and financial systems and controls. The Company utilizes centralized accounting systems and computer systems that link each community with the Company's executive offices to provide management with on-line revenue and expense information regarding its residential communities. The Company's systems provide an on-line analysis capability for resident billing, occupancy, marketing and statistical information. COMMUNITY DISPOSITIONS As of December 31, 1997, the Company is exploring strategic alternatives regarding the disposition of five to ten of the Company's assisted-living communities. Strategic alternatives involve possible sublease, sale or partnership with respect to certain communities and may depend on the geographical regions. COMPETITION The number of assisted-living communities in the United States, the ownership of which is fragmented, is increasing rapidly. The Company is experiencing an increase in competition through the development of assisted-living communities. As the assisted-living industry continues to grow, fewer attractive development sights are made available. This market saturation could have an adverse effect on the Company's newly developed communities and their availability to fill-up and achieve a stabilized occupancy . Moreover, the senior housing services industry has been subject to pressures that have resulted in the consolidation of many small local operations into larger regional and national multifacility operations. While there are several national and regional companies that provide senior living alternatives, the Company anticipates that its primary source of competition will come from local and regional assisted-living companies that operate, manage and develop residences within the same geographic area as the Company, as well as retirement facilities and communities, home healthcare agencies, not-for- profit or charitable operators and, to a lesser extent, skilled-nursing facilities and convalescent centers. The Company believes that quality of service, reputation, a facility's location and physical appearance, and price will be significant competitive factors. Some of 10 the Company's competitors have significantly greater resources, experience and recognition within the healthcare community than does the Company. EMPLOYEES As of December 31, 1997, the Company had 4,106 employees, including 708 full time employees, of which 90 were employed at the Company's headquarters. None of the Company's employees are currently represented by a labor union, and the Company is not aware of any union-organizing activity among its employees. The Company believes that its relationship with its employees is good. Although the Company believes it is able to employ sufficient skilled personnel to staff the communities it operates or manages, a shortage of skilled personnel in any of the geographic areas in which it operates could adversely affect the Company's ability to recruit and retain qualified employees and control its operating expenses. TRADEMARKS The Registration of the Company's FlexAssist service mark was granted in February 1997. FACTORS AFFECTING FUTURE RESULTS AND REGARDING FORWARD-LOOKING STATEMENTS The Company's business, results of operations and financial condition are subject to many risks, including those set forth below. In addition, the following important factors, among others, could cause the Company's actual results to differ materially from those expressed in the Company's forward-looking statements in this report and presented elsewhere by management from time to time. When used in this report, the words "believes", "anticipates" and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. RECENT ORGANIZATION; HISTORY OF LOSSES. The Company was organized and began operations in July 1993 and has operated at a loss since its inception. For 1996 and 1997, the Company recorded a net loss of $8.2 million and $28.2 million, respectively. The majority of the Operating Communities that have been acquired operated at a loss following acquisition. The Company, if provided with attractive opportunities, intends to continue to acquire long-term-care facilities that are likely to operate at a loss for at least 12 months to 18 months after the Company acquires its interest in each facility. In addition, the Company is developing new assisted-living communities, all of which are expected to incur start-up losses for at least twelve months after commencing operations. As a result, the Company expects to continue to incur losses at least through the end of 1999. There can be no assurance, however, that the Company's operations will become profitable at the rate currently expected by the Company, if at all. The Company's inability to achieve profitability on a timely basis could have an adverse effect on the Company's business, operating results and financial condition and the market price of its Common Stock. EMPHASIS ON ACQUISITIONS; DIFFICULTIES OF INTEGRATING ACQUISITIONS. The Company's growth strategy has emphasized a program of acquiring existing assisted-living communities and properties that it believes it can efficiently reposition as assisted-living communities. During the first half of 1997, the Company acquired ownership of or leasehold interests in seven long-term-care facilities. No further acquisitions occurred during the year due to the unavailability of attractive facilities and no acquisitions are currently in process. However, if attractive opportunities are made available, the Company will continue to acquire ownership or leasehold interest in existing long-term-care facilities. Acquisitions of long-term-care facilities are typically subject to a number of closing conditions, including those regarding the status of title to real property included in the acquisition, the results of environmental investigations performed on the Company's behalf, the transfer of applicable licenses or permits and the availability of appropriate financing. There can be no assurance that the Company's acquisition of long-term-care facilities will occur at the rate currently expected by the Company or that future acquisitions will be completed in a timely manner, if at all. Due in part to management's industry experience and contacts, the Company may be presented with more attractive acquisition proposals than currently is expected and, as a result, may attempt to purchase long-term-care facilities at a substantially higher rate than currently expected, which could cause the Company to overextend its management and financial resources. To the extent that acquisitions are consummated, there can be no assurance that the Company will, where appropriate, successfully reposition an acquired facility or integrate a newly acquired or repositioned community with its other operations. In addition, the Company has from time to time acquired, and may under certain circumstances continue to acquire, independent-living or skilled-nursing facilities that for various reasons it does not reposition as assisted-living communities. There 11 can be no assurance that the Company will successfully operate such independent-living or skilled-nursing facilities. Even if the Company should determine to transfer ownership or operation of such independent- living or skilled-nursing facilities, there can be no assurance that it will be able to locate qualified purchasers or operators of such facilities or that the terms on which it transfers ownership or operation of such facilities will be advantageous to the Company, either of which could adversely affect the market price of the shares of Common Stock as well as the Company's results of operations and financial position. Furthermore, the acquisition of independent-living facilities and the development of assisted-living communities by the Company may exacerbate potential conflicts of interest between the Company and Holiday and could expose management of the Company to claims that duties to one or both companies have not been met. See "Conflicts of Interest with Holiday". Finally, any failure by the Company with respect to the repositioning, integration or operation of any acquired facilities may have a material adverse effect on the Company's business, operating results and financial condition. DIFFICULTIES IN DEVELOPING ADDITIONAL ASSISTED-LIVING COMMUNITIES. The Company's prospects for growth are directly affected by its ability to develop additional assisted-living communities. The Company expects to open approximately 10 to 15 newly developed assisted-living communities in 1999. Currently, the Company has 26 assisted-living communities in various stages of development and it anticipates opening 10 to 15 assisted-living communities in 1998. In connection with the development communities, the Company has construction commitments of $34.8 million and $30.7 million on owned and leased developments, respectively, for which the Company has financing in place at December 31, 1997. See "Management Discussion and Analysis". To date, the Company has opened 31 newly developed communities, 28 developed by the Company and three developed by others and acquired by the Company. There can be no assurance that the Company will not suffer delays in its development program, which could slow the Company's growth. Development of assisted-living communities can be delayed or precluded by various zoning, healthcare licensing and other applicable governmental regulations and restrictions. The nature of such licenses and approvals and the timing and likelihood of obtaining them vary widely from state to state, depending on the community, or its operation, and the type of services to be provided. If the Company's development schedule is delayed, the Company's business, operating results and financial condition could be adversely affected. SUBSTANTIAL DEBT AND LEASE OBLIGATIONS OF THE COMPANY. At December 31, 1997, the Company had mortgage indebtedness in an aggregate amount of $120.9 million, with minimum principal payments estimated to be approximately $12.8 million in 1998. Of the $120.9 million, approximately $45.3 million represents borrowings under construction loans totaling $51.0 million in connection with the Development Communities. As of December 31, 1997, approximately $66.6 million principal amount of the Company's indebtedness bore interest at fluctuating rates (including $21.6 million of construction loans); therefore, increases in prevailing interest rates would increase the Company's interest payment obligations and could have an adverse effect on the Company's operating results and financial condition. At December 31, 1997, the Company was also a party to long-term operating leases for 76 of its residential communities, which leases require minimum annual lease payments aggregating $41.7 million, and generally provide for annual rent increases. In addition, the Company will have approximately $12.8 and $33.3 million in principal amount of debt repayment obligations that become due in 1998 and 1999, respectively. The Company intends to continue to finance its properties through a combination of mortgage financing and operating leases, including leases arising through sale/leaseback transactions, and, accordingly, the amount of mortgage indebtedness and annual lease payments is expected to increase as the Company pursues its growth strategy. As a result of such mortgages and leases, a substantial portion of the Company's cash flow will be devoted to debt service and lease payments. There can be no assurance that the Company will generate sufficient cash flow from operations to cover required interest, principal and lease payments. Furthermore, from time to time the Company has not been in compliance with certain covenants in its financing agreements. While to date the Company has been able to obtain waivers for such noncompliance, there can be no assurance that in the future it will be able to comply with such covenants, which generally relate to matters such as cash flow and debt coverage ratios. If the Company were unable to meet interest, principal or lease payments, it could be required to seek renegotiation of such payments or obtain additional equity or debt financing. There can be no assurance, however, that such efforts would be successful or timely or that the terms of any such financing or refinancing would be acceptable to the Company. Furthermore, because of cross-default and cross-collateralization provisions in certain of the Company's mortgage and sale/leaseback agreements, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's properties. The Company's leverage may also adversely affect the Company's ability to respond to changing business and economic conditions or continue its development and acquisition program. NEED FOR ADDITIONAL CAPITAL; NEGATIVE CASH FLOW AND FINANCING REQUIREMENTS. The Company expects negative operating cash flow to continue through at least 1998 as it continues to develop and acquire assisted-living communities. The Company does not expect any of its newly developed assisted-living communities to generate positive cash flow for at least nine months after commencing operations. In addition, the Company expects that the properties it acquires for repositioning as assisted-living communities will typically require at least 12 months to 18 months after acquisition to begin to generate positive cash flows. There can be no assurance that any newly developed or repositioned community will achieve a stabilized occupancy rate and resident mix that meets the Company's expectations, generate positive cash flow or operating results sufficient to allow the Company to refinance 12 outstanding indebtedness secured by the community through sale/leaseback transactions. To successfully continue its aggressive growth, the Company must have sufficient financial resources to fund its development and acquisition activities and anticipated operating losses. Furthermore, the Company's future success depends in part on arranging sale/leaseback financing or mortgage refinancing for assisted-living communities that have achieved stabilized occupancy rates, resident mix and operating margins after initial development or repositioning. The Company will from time to time seek additional funding through public or private financing, including equity financing. If additional funds are raised by issuing equity securities, the Company's shareholders may experience dilution. There can be no assurance, however, that adequate equity, debt or sale/leaseback financing will be available as needed or on terms acceptable to the Company. A lack of available funds may require the Company to delay, scale back or eliminate all or some of its development and acquisition projects. CONFLICTS OF INTEREST WITH HOLIDAY. Mr. Baty, the Company's Chief Executive Officer, and Mr. Colson, a director of the Company, are the principal shareholders, directors and senior executive officers of Holiday, and substantially all the independent-living facilities operated by Holiday are owned by partnerships controlled by Messrs. Baty and Colson and in which they have varying financial interests. Messrs. Baty's and Colson's responsibilities to Holiday and its affiliates include overseeing the management of independent-living facilities, the acquisition, financing and refinancing of existing facilities and the development and construction of, and capital-raising activities to finance, new facilities. Although the Company believes that its relationship with Holiday is beneficial, the financial interests and management and financing responsibilities of Messrs. Baty, Colson, Brandstrom and Ruffo with respect to Holiday and its affiliated partnerships could present conflicts of interest, including conflicts relating to the selection of future development or acquisition sites, competition for potential residents in markets where both companies operate and the allocation of time and efforts of Mr. Baty. Because Mr. Baty is the Chief Executive Officer of the Company and a principal executive officer of Holiday circumstances could arise that would distract them from the Company's operations, which distractions could have an adverse effect on the Company's business, operating results and financial condition. Moreover, there can be no assurance that the Company's and Holiday's interests will remain compatible. DIFFICULTIES OF MANAGING RAPID EXPANSION. Since its inception, the Company has pursued an aggressive expansion program, and it expects that its growth will continue as it implements its development program for new assisted-living communities. The Company's success will depend in large part on identifying suitable development and acquisition opportunities, and its ability to pursue such opportunities, complete developments, consummate acquisitions and effectively operate its assisted-living communities. The Company's growth has placed a significant burden on the Company's management and operating personnel. In late 1996 and early 1997, the Company reorganized its operating and marketing staffs with individuals having a strong background in the senior housing industry. The Company's ability to manage its growth effectively will require it to continue to improve its operational, financial and management information systems and to continue to attract, train, motivate, manage and retain key employees. If the Company is unable to manage its growth effectively, its business, operating results and financial condition could be adversely affected. DEPENDENCE ON SENIOR MANAGEMENT AND SKILLED PERSONNEL. The Company depends, and will continue to depend, on the services of Daniel R. Baty, its Chairman of the Board and Chief Executive Officer, Raymond R. Brandstrom, its President and Chief Operating Officer, and Frank A. Ruffo, Jr., its Vice President. The loss of the services of Mr. Baty or either of Messrs. Brandstrom or Ruffo would have a material adverse effect on the Company's operating results and financial condition. In addition, Mr. Baty has financial interests in and management responsibilities with respect to Holiday and its related partnerships. And, as a result, he will not be devoting his full time and efforts to the Company. Under certain circumstances, Mr. Baty also could have conflicts of interest in allocating his time and efforts between the Company and Holiday. The Company has entered into a noncompetition agreement with Mr. Baty but this noncompetition agreement does not limit Mr. Baty's current role with Holiday, or the related partnerships which own or lease properties currently operated by Holiday, so long as assisted-living is an incidental component to Holiday's operation or management of independent-living facilities. The Company has obtained a key employee insurance policy covering the lives of each of Messrs. Baty and Brandstrom in the amounts of $5.0 million and $1.0 million, respectively. The Company also depends on its ability to attract and retain management personnel who will be responsible for the day-to-day operations of each of its residential communities. If the Company is unable to hire qualified management to operate its assisted-living communities, the Company's business, operating results and financial condition could be adversely affected. POSSIBLE ENVIRONMENTAL LIABILITIES. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances, including, without limitation, asbestos-containing materials, that could be located on, in or under such property. Such laws and regulations often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of these substances could be substantial and the liability of an owner or operator as to any property is generally not limited under such laws and regulations, and could exceed the property's value and the aggregate assets of the owner or operator. The presence of these substances or 13 failure to remediate such substances properly may also adversely affect the owner's ability to sell or rent the property, or to borrow using the property as collateral. Under these laws and regulations, an owner, operator or any entity who arranges for the disposal of hazardous or toxic substances such as asbestos-containing materials, at a disposal site may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the disposal site. In connection with the ownership or operation of its properties, the Company could be liable for these costs, as well as certain other costs, including governmental fines and injuries to persons or properties. As a result, the presence, with or without the Company's knowledge, of hazardous or toxic substances at any property held or operated by the Company could have an adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON ATTRACTING SENIORS WITH SUFFICIENT RESOURCES TO PAY. The Company currently, and for the foreseeable future, expects to rely primarily on its residents' ability to pay the Company's fees from their own or familial financial resources. Generally only seniors with income or assets meeting or exceeding the comparable median in the region where the Company's assisted-living communities are located can afford the Company's fees. Inflation or other circumstances that adversely affect the ability of seniors to pay for the Company's services could have an adverse effect on the Company. If the Company encounters difficulty in attracting seniors with adequate resources to pay for its services, its business, operating results and financial condition could be adversely affected. STAFFING AND LABOR COSTS. The Company competes with other long- term-care providers with respect to attracting with retaining qualified or skilled personnel. The Company also depends on the available labor pool of low-wage employees. A shortage of nurses or other trained personnel or general inflationary pressures may require the Company to enhance its wage and benefits package in order to compete. There can be no assurance that the Company's labor costs will not increase or, if they do, that they can be matched by corresponding increases in private- payor revenues or governmental reimbursement. Any significant failure by the Company to attract and retain qualified employees, to control its labor costs or to match increases in its labor expenses with corresponding increases in revenues could have a material adverse effect on the Company's business, operating results and financial condition. GOVERNMENTAL REGULATION. Healthcare is heavily regulated at the federal, state and local levels and represents an area of expensive and frequent regulatory change. A number of legislative and regulatory initiatives relating to long-term care are proposed or under study at both the federal and state levels that, if enacted or adopted, could have an adverse effect on the Company's business and operating results. The Company cannot predict whether and to what extent any such legislative or regulatory initiatives will be enacted or adopted, and therefore cannot assess what effect any current or future initiative would have on the Company's business and operating results. Changes in applicable laws and new interpretations of existing laws can significantly affect the Company's operations, as well as its revenues (particularly those from governmental sources) and expenses. The Company's residential communities are subject to varying degrees of regulation and licensing by local and state health and social service agencies and other regulatory authorities specific to their location. While regulations and licensing requirements often vary significantly from state to state, they typically relate to fire safety, sanitation, staff training, staffing levels and living accommodations such as room size, number of bathrooms and ventilation, as well as regulatory requirements relating specifically to certain of the Company's health- related services. The Company's success will depend in part of its ability to satisfy such regulations and requirements and to acquire and maintain any required licenses. In addition, with respect to its residents who receive financial assistance from governmental sources for their assisted-living services, the Company is subject to certain federal and state regulations that prohibit certain business practices and relationships that might affect healthcare services reimbursable under Medicaid or similar state reimbursements programs. The Company's failure to comply with such regulations could jeopardize its reimbursement payments for any affected residents and, if egregious, could result in fines and the suspension or failure to renew the Company's operating licenses. Federal, state and local governments occasionally conduct unannounced investigations, audits and reviews to determine whether violations of applicable rules and regulations exist. Devoting management and staff time and legal resources to such investigations, as well as any material violation by the Company that is discovered in any such investigation, audit or review, could have a material adverse effect on the Company's business and operating results. There can be no assurance that regulatory oversight of construction efforts associated with repositionings will not result in loss of residents and disruption of community operations. COMPETITION. The long-term-care industry is highly competitive, and the Company believes that the assisting-living segment, in particular, will become even more competitive in the future. The Company will be competing with numerous other companies providing similar long-term-care alternatives such as home healthcare agencies, community-based service programs, retirement communities and convalescent centers. The Company expects that, as the provision of assisted-living services receives increased attention and the number of states providing reimbursement for assisted-living rises, competition will intensify as a result of new market entrants. The Company also faces potential competition from skilled-nursing facilities that provide long-term-care services. Moreover, in implementing its growth strategy, the Company expects to face competition in its efforts to develop and acquire assisted-living communities. Some of the Company's present and 14 potential competitors are significantly larger and have, or may obtain, greater financial resources than those of the Company. Consequently, there can be no assurance that the Company will not encounter increased competition in the future that could limit its ability to attract residents or expand its business and therefore have a material adverse effect on its business, operating results and financial condition. POTENTIAL ADVERSE IMPACT OF GOVERNMENTAL REIMBURSEMENT PROGRAMS. Currently, the federal government does not provide any reimbursement for the type of assisted-living services offered by the Company. Although some states have reimbursement programs in place, the level of reimbursement is generally insufficient to cover the costs of the Company's assisted-living services. Depending in part on the results of the Company's acquisition program, net revenues from governmental reimbursement programs could increase from time to time. In 1996 and 1997, less than 10% of the Company's revenues were from residents who receive governmental assistance from a state medicaid program. There can be no assurance that the Company will continue to meet the requirements for participating in governmental reimbursement programs. Furthermore, governmental reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and governmental funding restrictions, some of which could have a material adverse effect on the future rate of payment to communities operated by the Company. A substantial dependence on governmental reimbursement programs, changes in the funding levels of such programs or the failure of the Company's operations to qualify for governmental reimbursement could have an adverse effect on the Company's business, operating results and financial condition. LIABILITY AND INSURANCE. The Company's business entails an inherent risk of liability. In recent years, participants in the long- term-care industry have become subject to an increasing number of lawsuits alleging malpractice or related legal theories, many of which involve large claims and significant legal costs. The Company expects that from time to time it will be subject to such suits as a result of the nature of its business. The Company currently maintains insurance policies in amounts and with such coverage and deductibles as it deems appropriate, based on the nature and risks of its business, historical experience and industry standards. There can be no assurance, however, that claims in excess of the Company's insurance coverage or claims not covered by the Company's insurance coverage will not arise. A successful claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect on the Company's operating results and financial condition. Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect on the Company's ability to attract residents or expand its business and would require management to devote time to matters unrelated to the operation of the Company's business. In addition, the Company's insurance policies must be renewed annually, and there can be no assurance that the Company will be able to obtain liability insurance coverage in the future or, if available, that such coverage will be on acceptable terms. POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock could be subject to significant fluctuations in response to various factors and events, including the liquidity of the market for the Common Stock, variations in the Company's operating results, variations from analysts expectations, new statutes or regulations or changes in the interpretation of existing statutes or regulations affecting the healthcare industry generally or the assisted- living residence business in particular. In addition, the stock market in recent years has experienced broad price and volume fluctuations that often have been unrelated to the operating performance of particular companies. These market fluctuations also may adversely affect the market price of the Common Stock. 15 ITEM 2. DESCRIPTION OF PROPERTY PROPERTIES The Company's assisted-living communities generally consist of one- to three-story buildings and include common dining and social areas. Twelve of the Company's Operating Communities, containing approximately 1,000 units, were previously or are currently operated as independent- living facilities. Of these facilities, five have been or are in the process of being, repositioned to assisted-living communities, which process typically involves changing their operating licenses, policies and standards, offering additional services required by assisted-living residents and making physical improvement to the property. Four of the Company's Operating Communities, containing approximately 100 units, are currently operated as skilled-nursing facilities. Of these facilities, one is managed by an independent third party. The table below summarizes certain information regarding the Operating Communities.
Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - --------------------------------------------- ----------------- ---------- --------- -------- -------------- Arizona Olive Grove (d) Phoenix Jun. 1994 98 111 Lease La Villita (d) Phoenix Jun. 1994 92 92 Own Scottsdale Royale (1) Scottsdale Aug. 1994 63 63 Own Villa Ocotillo Scottsdale Sep. 1994 102 106 Own California Fulton Villa (c) Stockton Apr. 1995 80 80 Own Laurel Place (c) (d) San Bernadino Apr. 1996 71 72 Lease Rosewood Court Fullerton Mar. 1996 71 78 Lease The Terrace (c) Grand Terrace Jan. 1996 87 87 Lease Villa Del Rey (c) (d) Escondido Mar. 1997 84 84 Own Connecticut Cold Spring Commons (d) Rocky Hill May 1997 80 88 Lease Delaware Green Meadows at Dover Dover Oct. 1995 52 63 Lease Florida Barrington Place LeCanto May 1996 79 120 Lease Beneva Park Club Sarasota Jul. 1995 96 102 Lease Central Park Village (d) (5) Orlando Jul. 1995 174 190 Lease College Park Club (d) Brandenton Jul. 1995 85 93 Lease Colonial Park Club Sarasota Aug. 1996 88 90 Lease La Casa Grande New Port Richey May 1997 200 235 Own Park Club of Brandon Brandon Jul. 1995 88 88 Lease Park Club of Fort Myers Fort Myers Jul. 1995 77 82 Lease Park Club of Oakbridge Lakeland Jul. 1995 88 88 Lease Madison Glen Clearwater May 1996 135 154 Own River Oaks Englewood May 1997 155 200 Own Springtree Sunrise May 1996 179 246 Lease Stanford Centre Altamonte Springs May 1997 118 180 Own The Lodge at Mainlands Pinellas Park Aug. 1996 154 162 Lease Idaho Camlu Retirement (1) Coeur d'Alene Nov. 1996 83 86 Management Highland Hills Pocatelo Oct. 1996 49 55 Lease Juniper Meadows Lewiston Dec. 1997 82 90 Own Ridge Wind Chubbock Aug. 1996 80 106 Lease Summer Wind Boise Sep. 1995 49 53 Lease The Lakewood Inn (6) Coeur d'Alene Mar. 1996 108 114 Lease Iowa Silver Pines Cedar Rapids Jan. 1995 80 80 Own Kansas Elm Grove Estates Hutchinson Jun. 1997 121 133 Lease 16 Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - --------------------------------------------- ----------------- ---------- --------- -------- -------------- Kentucky Stonecreek Lodge (d) Louisville May 1997 80 88 Lease Massachusetts Meadow Lodge at Drum Hill (d) Chelmsford Oct. 1997 80 88 Lease The Pines at Tewksbury (d) Tewksbury Jan. 1996 49 65 Lease Woods at Eddy Pond (d) Auburn Jun. 1997 80 88 Lease Mississippi Ridgeland Court (d) Ridgeland Aug. 1997 79 87 Lease Missouri Autumn Ridge (5) Herculaneum Jun. 1997 94 94 Management Montana Springmeadows Residence Bozeman May 1997 74 81 Own Nevada Concorde (d) Las Vegas Nov. 1996 116 128 Own New Jersey Laurel Lake Estates Voorhees Jul. 1995 117 119 Lease New York Bassett Manor Williamsville Nov. 1996 103 105 Lease(2) Bassett Park Manor Williamsville Nov. 1996 78 80 Lease(2) Bellevue Manor Syracuse Nov. 1996 90 90 Lease(2) Colonie Manor Latham Nov. 1996 94 94 Lease(2) East Side Manor Fayettville Nov. 1996 80 88 Lease(2) Green Meadows at Painted Post Painted Post Oct. 1995 73 96 Lease(2) Perinton Park Manor Fairport Nov. 1996 78 86 Lease(2) West Side Manor - Rochester Rochester Nov. 1996 72 72 Lease(2) West Side Manor - Syracuse Syracuse Nov. 1996 78 80 Lease(2) Woodland Manor Vestal Nov. 1996 60 116 Lease(2) North Carolina Heritage Health Center (3) Hendersonville Feb. 1996 66 134 Lease Heritage Hills Retirement Community (1) Hendersonville Feb. 1996 99 99 Own Heritage Lodge Assisted-Living Hendersonville Feb. 1996 20 24 Lease Pine Park Retirement Community (1) Hendersonville Feb. 1996 110 110 Lease Ohio Park Lane (5) Toledo Jan. 1998 92 101 Management Oregon Meadowbrook Retirement (c) Ontario Jun. 1995 53 55 Lease Pennsylvania Green Meadows at Allentown Allentown Oct. 1995 76 97 Lease Green Meadows at Latrobe Latrobe Oct. 1995 84 125 Lease South Carolina Anderson Place - The Summer House Anderson Oct. 1996 30 40 Lease Anderson Place - The Village (1) Anderson Oct. 1996 75 75 Lease Anderson Place - The Health Center (4) Anderson Oct. 1996 22 44 Lease Bellaire Place (d) Greenville Jul. 1997 81 89 Lease Countryside Village Health Care Center (4) Easley Feb. 1996 24 44 Lease Countryside Village Assisted-Living Easley Feb. 1996 48 78 Lease Countryside Village Retirement Center (1) Easley Feb. 1996 72 75 Lease Countryside Park Easley Feb. 1996 48 66 Lease Skylyn Health Center (4) Spartanburg Feb. 1996 26 48 Lease Skylyn Personal Care Center Spartanburg Feb. 1996 80 119 Lease Skylyn Retirement Community (1) Spartanburg Feb. 1996 155 155 Lease York Care York Apr. 1997 50 100 Management Tennessee Walking Horse Meadows (d) Clarksville Jun. 1997 50 55 Lease 17 Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - --------------------------------------------- ----------------- ---------- --------- -------- -------------- Texas Amber Oaks (d) (5) San Antonio Apr. 1997 163 275 Lease Cambria (d) El Paso Oct. 1996 79 87 Lease Dowlen Oaks Beaumont Mar. 1997 79 87 Lease Eastman Estates Longview Jul. 1997 70 77 Lease Elmbrook Estates Lubbock Feb. 1997 79 87 Lease Lakeridge Place (7) Wichita Falls Jul. 1997 79 87 Lease Meadowlands Terrace (d) (7) Waco Jul. 1997 71 78 Own Myrtlewood Estates San Angelo Aug. 1997 79 87 Lease Redwood Springs San Marcos Apr. 1997 90 90 Lease Saddleridge Lodge (7) Midland Mar. 1997 79 87 Lease Seville Estates (d) Amarillo Mar. 1997 50 55 Lease Sherwood Place (d) (7) Odessa Oct. 1996 79 87 Lease The Palisades (d) (5) El Paso Apr. 1997 158 215 Lease Vickery Towers at Belmont (5) Dallas Apr. 1995 301 331 Own Virginia Carriage Hill Retirement Bedford Sep. 1994 91 137 Lease Cobblestones at Fairmont (d) Manassas Sep. 1996 75 82 Own Washington Cooper George (d) (5) Spokane Jun. 1996 140 158 Partnership Evergreen Lodge Federal Way Apr. 1996 98 124 Lease Fairhaven Estates (d) Bellingham Oct. 1996 50 55 Lease Garrison Creek Lodge (d) Walla Walla Jun. 1996 80 88 Lease Harbour Pointe Shores Ocean Shores Mar. 1997 50 55 Lease Kirkland Lodge at Lakeside Kirkland Feb. 1996 74 84 Lease Renton Villa (d) Renton Sep. 1993 79 97 Lease Seabrook (d) Everett Jun. 1994 60 62 Lease The Court Yard at the Willows (d) Puyallup Oct. 1997 101 111 Own The Hearthstone Moses Lake Nov. 1996 84 92 Lease Van Vista Vancouver Oct. 1997 100 100 Admin Services Wyoming Park Place (c) Casper Feb. 1996 60 60 Lease --------- -------- Total 8,782 10,184 ========= ========
(a) A unit is a single- or double-occupancy residential living space, typically an apartment or studio. (b) "Beds" reflects the actual number of beds, which in no event is greater than the maximum number of licensed beds allowed under the community's license. (c) Previously operated as an independent-living facility, currently repositioned as an assisted-living community. (d) Near an existing or proposed Holiday facility. (1) Operated as an independent-living facility; the Company does not currently plan to reposition this facility as an assisted- living community. (2) The Company provides administrative services to the community which is operated by Painted Post Partnership through a lease agreement with an independent third party. See "Strategic Relationships - Painted Post Partners Relationship". (3) Operated as a skilled-nursing facility and managed by an independent third party; the Company does not currently plan to reposition this facility as an assisted-living community. (4) Operated as a skilled-nursing facility; the Company does not currently plan to reposition this facility as an assisted- living community. (5) Operated as both an independent-living facility and assisted- living facility; the Company does not currently plan to reposition the portion of the independent-living facility as an assisted-living community. (6) Operated as an independent-living facility; an assisted-living addition opened during 1997. (7) Managed by Holiday. 18 DEVELOPMENTS The following table summarizes certain information regarding the Development Communities under construction, which are communities where construction activities, such as ground-breaking activities, exterior construction or interior build-out have commenced.
Site Scheduled Ownership Community Location Opening Units (a) Beds (b) Interest - -------------------------- ------------------- ------------- --------- -------- ---------------- Anticipated 1998 Openings: Arizona North Phoenix (c) Phoenix 4th Quarter 101 111 Lease California Auburn Oaks (c) Auburn 2nd Quarter 89 98 Manage/Lease (3) Northbay Retirement (1) Fairfield 2nd Quarter 172 189 Joint Venture Creston Village (2) Paso Robles 2nd Quarter 100 110 Joint Venture Delaware White Chapel Village Newark 3rd Quarter 100 110 Lease Illinois Urbana Urbana 3rd Quarter 101 111 Manage/Lease (3) Mississippi Biloxi Biloxi 4th Quarter 83 91 Manage/Lease (3) North Hill Estates Meridian 3rd Quarter 101 111 Manage North Carolina The Pines of Goldsboro Goldsboro 3rd Quarter 101 111 Manage Ohio Middleburg Heights Middleburg Heights 3rd Quarter 99 101 Lease Utah Emeritus Estates Ogden 1st Quarter 83 91 Lease Virginia Wilburn Gardens Fredericksburg 4th Quarter 101 111 Manage Washington Richland Gardens Richland 3rd Quarter 100 110 Manage Wyoming Cheyenne Cheyenne 2nd Quarter 83 91 Manage/Lease (3) --------- -------- Total 1998 Openings 1,414 1,546 ========= ======== Anticipated 1999 Openings: Maryland Essex Essex - 97 107 Manage Virginia Stauton Stauton - 100 110 Manage/Lease (3) --------- -------- Total 1999 Openings 197 217 ========= ========
(a) A unit is a single- or double-occupancy residential living space, typically an apartment or studio. (b) "Beds" reflects the actual number of beds, which in no event is greater than the maximum number of licensed beds allowed under the community's license. (c) Near an existing or proposed Holiday facility. (1) The Company holds a 66.67% interest in a joint venture with an independent third party. (2) The Company holds a 50.0% interest in a joint venture with an independent third party. (3) The Company will provide management services for a period of two years commencing on the date that the first resident occupies one of the units in the community. The Company will receive a management fee based on a percentage of gross revenues over the term of the agreement. Commencing on the earlier date to occur (a) two years after commencement of the management agreement of (b) the first month in which the community is cash flow even, the Company will lease the community from the independent third party under an operating lease agreement. In addition to those Development Communities under construction, the Company has 10 Development Communities under development, which are communities where activities such as site surveys, preparation or architectural plans or initiation of zoning changes have commenced (but construction has not commenced). These communities are expected to open during 1999. 19 The Company's executive offices are located in Seattle, Washington, where the Company leases approximately 26,500 square feet of space. The agreement includes a lease term of 10 years with two five-year renewal options. ITEM 3. LEGAL PROCEEDINGS The Company is not currently a party to any material litigation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of its security holders during the fourth quarter of its fiscal year ended December 31, 1997. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information about the executive officers of the Company. There are no family relationships between any of the directors or executive officers of the Company.
Name Age Position - --------------------- --- ------------------------------------------------ Daniel R. Baty 53 Chairman of the Board and Chief Executive Officer Raymond R. Brandstrom 45 President, Chief Operating Officer and Director Gary D. Witte 53 Vice President, Operations Frank A. Ruffo, Jr. 55 Vice President Kelly J. Price 29 Vice President, Finance, Chief Financial Officer, Principal Accounting Officer and Secretary Michelle A. Bickford 30 Vice President, New Business Development Sarah J. Curtis 35 Vice President, Sales and Marketing
Daniel R. Baty, one of the Company's founders, has served as its Chief Executive Officer and as a director since inception in 1993 and became Chairman of the Board in April 1995. Mr. Baty has served as the chairman of the board of Holiday since 1987 and as its chief executive officer from 1991 through September 1997. Since 1984, Mr. Baty has served as chairman of the board of Columbia-Pacific Group Inc. ("Columbia Pacific") and, since 1986, chairman of the board of Columbia Pacific Management, Inc. ("Columbia Management"), both of which companies are wholly owned by Mr. Baty and engaged in developing independent-living facilities and providing consulting services regarding that market. Raymond R. Brandstrom, one of the Company's founders, has served as its President and Chief Operating Officer and as a director since its inception in 1993. From May 1992 to October 1996, Mr. Brandstrom served as President of Columbia Pacific and Columbia Management. From May 1992 to May 1997, Mr. Brandstrom served as Vice President and Treasurer of Columbia Winery, a company affiliated with Mr. Baty that is engaged in the production and sale of still table wines. Frank A. Ruffo, Jr., one of the Company's founders, has served as its Vice President since its inception in 1993. From August 1992 until he joined the Company, Mr. Ruffo was employed by Columbia Management in special servicing related to securitized pools of mortgages. Gary D. Witte, joined the Company as Vice President, Operations in November 1996. From 1985 to June 1996, he was Vice President of Operations, Southern Region of Hillhaven/Vencor Corporation. Mr. Witte held a variety of operating positions at that company for 20 years. Kelly J. Price, C.P.A., has served as the Company's Vice President since February 1997, as Chief Financial Officer and Secretary since September 1995 and as Principal Accounting Officer since February 1998. Prior to that, from January 1995 he was Director of Finance. From May 1994 until joining the Company, Mr. Price was employed at Deloitte & Touche LLP Management Consulting, where he was a senior consultant in the real estate, healthcare and manufacturing industries. Prior to that he was employed by Deloitte & Touche LLP from September 1991. Michelle A. Bickford, has served as Vice President, New Business Development since January 1997, prior to which she served as Director of Acquisitions since July 1993. From 1990 to July 1993, Ms. Bickford was a Senior Accountant at National Medical Enterprises, Inc., a publicly held hospital company. 20 Sarah J. Curtis, jointed the Company as Vice President of Sales and Marketing in March 1997. Prior to that, from March 1996 she was National Director of Sales for Beverly Enterprises, Inc. From July 1991 until February 1996 Ms. Curtis was Regional Director of Sales and Marketing of Hillhaven/Vencor Corporation. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the American Stock Exchange, Inc. ("AMEX") under the symbol "ESC". The Common Stock has been listed on the AMEX since November 21, 1995, the date of the Company's initial public offering. The following table sets forth, for the periods indicated, the high and low closing prices for the Common Stock as reported on AMEX.
High Low ------- -------- 1996 First Quarter............................ $21.750 $11.6250 Second Quarter........................... $20.875 $17.6250 Third Quarter............................ $18.000 $14.0000 Fourth Quarter........................... $16.000 $10.0000 1997 First Quarter............................ $13.500 $11.1250 Second Quarter........................... $16.250 $11.5000 Third Quarter............................ $15.500 $13.8750 Fourth Quarter........................... $16.250 $11.8750 1998 First Quarter (through March 20, 1998)... $13.500 $10.6875
As of March 27, 1998, the number of record holders of the Company's Common Stock was 175. The Company has never declared or paid any dividends on its Common Stock, and expects to retain any future earnings to finance the operation and expansion of its business. Future dividend payments will depend on the results or operations, financial condition, capital expenditure plans and other obligations of the Company and will be at the sole discretion of the Company's Board of Directors. Certain of the Company's existing leases and lending arrangements contain provisions that restrict the Company's ability to pay dividends, and it is anticipated that the terms of future leases and the debt financings may contain similar restrictions. Therefore, the Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data have been derived from the audited consolidated financial statements of the Company and subsidiaries for the period from July 28, 1993 (inception) through December 31, 1993 and the years ended December 31, 1994, 1995, 1996 and 1997. The data set forth below should be read in conjunction with the consolidated financial statements and related notes thereto included elsewhere in the Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Period from July 28, 1993 (inception) Through Year ended December 31, December 31, --------------------------------------------- 1993 1994 1995 1996 1997 -------------- --------- ---------- ---------- ---------- (in thousands, except per share and operating data) Consolidated Statements of Operations Data: Total operating revenues.......... $ 323 $ 4,409 $ 21,277 $ 68,926 $117,772 Total operating expenses.......... 290 4,761 22,149 74,053 139,323 -------------- --------- ---------- ---------- ---------- Income (loss) from operations..... 33 (352) (872) (5,127) (21,551) -------------- --------- ---------- ---------- ---------- Net other expense................. (63) (1,080) (6,815) (3,075) (6,660) Extraordinary loss on extinguishment of debt.......... - - (1,267) - - -------------- --------- ---------- ---------- ---------- Net loss....................... (30) (1,432) (8,954) $ (8,202) $(28,211) ============== ========= ========== ========== ========== Preferred stock dividends......... - - - - 425 -------------- --------- ---------- ---------- ---------- Net loss to common shareholders $ (30) $(1,432) $ (8,954) $ (8,202) $(28,636) ============== ========= ========== ========== ========== Loss per common share before extraordinary item - basic and diluted............... $ (0.95) $ (0.75) $ (2.60) Extraordinary loss per common share - basic and diluted............... $ (0.16) $ - $ - Net loss per common share - basic and diluted............... $ (1.11) $ (0.75) $ (2.60) Weighted average number of common shares outstanding (1) - basic and diluted............... 8,062 11,000 11,000 ========== ========== ========== Consolidated Operating Data: Communities operated (2)........ 1 6 22 69 99 Number of units (2)............. 79 494 1,857 5,807 8,624
December 31, --------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- --------- --------- --------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.............. $ 26 $ 220 $ 9,507 $ 23,039 $ 17,537 Working capital (deficit).............. (1,489) (2,762) 4,091 9,757 12,074 Total assets........................... 3,542 24,493 115,635 158,038 228,573 Long-term debt, less current portion... 2,014 22,684 66,814 60,260 108,117 Minority interests..................... - 77 2,229 1,918 1,176 Shareholders equity (deficit).......... (30) (1,462) 34,895 26,188 1,207 (1) The weighted average shares outstanding were retroactively adjusted for the 9,200-for-1 split on April 14,1995. (2) Information is as of the end of the period and excludes the Operating Communities and units therein that are managed by others.
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its organization in July 1993, the Company has achieved significant growth in revenues, primarily due to the acquisition existing and development of new residential communities. The Company believes that it is one of the largest providers of assisted-living services in the United States. The Company's revenues are derived primarily from rents and service fees charged to its residents. For 1995, 1996 and 1997, the Company generated total operating revenues of $21.3 million, $68.9 million and $117.8 million, respectively. As of December 31, 1997, the Company's accumulated deficit was $47.3 million and its total shareholders' equity was $1.2 million. For 1995, 1996 and 1997, the Company generated losses of $9.0 million, $8.2 million and $28.6 million, respectively. As discussed below, the Company's losses result from a number of factors, including the opening in 1996 and 1997 a number of newly developed and acquired communities that incur operating losses during an initial 12 to 24 months rent-up phase, occupancy percentages in the Company's stabilized communities that have not risen as quickly as the Company had anticipated and that in some cases has declined, financing costs arising from sale/leaseback transactions and mortgage financing and refinancing transactions at proportionately higher levels of debt, increased administrative and corporate expenses resulting from a restructuring of the Company's operations and marketing required by rapid growth, and the costs and expenses of the Company's attempt to acquire ARV Assisted Living, Inc. ("ARV"). The Company's operating strategy is to increase operating margins at each acquired or newly developed community, whether leased or owned, primarily by increasing occupancy levels, encouraging residents to remain at the Company's communities longer by offering them a range of service options, increasing revenues through modifications in rate structures, where appropriate, and identifying opportunities to create operating efficiencies and reduce costs. As of March 20, 1998, the Company held ownership, leasehold or management interests in 101 residential communities (the "Operating Communities") consisting of approximately 8,800 units with the capacity for 10,200 residents, located in 26 states. Of the 101 Operating Communities, 11 and 20 newly developed communities were opened during 1996 and 1997, respectively. Additionally, the Company completed construction on an expansion to an existing community during 1997. Subsequent to December 31, 1997, the Company entered into an agreement with an affiliate to provide management services for an independent- living community located in Ohio. The Company owns, has a leasehold interest in, management interest in or has acquired an option to purchase development sites for 26 new assisted-living communities (the "Development Communities"). Sixteen of the Development Communities are currently under construction, 14 of which are scheduled to open during 1998. The Company leases 77 of its residential communities, typically from a financial institution such as a Real Estate Investment Trust ("REIT"), owns 18 communities, manages or provides administrative services for five communities and has a partnership interest in one community. Additionally, the Company holds a minority interest in Alert Care Corporation ("Alert"), an Ontario, Canada based owner and operator of 22 assisted-living communities consisting of approximately 1,250 units with a capacity of approximately 1,350 residents. See "-Strategic Relationships - Alert Relationship". Assuming completion of the Development Communities scheduled to open throughout 1998 and including the minority interest in Alert, the Company will own, lease, have an ownership interest in or manage 137 properties in 28 states and Canada, containing an aggregate of approximately 11,450 units with capacity of over 13,100 residents. There can be no assurance, however, that the Development Communities will be completed on schedule and will not be affected by construction delays, the effects of government regulation or other factors beyond the Company's control." The Company's management of assisted-living communities owned or leased by others has not been material to the Company's business or revenue. See "Description of Business Growth Strategy -Management Agreements". See "Factors Affecting Future Results and Forward Looking Statements -Emphasis on Acquisitions; Difficulties of Integrating Acquisitions", "-Ability to Develop Additional Assisted-Living Communities", and "-Need for Additional Capital. 23 The following table sets forth a summary of the Company's property interests.
As of December 31, ------------------------------------------------------------------------ 1994 1995 1996 1997 ---------------- ---------------- ----------------- ----------------- Buildings Units Buildings Units Buildings Units Buildings Units --------- ------ --------- ------ --------- ------- --------- ------- Owned 6 494 14 1,496 15 1,485 19 2,099 Leased 1 91 9 662 53 4,165 76 6,124 Managed - - - - 1 83 4 327 Joint Venture/Partnership - - 1 22 2 162 1 140 --------- ------ --------- ------ --------- ------- --------- ------- Sub Total 7 585 24 2,180 71 5,895 100 8,690 Annual Growth - % - % 243% 273% 196% 170% 41% 47% Pending Acquisitions 3 461 13 895 8 1,028 - - New Developments 9 720 26 2,112 27 2,296 26 2,483 Minority Interest - - - - 17 959 22 1,248 --------- ------ --------- ------ --------- ------- --------- ------- Total 19 1,766 63 5,187 123 10,178 148 12,421 --------- ------ --------- ------ --------- ------- --------- ------- Annual Growth - % - % 232% 194% 95% 96% 20% 22%
When used in this discussion, the words "believes," "anticipates," "intends" and similar expressions are intended to identify forward- looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. See "Factors Affecting Future Results and Regarding Forward-Looking Statements" under "Item 1. Description of Business" elsewhere in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect recent events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. RESULTS OF OPERATIONS The following table sets forth, for the years indicated, certain items of the Company's Consolidated Statements of Operations as a percentage of total revenues and the percentage change of the dollar amounts from year to year.
Year to Year Percentage of Revenues Percentage Years ended December 31, Increase (Decrease) 1995 1996 1997 1995-1996 1996-1997 ------ ------- ------- --------- --------- Revenues............................... 100 % 100 % 100 % 224 % 71 % Expenses: Community operations.............. 75 71 70 208 69 General and administrative........ 12 9 9 134 76 Depreciation and amortization..... 12 4 6 15 131 Rent.............................. 5 23 29 1316 115 Other............................. - - 4 - N/A ------ ------- ------- --------- --------- Total operating expenses..... 104 107 118 234 88 ------ ------- ------- --------- --------- Loss from operations......... (4) (7) (18) 488 320 ------ ------- ------- --------- --------- Other expense: Interest expense, net............. 27 4 6 (46) 141 Write-down of note receivable..... 5 - - N/A - Other, net........................ 1 - (1) N/A N/A Extraordinary loss on extinguishment of debt.......... 6 - - N/A - ------ ------- ------- --------- --------- Net loss..................... (43)% (11)% (23)% (8)% 244 % ====== ======= ======= ========= =========
24 COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996 REVENUES. Total operating revenues for 1997 were $117.8 million, representing a $48.8 million, or 71%, increase over revenues of $68.9 million for 1996. The increase resulted from the opening of new developments and the related fill-up of units and the acquisition of communities during 1997. The Company ended with 71 and 100 communities representing approximately 5,900 and 8,700 units as of December 31, 1996 and 1997, respectively, an increase of 41%. For 1997, there was a decline in average occupancy to 71% from 74% for 1996, primarily attributable to the opening of 20 new communities during 1997. The impact on revenue from the decline in occupancy was offset by an increase in the rate per occupied unit. COMMUNITY OPERATIONS. Expenses for community operations for 1997 were $82.8 million, representing a $33.9 million, or 69%, increase over $48.9 million for 1996, primarily due to the Company's opening of new developments and the acquisition of communities during 1997. As a percentage of total operating revenues, expenses for community operations decreased to 70% for 1997, from 71% for 1996. GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1997 were $10.8 million, representing an increase of $4.7 million, or 76%, from $6.2 million for 1996. As a percentage of total operating revenues, general and administrative expenses remained unchanged at 9% for 1996 and 1997 while the number of employees located at the corporate office was 83 and 90 at December 31, 1996 and 1997, respectively. The dollar increase in general and administrative expenses was attributable to salaries and associated costs relating to additional employment in conjunction with new business, increased accounting costs and higher travel and other costs relating to the Company's larger number of communities. General and administrative costs are expected to continue to increase in line with revenues and community operations at least through 1998 as the Company acquires additional existing communities and develops new communities. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for 1997 was $6.6 million, or 6%, of total operating revenues, compared to $2.9 million or 4%, of total operating revenues, for 1996. The increase was due to a combination of an increase in pre-opening amortization expense from the opening of 20 developments in 1997 and the addition of four owned communities, net of communities sold in sale/leaseback transactions in 1997. The Company owned 19%, or 19 of its 100 communities representing approximately 2,100 units at December 31, 1997 compared to 21%, or 15 of its 71 communities representing approximately 1,500 units at December 31, 1996. RENT. Rent expense for 1997 was $34.6 million, representing an increase of $18.5 million, or 115%, from rent expense of $16.1 million for 1996. As a percentage of total operating revenues, rent expense increased to 29% for 1997, from 23% for 1996. The dollar increases were due to additional lease financing or sale/leaseback transactions. The Company leased 76%, or 76 out of 100 of its residential communities representing approximately 6,100 units as of December 31, 1997 compared to 75%, or 53 out of 71 communities representing approximately 4,200 units as of December 31, 1996. The increase in rent expense as a percentage of revenue is attributable to the opening of newly developed communities, in their fill-up stage, operated by the Company under lease agreements. The Company expects an occupancy fill-up period of 12 to 24 months for a newly developed community. As the fill-up of newly developed communities continues, rent expense as a percentage of revenue is expected to decrease. OTHER. The Company incurred other expense of $4.4 million for 1997 which represents charges related to the termination of the Company's tender offer for ARV and changes in the Company's operating structure. In 1997, the Company wrote-off certain capitalized pre-opening and marketing expenses related to newly opened developed communities prior to July 1997. This write-off was a result of changes in senior operating personnel and the Company's marketing approach. INTEREST EXPENSE. Interest expense for 1997 was $8.4 million compared to $4.3 million for 1996, increasing as a percentage of total operating revenue to 7% for 1997 from 6% for 1996. The increase was primarily due to the acquisition of four communities through mortgage financing bearing interest at rates between 8% and 18%, construction financings bearing interest at fixed rates between 9.0% and 9.25% and the opening of four developments owned by the Company, all partially offset by sale/leaseback refinancings, as well as, interest costs related to the Company's investment in ARV common stock. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995 REVENUES. Total operating revenues for 1996 were $68.9 million, representing a $47.6 million, or 224%, increase over revenues of $21.3 million for 1995. The increase resulted from the opening of new developments and the related fill-up of units and the acquisition of communities during 1996. The Company ended with 24 and 71 communities representing approximately 2,200 and 5,900 units as of December 31, 1995 and 1996, respectively, an increase of 196%. 25 COMMUNITY OPERATIONS. Expenses for community operations for 1996 were $48.9 million, representing a $33.0 million, or 208%, increase over $15.9 million for 1995, primarily due to the Company's opening of new developments and the acquisition of communities during 1996. As a percentage of total operating revenues, expenses for community operations decreased to 71% for 1996, from 75% for 1995. GENERAL AND ADMINISTRATIVE. General and administrative expenses for 1996 were $6.2 million, representing an increase of $3.5 million, or 134%, from $2.6 million for 1995. As a percentage of total operating revenues, general and administrative expenses decreased to 9% for 1996 from 12% for 1995 while the number of employees located at the corporate office was 43 and 83 at December 31, 1995 and 1996, respectively. The dollar increase in general and administrative expenses was attributable to salaries and associated costs relating to additional employment in conjunction with new business, increased accounting costs and higher travel and other costs relating to the Company's larger number of communities. DEPRECIATION AND AMORTIZATION. Depreciation and amortization 1996 was $2.9 million, or 4% of total operating revenues, compared to $2.5 million or 12%, of total operating revenues, for 1995. The increase was due to the opening of new developments and the acquisition of eight communities owned by the Company, net of communities sold in sale/leaseback transactions in 1996. The Company owned 21%, or 15 of its 71 communities representing approximately 1,500 units at December 31, 1996 compared to 58%, or 14 of its 24 communities representing approximately 1,500 units at December 31, 1995. RENT. Rent expense for 1996 was $16.1 million, representing an increase of $15.0 million, or 1316%, from rent expense of $1.1 million for 1995. As a percentage of total operating revenues, rent expense increased to 23% 1996, from 5% 1995. The dollar and percentage increases were due to the Company entering into lease financing or sale/leaseback transactions with respect to 75%, or 53 out of 71 of its residential communities representing approximately 4,200 units as of December 31, 1996 compared to 38%, or nine out of 24 communities representing approximately 700 units as of December 31, 1995. INTEREST EXPENSE. Interest expense for 1996 was $4.3 million compared to $4.2 million for 1995, decreasing as a percentage of total operating revenues from 20% for 1995 to 6% for 1996. The decrease was due to the repayment of existing mortgage debt with lower rate convertible debenture proceeds and refinancing of mortgage indebtedness through sale/leaseback transactions. WRITE-DOWN OF NOTE RECEIVABLE FROM AFFILIATE. In 1994 and 1995, the Company made aggregate loans of $1,133,000 to a corporation that owned three assisted-living communities. In connection with the loan, the Company received 49.0% of the outstanding stock of the corporation and a pledge of the remaining 51.0%. The holder of the first mortgages initiated foreclosure proceedings in October 1995 and the Company no longer has an interest in the communities or the corporation and the note receivable was written-off in 1995. LOSS ON EXTINGUISHMENT OF DEBT. On April 17, 1995, the Company issued 4,158,000 shares of Series A Preferred Stock and $25.9 million principal amount of Subordinated Secured Promissory Notes to a group of investors. In connection with this transaction, the Company incurred $979,000 of deferred financing costs. Upon completion of the initial public offering November 1995, the Series A Preferred Stock was converted to Common Stock, the Notes were repaid in full, and the deferred financing costs were written off, resulting in an extraordinary loss. Additionally, the Company completed refinancings during 1995 on three communities, resulting in an extraordinary loss of approximately $288,000 relating to the write-off of deferred financing costs. SAME COMMUNITY COMPARISON The Company operated 50 communities ("Same Community") on a comparable basis during both the three months ended December 31, 1996 and 1997. The Same Communities represented 61% of the Company's total revenue for the quarter. Net operating margins increased by $849,000 to 31% on revenue of $20.0 million as compared to 28% on revenue of $19.3 million for the three months ended December 31, 1996. The increase in revenue can be attributed to monthly rate increases and greater services offered at the communities, partially offset by a decline in average occupancy. Same Community pre-tax loss, before corporate overhead, decreased by $878,000 from $893,000 to $15,000 compared to the comparable period last year. In addition, average revenue per occupied unit increased approximately 5%, from $2,012 to $2,105, during the fourth quarter 1996 and 1997, respectively, while Same Community average occupancy declined slightly to 79% during the three months ended December 31, 1997 compared to 80% for the comparable period last year. Included among the 50 Same Communities, were nine communities newly developed in 1996. These communities reported an average occupancy of 38% and 62%, net operating margin of 1% and 18% on revenue of $1.5 million and $2.6 million and pre-tax net loss of $1.2 million and $795,000 for the three months ended December 31, 1996 and 1997, respectively. 26 The following table sets forth a comparison of Same Community results of operations before corporate overhead for the three months ended December 31, 1996 and 1997.
Three Months Ended December 31, (In thousands) Dollar Percentage 1996 1997 Change Change --------- --------- -------- ---------- Revenue........................... $19,252 $19,987 $735 4 % Community operating expense....... 13,833 13,719 (114) (1) --------- --------- -------- ---------- Community operating income... 5,419 6,268 849 16 --------- --------- -------- ---------- Depreciation and amortization..... 663 583 (80) (12) Rent.............................. 5,097 5,318 221 4 --------- --------- -------- ---------- Operating income............. (341) 367 708 (208) --------- --------- -------- ---------- Interest income (expense), net.... (691) (643) 48 (7) Other income, net................. 139 261 122 88 --------- --------- -------- ---------- Pre-tax income (loss)........ $ (893) $ (15) $878 (98)% ========= ========= ======== ==========
Three months ended December 31, -------------------- 1996 1997 --------- --------- Other Same Community Information: Communities....................... 50 50 Total units....................... 3,985 3,985 Average occupancy................. 80% 79% Revenue per average occupied unit. $2,012 $2,105
The 39 Same Communities included in the quarters ending September 30, 1997 and December 31, 1997 reported revenue of 16.6 million and $16.5 million, community operating expenses of $11.3 million and $11.2 million and pre-tax income of $371,000 and $503,000 for such quarters, respectively, while average occupancy remained unchanged at 82% for the two quarters. STABILIZED (GROUP ONE) AND START-UP/REPOSITIONED (GROUP TWO) COMMUNITY COMPARISON For the three months ended December 31, 1997, the Company had 54 communities that had achieved average occupancy of at least 90% during one quarter ("Group One Communities") and 46 communities that had average occupancy of less than 90%, which includes 38 newly opened developments and/or communities with significant ongoing repositioning and/or refurbishment activity ("Group Two Communities"). 27 The following table sets forth a comparison of Group One and Group Two Community results of operations for the three months ended December 31, 1997.
Three Months Ended December 31, 1997 (In thousands) Start-Up/ Stabilized Repositioned Communities Communities (Group One) (Group Two) Overhead Total ------------- ------------- -------- --------- Revenue........................... $23,238 $ 9,549 $ 16 $ 32,803 Community operating expense....... 15,036 8,842 - 23,878 ------------- ------------- -------- --------- Community operating income... 8,202 707 16 8,925 ------------- ------------- -------- --------- General and administrative........ - - 3,109 3,109 Depreciation and amortization..... 490 1,565 131 2,186 Rent.............................. 5,931 4,127 120 10,178 Other............................. - - 4,426 4,426 ------------- ------------- -------- --------- Operating income (loss)...... 1,781 (4,985) (7,770) (10,794) ------------- ------------- -------- --------- Interest income (expense), net.... (945) (1,330) (379) (2,654) Other income (expense), net....... 127 (655) 782 254 ------------- ------------- -------- --------- Pre-tax income (loss)........ $ 963 $(6,970) $(7,367) $(13,374) ============= ============= ======== ========= Other Group One and Group Two Information: Communities..................... 54 46 100 Total units..................... 4,460 4,230 8,690 Average Occupancy............... 89% 45% 68% Revenue per average occupied unit.......................... $ 1,954 $ 1,721 $ 1,881
Group One Communities ended the fourth quarter of 1997 with an average occupancy of 89% compared to 93% for the fourth quarter of 1996 while net operating margins increased by $3.3 million to 35% on revenue of $23.2 million for the three months ended December 31, 1997 as compared to 33% on revenue of $15.2 million for the three months ended December 31, 1996. Group One Community pre-tax income, before corporate overhead, increased by 56% to $963,000 compared to the comparable period last year. The total number of Group One Communities increased by 18 in the fourth quarter of 1997 compared to the fourth quarter of 1996 due to a combination of acquisitions and communities achieving an occupancy of at least 90% during one quarter. Group Two Communities ended the fourth quarter of 1997 with an average occupancy of 45% compared to 56% for the fourth quarter of 1996 while net operating margins decreased by $733,000 to 7% on revenue of $9.5 million as compared to 19% on revenue of $7.6 million for the three months ended December 31, 1996. Group Two Community pre-tax loss, before corporate overhead, increased by 203% to $7.0 million compared to the comparable period last year. The total number of Group Two Communities had a net increase of 11 compared to the fourth quarter of 1996 due primarily to the opening of new developments. 28 The following tables set forth a comparison of Group One and Group Two Community results of operations before corporate overhead for the three months ended December 31, 1996 and 1997.
Stabilized Communities (Group One) Three Months Ended December 31, (In thousands) Dollar Percentage 1996 1997 Change Change --------- --------- -------- ---------- Revenue........................... $15,182 $ 23,238 $8,056 53 % Community operating expense....... 10,235 15,036 4,801 47 --------- --------- -------- ---------- Community operating income... 4,947 8,202 3,255 66 --------- --------- -------- ---------- Depreciation and amortization..... 350 490 140 40 Rent.............................. 3,586 5,931 2,345 65 --------- --------- -------- ---------- Operating income............. 1,011 1,781 770 76 --------- --------- -------- ---------- Interest income (expense), net.... (393) (945) (552) 140 Other income, net................. - 127 127 100 --------- --------- -------- ---------- Pre-tax income............... $ 618 $ 963 $ 345 56 % ========= ========= ======== ========== Other Group One Information: Communities.................... 36 54 Total units.................... 2,675 4,460 Average occupancy.............. 93% 89% Revenue per occupied unit...... $ 2,034 $ 1,954
Start-Up/Repositioned Communities (Group Two) Three Months Ended December 31, (In thousands) Dollar Percentage 1996 1997 Change Change --------- --------- ---------- ----------- Revenue........................... $ 7,598 $ 9,549 $ 1,951 26 % Community operating expense....... 6,158 8,842 2,684 44 --------- --------- ---------- ----------- Community operating income... 1,440 707 (733) 49 --------- --------- ---------- ----------- Depreciation and amortization..... 484 1,565 1,081 223 Rent.............................. 2,560 4,127 1,567 61 --------- --------- ---------- ----------- Operating loss............... (1,604) (4,985) (3,381) 211 --------- --------- ---------- ----------- Interest income (expense), net.... (560) (1,330) (770) 138 Other income (expense), net....... (136) (655) (519) 382 --------- --------- ---------- ----------- Pre-tax loss................. $(2,300) $(6,970) $(4,670) 203 % ========= ========= ========== =========== Other Group Two Information: Communities.................... 35 46 Total units.................... 3,219 4,230 Average occupancy.............. 56% 45% Revenue per occupied unit...... $ 1,580 $ 1,721
Group One Communities for the three months ended December 31, 1997 and September 30, 1997, consisted of 54 and 52 communities, respectively. Average Occupancy declined slightly to 89% for the fourth quarter 1997 compared to 90% for the third quarter 1997. Revenue increased $886,000, or 4%, to $23.2 million for the three months ended December 31, 1997 from $22.4 million for the three months ended September 30, 1997. Community operating expenses for the forth quarter 1997 increased $866,000, or 6%, to $15.0 million for the three months ended December 31, 1997 from $14.2 million for the three months ended September 30, 1997. Pre-tax income decreased $431,000, or 31% to $963,000 for the three months ended December 31, 1997 from $1.4 million for the three months ended September 30, 1997. 29 Group Two Communities for the three months ended December 31, 1997 and September 30, 1997, consisted of 46 communities and 44 communities, respectively, representing 32 and 29 newly developed communities, respectively. Average Occupancy declined slightly to 45% for the fourth quarter 1997 compared to 48% for the third quarter 1997. Revenue increased $381,000, or 4%, to $9.5 million for the three months ended December 31, 1997 from $9.2 million for the three months ended September 30, 1997. Community operating expenses for the fourth quarter 1997 were $8.8 million, representing an increase of $399,000, or 5%, over $8.4 million for the third quarter 1997. Pre-tax loss increased $152,000, or 2%, to $7.0 million for the three months ended December 31, 1997 from $6.8 million for the three months ended September 30, 1997. The changes between third quarter 1997 and fourth quarter 1997 Group Two Communities are primarily a result of newly opened developments. The Company expects an occupancy fill-up period of 12 to 24 months for a newly developed community to show positive operating results. Newly developed communities generated $5.5 million in revenue for the three months ended December 31, 1997 compared to $3.9 million for the three months ended September 30, 1997, $5.6 million in community operating expenses for the fourth quarter 1997 compared to $4.4 million for the third quarter 1997 and pre-tax loss of $6.1 million for the fourth quarter 1997 compared to pre-tax loss of $4.5 million for the third quarter 1997. The increase in pre-tax loss between quarters can be attributed to the charge for the change in the Company's operating structure. See "Results of Operations - Comparison of the Years Ended December 31, 1997 and 1996 - Other" above. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997. For 1997, net cash used in operating activities was $17.7 million, primarily due to losses incurred on newly acquired and developed communities. The Company obtained $28.7 million in proceeds from the sale of communities in sale/leaseback financing transactions and repaid related mortgage indebtedness of $12.3 million as well as $16.7 million of unrelated mortgage indebtedness which includes refinancing $5.6 million in long- term debt on two assisted-living communities and repaying $2.2 million in long-term debt on one assisted-living community. The Company obtained $1.7 million in proceeds from the sale of land. The Company also incurred additional long-term debt of $44.6 million, obtained $25.0 million in net proceeds from the sale of redeemable preferred stock and purchased additional property and equipment and property held for development of $40.2 million. As a result of these acquisition and financing transactions the Company decreased its cash position by approximately $5.5 million. As of December 31, 1997, the Company had working capital of $12.1 million. CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996. For 1996, net cash used in operating activities was $5.4 million, primarily due to losses incurred on newly acquired communities. The Company obtained $73.3 million in proceeds from the sale of communities in sale/leaseback financing transactions and repaid related mortgage debt of $52.8 million as well as $17.2 million of unrelated mortgage debt. The Company also incurred additional long-term debt of $64.4 million, including $30.7 million, net proceeds from the private placement of convertible subordinated debentures, and purchased additional property and equipment and property held for development of $66.7 million. As of December 31, 1996, the Company had working capital of $9.8 million. CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995. For the year ended December 31, 1995, net cash used in operating activities was $4.8 million, primarily due to losses incurred on newly acquired communities. The Company used $ 78.4 million to acquire property and equipment and property held for development and obtained $11.6 million in proceeds from the sale of communities in sale/leaseback financing transactions. The Company obtained $84.1 million in net cash from financing activities including its initial public offering and net proceeds from long and short-term borrowings. The Company is committed under construction contracts with respect to certain development projects. Total construction commitments for owned developments at December 31, 1997, were $34.8 million, of which $25.2 million had been incurred. At December 31, 1997, $9.5 million in construction financing commitments remained in place which bear interest at rates ranging between prime plus 0.75% and 1.25% and are due through January 2003. In October 1997, NorthStar Capital Partners LLC ("NorthStar"), a private investment group with financial backing from a Union Bank of Switzerland Securities affiliate and Quantum Realty Partners, a fund advised by Soros Fund Management LLC, invested $25.0 million in the Company through the purchase of 25,000 shares of Series A Convertible Exchangeable Redeemable Preferred Stock (the "Series A Preferred Stock"), representing approximately 10% ownership in the Company. Each share of Series A Preferred Stock is convertible into that number of shares of the Company's Common Stock equal to the liquidation value of a share of Series A Preferred Stock ($1,000) divided by the conversion price of $18.20 per share. Currently the Series A Preferred Stock is convertible into an aggregate of 1,373,626 shares of Common Stock. The Series A Preferred Stock is also exchangeable into convertible debt at the option of the Company. The conversion price is subject to adjustment 30 in the event of stock dividends, stock subdivisions and combinations, and extraordinary distributions. The Series A Preferred Stock has a mandatory redemption date of October 24, 2004. In December 1997, the Company purchased 25,600 shares of its common stock at an aggregate cost of $341,000. Subsequently, in January 1998, the Company's Board of Directors authorized a treasury stock purchase program to acquire up to an additional 500,000 shares of the Company's common stock from time to time on the open market. As of March 20, 1998, the Company has purchased 517,200 shares of its common stock at an aggregate cost of $5.7. In March 1998, the Company entered into a commitment with German American Capital Corporation ("GACC"), a wholly owned subsidiary of Deutsche Bank North America. The commitment terms include a three year loan not to exceed $77.9 million with a 30-day LIBOR rate plus 2.95%. The Company plans to use the proceeds to refinance up to ten of its Operating Communities. The Company has been, and expects to continue to be, dependent on third-party financing for its acquisition and development programs. There can be no assurance that financing for the Company's acquisition and development programs will be available to the Company on acceptable terms. Moreover, to the extent the Company acquires communities that do not generate positive cash flow, the Company may be required to seek additional capital or borrowings for working capital and liquidity purposes. YEAR 2000 Concerns surrounding the Year 2000 are the result of computer programs being written using two digits rather than four to define the applicable year. Thus programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather then the year 2000 resulting in a major system failure or miscalculations. The Company has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" issue and is developing an implementation plan to resolve the issue. The Company presently believes that, with modifications to existing software and converting to new software, the Year 2000 problem will not pose significant operational problems for the Company's computer systems as so modified and converted and there will be no substantial impact on the financial statements. However, if such modifications and conversions are not completed timely, the Year 2000 issue may have a material impact on the operations of the Company. IMPACT OF INFLATION To date, inflation has not had a significant impact on the Company. Inflation could, however, affect the Company's future revenues and operating income due to the Company's dependence on its senior resident population, most of whom rely on relatively fixed incomes to pay for the Company's services. As a result, the Company's ability to increase revenues in proportion to increased operating expenses may be limited. The Company typically does not rely to a significant extent on governmental reimbursement programs. In pricing its services, the Company attempts to anticipate inflation levels, but there can be no assurance that the Company will be able to respond to inflationary pressures in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and the report of Independent Auditors are listed at Item 14 and are included beginning on Page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K and under the captions "Election of Directors -Nominees for Election" and "Compliance with Section 16(a) of the Exchange Act of 1934" in the Company's Proxy Statement relating to its 1998 annual meeting of shareholders (the "Proxy Statement") is hereby incorporated by reference. 31 ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Executive Compensation" and "Election of Directors -Director Compensation" in the Company's Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Certain Transactions" in the Company's Proxy Statement is hereby incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of the report: (1) FINANCIAL STATEMENTS. The following financial statements of the Registrant and the Report of Independent Public Accountants therein are filed as part of this Report on Form 10-K: Page Independent Auditors' Reports............................. F-2 Consolidated Balance Sheets............................... F-4 Consolidated Statements of Operations..................... F-5 Consolidated Statements of Cash Flows..................... F-6 Consolidated Statements of Shareholders' Equity (Deficit). F-8 Notes to Consolidated Financial Statements................ F-9 (2) FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and Qualifying Accounts (contained on page F-24) Other financial statement schedules have been omitted because the information required to be set forth therein is not applicable, is immaterial or is shown in the consolidated financial statements or notes thereto. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1997. (c) EXHIBITS: The following exhibits are filed as a part of, or incorporated by reference into, this Report on Form 10-K:
Exhibit Description Reference - ---- ----------------------------------------------------------- ------ 3.1 Restated Articles of Incorporation of registrant (Exhibit (2) 3.1). 3.2 Amended and Restated Bylaws of the registrant (Exhibit (1) 3.2). 4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006 (2) (Exhibit 4.1). 4.2 Indenture dated February 15, 1996 between the registrant and Fleet National Bank ("Trustee") (Exhibit 4.2). (2) 4.3 Preferred Stock Purchase Agreement (including Designation of Rights and Preferences of Series A Convertible Exchangeable Redeemable Preferred Stock of Emeritus Corporation Agreement, Registration of Rights Agreement and (12) Shareholders Agreement) dated October 24, 1997 between the registrant ("Seller") and Merit Partners, LLC ("Purchaser") (Exhibit 4.1). 10.1 1995 Stock Incentive Plan (Exhibit 10.1). (1) 10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2). (2) 10.3 Form of Indemnification Agreement for officers and (1) directors of the registrant (Exhibit 10.3). 10.4 Noncompetition Agreements entered into between the registrant and each of the following individuals: 10.4. Daniel R. Baty (Exhibit 10.4.1), Raymond R. 1 Brandstrom (Exhibit 10.4.2) and Frank A. Ruffo (2) (Exhibit 10.4.3). 10.5 Shareholders Agreement dated as of April 17, 1995, and as amended September 27, 1995, among the registrant, its (1) Founders and certain Investors, as defined therein (Exhibit 10.5). 10.6 Form of Stock Purchase Agreement dated July 31, 1995, entered into between Daniel R. Baty and each of Michelle A. (1) Bickford, Jean T. Fukuda, James S. Keller, George T. Lenes and Kelly J. Price (Exhibit 10.6). 10.7 Series A Preferred Stock and Note Purchase Agreement dated as of April 17, 1995 among the registrant and the investors (1) listed on Schedule I thereto (Exhibit 10.7). 32 10.8 La Villita in Phoenix, Arizona 10.8. Promissory Note dated April 22, 1997 in the amount of 1 $3,500,000 between U.S. Bank of Washington ("Lender") (9) and Emeritus Properties VI, Inc. ("Borrower") (Exhibit 10.2.1). 10.8. First Addendum to Promissory Note between Lender and (9) 2 Borrower (Exhibit 10.2.2). 10.8. Second Addendum to Promissory Note between Lender and (9) 3 Borrower (Exhibit 10.2.3). 10.8. Construction Deed of Trust dated April 22, 1997 4 between Emeritus Properties VI, Inc. ("Trustor"), (9) U.S. Bank of Washington ("Lender " and "Beneficiary") and United States National Bank of Oregon ("Trustee") (Exhibit 10.2.4). 10.8. Addendum to Construction Deed of Trust between (9) 5 Trustor, Lender and Trustee (Exhibit 10.2.5). 10.8. Guaranty dated April 22, 1997 between Daniel R. Baty 6 ("Guarantor") U.S. Bank of Washington ("Lender") and (9) Emeritus Properties VI, Inc. ("Borrower") (Exhibit 10.2.6). 10.9 Scottsdale Royale in Scottsdale, Arizona, Villa Ocotillo in Scottsdale, Arizona and Madison Glen in Clearwater, Florida. The following agreements are representative of those executed in connection with these properties: 10.9. Loan Agreement dated December 31, 1996 in the amount 1 of $12,275,000 by the registrant ("Borrower") and (5) Lender (Exhibit 10.9.1). 10.9. Promissory Note dated December 31, 1996 in the amount 2 of $6,775,000 between the registrant to Bank United (5) (the "Lender") with respect to Madison Glen (Exhibit 10.9.2). 10.9. Promissory Note dated December 31, 1996 in the amount 3 of $5,500,000 between the registrant to Bank United (the "Lender") with respect to Scottsdale Royale and (5) Villa Ocotillo (Exhibit 10.9.3). 10.9. Deed of Trust, Security Agreement, Assignment of 4 Leases and Rents, and Fixture Filing (Financial Statement) dated as of December 31, 1996, by the registrant, as Trustor and debtor, to Chicago Title (5) Insurance Company, as Trustee, for the benefit of the Lender, Beneficiary and secured party with respect to Scottsdale Royale and Villa Ocotillo (Exhibit 10.9.4). 10.9. Mortgage and Security Agreement between the 5 registrant ("Mortgagor") and Bank United (5) ("Mortgagee") with respect to Madison Glen (Exhibit 10.9.5). 10.1 Rosewood Court in Fullerton, California 0 10.10 Lease Agreement dated March 29, 1996 between the .1 registrant ("Lessee") and Health Care Property (3) Investors, Inc. ("Lessor") (Exhibit 10.1.1). 10.10 First Amendment Lease Agreement dated April 25, 1996 .2 by and between the registrant ("Lessee") and Health (3) Care Property Investors, Inc. ("Lessor") (Exhibit 10.1.2). 10.1 The Arbor at Olive Grove in Phoenix, Arizona 1 10.11 Lease Agreement dated as of December 27, 1995 between .1 the registrant and Health Care Property Investors, (2) Inc. (Exhibit 10.12.1). 10.11 First Amended Lease Agreement dated as of February .2 19, 1996 by and between the registrant and Health (2) Care Property Investors, Inc. (Exhibit 10.12.2). 10.1 Renton Villa in Renton, Washington 2 10.12 Lease Agreement dated as of December 27, 1995 between .1 the registrant and Health Care Property Investor, (2) Inc. (Exhibit 10.13.1). 10.12 First Amended Lease Agreement dated as of February .2 19, 1996 by and between the registrant and Health (2) Care Property Investors, Inc. (Exhibit 10.13.2). 10.1 Seabrook, in Everett, Washington 3 10.13 Lease Agreement dated as of December 27, 1995 between .1 the registrant and Health Care Property Investor, (2) Inc. (Exhibit 10.14.1). 10.13 First Amended Lease Agreement dated as of February .2 19, 1996 by and between the registrant and Health (2) Care Property Investors, Inc. (Exhibit 10.14.2). 10.1 Laurel Lake Estates in Voorhees, New Jersey 4 10.14 Lease Agreement dated as of December 27, 1995 between .1 the registrant and Health Care Property Investor, (2) Inc. (Exhibit 10.15.1). 10.14 First Amended Lease Agreement dated as of February .2 19, 1996 by and between the registrant and Health (2) Care Property Investors, Inc. (Exhibit 10.15.2). 10.1 Florida Communities. 5 10.15 Lease Agreement dated March 15, 1996 between .1 Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect (2) to Beneva Park Club (Exhibit 10.16.1). 10.15 Lease Agreement dated March 15, 1996 between .2 Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect (2) to Central Park Club (Exhibit 10.16.2). 10.15 Lease Agreement dated March 15, 1996 between .3 Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect (2) to College Park Club (Exhibit 10.16.3). 10.15 Lease Agreement dated March 15, 1996 between .4 Meditrust Acquisition Corporation I ("Lessor") and ESC I, G.P., Inc. ("Lessee") with respect to Park (2) Club of Brandon (Exhibit 10.16.4). 33 10.15 Lease Agreement dated March 15, 1996 between .5 Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect (2) to Park Club of Fort Myers (Exhibit 10.16.5). 10.15 Lease Agreement dated March 15, 1996 between .6 Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect (2) to Park Club of Oakbridge (Exhibit 10.16.6). 10.1 Summer Wind in Boise, Idaho 6 10.16 Lease Agreement dated as of August 31, 1995 between .1 AHP of Washington, Inc. and the registrant (Exhibit (1) 10.18.1). 10.16 First Amended Lease Agreement dated as of December .2 31, 1996 by and between the registrant and AHP of (5) Washington, Inc. (Exhibit 10.16.2). 10.1 Silver Pines (formerly Willowbrook) in Cedar Rapids, Iowa 7 10.17 Purchase and Sale Agreement (including Real Estate .1 Contract) dated January 4, 1995 between Jabo, Ltd. (1) ("Jabo") and the registrant (Exhibit 10.19.1). 10.17 Assignment and Assumption Agreement with respect to .2 facility leases dated as of January 17, 1995 by and (1) between Jabo, as Assignor, and the registrant, as Assignee (Exhibit 10.19.2). 10.1 The Palisades in El Paso, Texas, Amber Oaks in San Antonio, 8 Texas and Redwood Springs in San Marcos, Texas. The following agreements are representative of those executed in connection with these properties. 10.18 Lease Agreement dated April 1, 1997 between ESC III, .1 L.P. D/B/A Texas-ESC III, L.P. ("Lessee") and Texas (6) HCP Holding , L.P. ("Lessor") (Exhibit 10.4.1). 10.18 First Amendment to Lease Agreement dated April 1, .2 1997 between Lessee and Texas HCP Holding , L.P. (6) Lessor (Exhibit 10.4.2). 10.18 Guaranty dated April 1, 1997 by the registrant .3 ("Guarantor") in favor of Texas HCP Holding , L.P. (6) (Exhibit 10.4.3) 10.18 Assignment Agreement dated April 1, 1997 between the .4 registrant ("Assignor") and Texas HCP Holding , L.P. (6) ("Assignee") (Exhibit 10.4.4). 10.1 Carriage Hill Retirement in Bedford, Virginia 9 10.19 Lease Agreement dated August 31, 1994 between the .1 registrant, as Tenant, and Carriage Hill Retirement (1) of Virginia, Ltd. as Landlord (Exhibit 10.23.1). 10.19 Supplemental Lease Agreement dated September 2, 1994 (1) .2 (Exhibit 10.23.2). 10.2 Green Meadows Communities 0 10.20 Consent to Assignment of and First Amendment to Asset .1 Purchase Agreement dated September 1, 1995 among the registrant, The Standish Care Company and Painted Post Partnership, Allentown Personal Car General Partnership, Unity Partnership, Saulsbury General Partnership and P. Jules Patt (collectively, the (1) "Partnerships"), together with Asset Purchase Agreement dated July 27, 1995 among The Standish Care Company and the Partnerships (Exhibit 10.24.1). 10.20 Lease Agreement dated October 19, 1995 between the .2 registrant and HCPI Trust with respect to Green (1) Meadows - Allentown (Exhibit 10.24.2). 10.20 Lease Agreement dated October 16, 1995 between the .3 registrant and HCPI Trust with respect to Green (1) Meadows - Dover (Exhibit 10.24.3). 10.20 Lease Agreement dated October 19, 1995 between the .4 registrant and HCPI Trust with respect to Green (1) Meadows - Latrobe (Exhibit 10.24.4). 10.20 Lease Agreement dated October 19, 1995 between the .5 registrant and HCPI Trust with respect to Green (1) Meadows - Painted Post (Exhibit 10.24.5). 10.20 Agreement to Provide Administrative Services to an .6 Adult Home dated October 23, 1995 between the (1) registrant and P. Jules Patt and Pamela J. Patt (Exhibit 10.24.6). 10.20 Assignment Agreement dated October 19, 1995 between .7 the registrant, HCPI Trust and Health Care Property (1) Investors, Inc. (Exhibit 10.24.8). 10.20 Assignment and Assumption Agreement dated August 31, .8 1995 between the registrant and The Standish Care (1) Company (Exhibit 10.24.9). 10.20 Guaranty dated October 19, 1995 by Daniel R. Baty in .9 favor of Health Care Property Investors, Inc., and (1) HCPI Trust (Exhibit 10.24.10). 10.20 Guaranty dated October 19, 1995 by the registrant in .10 favor of Health Care Property Investors, Inc. (1) (Exhibit 10.24.11). 10.20 First Amended Lease Agreement dated as of December .11 13, 1995 by and between the registrant and HCPI, (5) Trust with respect to Green Meadows - Allentown (Exhibit 20.12). 10.20 Second Amended Lease Agreement dated as of February .12 13, 1996 by and between the registrant and HCPI, (5) Trust with respect to Green Meadows - Allentown (Exhibit 10.20.13). 10.20 First Amended Lease Agreement dated as of December .13 13, 1995 by and between the registrant and Health Care Property Investors, Inc., with respect to Green (5) Meadows - Dover (Exhibit 10.20.14). 10.20 Second Amended Lease Agreement dated as of February .14 13, 1996 by and between the registrant and Health Care Property Investors, Inc., with respect to Green (5) Meadows - Dover (Exhibit 10.20.15). 10.20 First Amended Lease Agreement dated as of December .15 13, 1995 by and between the registrant and HCPI, (5) Trust with respect to Green Meadows - Latrobe (Exhibit 10.20.16). 34 10.20 Second Amended Lease Agreement dated as of February .16 13, 1996 by and between the registrant and HCPI, (5) Trust with respect to Green Meadows - Latrobe (Exhibit 10.20.17). 10.20 First Amended Lease Agreement dated as of December .17 13, 1995 by and between the registrant and Health Care Property Investors, Inc., with respect to Green (5) Meadows - Painted Post (Exhibit 10.20.18). 10.20 Second Amended Lease Agreement dated as of June 24, .18 1996 by and between the registrant and Health Care Property Investors, Inc., with respect to Green (5) Meadows - Painted Post (Exhibit 10.20.19). 10.20 Second Amendment to Agreement to provide .19 Administrative Services to an Adult Home dated (10) January 1, 1997 between Painted Post Partners and the registrant (Exhibit 10.2). 10.2 Carolina Communities 1 10.21 Lease Agreement dated January 26, 1996 between the .1 registrant and HCPI Trust with respect to Countryside (2) Facility (Exhibit 10.23.1). 10.21 Lease Agreement dated January 26, 1996 between the .2 registrant and Health Care Property Investors with (2) respect to Heritage Health Center Facility (Exhibit 10.23.2). 10.21 Management Services Agreement between the registrant .3 and Sunrise Healthcare Corporation ("Manger") dated (13) December 1997. 10.21 Promissory Note dated as of January 26, 1996 in the .4 amount of $3,991,190 from Heritage Hills Retirement, Inc. ("Borrower") to Health Care Property Investors, (2) Inc. ("Lender") (Exhibit 10.23.4). 10.21 Loan Agreement dated January 26, 1996 between the .5 Borrower and the Lender (Exhibit 10.23.5). (2) 10.21 Guaranty dated January 26, 1996 by the registrant in (2) .6 favor of the Borrower (Exhibit 10.23.6). 10.21 Deed of Trust with Assignment of Rents, Security .7 Agreement and Fixture Filing dated as of January 26, 1996 by and among Heritage Hills Retirement, Inc. ("Grantor"), Chicago Title Insurance Company (2) ("Trustee") and Health Care Property Investor, Inc. ("Beneficiary") (Exhibit 10.23.7). 10.21 Lease Agreement dated as of January 26, 1996 between .8 the registrant and Health Care Property Investor, (2) Inc. with respect to Heritage Lodge Facility (Exhibit 10.23.8). 10.21 Lease Agreement dated as of January 26, 1996 between .9 the registrant and Health Care Property Investor, (2) Inc. with respect to Pine Park Facility (Exhibit 10.23.9). 10.21 Lease Agreement dated January 26, 1996 between the .10 registrant and HCPI Trust with respect to Skylyn (2) Facility (Exhibit 10.23.10). 10.21 Lease Agreement dated January 26, 1996 between the .11 registrant and HCPI Trust with respect to Summit (2) Place Facility (Exhibit 10.23.11). 10.21 Amendment to Deed of Trust dated April 25, 1996 .12 between Heritage Hills Retirement, Inc. ("Grantor"), (5) and Health Care Property Investors, Inc. ("Beneficiary") (Exhibit 10.21.12). 10.21 First Amendment to Lease Agreement dated March 29, .13 1996 between registrant and Health Care Property (5) Investors, Inc. with respect to Heritage Health Center (Exhibit 10.21.13). 10.2 Letter of Intent dated January 31, 1996 between the 3 registrant and Meditrust Acquisition Corporation I relating (2) to developments (Exhibit 10.33). 10.2 Letter of Intent dated January 31, 1996 between the 4 registrant and Meditrust Acquisition Corporation I relating (2) to acquisitions (Exhibit 10.34). 10.2 Letter of Intent dated August 13, 1996 between the 4 registrant and Meditrust Acquisition Corporation I relating (5) to acquisitions (Exhibit 10.24). 10.2 Letter of Intent dated August 13, 1996 between the 5 registrant and Meditust Acquisition Corporation I relating (5) to developments (Exhibit 10.24). 10.2 Juniper Meadows in Lewiston, Idaho 6 10.26 Agreement to Purchase Construction Loan dated January .1 30, 1997 between RMI Capital Management Co. (5) ("Construction Lender") and the registrant (Exhibit 10.26.1). 10.26 Construction Loan Agreement between RMI Capital .2 Management Co. ("Lender") and Emeritus Properties II, (5) Inc. ("Borrower") (Exhibit 10.26.2). 10.26 Promissory Note dated January 30, 1997 in the amount .3 of $5,080,082.39 between RMI Capital Management Co. (5) ("Holder") and Emeritus Properties II, Inc. ("Maker") (Exhibit 10.26.3). 10.26 Deed of Trust, Assignment of Rents, Security .4 Agreement and Financing Statement dated January 30, 1997 between Emeritus Properties II, Inc. ("Borrower" (5) or "Grantor"), Alliance Title & Escrow Corp. ("Trustee") and RMI Capital Management Co. (Exhibit 10.26.4). 10.2 Assignment, Assumption and Consent Agreement dated as of 7 April 17, 1995 Between the registrant and Columbia-Pacific (1) Group, Inc. (Exhibit 10.32). 10.2 Convertible Debenture Agreement dated as of June 10, 1994 8 among The Standish Care Company and the individuals on (1) Schedule I attached thereto (Exhibit 10.33). 10.2 Registration Rights Agreement dated June 10, 1994 among The 9 Standish Care Company and Columbia-Pacific Group (Exhibit (1) 10.34). 10.3 Warrant to Purchase Common Stock of The Standish Care (1) 0 Company (Exhibit 10.35) 35 10.3 Development Property in Fairfield, California 1 10.31 Loan Agreement in the amount of $12,800,000 dated .1 January 10, 1997, between Fairfield Retirement Center, LLC ("Borrower") and the Finova Capital (5) Corporation ("Lender") (Exhibit 10.31.1). 10.31 Promissory Note dated January 10, 1997 in the amount .2 of $12,800,000 between Fairfield Retirement Center, LLC ("Borrower") and Finova Capital Corporation (5) ("Lender") (Exhibit 10.31.2). 10.31 Deed of Trust, Security Agreement, Assignment of .3 Leases and Rents and Fixture Filing dated January 10, 1997 between Fairfield Retirement Center, LLC (5) ("Trustor"), Chicago Title Company ("Trustee") and Finova Capital Corporation ("Beneficiary") (Exhibit 10.31.3). 10.31 Guaranty Agreement dated January 10, 1997 between the .4 registrant ("Guarantor") and Finova Capital (5) Corporation ("Lender") (Exhibit 10.31.4). 10.3 Courtyard at the Willows in Puyallup, Washington 2 10.32 Loan Agreement dated January 30, 1997, between .1 Emeritus Properties III, Inc. ("Maker") and Ocwen (5) Federal Bank FSB ("Payee") (Exhibit 10.32.1). 10.32 Promissory Note dated January 30, 1997 in the amount .2 of $6,465,000 between Emeritus Properties III, Inc. (5) ("Maker") and Ocwen Federal Bank, FSB ("Payee") (Exhibit 10.32.2). 10.32 Deed of Trust, Security Agreement, Assignment of .3 Leases and Rents and Fixture Filing dated January 30, 1997 between Emeritus Properties III, Inc. (5) ("Borrower"), Chicago Title Insurance Company ("Trustee") and Ocwen Federal Bank, FSB ("Lender") (Exhibit 10.32.3). 10.32 Deed of Trust, Security Agreement, Financing .4 Statement and Assignment of Resident Agreements and Rents dated January 30, 1997 between Emeritus Properties III, Inc. ("Grantor"), Chicago Title (6) Insurance Company ("Trustee") and Ocwen Federal Bank FSB ("Beneficiary") (Exhibit 10.5.1). 10.32 Agreement for Amendment of Documents dated January .5 30, 1997 between Emeritus Properties III, Inc., (6) ("Borrower") and OCWEN Federal Bank FSB, ("Lender") (Exhibit 10.5.2). 10.3 Kirkland Lodge at Lakeside in Kirkland, Washington, Park 3 Place in Casper, Wyoming, The Hearthstone in Moses Lake, Washington and Meadowbrook Retirement in Ontario, Oregon. The following agreement is representative of that executed in connection with these properties. 10.33 Lease Agreement dated May 1, 1997 and May 23, 1997 .1 between Emeritus Properties I, Inc., ("Lessee") and (9) Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.1.1). 10.3 The Pines at Tewksbury in Tewksbury, Massachusetts 4 10.34 Lease Agreement dated March 15, 1996 between .1 Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect (2) to Tewksbury (Exhibit 10.37.1). 10.3 Garrison Creek Lodge in Walla Walla, Washington, Cambria in 5 El Paso Texas, and Sherwood Place in Odessa, Texas. The following agreements are representative of those executed in connection with these properties: 10.35 Lease Agreement dated July, August and September 1996 .1 between the registrant ("Lessee") and American Health (4) Properties, Inc. ("Lessor") (Exhibit 10.3.1). 10.35 First Amendment to Lease Agreement dated December 31, .2 1996 between the registrant ("Lessee") and AHP of (5) Washington, Inc., ("Lessor") (Exhibit 10.35.2). 10.3 Cobblestone at Fairmont in Manassas, Virginia 6 10.36 Loan Agreement effective as of October 26, 1995 .1 between the registrant and Health Care REIT, Inc. (1) (Exhibit 10.42.1). 10.36 Deed of Trust, Security Agreement, Assignment of .2 Leases and Rents and Fixture Filing dated as of (1) October 26, 1995 by the registrant to Health Care REIT, Inc. (Exhibit 10.42.2). 10.36 Note dated October 26, 1995 from the registrant to (1) .3 Health Care REIT, Inc. (Exhibit 10.42.3). 10.36 Unconditional and Continuing Guaranty dated as of .4 October 26, 1995 by Daniel R. Baty in favor of Health (1) Care REIT, Inc. (Exhibit 10.42.4). 10.3 Rosewood Court in Fullerton, California, The Arbor at Olive 7 Grove in Phoenix, Arizona, Renton Villa in Renton, Washington, Seabrook in Everett, Washington and Laurel Lake Estates in Voorhees, New Jersey. The following agreements are representative of those executed in connection with these properties: 10.37 Second Amended Lease Agreement dated as of December .1 30, 1996 by and between the registrant and Health (5) Care Property Investors, Inc. (Exhibit 10.37.1). 10.3 Eastman Estates in Longview, Texas 8 10.38 Lease Agreement dated September 30, 1997 between .1 Meditrust Acquisition Corporation I ("Lessor") and (12) ESC I, L.P. ("Lessee") (Exhibit 10.3.1). 10.3 Meadowlands Terrace in Waco, Texas 9 10.39 Loan Agreement dated September 30, 1997 between .1 Meditrust Mortgage Investments, Inc. ("Lender") and (12) ESC I, L.P. ("Borrower") (Exhibit 10.4.1). 10.39 Promissory Note dated September 30, 1997 in the .2 amount of $4,288,000 between Meditrust Mortgage (12) Investments, Inc. ("Lender") and ESC I, L.P. ("Borrower") (Exhibit 10.4.2). 10.4 Cooper George Partners Limited Partnership 0 36 10.40 Agreement of Cooper George Partners Limited .1 Partnership dated August 7, 1995 between Emeritus Real Estate IV, L.L.C. ("General Partner") and Bella (2) Torre De Pisa Limited Partnership ("Limited Partner") (Exhibit 10.43.1). 10.40 Construction Loan Agreement dated December 12, 1995 .2 between Cooper George Partners Limited Partnership (" Borrower") and Intervest-Mortgage Investment Company (2) ("Lender") (Exhibit 10.43.2). 10.40 Promissory Note dated December 1995 between Cooper .3 George Partners Limited Partnership ("Maker") and the (2) Lender (Exhibit 10.43.3). 10.40 Guaranty dated December 1995 by Daniel R. Baty and .4 Pamela D. Baty ("Guarantor") in favor of the Lender (2) (Exhibit 10.43.4). 10.40 Deed of Trust, Assignment of Rents and Security .5 Agreement dated December 1995 between Cooper George Partners Limited Partnership ("Grantor"), First American Title Insurance Company ("Trustee") and (2) Intervest-Mortgage Investment Company ("Beneficiary") (Exhibit 10.43.5). 10.4 Registration Rights Agreement dated February 8, 1996 with 1 respect to the registrant's 6.25% Convertible Subordinated (2) Debentures due 2006 (Exhibit 10.44). 10.4 Registration Rights Agreement dated February 8, 1996 with 2 respect to the registrant's 6.25% Convertible Subordinated (2) Debentures due 2006 (Exhibit 10.45). 10.4 Development Properties in Beaumont, Texas, Midland, Texas, 3 Lubbock, Texas, Amarillo, Texas, Clarksville, Tennessee, Wichita Falls in Wichita Falls, Texas and San Angelo in San Angelo, Texas. The following agreements are representative of those executed in connection with these properties: 10.43 Lease Agreement dated April and July 1996 between ESC .1 I, L.P. ("Lessee") and Meditrust Acquisition (3) Corporation I ("Lessor") (Exhibit 10.2.1). 10.43 Leasehold Improvement Agreement dated April 15, 1996 .2 between Meditrust Acquisition Corporation I (3) ("Lessor") and ESC I, L.P. ("Lessee") (Exhibit 10.2.2). 10.4 Barrington Place in LeCanto, Florida and Springtree in 4 Sunrise, Florida. The following agreement is representative of those executed in connection with these properties: 10.44 Lease Agreement dated May 1, 1996 between Emeritus .1 Properties I, Inc. ("Lessee") and Meditrust (3) Acquisition Corporation I ("Lessor") (Exhibit 10.3.1). 10.4 Laurel Place in San Bernardino, California 5 10.45 Purchase and Sale Agreement dated January 24, 1996 .1 between Western Biologics Inc., ("Seller"), Nancy F. Feinstein and Jay L. Feinstein ("Seller") and the (3) registrant ("Purchaser") (Exhibit 10.4.1). 10.4 Lakewood Inn in Coeur d'Alene, Idaho, Evergreen Lodge in 6 Federal Way, Washington, Greenville in Greenville, South Carolina, Grand Terrace in Grand Terrace, California, Ridge Wind In Chubbock, Idaho and Ocean Shores in Ocean Shores, Washington. The following agreement is representative of those executed in connection with these properties: 10.46 Lease Agreement dated April and June 1996 between .1 Emeritus Properties I, Inc. ("Lessee") and Meditrust (3) Acquisition Corporation I ("Lessor") (Exhibit 10.5.1). 10.4 Lakewood Inn in Coeur d'Alene, Idaho, Greenville in 7 Greenville, South Carolina and Ocean Shores in Ocean Shores, Washington. The following agreement is representative of those executed in connection with these properties: 10.47 Leasehold Improvement Agreement dated April and June .1 1996 between Meditrust Acquisition Corporation I (3) ("Lessor") and Emeritus Properties I ("Lessee") (Exhibit 10.6.1). 10.4 Development Property in Bozeman, Montana 8 10.48 Agreement to Purchase Construction Loan dated May 30, .1 1996 between RMI Capital Management Co. (3) ("Construction Lender") and Emeritus Corporation (Exhibit 10.7.1). 10.48 Construction Loan Agreement between RMI Capital .2 Management Co. ("Lender") and Emeritus Properties II, (3) Inc. ("Borrower") (Exhibit 10.7.2). 10.48 Promissory Note dated May 30, 1996 in the amount of .3 $4,695,000 between RMI Capital Management Co. (3) ("Holder") and Emeritus Properties II, Inc. ("Maker") (Exhibit 10.7.3). 10.48 Security Agreement dated May 30, 1996 between .4 Emeritus Properties II, Inc. ("Debtor") and RMI (3) Capital Management Co. ("Secured Party") (Exhibit 10.7.4). 10.48 Deed of Trust, Assignment of Rents, Security .5 Agreement and Financing Statement dated May 30, 1996 between Emeritus Properties II, Inc. ("Borrower" or "Grantor"), American Land Title Company ("Trustee") (3) and RMI Capital Management Co. ("Beneficiary" or "Lender") (Exhibit 10.7.5). 10.48 Guaranty Agreement dated May 30, 1996 between .6 Emeritus Corporation ("Guarantor") and RMI Capital (3) Management Co. ("Lender") (Exhibit 10.7.6). 10.4 Office Lease Agreement dated April 29, 1996 between Martin 9 Selig ("Lessor") and the registrant ("Lessee") (Exhibit (3) 10.8). 10.5 The Lodge at Mainlands in Pinellas Park, Florida, Colonial 0 Park Club in Sarasota, Florida, Fairhaven Estates in Bellingham, Washington, Highland Hills in Pocatello, Idaho and Anderson Place in Anderson, South Carolina. The following agreements are representative of those executed in connection with these properties: 10.50 Lease Agreement dated August and October 1996 between .1 Emeritus Properties I, Inc. ("Lessee") and Meditrust (4) Acquisition Corporation I ("Lessor") (Exhibit 10.1.1). 10.5 Colonial Park Club in Sarasota, Florida. 1 10.51 Leasehold Improvement Agreement dated August 21, 1996 .1 between Emeritus Properties I, Inc. ("Lessee") and (4) Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.2.1). 37 10.5 Colonie Manor in Latham, New York, Bassett Manor in 2 Williamsville, New York, West Side Manor in Liverpool, New York, Bellevue Manor in Syracuse, New York, Perinton Park Manor in Fairport, New York, Bassett Park Manor in Williamsville, New York, Woodland Manor in Vestal, New York, East Side Manor in Fayetteville, New York and West Side Manor in Rochester, New York. The following agreement is representative of those executed in connection with these properties: 10.52 Lease Agreement dated September 1, 1996 between .1 Philip Wegman ("Landlord") and Painted Post Partners (4) ("Tenant") (Exhibit 10.4.1). 10.52 Agreement to Provide Administrative Services to an .2 Adult Home dated September 2, 1996 between the (4) registrant and Painted Post Partners ("Operator") (Exhibit 10.4.2). 10.52 First Amendment to Agreement to Provide .3 Administrative Services to an Adult Home dated (10) January 1, 1997 between Painted Post Partners and the registrant (Exhibit 10.1). 10.5 Columbia House Communities. 3 10.53 Management Services Agreement between the Registrant .1 ("Manager") and Columbia House, LLC ("Lessee") dated (4) November 1, 1996 with respect to Camlu Retirement (Exhibit 10.6.1). 10.53 Management Services Agreement dated January 1, 19998 .2 between the registrant ("Manager") and Columbia House (13) LLC ("Lessee") with respect to York Care. 10.53 Commercial Lease Agreement dated January 13, 1997 .3 between Albert M. Lynch ("Landlord") and Columbia (6) House, LLC ("Tenant") with respect to York Care (Exhibit 10.3.2). 10.53 Management Services Agreement dated June 1, 1997 .4 between the registrant ("Manager") and Columbia House (9) LLC ("Owner") with respect to Autumn Ridge (Exhibit 10.3.1). 10.53 Agreement to Provide Accounting and Administrative .5 Services dated October 1, 1997 between Acorn Service Corporation ("Administrator") and Vancouver Housing, (12) L.L.C., ("Manager") with respect to Van Vista and Columbia House (Exhibit 10.6.1). 10.53 Assignment and First Amendment to Agreement to .6 Provide Management Services dated September 1, 1997 between the registrant, Columbia House, L.L.C., Acorn (13) Service Corporation and Camlu Coeur d'Alene, L.L.C. with respect to Camlu. 10.53 Assignment and First Amendment to Agreement to .7 Provide Management Services dated September 1, 1997 between the registrant, Columbia House, L.L.C., Acorn (13) Service Corporation and Autumn Ridge Herculaneum, L.L.C. with respect to Autumn Ridge. 10.53 Management Services Agreement dated January 1, 1998 .8 between the registrant ("Manager") and Columbia House (13) LLC ("Owner") with respect to Park Lane. 10.5 Development Property in Ogden, Utah 4 10.54 Lease Agreement dated April 30, 1997 between Emeritus .1 Properties I, Inc., ("Lessee") and Meditrust (9) Acquisition Corporation I ("Lessor") (Exhibit 10.4.1). 10.54 Leasehold Improvement Agreement dated April 30, 1997 .2 between Emeritus Properties I, Inc., ("Lessee") and (9) Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.4.2). 10.5 Vickery Towers in Dallas, Texas 5 10.55 Promissory Note dated November 26, 1996 in the amount .1 of $17,000,000 between ESC II, L.P. ("Maker") and (5) GMAC Commercial Mortgage Corporation ("Payee") (Exhibit 10.55.1). 10.55 Construction Loan Agreement dated November 26, 1996 .2 by ESC II, L.P., (Borrower) and GMAC Commercial (5) Mortgage Corporation ("Lender") (Exhibit 10.55.2). 10.55 Deed of Trust, Mortgage and Security Agreement dated .3 as of November 26, 1996 by ESC II, L.P. ("Grantor") (5) to Andrew D. Rocker, Trustee (Exhibit 10.55.3). 10.55 Guaranty Agreement dated November 26, 1996 between .4 Emeritus Corporation ("Guarantor") and GMAC (5) Commercial Mortgage Corporation ("Creditor") (Exhibit 10.55.4). 10.5 Concorde in Las Vegas, Nevada 6 10.56 Purchase and Sale Agreement dated July 9, 1996 .1 between the registrant ("Purchaser") and Sunday (5) Estates, Inc. ("Seller") (Exhibit 10.56.1). 10.56 First Amendment to Purchase and Sale Agreement dated .2 July 11, 1996 between the registrant the Seller (5) (Exhibit 10.56.2). 10.56 Promissory Note dated November 18, 1996 in the amount .3 of $4,000,000 between the registrant ("Maker") and (5) Sunday Estates, Inc. ("Payee") (Exhibit 10.56.3). 10.56 All-Inclusive Deed of Trust and Assignment of Rents .4 dated November 18, 1996 between the registrant ("Trustor"), Fidelity National Title Agency of (5) Nevada, Inc. ("Trustor") and Sunday Estates, Inc., ("Beneficiary") (Exhibit 10.56.4). 10.56 Addendum to All-Inclusive Deed of Trust and .5 Assignment of Rents dated November 18, 1996 between (5) the Trustor and the ("Beneficiary") (Exhibit 10.56.5). 10.5 Development Properties in Hutchinson, Kansas and Ridgeland, 7 Mississippi. The following agreements are representative of those executed in connection with these properties: 38 10.57 Lease Agreement dated March 1996 between Emeritus .1 Properties I, Inc. ("Lessee") and Meditrust (5) Acquisition Corporation I ("Lessor") (Exhibit 10.57.1). 10.57 Leasehold Improvement Agreement dated March 1996 .2 between Meditrust Acquisition Corporation I (5) ("Lessor") and Emeritus Properties I, Inc. (Exhibit 10.57.2). 10.5 Development Properties in Auburn and Chelmsford, 8 Massachusetts, Louisville, Kentucky and Rocky Hill, Connecticut. The following agreements are representative of those executed in connection with these properties: 10.58 Lease Agreement dated February 1996 between the .1 registrant ("Lessee") and LM Auburn Assisted Living LLC, and LM Louisville Assisted Living LLC, (5) ("Landlords") with respect to the development properties in Auburn and Louisville (Exhibit 10.58.1). 10.58 Amended and Restated Lease Agreement dated February .2 26, 1996 between the registrant ("Lessee") and LM Rocky Hill Assisted Living Limited Partnership, (5) ("Landlord") with respect to the development property in Rocky Hill (Exhibit 10.58.2). 10.58 Lease Agreement dated October 10, 1996 between the .3 registrant ("Lessee") and LM Chelmsford Assisted (5) Living LLC, ("Landlord") with respect to the development property in Chelmsford (Exhibit 10.58.3). 10.58 Promissory Note in the amount of $1,255,000 dated .4 December 1996 between the registrant ("Lender") and (5) LM Auburn Assisted Living LLC, ("Borrower") with respect to the development property in Auburn (Exhibit 10.58.4). 10.58 Promissory Note in the amount of $1,450,000 dated .5 January 1997 between the registrant ("Lender") and LM Louisville Assisted Living LLC, ("Borrower") with (5) respect to the development property in Louisville (Exhibit 10.58.5). 10.58 Promissory Note in the amount of $1,275,000 dated .6 January 1997 between the registrant ("Lender") and LM Rocky Hill Assisted Living Limited Liability (5) Partnership, ("Borrower") with respect to the development property in Rocky Hill (Exhibit 10.58.6). 10.58 Promissory Note in the amount of $300,000 dated .7 January 1997 between the registrant ("Lender") and LM Chelmsford Assisted Living LLC, ("Borrower") with (5) respect to the development property in Chelmsford (Exhibit 10.58.7). 10.5 Beneva Park Club, Central Park Village, College Park Club, 9 Park Club Brandon, Park Club Fort Myers and Park Club Oakbridge, The Pines at Tewksbury and The Terrace. The following documents are representative of those executed in connection with these properties: 10.59 First Amendment to Facility Lease dated December 31, .1 1996 between Meditrust Acquisition Corporation I (5) ("Lessor") and Emeritus Properties I, Inc. ("Lessee") (Exhibit 10.59.1). 10.59 Amended and Restated Memorandum of Lease dated .2 December 31, 1996 between Meditrust Acquisition (5) Corporation I ("Lessor") and Emeritus Properties I, Inc. ("Lessee") (Exhibit 10.59.2). 10.6 Evergreen Lodge in Federal Way, Washington 0 10.60 First Amendment to Facility Lease dated December 31, .1 1996 between Meditrust Acquisition Corporation I (5) ("Lessor") and Emeritus Properties I, Inc. ("Lessee") (Exhibit 10.60.1). 10.60 Amended and Restated Memorandum of Lease dated .2 December 31, 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, (5) Inc. ("Lessee") (Exhibit 10.60.2). 10.6 Development Properties in Cheyenne, Wyoming and Auburn, 1 California. The following agreements are representative of those executed in connection with these properties. 10.61 Management Agreement dated May 30, 1997 between .1 Willard Holdings, Inc., ("Owner") and the registrant (9) ("Manager") (Exhibit 10.5.1). 10.61 Lease Agreement dated May 30, 1997 between Willard .2 Holdings, Inc., ("Lessor") and the registrant (9) ("Lessee") (Exhibit 10.5.2). 10.6 Senior Management Employment Agreements entered into 2 between the registrant and each of the following individuals: 10.62 Michelle A. Bickford (Exhibit 10.6.1), Frank A. Ruffo .1 (Exhibit 10.6.2), Kelly J. Price (Exhibit 10.6.3), Gary D. Witte (Exhibit 10.6.4), Sarah J. Curtis (9) (Exhibit 10.6.4) and Raymond R. Brandstrom (Exhibit 10.6.5). 10.6 La Casa Grande in New Port Richey, Florida, River Oaks in 3 Englewood, Florida, and Stanford Centre in Altamonte Springs, Florida. The following agreements are representative of those executed in connection with these properties. 10.63 Stock Purchase Agreement dated September 30, 1996 .1 between Wayne Voegele, Jerome Lang, Ronald Carlson, Thomas Stanford, Frank McMillan, Lonnie Carlson, and (7) Carla Holweger ("Seller") and the registrant ("Purchaser") with respect to La Casa Grande (Exhibit 10.1). 10.63 First Amendment to Stock Purchase Agreement dated .2 January 31, 1997 between the Seller and the (7) registrant with respect to La Case Grande (Exhibit 10.2). 10.63 Stock Purchase Agreement dated September 30, 1996 .3 between the Seller and the registrant with respect (7) to River Oaks (Exhibit 10.3). 10.63 First Amendment to Stock Purchase Agreement dated .4 January 31, 1997 between the Seller and the (7) registrant with respect to River Oaks (Exhibit 10.4). 10.63 Stock Purchase Agreement dated September 30, 1996 .5 between the Seller and the registrant with respect (7) to Stanford Centre (Exhibit 10.5). 10.63 First Amendment to Stock Purchase Agreement dated .6 January 31, 1997 between the Seller and the (7) registrant with respect to Stanford Centre (Exhibit 10.6). 39 10.63 Term Loan Agreement dated May 1, 1997 in the amount .7 of $26,000,000 between Emeritus Properties V, Inc., (8) ("Borrower") and Fleet National Bank ("Lender") (Exhibit 10.7). 10.63 Promissory note dated May 1, 1997 in the amount of .8 $26,000,000 between Emeritus Properties V, Inc., (8) ("Borrower") and Fleet National Bank ("Lender") (Exhibit 10.8). 10.63 Promissory Note dated May 1, 1997 in the amount of .9 $7,000,000 between Emeritus Properties V, Inc., (8) ("Borrower") and High Yield Partners LLC, ("Lender") (Exhibit 10.9). 10.63 Credit Agreement dated May 1, 1997 between Emeritus .10 Properties V, Inc. and High Yield Partners LLC (8) (Exhibit 10.10). 10.63 Guaranty dated May 1, 1997 between the registrant .11 ("Guarantor") Emeritus Properties V, Inc., ("Debtor") (8) and High Yield Partners LLC ("Lender") (Exhibit 10.11). 10.63 Mortgage Deed and Security Agreement entered into .12 between the registrant ("Mortgagor") and Fleet (13) national Bank ("Lender"). 10.6 Painted Post Partnership 4 10.64 Painted Post Partners Partnership Agreement dated (1) .1 October 1, 1995 (Exhibit 10.24.7). 10.64 First Amendment to Painted Post Partners Partnership .2 Agreement dated October 22, 1996 between Daniel R. (5) Baty and Raymond R. Brandstrom (Exhibit 10.20.20). 10.64 Indemnity Agreement dated November 3, 1996 between .3 the registrant and Painted Post Partners (Exhibit (10) 10.3). 10.64 First Amendment to Indemnity Agreement dated January .4 1, 1997 between the registrant and Painted Post (10) Partners (Exhibit 10.4). 10.64 Undertaking and Indemnity Agreement dated October 23, .5 1995 between the registrant, P. Jules Patt and Pamela (10) J. Patt and Painted Post Partnership (Exhibit 10.5). 10.64 First Amendment to Undertaking and Indemnity .6 Agreement dated January 1, 1997 between Painted post (10) Partners and the registrant (Exhibit 10.6). 10.64 First Amendment to Non-Competition Agreement between .7 the registrant and Daniel R. Baty (Exhibit 10.1.1) (11) and Raymond R. Brandstrom (Exhibit 10.1.2). 10.6 Ridgeland Court in Ridgeland, Mississippi 5 10.65 Master Agreement and Subordination Agreement dated .1 September 5, 1997 between the registrant, Emeritus Properties I, Inc., and Mississippi Baptist health (12) Systems, Inc. (Exhibit 10.1.1). 10.65 License Agreement dated September 5, 1997 between the .2 registrant and its subsidiary and affiliated (12) corporations and Mississippi Baptist health Systems, Inc. (Exhibit 10.1.2). 10.65 Economic Interest Assignment Agreement and .3 Subordination Agreement dated September 5, 1997 between the registrant, Emeritus Properties I, Inc., (12) and Mississippi Baptist Health Systems, Inc. (Exhibit 10.1.3). 10.6 Development Property in Urbana, Illinois. 6 10.66 Lease Agreement dated September 10, 1997 between ALCO .1 IV, L.L.C. ("Lessor") and the registrant ("Lessee") (12) (Exhibit 10.2.1). 10.66 Management Agreement dated September 10, 1997 between .2 the registrant ("Manager" and ALCO IV, L.L.C. (12) ("Owner") (Exhibit 10.2.2). 10.6 Development Properties in Middleburg Heights, Ohio and 7 Newark, Delaware. The following agreements are representative of those executed in connection with these properties. 10.67 Lease Agreement dated September, 1997 between .1 Emeritus Properties I, Inc., ("Lessee") and Meditrust (12) Acquisition Corporation I, ("Lessor") (Exhibit 10.5.1). 10.67 Leasehold Improvement Agreement dated September, 1997 .2 between Emeritus Properties I, Inc., ("Lessee") and (12) Meditrust Acquisition Corporation I, ("Lessor") (Exhibit 10.5.2). 10.6 Settlement Agreement dated April 25, 1997 by and between 8 the registrant and Carematrix Corporation (formerly The (13) Standish Care Company). 10.6 Amendment to Office Lease Agreement dated September 6, 1996 9 between Martin Selig ("Lessor") and the registrant. (13) 10.7 Villa Del Rey in Escondido, California 0 10.70 Purchase and Sale Agreement dated December 19, 1996 .1 between the registrant ("Purchaser") and Northwest (6) Retirement ("Seller") (Exhibit 10.1.1). 10.70 Restated Promissory Note dated February 26, 1997 in .2 the amount of $3,030,773.40 between the registrant (6) ("Borrower") and Redlands Federal Bank ("Lender") (Exhibit 10.1.2). 10.70 Agreement for Modification of Loan Documents dated .3 February 26, 1997 between the registrant and Redlands (6) Federal Savings Bank (Exhibit 10.1.3). 10.70 Loan Assumption Agreement dated February 26, 1997 .4 between the registrant and Redlands Federal Savings (6) Bank (Exhibit 10.1.4). 10.70 Amended and Restated Deed of Trust dated February 26, .5 1997 between the registrant ("Borrower") and Redlands Financial Services, Inc. ("Trustee") and Redlands (6) Federal Bank ("Lender") (Exhibit 10.1.5). 10.70 All-Inclusive Promissory Note dated March 25, 1997 in .6 the amount of $749,512.17 between the registrant and (6) Northwest Retirement ("Payee") (Exhibit 10.1.6). 40 10.70 All-Inclusive Deed of Trust dated March 26, 1997 .7 between the registrant ("Trustor"), Chicago Title Insurance Company ("Trustee") and Northwest (6) Retirement ("Beneficiary") (Exhibit 10.1.7). 10.7 Development Property in Paso Robles, California 1 10.71 Agreement of TDC/Emeritus Paso Robles Associates .1 dated June 1, 1995 between the registrant and TDC (6) Convalescent, Inc. (Exhibit 10.2.1). 10.71 Loan Agreement in the amount of $6,000,000 dated .2 February 15, 1997 between Finova Capital Corporation ("Lender") and TDC/Emeritus Paso Robles Associates (6) ("Borrower") (Exhibit 10.2.2). 10.71 Promissory Note dated February 28, 1997 in the amount .3 of $6,000,000 between Finova Capital Corporation ("Lender") and TDC/Emeritus Paso Robles Associates (6) ("Borrower") (Exhibit 10.2.3). 10.71 Deed of Trust, Security Agreement, Assignment of .4 Leases and Rents and Fixture Filing dated February 18, 1997 between TDC/Emeritus Paso Robles Associates (6) ("Trustor"), Chicago Title Company ("Trustee") and Finova Capital Corporation ("Beneficiary") (Exhibit 10.2.4). 10.71 Guaranty between TDC Convalescent, Inc. ("Guarantor") .5 and Finova Capital Corporation (Exhibit 10.2.5). (6) 10.71 Guaranty between the registrant ("Guarantor") and .6 Finova Capital Corporation (Exhibit 10.2.6). (6) 10.7 Development Property in Staunton, Virginia 2 10.72 Purchase and Sale Agreement dated February 5, 1997 .1 between Greencastle Retirement Partners, L.L.C. (13) ("Purchaser") and Gail G. Brown ("Seller"). 10.72 Assignment and Assumption of Purchase and Sale .2 Agreement dated February 12, 1997 between Greencastle (13) Retirement Partners, L.L.C. and the registrant. 10.7 Development Property in Jamestown New York 3 10.73 Purchase Agreement dated December 12, 1996 between .1 June Fagerstrom ("Seller") and Wegman Family LLC (13) ("Buyer"). 10.73 Assignment and Assumption Agreement dated December .2 30, 1997 between Wegman Family LLC ("Assignor") and (13) Painted Post Partners ("Assignee"). 10.7 Development Property in Danville, Illinois 4 10.74 Purchase and Sale Agreement dated October 14, 1997 .1 between South Bay Partners, Inc. ("Purchaser") and (13) Elks Lodge No. 332, BPOE ("Seller"). 10.74 Assignment and Assumption of Purchase and Sale .2 Agreement dated October 21, 1997 between South Bay (13) Partners, Inc. and the registrant. 10.7 Development Property in Biloxi, Mississippi 5 10.75 Management Agreement dated December 18, 1997 between .1 the registrant ("Manager") and ALCO VII, L.L.C. (13) ("Owner"). 10.7 Sanyo Electric Co., Ltd. 6 10.76 Agreement entered into on May 30, 1996 between the .1 registrant and Sanyo Electric Co., Ltd. for the interest in jointly entering the development, (13) construction and /or operation of the Senior Housing Business in Japan. 10.76 Joint Venture Agreement entered into on July 9, 1997, .2 between the registrant and Sanyo Electric Co., Ltd. (13) 10.7 Development Property in North Phoenix, Arizona. 7 10.77 Leasehold Improvement Agreement dated December 30, .1 1997 between Emeritus Properties I, Inc., ("Lessee") (13) and Meditrust Acquisition Corporation I, ("Lessor"). 10.7 Lakeridge Place in Wichita Falls, Texas, Meadowlands 8 Terrace in Waco, Texas, Saddleridge Lodge in Midland, Texas and Sherwood Place in Odessa, Texas. The following agreements are representative of those executed in connection with these properties. 10.78 Management and Consulting Agreement dated February 1, .1 1997 between ESC I, L.P., and XL Management Company (13) L.L.C. 10.7 Aurora Bay Agreements 9 10.79 Convertible Promissory Note dated January 7, 1998 .1 between Aurora Bay Investments, LLC and the (13) registrant. 10.79 Notice and Agreement Emeritus Corporation Loan to .2 Aurora Bay Investments, LLC dated January 7, 1998. (13) 10.79 Credit Agreement dated January 7, 1998 between the .3 registrants and Aurora Bay Investments, LLC. (13) 10.79 Project Promissory Note dated January 7, 1998 between .4 Lubbock Group, Ltd. and Aurora Bay Investments, LLC. (13) 10.79 Project Pledge and Security Agreement dated January .5 7, 1998 between Aurora Investments, LLC and Aurora (13) Bay I, LLC for the benefit of the registrant. 10.79 Guarantor Pledge and Security Agreement dated January .6 7, 1998 between Thilo Best, Erwin Investors I, LLC (13) and Craig Spaulding for the benefit of the registrant. 10.79 Guaranty dated January 7, 1998 between Thilo Best, .7 Erwin Investors I, LLC. And Craig Spaulding for the (13) benefit of the registrant. 10.79 Operating Agreement of Aurora Bay I, LLC. Dated .8 January 6, 1998 entered into between Aurora Bay (13) Investment, LLC and Erwin Investors I, LLC. 41 10.79 Development Services Agreement dated January 9, 1998 .9 between Lubbock Group, Ltd. and South Bay Partners, (13) Inc. with respect to the development property in Lubbock, Texas. 21.1 Subsidiaries of the registrant. (13) 23.1 Consent of KPMG Peat Marwick, LLP. (13) 27.1 Financial Data Schedule. (13)
(1) Incorporated by reference to the indicated exhibit filed with the Company's Registration Statement on Form S-1 (File No. 33-97508) declared effective on November 21, 1995. (2) Incorporated by reference to the indicated exhibit filed with the Company's Annual Report on Form 10-K (File No. 1-14012) on March 29, 1996. (3) Incorporated by reference to the indicated exhibit filed with the Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August 14, 1996. (4) Incorporated by reference to the indicated exhibit filed with the Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 14, 1996. (5) Incorporated by reference to the indicated exhibit filed with the Company's Annual Report on Form 10-K (File No. 1-14012) on March 31, 1997. (6) Incorporated by reference to the indicated exhibit filed with the Company's First Quarter Report on Form 10-Q (File No. 1-14012) on May 15, 1997. (7) Incorporated by reference to the indicated exhibit filed with the Company's Current Report on Form 8-K (File No. 1-14012) on May 16, 1997. (8) Incorporated by reference to the indicated exhibit filed with the Company's Current Report on Form 8-K Amendment No. 1 (File No. 1- 14012) on July 14, 1997. (9) Incorporated by reference to the indicated exhibit filed with the Company's Second Quarter Report on Form 10-Q (File No. 1-14012) on August 14, 1997. (10) Incorporated by reference to the indicated exhibit filed with the Company's Registration Statement on Form S-3 Amendment No. 2 (File No. 333-20805) on August 14, 1997. (11) Incorporated by reference to the indicated exhibit filed with the Company's Registration Statement on Form S-3 Amendment No. 3 (File No. 333-20805) on October 29, 1997. (12) Incorporated by reference to the indicated exhibit filed with the Company's Third Quarter Report on Form 10-Q (File No. 1-14012) on November 14, 1997. (13) Filed herewith. 42 SIGNATURES Pursuant to the requirements of 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: March 27, 1998 EMERITUS CORPORATION (Registrant) /s/ Daniel R. Baty -------------------------------- Daniel R. Baty, Chief Executive Officer and Director /s/ Raymond R. Brandstrom -------------------------------- Raymond R. Brandstrom, Chief Operating Officer and Director /s/ Kelly J. Price -------------------------------- Kelly J. Price, Chief Financial Officer, Vice President, Finance and Principal Accounting Officer /s/ Tom A. Alberg -------------------------------- Tom A. Alberg, Director /s/ Patrick Carter -------------------------------- Patrick Carter, Director /s/ William E. Colson -------------------------------- William E. Colson, Director /s/ David Hamamoto -------------------------------- David Hamamoto, Director /s/ Motoharu Iue -------------------------------- Motoharu Iue, Director Index to Consolidated Financial Statements Page No. Independent Auditors' Report..................................... F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997..... F-4 Consolidated Statements of Operations for the years ended F-5 December 31, 1995, 1996 and 1997................................. Consolidated Statements of Cash Flows for the years ended F-6 December 31, 1995, 1996 and 1997................................. Consolidated Statements of Shareholders' Equity (Deficit) for the F-8 years ended December 31, 1995, 1996 and 1997..................... Notes to Consolidated Financial Statements....................... F-9 Schedule II - Valuation and Qualifying Accounts.................. F-24 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Emeritus Corporation: We have audited the accompanying consolidated balance sheets of Emeritus Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emeritus Corporation and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick, LLP Seattle, Washington February 27, 1998, except for Note 10 as to which the date is March 13, 1998 F-2 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors and Shareholders Emeritus Corporation Under date of February 27, 1998, except for note 10 as to which the date is March 13, 1998, we reported on the consolidated balance sheets of Emeritus Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three year period ended December 31, 1997, as contained in the 1997 annual report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule of valuation and qualifying accounts. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respect, the information set forth therein. /s/ KPMG Peat Marwick, LLP Seattle, Washington February 27, 1998 F-3 EMERITUS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS
December 31, -------------------- 1996 1997 --------- --------- Current assets: Cash and cash equivalents......................... $ 23,039 $ 17,537 Short-term investments............................ 2,152 17,235 Current portion of restricted deposits............ 934 550 Trade accounts receivable, net.................... 1,713 2,191 Other receivables................................. 1,292 1,362 Prepaid expenses and other current assets......... 3,269 3,716 Property held for sale............................ - 8,202 --------- --------- Total current assets...................... 32,399 50,793 Property and equipment, net......................... 99,590 145,831 Property held for development....................... 6,356 2,754 Notes receivable from and investments in affiliates. 2,464 6,422 Restricted deposits, less current portion........... 6,875 10,273 Lease acquisition costs, net........................ 8,127 8,677 Other assets, net................................... 2,227 3,823 --------- --------- Total assets.............................. $158,038 $228,573 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt................. $ 5,816 $ 12,815 Margin loan on short-term investments............. - 9,165 Trade accounts payable............................ 4,707 2,541 Construction advances - leased communities........ 6,387 - Accrued employee compensation and benefits........ 3,071 3,987 Other accrued expenses............................ 1,898 9,064 Other current liabilities......................... 763 1,147 --------- --------- Total current liabilities................. 22,642 38,719 Deferred rent....................................... 3,662 8,474 Deferred gains on sale of communities............... 9,433 12,314 Deferred income..................................... 843 114 Convertible debentures.............................. 32,000 32,000 Long-term debt, less current portion................ 60,260 108,117 Security deposits and other long-term liabilities... 1,092 1,452 --------- --------- Total liabilities......................... 129,932 201,190 --------- --------- Minority interests.................................. 1,918 1,176 Redeemable preferred stock.......................... - 25,000 Shareholders' equity: Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and outstanding 11,000,000 and 10,974,650 shares at December 31, 1996 and 1997, respectively...................... 1 1 Additional paid-in capital......................... 44,787 44,449 Unrealized gain on investment securities........... 18 4,015 Foreign currency translation adjustment............ - (4) Accumulated deficit................................ (18,618) (47,254) --------- --------- Total shareholders' equity................ 26,188 1,207 Commitments, contingencies and subsequent events.... --------- --------- Total liabilities and shareholders' equity $158,038 $228,573 ========= =========
See accompanying Notes to Consolidated Financial Statements. F-4 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Years Ended December 31, ------------------------------- 1995 1996 1997 --------- --------- --------- Revenues: Community revenue....................... $20,814 $67,243 $114,299 Other service fees...................... 456 1,494 3,370 Management fees......................... 7 189 103 --------- --------- --------- Total operating revenues........ 21,277 68,926 117,772 --------- --------- --------- Expenses: Community operations.................... 15,864 48,900 82,783 General and administrative.............. 2,630 6,158 10,819 Depreciation and amortization........... 2,517 2,881 6,644 Rent.................................... 1,138 16,114 34,651 Other................................... - - 4,426 --------- --------- --------- Total operating expenses........ 22,149 74,053 139,323 --------- --------- --------- Loss from operations............ (872) (5,127) (21,551) --------- --------- --------- Other income (expense): Interest income......................... 355 1,236 1,157 Interest expense on debt payable to affiliates........................... (1,802) - - Other interest expense.................. (4,187) (4,259) (8,427) Write-down of note receivable from affiliate............................ (1,002) - - Other, net.............................. (179) (52) 610 --------- --------- --------- Net other expense............... (6,815) (3,075) (6,660) --------- --------- --------- Loss before extraordinary item.. (7,687) (8,202) (28,211) --------- --------- --------- Extraordinary loss on extinguishment of debt................................. (1,267) - - --------- --------- --------- Net loss........................ (8,954) (8,202) (28,211) ========= ========= ========= Preferred stock dividends................. - - 425 --------- --------- --------- Net loss to common shareholders. $(8,954) $ (8,202) $(28,636) ========= ========= ========= Loss per common share before extraordinary item - basic and diluted....................... $ (0.95) $ (0.75) $ (2.60) Extraordinary loss per common share - basic and diluted....................... $ (0.16) $ - $ - Net loss per common share - basic and diluted....................... $ (1.11) $ (0.75) $ (2.60) Weighted average number of common shares outstanding - basic and diluted....................... 8,062 11,000 11,000 ========= ========= =========
See accompanying Notes to Consolidated Financial Statements. F-5 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, --------------------------- 1995 1996 1997 -------- -------- -------- Cash flows from operating activities: Net loss..................................... $(8,954) $(8,202) $(28,211) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............. 2,800 3,641 7,759 Amortization of deferred gains and income. - (1,254) (1,887) Other..................................... 143 (237) 242 Changes in operating assets and liabilities: Trade accounts receivable............ (166) (1,615) (699) Other receivables.................... (876) (416) 533 Prepaid expenses and other current assets............................ (877) (2,493) (947) Other assets......................... (3,398) (420) - Trade accounts payable............... 3,433 458 (2,166) Accrued employee compensation and benefits.......................... 849 2,034 853 Other accrued expenses............... 1,330 (61) 1,368 Other current liabilities............ 256 392 384 Security deposits and other long-term liabilities....................... 670 274 293 Deferred rent........................ - 2,467 4,812 -------- -------- -------- Net cash used in operating activities..................... (4,790) (5,432) (17,666) -------- -------- -------- Cash flows from investing activities: Acquisition of property and equipment........ (62,987) (36,650) (17,471) Acquisition of property held for development. (15,418) (30,069) (22,743) Proceeds from sale of property and equipment. 11,554 73,290 28,675 Purchase of investment securities............ (2,425) (54) (13,285) Proceeds from the sale of investment securities................................. - 670 3,207 Construction advances - leased communities... - 43,411 25,139 Construction expenditures - leased communities................................ - (37,024) (31,101) Advances to and investments in affiliates.... (139) (2,626) (4,188) Repayments of advances by affiliates......... - 800 - Acquisition of businesses and partnership interests.................................. (604) (4,339) - -------- -------- -------- Net cash provided by (used in) investing activities............ (70,019) 7,409 (31,767) -------- -------- --------
See accompanying Notes to Consolidated Financial Statements. F-6 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (In thousands)
Years Ended December 31, --------------------------- 1995 1996 1997 -------- -------- -------- Cash flows from financing activities: Increase in restricted deposits.............. (1,025) (6,247) (3,014) Proceeds from (repayment of) short-term borrowings, net............................ 6,272 (520) 9,165 Proceeds from long-term borrowings........... 78,886 64,356 44,597 Repayment of long-term borrowings............ (44,276) (69,977) (29,023) Increase in lease acquisition and deferred financing costs............................ (672) (6,554) (2,452) Proceeds from sale of common stock........... 43,831 - - Proceeds from sale of redeemable preferred stock...................................... 1,080 - 25,000 Proceeds from issuance of convertible debentures................................. - 30,620 - Repurchase of common stock................... - - (341) Other........................................ - (123) 3 -------- -------- -------- Net cash provided by financing activities...................... 84,096 11,555 43,935 Effect of exchange rate changes on cash........ - - (4) -------- -------- -------- Net increase (decrease) in cash and cash equivalents............ 9,287 13,532 (5,502) Cash and cash equivalents at beginning of year. 220 9,507 23,039 -------- -------- -------- Cash and cash equivalents at end of year....... $ 9,507 $23,039 $17,537 ======== ======== ======== Supplemental disclosure of cash flow information cash paid during the year for interest..................................... $ 5,468 $ 3,300 $ 9,444 ======== ======== ======== Noncash investing and financing activities: Acquisition of business and majority interest in a partnership: Assets acquired........................... $ 5,025 $11,215 $37,347 Liabilities assumed....................... 2,800 7,042 36,997 Transfer of property held for development to property and equipment...................... 4,200 22,500 26,345 Transfer of property and equipment to property held for sale............................... - - 8,202 Vehicles acquired through debt financing...... - - 2,375
See accompanying Notes to Consolidated Financial Statements. F-7 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
Unrealized Preferred stock Common stock gain (loss) Foreign ------------------- ------------------- Additional on currency Number Number paid-in investment translation Accumulated Of shares Amount of shares Amount capital securities adjustment deficit ----------- ------ ----------- ------ ---------- ----------- ----------- ----------- Balances at December 31, 1994 - $ - 3,542,000 $ - $ - $ - $ - $ (1,462) Sale of preferred stock............ 4,158,000 - - - 1,080 - - - Conversion of preferred stock to common stock.. (4,158,000) - 4,158,000 - - - - - Sale of common stock, net of issue costs of $5,670........... - - 3,300,000 1 43,830 - - - Unrealized gain on investment securities....... - - - - - 400 - - Net loss for the year ended December 31, 1995 - - - - - - - (8,954) ----------- ------ ----------- ------ ---------- ----------- ----------- ----------- Balances at - - 11,000,000 1 44,910 400 - (10,416) December 31, 1995 Common stock issue costs............ - - - - (123) - - - Unrealized loss on investment securities....... - - - - - (382) - - Net loss for the year ended December 31, 1996 - - - - - - - (8,202) ----------- ------ ----------- ------ ---------- ----------- ----------- ----------- Balances at December 31, 1996 - - 11,000,000 1 44,787 18 - (18,618) Unrealized gain on investment securities....... - - - - - 3,997 - - Foreign currency translation adjustment....... - - - - - - (4) - Repurchase of common stock..... - - (25,600) - (341) - - - Stock options exercised........ - - 250 - 3 - - - Preferred stock dividend declared - - - - - - - (425) Net loss for the year ended December 31, 1997 - - - - - - - (28,211) ----------- ------ ----------- ------ ---------- ----------- ----------- ----------- Balances at December 31, 1997 - $ 10,974,650 $ 1 $44,449 $4,015 $ (4) $(47,254) =========== ====== =========== ====== ========== =========== =========== =========== Total shareholders' equity (deficit) ------------------ Balances at December 31, 1994 $ (1,462) Sale of preferred stock............ 1,080 Conversion of preferred stock to common stock.. - Sale of common stock, net of issue costs of $5,670........... 43,831 Unrealized gain on investment securities....... 400 Net loss for the year ended December 31, 1995 (8,954) ---------- Balance at December 31, 1995 34,895 Common stock, issue costs............ (123) Unrealized loss on investment securities....... (382) Net loss for the year ended December 31, 1996 (8,202) ---------- Balances at December 31, 1996 26,188 Unrealized gain on investment securities....... 3,997 Foreign currency translation adjustment....... (4) Repurchase of common stock..... (341) Stock options exercised........ 3 Preferred stock dividend declared (425) Net loss for the year ended December 31, 1997 (28,211) ---------- Balances at December 31, 1997 $ 1,207 ==========
See accompanying Notes to Consolidated Financial Statements. F-8 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Emeritus Corporation (conducting business as Emeritus Assisted Living) (the "Company") is a long-term-care services company focused on operating residential-style assisted-living communities throughout the United States. The Company was incorporated on July 28, 1993. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. In addition, the accounts of a partnership have been consolidated where the Company maintains effective control over the partnership's assets and operations, not withstanding a lack of technical majority ownership of the partnership. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Resident units are rented on a month-to-month basis and rent is recognized in the month the unit is occupied. Service fees paid by residents for assisted-living and other related services and management fees are recognized in the period services are rendered. CASH AND CASH EQUIVALENTS All short-term investments with a maturity at date of purchase of three months or less are considered to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets as follows: buildings and improvements, 25 to 40 years; furniture, equipment and vehicles, 5 to 7 years; leasehold improvements, over the lesser of the estimated useful life or the lease term. For long-lived assets, including property and equipment, the Company evaluates the carrying value of the assets by comparing the estimated future cash flows generated from the use of the assets and their eventual disposition with the assets' reported net book values. The carrying values of assets are evaluated for impairment when events or changes in circumstances occur which may indicate the carrying amount of the assets may not be recoverable. INVESTMENTS Investment securities are classified as available-for- sale and are recorded at fair value. Unrealized holding gains and losses, net of any related tax effect, are excluded from results of operations and are reported as a separate component of shareholders' equity. Investments in 20% to 50% owned affiliates are accounted for under the equity method. Investments in less than 20% owned entities are accounted for under the cost method. INTANGIBLE ASSETS Intangible assets, which are included in other assets, are composed of deferred financing and community pre-opening costs. Deferred financing costs are amortized using a method which approximates the effective interest method over the term of the related debt. Community pre-opening costs, which consist of costs related to opening a facility, are amortized using the straight-line method over one-year. F-9 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) INCOME TAXES Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized. LEASING ACTIVITIES Lease acquisition costs represent legal and other costs, incurred in conjunction with the negotiation of leases. These costs are capitalized and amortized using the straight-line method over the lives of the associated leases. Deferred rent primarily represents lease incentives which are deferred and amortized using the straight-line method over the lives of the associated leases. DEFERRED GAINS ON SALE OF COMMUNITIES Deferred gains on sale of communities represents gains on sale/leaseback transactions which are deferred and amortized using the straight-line method over the lives of the associated leases. The Company has no continuing involvement in communities which it has sold and leased back outside of operating the communities. COMMUNITY OPERATIONS Community operations represent direct costs incurred to operate the communities and include costs such as activities for the residents, marketing, housekeeping, food service, payroll and benefits, facility maintenance, utilities, taxes and licenses. STOCK-BASED COMPENSATION The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in measuring compensation costs for its stock option plans. The Company discloses pro forma net income (loss) and net income (loss) per share as if compensation cost had been determined consistent with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. NET LOSS PER SHARE In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. This statement establishes standards for computing and presenting earnings per share (EPS), replacing the presentation of primary EPS with a presentation of Basic EPS. Under this new statement, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution. Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the previously required fully diluted EPS. The capital structure of the Company includes convertible debentures, redeemable convertible preferred stock, as well as stock options. The assumed conversion and exercise of these securities have been excluded from the calculation of Diluted EPS as their effect is anti-dilutive. F-10 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATIONS Foreign currency amounts attributable to foreign operations have been translated into U.S. dollars using year- end exchange rates for assets and liabilities, historical rates for equity, and average annual rates for revenues and expenses. Unrealized gains and losses arising from fluctuations in the year-end exchange rates are recorded as equity adjustments from foreign currency translation. RECLASSIFICATIONS Certain reclassifications of the 1995 and 1996 amounts have been made to conform to the 1997 presentation. (2) CHANGE IN ACCOUNTING ESTIMATES Effective January 1, 1997, the Company changed the period over which pre-opening costs on newly opened developments are amortized from 18 months to one-year. The impact for the year ended December 31, 1997, was to increase amortization expense and net loss by $627,000, or $.06 per share. Effective January 1, 1997, the Company also changed the estimate for the useful life of acquired buildings. The impact for the year ended December 31, 1997, was to decrease depreciation expense and net loss by $403,000, or $.04 per share. (3) RESTRICTED DEPOSITS AND CONSTRUCTION ADVANCES - LEASED COMMUNITIES Restricted deposits consist of funds required by various Real Estate Investment Trusts ("REITs") to be placed on deposit until the Company's communities meet certain debt coverage and/or cash flow coverage ratios, at which time the funds will be released to the Company. In January 1996, the Company entered into a letter of intent with a REIT relating to sale/leaseback financing of $100 million for newly developed facilities and, in September 1996, the Company entered into a similar arrangement with the REIT for an additional $100 million financing for newly developed facilities. As part of this arrangement, the Company manages and oversees the development of projects owned by this REIT. Upon completion of the projects, the Company will lease the facilities from the REIT under operating lease agreements. Approximately $101.0 million of such financing remains available to the Company. At December 31, 1996, the REIT had advanced funds in excess of amounts expended on the development projects which have been classified as construction advances - leased communities. F-11 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (4) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, In thousands 1996 1997 - ---------------------------------- ------- -------- Land and improvements............. $ 7,826 $ 10,810 Buildings and improvements........ 65,367 104,199 Furniture and equipment........... 7,231 11,368 Vehicles.......................... 1,783 2,997 Leasehold improvements............ 885 2,433 ------- -------- 83,092 131,807 Less accumulated depreciation and amortization................... 3,996 7,700 ------- -------- 79,096 124,107 Construction in progress.......... 20,494 21,724 ------- -------- $99,590 $145,831 ======= ========
Depreciation and amortization expense related to property and equipment totaled $2.4 million, $2.7 million and $4.4 million for 1995, 1996 and 1997, respectively. (5) PROPERTY HELD FOR DEVELOPMENT Property held for development is recorded at cost. Interest costs capitalized on property held for development and construction in progress was $880,000, $1.4 million and $2.7 million for 1995, 1996 and 1997, respectively. The Company is committed under construction contracts with respect to certain development projects. Total construction commitments for owned developments at December 31, 1997, were $34.8 million, of which $25.2 million had been incurred. At December 31, 1997, $9.5 million in construction financing commitments remained which bears interest at rates ranging between the prime rate plus .75% and 1.25% and will be payable through January 2003. In addition to developments owned by the Company, the Company has commitments with respect to developments under construction owned by a REIT. Under these commitments, the Company is committed to construction of the development and the REIT is to provide $30.4 million in construction financing, of which $9.5 million has been incurred as of December 31, 1997. Upon completion of the developments, the Company will enter into long-term operating leases with the REIT where the Company will be committed to annual lease payments based on the cost of the developments as funded by the REIT at rates tied to the 10-year U.S. Treasury note. (6) INVESTMENT SECURITIES In April 1995, the Company purchased investment securities in The Standish Care Company ("Standish") from Columbia-Pacific Group, Inc., a company wholly-owned by a principal shareholder of the Company. The investment securities consisted of common stock, warrants and an agreement to provide a $2.0 million credit facility through the purchase of convertible debentures, of which $1,410,000 was outstanding at the time of purchase. The remaining $590,000 was loaned to Standish prior to December 31, 1995. The Company purchased the investment securities at the affiliate's original cost, which exceeded fair value. During 1996, Standish completed a merger transaction with 12 "Carematrix" corporations, changed its name and completed a public offering. As a result of these transactions, the convertible debentures that bear interest at 8.5%, are convertible into Carematrix common stock at the option of the Company at $15.00 per share. The contractual maturity of these convertible debt securities is June 10, 1998. F-12 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In 1996, the Company sold a portion of the Carematrix equity securities and recognized a gain on sale of $325,000 which is included in other expenses, net. The cost basis of the securities sold was determined on the specific identification basis. In 1997, the Company sold all of its remaining Carematrix equity securities and convertible debentures and recognized a gain of $410,000 on the transaction. This gain is included in other income, net. During 1997, the Company purchased common stock of ARV Assisted Living, Inc. ("ARV") in market transactions. At December 31, 1997 the Company held 1,077,200 shares of ARV common stock which is recorded at fair market value. The unrealized gain on the ARV investment securities of $4,015,000 at December 31, 1997 is included as a component of shareholders' equity. Also in 1997, the Company initiated a tender offer which was terminated in January 1998, for all of the remaining outstanding common stock of ARV. The Company incurred costs of $3,418,000 associated with this activity in 1997. Details regarding investment securities by major security type as of December 31, are as follows:
Gross Amortized Unrealized Fair In thousands Cost Gains value - ----------------------------- -------- ---------- ------- 1996 Equity securities......... $ 134 $ 18 $ 152 Convertible debt Securities.............. 2,000 - 2,000 --------- ---------- ------- $ 2,134 $ 18 $ 2,152 ========= ========== ======== 1997 Equity securities......... $13,220 $4,015 $17,235 ========= ========== ========
(7) FINANCIAL INSTRUMENTS The Company has financial instruments other than investment securities consisting of cash and cash equivalents, trade accounts receivable, notes receivable from and investments in affiliates, short-term borrowings, accounts payable, convertible debentures, redeemable preferred stock and long-term debt. The fair value of the Company's financial instruments based on their short-term nature or current market indicators such as prevailing interest rates approximate their carrying value with the exception of the convertible debentures which had a fair value of $28.3 million versus a book value of $32.0 million at December 31, 1997. (8) NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATED COMPANIES In 1994 and 1995, the Company made loans to Extended Care Corporation ("Extended Care") of $700,000 and $433,000, respectively. The Company received 49.0% of the F-13 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) outstanding capital stock of Extended Care in connection with the loans and a pledge of the remaining 51.0% as additional security for the loans. In 1995, the Company wrote-off the note receivable due to Extended Care's continued losses and the Company's belief that the holder of the first mortgages on the Extended Care communities intended to initiate foreclosure proceedings, which would have the effect of terminating the Company's second mortgages and making the loans uncollectible. The holder of the first mortgages initiated foreclosure proceedings in October 1995, and Extended Care filed for protection from its creditors under Chapter 11 of the Bankruptcy Code during 1996. In 1995, the Company advanced $600,000 to a limited liability company (the "LLC"), which operates an assisted- living community, as a part of a financing agreement. The advance was due in 1998 and accrued interest at 10% per annum. Under the agreement, the Company received a 49% ownership interest in the LLC for which no value was assigned. The remaining 51% interest is owned by Carematrix. As of December 31, 1996, the amount due the Company was $410,000. As a member of the LLC, the Company has provided a tertiary guarantee for the currently outstanding debt of the LLC in the amount of $1.1 million. The Company's equity in earnings of the LLC was approximately $25,000 for 1995 and its equity in losses was approximately $6,000 in 1996. In April 1997, the Company and Carematrix entered into an agreement whereby the Company transferred and relinquished its 49% interest in the LLC. Pursuant to the agreement, Carematrix paid the Company $410,000 plus accrued interest for all outstanding obligations between the two parties. During 1995, the Company became a 50% partner in a general partnership which was formed to jointly develop an assisted-living facility in Paso Robles, California. As of December 31, 1996 and 1997, the Company had $750,000 in construction commitments of which $445,000 and $750,000 had been incurred, respectively. In November 1996, the Company agreed to purchase up to 6,888,466 shares of convertible preferred stock of Alert Care Corporation ("Alert"), an Ontario, Canada-based owner and operator of assisted-living communities at prices ranging from $0.67 to $0.74 per share (Cdn). In addition, the Company acquired an option to purchase an additional 4,000,000 shares of convertible preferred stock at an exercise price of $1.00 per share (Cdn), as well as an option to purchase from Eclipse Capital Management ("Eclipse"), the majority shareholder of Alert, and certain other shareholders of Alert, 9,050,000 currently issued and outstanding shares of common stock of Alert and 950,000 currently issued and outstanding shares of Class A non- voting stock of Alert both at an exercise price of $3.25 per share (Cdn). Each Preferred Share is convertible into one common share or one Class A non-voting share, at the holder's election; the Preferred Shares are immediately convertible into Class A nonvoting shares but are not immediately convertible into common shares and are so convertible only after the controlling persons of Alert have transferred to others (which could include the Company) not less than 10 million shares of common or Class A nonvoting shares (as of December 31, 1997, there are approximately 23.8 million such shares outstanding) and such controlling persons are relieved of certain guarantees of indebtedness. As of December 31, 1996, the Company had purchased and held 2,577,692 shares of preferred stock for a total investment of $1,331,000 (US). An additional 5,010,774 shares of preferred stock were acquired and paid for in 1997, increasing its ownership to 7,588,466 shares or $4,111,000 (US) at December 31, 1997. As of December 31, 1997, the Company's total investment in Alert represents on an as-converted basis approximately 24.2% of the outstanding common and Class A non-voting shares taken together. In January 1998, the Company purchased an additional 850,000 shares of preferred stock resulting in an ownership interest of 8,438,466 shares or 26.2%. There was no cost in acquiring the option to purchase additional shares from Alert and no value to the option was recorded in the financial statements. The investment in Alert is accounted for under the cost method, as the Company's equity ownership consists of non-voting preferred stock. Alert has entered into an exclusive management agreement to manage the Company's future assisted-living communities in Ontario. Eclipse, through its wholly-owned subsidiary, Eclipse Construction Inc., develops and constructs retirement homes for Alert on a contract basis. Under the agreement, Eclipse has entered into an exclusive development agreement with the Company and Alert to develop their future construction projects in Ontario. No communities have been developed under these agreements as of December 31, 1997. (9) CONVERTIBLE DEBENTURES On February 15, 1996, the Company completed a $32.0 million Private Placement Offering of 6.25% convertible subordinated debentures (the "Debentures") due in 2006. The Debentures, non-callable for three years, are convertible into common stock at the rate of $22 per share, which equates to an aggregate of approximately 1,454,545 shares of the Company's common stock and bear interest F-14 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) payable semiannually on January 1 and July 1 of each year, commencing July 1, 1996. The Debentures are unsecured and subordinated to all other indebtedness of the Company. The holders of the Debentures are entitled, subject to prior redemption, to convert the Debentures or portions thereof into shares of common stock at the conversion price set forth in the Debentures. The conversion price is subject to adjustments in certain events. The Debentures are subject to redemption, as a whole or in part, at any time or from time to time commencing after July 1, 1999 at the Company's option on at least 30 days' and not more than 60 days' prior notice by mail. The redemption prices (expressed as a percentage of principal amount) are as follows for the 12-month period beginning after July 1 of the following years:
Year Price ------------------- -------------- 1999 102% 2000 101% 2001 and thereafter 100%
(10) LONG-TERM DEBT Long-term debt consists of the following:
December 31, In thousands 1996 1997 - ---------------------------------------------- --------- --------- Notes payable, interest only at rates between 10.5% and 18%, payable monthly, unpaid principal and interest due May 2000..$ 12,585 $ 7,000 Notes payable, interest only at the 30 day LIBOR rate plus 2.25% (7.9% at December 31, 1997), payable monthly, unpaid principal and interest due December 1998.... 9,269 10,220 Notes payable, interest at rates between 6.9% and 12%, payable in monthly installments, due through July 2009....................... 7,688 10,279 Note payable, interest only at 8.4%, payable monthly, unpaid principal and interest due November 1999, refinanced through sale/leaseback transaction, see note 17..... 4,160 - Note payable, interest at 11%, payable in monthly installments, balance due July 2004, refinanced with long-term debt, interest only at the prime rate plus 1% (9.5% at December 31, 1997), unpaid principal and interest due May 2000....................... 2,169 - Note payable, interest at 9.25%, payable in monthly installments, due September 1997, refinanced with long-term debt, interest at the LIBOR rate plus 2.25% (7.9% at December 31, 1997), payable monthly, unpaid principle and interest due December 1998.............. 1,837 - Notes payable, interest at the LIBOR rate plus 2.50% (8.4% at December 31, 1997), payable monthly, unpaid principal and interest due April 1999.................................. - 26,000 Note payable, interest only at the LIBOR rate plus 2.25% (8.0% at December 31, 1997), payable monthly, unpaid principal and interest due May 2000....................... - 3,500 Note payable interest only through September 1998 at 9.28%, principal and interest over remaining term, unpaid principal and interest due April 2009..................... - 4,288 F-15 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) Construction loan, total commitment $17.0 million, interest only through November 1998 at the 30 day LIBOR rate plus 2.75% (8.4% at December 31, 1997), principal and interest payments over remaining term, unpaid principal and interest due through November 2001............................... 7,670 14,066 Construction loan from bank, total commitment $7.3 million, interest only at the prime rate plus 1.25%, payable monthly, unpaid principal and interest due November 1997, refinanced with long - term debt, (interest only October 1997 through September 1998 at 9.28%, principal and interest remaining term, unpaid principal and interest due April 2009) and sale/leaseback transactions, see note 17................................. 4,807 - Construction loan from bank, total commitment $4.8 million, interest only at the prime rate plus 1%, payable monthly, unpaid principal and interest due July 1998, with an option to extend to January 1999, refinanced through sale/leaseback transaction, see note 17.................... 4,639 - Construction loan from bank, total commitment $4.9 million, interest only at the prime rate plus 3.5% (12% at December 31, 1997), payable monthly, unpaid principal and interest due February 2004.................. 4,307 4,799 Construction loan, total commitment $4.7 million, interest only at 9.75%, payable monthly, unpaid principal and interest due May 1999.................................... 1,905 4,695 Construction loan, total commitment $12.8 million, interest only during the construction term (completion date or 18 months after loan closing) at the prime rate plus .75% (9.25% at December 31, 1997), principal and interest over remaining term, unpaid principal and interest due earlier of 90 months after loan closing or 6 years after the completion of construction........ - 7,578 Construction loan, total commitment $6.5 million, interest only during the construction term at the prime rate plus 1.25% (9.75% at December 31, 1997), principal and interest at the prime rate plus 3.25% over remaining term, unpaid principal and interest due January 2001..... - 5,216 Construction loan, total commitment $5.1 million, interest only at 9%, payable monthly, unpaid principal and interest due February 2000............................... - 4,444 Other......................................... 5,040 4,452 --------- --------- Subtotal................................. 66,076 106,537 --------- ----------- Debt with commitment to refinance with long- term debt subsequent to year end - notes payable, interest only at rates between 9% and 11%, payable monthly, unpaid principal and interest due through December 1998 to be refinanced through long- term debt in 1998, interest only at the 30 day LIBOR rate plus 2.95% due April 2001.... - 14,395 --------- --------- 66,076 120,932 Less current portion.......................... 5,816 12,815 --------- --------- Long-term debt, less current portion..... $60,260 $108,117 ========= =========
Substantially all long-term debt is secured by the Company's property and equipment and/or by personal guarantees of a principal shareholder of the Company. Certain of the Company's indebtedness includes restrictive provisions related to cash dividends, investments and borrowings, and require maintenance of specified operating ratios, levels of working capital and F-16 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) net worth. As of December 31, 1997, the Company was in compliance with such covenants or obtained waivers for noncompliance . Principal maturities of long-term debt at December 31, 1997 are as follows:
In thousands ---------------------------- -------- 1998........................ $ 12,815 1999........................ 33,308 2000........................ 17,191 2001........................ 34,962 2002........................ 451 Thereafter.................. 22,205 -------- $120,932 ========
(11) MARGIN LOAN ON EQUITY SECURITIES During 1997, the Company opened a margin account to facilitate the acquisition of marketable securities. This account had a loan balance of $9,165,000 at December 31, 1997 secured by marketable equity securities with a market value of $17,235,000. This loan is due upon the sale of the securities and bears interest at 0.375% under broker call (7.75% as of December 31, 1997). (12) INCOME TAXES Income taxes reported by the Company differ from the amount computed by applying the statutory rate primarily due to limitations on utilizing net operating losses. The tax effect of temporary differences and carryforwards that give rise to significant portions of federal deferred tax assets and liabilities are comprised of the following:
December 31, In thousands 1996 1997 - --------------------------------------- ------- --------- Deferred tax liabilities: Depreciation and amortization........ $ (127) $(1,470) Other................................ - (361) ------- --------- Gross deferred tax liabilities... (127) (1,831) ------- --------- Deferred tax assets: Net operating loss carryforwards..... 1,220 10,966 Deferred gains on sale/leaseback..... 3,245 4,187 Unearned rental income............... 255 382 Vacation accrual..................... 389 349 Other................................ 418 727 ------- --------- Gross deferred tax assets........ 5,527 16,611 Less valuation allowance............... (5,400) (14,780) ------- --------- Deferred tax assets, net............... 127 1,831 ------- --------- Net deferred tax assets.......... $ - $ - ======= =========
The net increase in the total valuation allowance was $2,070,000, $2,800,000 and $9,380,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The increases were primarily due to the increase in deferred gains on sale/leasebacks and the amount of net operating loss carryforwards, for which management does not believe that it is more likely than not that realization is assured. For federal income tax purposes, the Company has net operating loss carryforwards at December 31, 1997, available to offset future federal taxable income, if any, of approximately $32,252,000 expiring beginning in 2012. F-17 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) (13) RELATED-PARTY MANAGEMENT AGREEMENTS During 1995, the Company's two most senior executive officers, CEO and President, formed a New York general partnership (the "Partnership") to facilitate the operation of assisted-living communities in the state of New York, which generally requires that natural persons be designated as the licensed operators of assisted-living communities. The Partnership operates ten leased communities in New York. The Company has agreements with the Partnership and the partners under which all of the Partnership's profits have been assigned to the Company and the Company has indemnified the partners against losses. In addition, the partners have agreed to transfer their ownership interests in the Partnership at a nominal value to Company nominees in the event that they cease to be officers of the Company. As the Company has a unilateral and perpetual control over the Partnership's assets and operations, the results of operations of the Partnership are consolidated with those of the Company. Columbia House I, Limited Partnership, ("Columbia House"), which is partly owned indirectly by Mr. Baty, the Company's Chairman and Chief Executive Officer, develops, owns and leases low income senior housing projects. The Company has agreements with Columbia House to provide certain administrative support, due diligence and financial support services to Columbia House with respect to the acquisition, development and administration of Columbia House communities. The agreements have terms ranging from two to four years, with options to renew, and provide for management fees ranging from 4% to 6% of gross operating revenues and fixed administrative fees. Fees earned under these agreements were $103,000 in 1997, of which $16,000 was receivable at December 31, 1997. The Company also had receivables of $137,000 due from Columbia House at December 31, 1997 representing advances related to various Columbia House communities. (14) SHAREHOLDERS' EQUITY In April 1995, the Company authorized a 9,200-for-1 stock split of the Company's common stock and, on September 28, 1995, authorized a 3.85-for-1 stock split of the Company's common stock and preferred stock. All share and per share information, except par value, has been adjusted for all years to reflect the stock splits. On November 21, 1995, the Company completed an initial public offering of 6,534,000 shares of its common stock at a price of $15 per share. Of the total amount of shares sold, 3,300,000 shares were sold by the Company and 3,234,000 were sold by existing shareholders. In December 1997, the Company purchased 25,600 shares of its common stock at an aggregate cost of $341,000. In January 1998, the Company's board of directors authorized a stock repurchase program to acquire up to an additional 500,000 shares of the Company's common stock. As of February 25, 1998, the Company had purchased in 1997 and 1998 a total of 517,200 shares of its common stock at an aggregate cost of $5.7 million. 1995 STOCK INCENTIVE PLAN The Company has a 1995 stock incentive plan ("1995 Plan") which combines the features of an incentive and nonqualified stock option plan, stock appreciation rights and a stock award plan (including restricted stock). The 1995 Plan is a long-term incentive compensation plan and is designed to provide a competitive and balanced incentive and reward program for participants. The Company has authorized 1,100,000 shares of common stock to be reserved for grants under the 1995 Plan of which 615,100 remained available for future awards at December 31, 1997. Options generally vest over a five-year period in cumulative increments of 20% each year beginning one year after the date of the grant and expire not later than ten years from the date of grant. The options are granted at an exercise price equal to the fair market value of the common stock on the date of the grant. F-18 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) Had compensation cost for the Company's option plan been determined consistent with SFAS 123, the Company's pro forma net loss and pro forma net loss per share would have been as follows:
Year ended December 31, In thousands, except per share data 1995 1996 1997 - ----------------------------- -------- -------- --------- Net loss to common shareholders: As reported............. $(8,954) $(8,202) $(28,636) Pro forma............... (8,970) (8,477) (29,236) Net loss per common share - basic and diluted: As reported............. $ (1.11) $ (0.75) $ (2.60) Pro forma............... (1.11) (0.77) (2.66)
The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1995, 1996 and 1997: dividend yield of 0.0% for all periods; expected volatility of 55% for 1995 and 1996 and 49.1% for 1997; risk-free interest rates of 5.53% for 1995, 5.47% to 6.39% for 1996, and 5.45% to 5.50% for 1997; and an expected option term of 5 years, 4.5 years and 5 years for 1995, 1996 and 1997, respectively. A summary of the activity in the Company's stock option plans follows:
1995 1996 1997 Weighted-Average Weighted-Average Weighted-Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- ------------------ -------- ------------------ ---------- ------------------ Outstanding at beginning of year - $ - 202,000 $14.38 484,900 $11.90 Granted 202,000 $14.38 363,500 $11.06 703,000 $13.43 Exercised - $ - - $ - (250) $15.25 Canceled - $ - (80,600) $14.34 (98,000) $12.32 ------- ------------------ -------- ------------------ ---------- ------------------ Outstanding at end of year 202,000 $14.38 484,900 $11.90 1,089,650 $12.86 Options exercisable at year-end - $ - 37,950 $14.38 101,800 $12.40 Weighted-average fair value of options granted during the year $ 7.69 $ 5.67 $ 6.65
F-19 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) The following is a summary of stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable ----------------------------------- ---------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Number Contractual Exercise Number Exercise Range of Exercise Prices Outstanding Life Price Exercisable Price - ------------------------ ----------- ----------- --------- ----------- --------- $ 13.38 575,500 9.89 $13.38 - - $12.00 - 15.63 127,500 9.33 $13.70 - - $ 10.50 261,950 8.89 $10.50 52,650 $10.50 $14.38 - 20.38 124,700 7.21 $14.52 49,150 $14.44 ----------- ----------- --------- ----------- --------- 1,089,650 9.28 $12.86 101,800 $12.40 =========== =========== ========= =========== =========
(15) REDEEMABLE PREFERRED STOCK The Company has authorized 5,000,000 shares of preferred stock, $0.0001 par value. Pursuant to such authority, in October 1997, the Company issued and sold 25,000 shares of Series A cumulative convertible, exchangeable, redeemable preferred stock for $25,000,000. Cumulative dividends of 9% are payable quarterly. The preferred stock has a mandatory redemption date of October 24, 2004 at a price equal to $1,000 per share plus any accrued but unpaid dividends. Each share of preferred stock may be converted, at the option of the holder, into 55 shares of common stock. The preferred stock is also exchangeable in whole only, at the option of the Company, to 9% subordinated convertible notes due October 24, 2004. The 9% subordinated notes would contain the same conversion rights, restrictions and other terms as the preferred stock. The Company may redeem the preferred stock, in whole or in part, after October 24, 2001 for $1,050 per share plus accrued dividends, provided that the market price of common stock is at least 130% of the conversion price for the preferred stock. In the event of liquidation of the Company, the holders of outstanding preferred stock shall be entitled to receive a distribution of $1,000 per share plus accrued dividends. (16) LEASES The Company leases office space and 76 assisted-living communities . The office lease expires in 2006 and contains two five-year renewal options. The community leases expire from 2004 to 2017 and contain two to six five-year renewal options. Minimum lease payments under noncancelable operating leases at December 31, 1997 are as follows:
In thousands ---------------------------- -------- 1998........................ $ 41,747 1999........................ 41,747 2000........................ 41,747 2001........................ 41,753 2002........................ 42,110 Thereafter.................. 302,715 ----------- $511,819 ===========
Rent expense under noncancelable operating leases was $1,138,000, $16,114,000 and $34,651,000 for 1995, 1996 and 1997, respectively. F-20 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) (17) ACQUISITIONS During 1996 and 1997, the Company completed several acquisitions of assisted-living, independent-living and skilled nursing communities. These acquisitions have been accounted for as purchases and, accordingly, the assets and liabilities of the acquired communities were recorded at their estimated fair values at the dates of acquisitions. No goodwill or other identifiable intangibles were recorded with respect to any of the acquisitions. The results of operations of the communities acquired have been included in the Company's consolidated financial statements from the dates of the acquisition. Summary information concerning the acquisitions is as follows:
Total Communities acquired Acquisition date Purchase price Units - --------------------------------------- ----------------- -------------- --------- (in thousands) Heritage Hills Retirement Community.... February 1996 $ 4,338 100 The Lakewood Inn (1)................... March 1996 2,800 108 The Hearthstone (2).................... November 1996 5,200 84 Concorde............................... November 1996 8,400 116 Other 1996 Acquisitions................ Various 8,202 272 Villa Del Rey.......................... March 1997 4,252 84 La Casa Communities (3)................ May 1997 33,062 473 -------------- --------- $66,254 1,237 ============== =========
(1) Refinanced through a sale/leaseback with a REIT. Lease includes an initial term of 13 years with four five-year renewal options and annual base rent of approximately $686,000. The Company has no continuing involvement outside of operating the community. (2) Refinanced through a sale/leaseback with a REIT. Lease includes an initial term of 11 years 11 months with four five-year renewal options and annual base rent of approximately $596,000. The Company has no continuing involvement outside of operating the community. (3) Consists of three long-term-care communities. The foregoing acquisitions were generally financed through borrowings. During the years ended December 31, 1996 and 1997, the Company completed several acquisitions or sale/leasebacks of communities through lease financing transactions with certain REITs', pursuant to which the REITs' leased such communities to the Company under operating leases. The results of operations of the communities acquired have been included in the Company's consolidated financial statements from the dates the leases commenced for those communities not previously owned.
Lease Initial Renewal Annual Communities leased Acquisition date Lease Term Options Rent Units - --------------------------- ------------------ -------------- ----------------- ----------- ----- Carolina Communities (1)... February 1996 15 years Three five-year $ 4,145,607 648 Evergreen Lodge............ April 1996 13 years Four five-year 572,569 98 Rosewood Court (2)......... April 1996 14 yrs/9 mos Three five-year 393,200 71 Barrington Place........... May 1996 11 yrs/11 mos Four five-year 413,601 80 Springtree................. May 1996 11 yrs/11 mos Four five-year 1,410,353 185 The Terrace (3)............ August 1996 11 yrs/8 mos Four five-year 416,887 88 The Lodge at Mainlands..... August 1996 11 yrs/7 mos Four five-year 924,530 154 Colonial Park Club......... August 1996 11 yrs/7 mos Four five-year 770,862 90 Ridge Wind................. August 1996 11 yrs/8 mos Four five-year 458,061 80 Other 1996 Leases.......... October 1996 11 years Four five-year 1,753,006 226 New York Communities (4)... November 1996 15 years Two five-year 4,975,000 738 Texas Communities (5)...... April 1997 15 years Three five-year 2,174,328 411 ----------- ----- $18,408,004 2,869 =========== =====
F-21 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) (1) Consists of 10 long-term-care communities located in North and South Carolina. (2) Originally acquired in 1995, refinanced through a sale/leaseback with a REIT. The Company has no continuing involvement outside of operating the community. (3) Originally acquired in 1996, refinanced through a sale/leaseback with a REIT. The Company has no continuing involvement outside of operating the community. (4) Consists of 9 long-term-care communities located in New York. (5) Consists of 3 long-term-care communities located in Texas. In January 1996, the Company entered into a letter of intent with a REIT relating to sale/leaseback financing of $100 million for newly purchased facilities and, in September 1996, the Company entered into a similar arrangement with the REIT for an additional $100 million financing for newly purchased facilities. At December 31, 1997, approximately $58.3 million of such financing remains available to the Company. During 1996, the Company entered into sale/leaseback transactions with a REIT, pursuant to which the REIT acquired four new communities developed by the Company (The Pines at Tewksbury, Garrison Creek Lodge, Cambria and Sherwood Place) and leased the communities back to the Company with initial lease terms from 10 to 11 years, four to six five-year renewal options and annual lease payments aggregating approximately $2.2 million. Also, during 1996, the Company entered into a sale/leaseback transaction with a REIT pursuant to which the REIT acquired seven existing communities (Beneva Park Club, Central Park Village, College Park Club, Park Club Brandon, Park Club of Fort Myers and Park Club of Oakbridge) and leased such communities back to the Company with initial lease terms of 10 to 12 years, three and four five-year renewal options and annual lease payments aggregating approximately $4.2 million. The Company has no continuing involvement outside of operating the communities. During 1997, the Company entered into sale/leaseback transactions with a REIT, pursuant to which the REIT acquired two new communities developed by the Company (Eastman Estates and Kirkland Lodge) and three existing communities (Meadowbrook, Park Place and The Hearthstone) and leased the communities back to the Company with initial lease terms from 11 years seven months to 12 years one month and four five-year renewal options and annual lease payments aggregating approximately $2.5 million. The Company has no continuing involvement outside of operating the communities. The following summary, prepared on a pro forma basis, combines the results of operations of the acquired businesses with those of the Company as if the acquisitions, acquisitions through lease financings and sale/leaseback financings had been consummated as of January 1, 1996 and 1997, after including the impact of certain adjustments such as depreciation on assets acquired and interest expense on acquisition financing.
December 31, In thousands, except per share data (unaudited) 1996 1997 - ----------------------------------------------- --------- --------- Revenues....................................... $109,830 $122,703 Net loss to common shareholders................ (10,906) (29,061) Pro forma net loss per common share - basic and diluted.................... $ (0.99) $ (2.64)
The unaudited pro forma results are not necessarily indicative of what actually might have occurred if the acquisitions had been completed as of the beginning of the periods presented. In addition, they are not intended to be a projection of future results of operations and do not reflect any of the synergies that might be achieved from combined operations. F-22 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued) (18) SUBSEQUENT EVENTS In January 1998, the Company entered into a $5.0 million credit with Aurora Bay Investments, L.L.C. ("Aurora Bay"), a limited liability company that acquires, develops and operates Alzheimer's special care facilities to provide room, board, and personal care services primarily to elderly persons afflicted with Alzheimer's disease. Advances are evidenced by a convertible promissory note (the "Convertible Note"), which is due in January 2003 and accrues interest at 9.0% per annum. The Convertible Note is convertible, at the Company's option, into a 48% equity interest in Aurora Bay. The conversion rights will lapse if not exercised by the Company on or prior to the maturity date of the Convertible Note. The arrangement allows for Aurora Bay to borrow up to $5.0 million to develop Alzheimer's facilities. In January 1998, the Company advanced $535,000 to Aurora Bay for the first Alzheimer development located in Lubbock, Texas. In February 1998, the Company entered into a joint venture with Sanyo Electric Co. Ltd., ("Sanyo") of Osaka, Japan, to provide assisted living services in Japan. The joint venture, Sanyo Emeritus Corporation, has been formed to provide a residential based health care alternative for Japan's growing elderly population. The joint venture will be initially capitalized with Y50 million ($384,000 U.S.), with each company providing half the funds. The joint venture is expected to complete its first assisted living project in Japan by the year 2000. Also in February 1998, the Company and XL Management Company L.L.C., ("XL Management"), an affiliate of Holiday Retirement Corp., an owner and operator of independent- living communities, entered into four management agreements whereby XL Management will provide management services relating to four newly developed assisted-living communities located in Texas. The agreements consist of initial terms of two years six months and management fees based on 6% of gross revenues payable monthly. The Company will pay a bonus fee per community to XL Management based on occupancy; one year after managing the communities, if occupancy is between 75% and 89%, XL Management will receive a bonus fee of $25,000 and if occupancy is 90% or greater the bonus fee will be $50,000. The Company's Chairman and Chief Executive Officer and another member of the Company's board of directors are principal shareholders and officers of Holiday. Additionally, in February 1998, the Company completed a $4.0 million sale/leaseback transaction with a REIT pursuant to which the REIT acquired the community and leased it back to the Company under an operating lease agreement. The lease has an initial term of 11 years with four five-year renewal options and annual rent of approximately $354,000. F-23 EMERITUS CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1997, 1996 and 1995 (in thousands)
Column A Column B Column C Column D Column E - ------------------------------------------ --------- ------------- ---------- -------- Balance at Charged to Balance Beginning Other Costs (1) at End Description Of Year and Expenses Deductions of Year - ------------------------------------------ --------- ------------- ---------- -------- Year ended December 31, 1997: Valuation accounts deducted from assets: Allowance for doubtful receivables $127 $317 $96 $348 ========= ============= ========== ======== Year ended December 31, 1996: Valuation accounts deducted from assets: Allowance for doubtful receivables 14 128 15 127 ========= ============= ========== ======== Year ended December 31, 1995: Valuation accounts deducted from assets: Allowance for doubtful receivables $ - $ 14 $ - $ 14 ========= ============= ========== ========
___________________ (1) Represents amounts written off F-24 EX-10.21.3 2 EX 10.21.3 AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO A LONG TERM CARE FACILITY AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO A LONG TERM CARE FACILITY This Agreement made this __ day of December, 1997, between Sunrise Healthcare Corporation, a New Mexico corporation (hereinafter referred to as "Manager"), and Emeritus Corporation, a Washington corporation (hereinafter referred to as "Emeritus"). WHEREAS, Emeritus is the lessee of a long term care facility known as Heritage Health Center and located at 200 Heritage Drive, Hendersonville, North Carolina (the "Facility") under the terms of that Lease Agreement dated January 26,1996 between Health Care Property Investors, Inc. ("HCPI"), as landlord and Emeritus, as Tenant (the "Lease"); and WHEREAS, Emeritus wants someone to manage the Facility on its behalf; WHEREAS, Manager is experienced and qualified in the field of health care management; WHEREAS, Emeritus has determined that Manager's price is economical in light of the range of services which it provides; and WHEREAS, Manager is willing to operate the Facility on Emeritus' behalf, pursuant to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, IT IS AGREED AS FOLLOWS: I. MANAGEMENT AND CONSULTING RESPONSIBILITIES OF MANAGER: Emeritus hereby engages Manager and Manager hereby accepts such engagement and agrees to provide management, consulting and advisory services to Emeritus in connection with the operation of the Facility, upon the terms and conditions set forth in this Agreement. By entering into this Agreement, Emeritus does not delegate to Manager any powers, duties or responsibilities which it is prohibited by law from delegating. Emeritus also retains such other authority as shall not have been expressly delegated to Manager pursuant to this Agreement. Subject to the foregoing, Manager shall provide the following services: (a) OPERATIONAL POLICIES AND FORMS: Manager shall implement operational policies and procedures and develop such new policies and procedures as it deems necessary to insure the establishment and maintenance of operational standards appropriate for the nature of the Facility. (b) CHARGES: Manager shall establish the schedules of recommended charges, including any and all special charges for services rendered to the patients at the Facility. Emeritus shall have the right to review the charge schedules established by Manager. (c) INFORMATION: Manager shall develop any informational material, mass media releases, and other related publicity materials, which it deems necessary for the operation of the Facility. (d) REGULATORY COMPLIANCE: Manager, with the assistance of Emeritus if requested by Manager, shall use its best efforts to maintain all licenses, permits, qualifications and approvals from any applicable governmental or regulatory authority for the operation of the Facility and to manage the operations of the Facility in full compliance with all applicable laws and regulations, including, but not limited to the laws and regulations governing the licensure of nursing homes under North Carolina law and the certification of nursing homes under Medicare and Medicaid and local, state and federal employment rules and regulations. The cost of all such regulatory and legal compliance shall be deemed to be a Facility operating expense and shall be paid from the revenues of the Facility or from the working capital provided by Emeritus pursuant to the terms of this Agreement; provided, however, that if and to the extent Emeritus is able to demonstrate that any such regulatory and/or legal non-compliance is due to the acts or omissions of Manager in performing its obligations under this Agreement, Manager shall be solely liable for any damages, losses, costs or expenses which Emeritus incurs as a result thereof. (e) EQUIPMENT AND IMPROVEMENTS: Manager shall advise Emeritus as to equipment and improvements which are needed to maintain or upgrade the quality of the Facility and to replace obsolete or run-down equipment or to correct any other survey deficiencies which may be cited during the term of this Agreement. Emeritus shall review and act upon Manager's recommendations as expeditiously as possible. Manager shall not be liable for any cost or liability which Emeritus may incur in the event Emeritus disregards Manager's recommendations. Manager shall make all necessary and approved repairs, replacements and maintenance within the budgetary limits set forth in the annual capital budget prepared by Manager pursuant to Paragraph L and in a workmanlike and lien free manner. (f) ACCOUNTING: Manager shall provide home office and accounting support to the Facility, which shall include the preparation of any Medicare or Medicaid cost reports due for the cost reporting periods covered by the term of this Agreement; provided, however, that to the extent any such cost reporting periods include periods prior to the commencement of the term of this Agreement, Emeritus shall provide or cause to be provided to Manager any and all documentation which Manager may deem to be reasonably necessary to prepare such cost reports; and provided, further that to the extent any costs reports are required to be filed after the expiration or sooner termination of the term of this Agreement which include, in part, the period covered by the term of this Agreement, Manager shall, upon request, provide Emeritus or any successor manager with any information which it may have which is reasonably necessary for the preparation of such cost reports. All accounting procedures and systems utilized in providing said support shall be in accordance with the operating capital and cash programs developed by Manager, which programs shall conform to generally accepted accounting principles and shall not materially distort income or loss. In addition, at Emeritus' sole cost and expense, Manager shall prepare or cause to be prepared all payroll tax returns which may be due during the term of this Agreement. Emeritus shall prepare or cause to be prepared all other local, state and federal tax returns, subject to Manager's obligation, upon request of Emeritus, to pay any taxes which are due thereunder from the funds in the Facility's bank account, except to the extent the same are being duly contested by Emeritus or, at Emeritus's request and at Emeritus' sole cost and expense, by Manager. The costs incurred by Manager in preparing the payroll tax returns shall not be included in Manager's management fee, but shall be separately reimbursed by Emeritus; the costs incurred by Manager in preparing the Medicare and Medicaid cost reports and any other financial information required by the terms of this Agreement shall be included in Manager's management fee. The taxes and any reimbursement obligations due to Medicare and/or Medicaid shall be deemed to be Facility operating expenses and shall be paid out of the revenues of the Facility or the working capital provided by Emeritus. (g) REPORTS: Manager shall prepare and provide to Emeritus any reasonable operational information which may from time to time be specifically requested by Emeritus, including any information needed to assist Emeritus in completing its tax returns and in complying with any reporting obligations imposed by any landlords or mortgagees. In addition, (i) within twenty (20) days after the end of each calendar month, Manager shall provide Emeritus with an 2 unaudited balance sheet of the Facility, dated the last day of such month, and an unaudited statement of income and expenses for such month relating to the operation of the Facility and a "mini" Medicare cost report and (ii) within forty five (45) days after the end of the fiscal year of the Facility, Manager shall provide Emeritus with unaudited financial statements including a balance sheet of the Facility, dated the last day of said fiscal year, and a statement of income and expense for the year then ended relating to the operation of the Facility. Upon request Manager shall provide Emeritus with any and all supporting documentation which it may reasonably request with respect to the information contained in the financial statements prepared by Manager and delivered to Emeritus pursuant hereto. (h) BANK ACCOUNTS: Manager shall maintain the existing checking account previously established by Emeritus in the name of the Facility and shall deposit therein all money received during the term of this Agreement in the course of the operation of the Facility; provided, however, that during the term hereof, withdrawals and payments from this account shall be made only on checks signed by a person or persons designated by Manager. Emeritus shall be given notice as to the identity of said authorized signatories. All expenses incurred in the operation of the Facility in accordance with the terms of the Budgets submitted to Emeritus under Paragraph I(1), including, but not limited to, Facility mortgage or lease payments, payroll and employee benefits and payment of Manager's management fee, shall be paid by check drawn on this account. Withdrawals from this account shall be made first to pay Manager's management fee and thereafter to pay Facility expenses in such order of priority as Manager deems appropriate to the operation of the Facility. In the event the revenues generated by the Facility are at any time insufficient to pay all of the expenses associated with its operation, including, but not limited to, Manager's management fee, Emeritus shall, within five (5) days of its receipt of a written demand by Manager, deposit in the Facility bank account sufficient funds to satisfy the then working capital needs of the Facility. The amounts so advanced shall be deemed to be loans by Emeritus to the Facility and shall be repaid by Manager from future Facility revenues in accordance with the provisions of Section IX hereof (i) PERSONNEL: Manager shall recruit, employ, train, promote, direct, discipline, suspend and discharge Facility personnel; establish salary levels, personnel policies and employee benefits; and establish employee performance standards, all as needed during the term of this Agreement to ensure the efficient operation of all departments within and services offered by the Facility. All of the Facility personnel, other than the Facility Administrator who shall be an employee of Manager, shall be the employees of Emeritus. Notwithstanding the foregoing, the salary and benefits of the Administrator shall be deemed to be an operating expense of the Facility and shall be paid from the bank account described in Paragraph I(h). Manager shall provide Emeritus with a workers compensation loss run within twenty (20) days after the end of each month, along with the monthly financial statements provided pursuant to Paragraph I(f) and with copies of any and all equal employment opportunity claims which may be filed during the term of this Agreement within five (5) business days after Manager's receipt thereof, whether such claims related to the period prior to or during the term of this Agreement. Emeritus shall be responsible for the defense of any and all such EEOC claims but Manager shall cooperate in such defense and shall provide Emeritus with any and all documents necessary for such defense which Emeritus may reasonably request and which are in Manager's possession or under Manager's control. (j) SUPPLIES AND EQUIPMENT: Manager shall purchase supplies and non-capital equipment needed to operate the Facility within the budgetary limits set forth in the annual operating budget prepared by Manager pursuant to Paragraph I(1). In purchasing said supplies and equipment, if possible, Manager shall take advantage of any national or group purchasing agreements to which Manager or Emeritus (if and to the extent Emeritus gives Manager notice of such agreements) may be a party. 3 (k) LEGAL PROCEEDINGS: Manager shall, through its legal counsel, coordinate all legal matters and proceedings with Emeritus' counsel. (1) BUDGETS: The Facility shall be operated on a fiscal year of January 1 through December 31. Within forty-five (45) days prior to the start of each fiscal year, Manager shall prepare and submit to Emeritus for its review and approval, which approval shall not be unreasonably withheld, an annual operating budget, an annual capital expenditure budget, and an annual cash flow projection. The capital budget shall in substantially the form attached hereto as Exhibit A. In the event a budget has not been agreed upon by the beginning of the fiscal year, the budget in effect for the prior fiscal year shall continue in effect until the new budget is agreed upon. Thereafter, any expenditures made during the year pursuant to said budgets and/or any expenditures on an item-by-item basis exceeding by no more than 10% the amounts set forth therein for the applicable expense item (the "Budget Threshold") may be made without Emeritus' prior approval. Any unbudgeted expenditures and/or any expenditures in excess of the Budget Threshold shall be subject to Emeritus' prior approval, which approval shall not be unreasonably withheld. (m) COLLECTION OF ACCOUNTS: Manager shall issue bills and collect accounts and monies owed for goods and services furnished by the Facility, including, but not limited to, enforcing the rights of Emeritus and the Facility as creditor under any contract or in connection with the rendering of any services; provided, however, that any expenses incurred by Manager in so doing shall be treated as Facility operating expenses, which shall be payable out of Facility funds deposited in the bank account described in Section I(h). II. INSURANCE: Upon request, Manager, at Emeritus' sole cost and expense, shall arrange for and maintain all necessary and proper hazard insurance covering the Facility, the furniture, fixtures, and equipment situated thereon, and all necessary and proper malpractice and public liability insurance for Emeritus' protection and for the protection of Emeritus' officers, agents and employees. Until such a request is made and/or in the event Manager is unable to secure insurance coverage for the Facility for any reason whatsoever, Emeritus shall be responsible for obtaining and maintaining said insurance. In addition, Emeritus shall provide all employee health and worker's compensation insurance for its employees, which insurance shall be administered by Manager. Manager shall arrange for and maintain all necessary and proper malpractice and public liability insurance for the protection of itself, its officers, agents and employees. Any insurance provided pursuant to this paragraph shall comply with the requirements of the Lease or any applicable Facility mortgage. III. PROPERTY INTEREST: The systems, methods, procedures and controls employed by Manager and any written materials or brochures developed by Manager to document the same are to remain the property of Manager and are not, at any time during or after the term of this Agreement, to be utilized, distributed, copied or otherwise employed or acquired by Emeritus, except as authorized by Manager. IV. TERM OF AGREEMENT: The Term of this Agreement shall commence at 12 : 01 AM on January 1,1998 and shall terminate at midnight on December 31,1998, unless sooner terminated (i) due to the fact that 50"% or more of the Facility is damaged or destroyed or taken by condemnation proceedings or otherwise and Emeritus to the extent permitted by the Lease or mortgage documents does not elect to rebuild or repair, (ii) upon the occurrence of an Event of Default or (iii) upon the assignment of the Lease to Manager pursuant to the terms of the First of First Refusal Agreement of even date herewith between Emeritus and Manager. V. DEFAULT: Either party may terminate this Agreement, as specified in this Section V, 4 in the event of a default ("Event of Default") by the other party. (a) With respect to Manager, it shall be an "Event of Default" hereunder: (i) If Manager shall fail to keep, observe or perform any material agreement, term or provision of this Agreement, and such default shall continue for a period of thirty (30) days after notice thereof shall have been given to Manager by Emeritus, which notice shall specify the event or events constituting the default; or (ii) If written notice is received by Emeritus, Manager of the Facility, or proceedings are commenced, which threaten to revoke, rescind, termination or not renew the licensure or certification of the Facility (whether or not a period is granted prior to the effective date thereof in which corrective action may be undertaken or the same are stayed pending appeal) (the "Negative Regulatory Proceedings") and Emeritus is not satisfied, in its sole and absolute discretion, that Manager has the resources (financial and otherwise) necessary to undertake the corrective action required to successfully terminate such Negative Regulatory Proceedings, it being understood and agreed that in such event (A) Emeritus shall have the right, without further notice to Manager and without giving Manager any further opportunity to cure such breach, to terminate this Agreement effective upon such date as may be specified by written notice to Manager and (B) Manager shall be solely responsible for any damages, losses, costs or expenses incurred or suffered by Emeritus or any successor manager as a result of such Negative Regulatory Proceedings if and to the extent Emeritus can demonstrate that such damages, losses, costs or expenses are attributable to the acts or omissions of Manager in performing its obligations under this Agreement prior to the date on which this Agreement is terminated; provided, however, that in no event shall such damages, losses, costs or expenses for which Emeritus can seek recovery from Manager include any additional management or other fees or compensation which Emeritus may be required to pay to a successor operator of the Facility for any other costs incurred in transitioning operational responsibility for the Facility from Manager to such successor operator; or (ii) If Manager shall apply for or consent to the appointment of a receiver, trustee or liquidator of Manager of all or a substantial part of its assets, file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, make a general assignment for the benefit of creditors, file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law, or if an order judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Manager, a bankrupt or insolvent or approving a petition seeking reorganization of Manager, or appointing a receiver, trustee or liquidator of Manager, of all or a substantial part of its assets; or (iii) If any of the representations, warranties or covenants of Manager set forth in this Agreement shall be untrue in any material respect and Emeritus suffers or incurs any damages as a result thereof. (b) With respect to Emeritus, it shall be an Event of Default hereunder: (i) If Emeritus shall fail to make or cause to be made any payment to Manager required to be made hereunder (other than its working capital obligation, which default is subject to the provisions of Paragraph V(b)(ii)), and such failure shall continue for a period of thirty (30) days; or (ii) If Emeritus shall fail to keep, observe or perform any material agreement, term or 5 provision of this Agreement and such default shall continue for a period of thirty (30) days after notice, which notice shall specify an event or events constituting the default thereof by Manager to Emeritus; provided, however, that in the case of Emeritus' failure to provide necessary working capital upon demand by Manager, it shall be deemed to be an Event of Default hereunder if the same is not paid within ten (10) days of Manager's initial demand therefor without any further notice from Manager being required; or (iii) If Emeritus shall fail to make payments, or keep any covenants, owing to any third party which are beyond the control of Manager to make or keep, and which would cause Emeritus to lose possession of the Facility or any personal property which would be required to operate the Facility in the normal course; or (iv) If Emeritus shall be dissolved or shall apply for or consent to the appointment of a receiver, trustee or liquidator of Emeritus or of all or a substantial part of its assets, file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, make a general assignment for the benefit or creditors, file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law, or if an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Emeritus a bankrupt or insolvent or approving a petition seeking reorganization of Emeritus or appointing a receiver, trustee or liquidator of Emeritus of all or a substantial part of its assets; or (v) If any of the representations, warranties or covenants of Emeritus set forth in this Agreement shall be untrue in any material respect and Manager suffers or incurs any damages as a result thereof. VI. REMEDIES UPON DEFAULT: (a) If any Event of Default by Emeritus shall occur, Manager may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement, and neither party shall have any further obligations whatsoever under this Agreement, but Manager shall immediately be entitled to receive payment of all amounts theretofore unpaid but earned to the date of termination. (b) If any Event of Default by Manager shall occur, Emeritus may, in addition to any other remedy available to it in law or equity on account of such Event of Default, forthwith terminate this Agreement, and neither party shall have any further obligation whatsoever under this Agreement; provided, however, that Manager shall immediately be entitled to receive payment of all amounts theretofore unpaid but earned to date of termination, subject to Emeritus' right to receive payment of damages from Manager. VII. EMERITUS' INSPECTION: During the term hereof, each of Emeritus and HCPI and their agents and representatives shall have the right, upon request and at reasonable times, to inspect the Facility and to inspect and/or audit all books and records pertaining to the operation thereof. VIII. FACILITY OPERATIONS: (a) NO GUARANTEE OF PROFITABILITY: Manager does not guarantee that operation of the Facility will be profitable, but Manager shall use its best efforts to operate the Facility in as cost efficient and profitable a manner as possible. 6 (b) STANDARD OF PERFORMANCE: In performing its obligations under this Agreement and, if applicable, in transitioning operational responsibility for the Facility back to Emeritus or to a successor manager designated by Emeritus at the expiration or sooner termination of the term of this Agreement, Manager shall use its best efforts and act in good faith and with professionalism in accordance with acceptable and prevailing standards of health care and the policies adopted by, and resources available to, the Facility. (c) FORCE MAJEURE: Manager will not be deemed to be in violation of this Management Agreement if it is prevented from performing any of its obligations hereunder for any reason beyond its control; including, without limitation, strikes, shortages, war, acts of God, lack of Emeritus' financial resources, or any statute, regulation or rule of federal, state or local government or agency thereof. (d) CONTRACTS WITH AFFILIATES AND OTHERS FOR ANCILLARY SERVICES. Emeritus acknowledges and agrees that the residents of the Facility require certain ancillary services such as physical, occupational. speech and respiratory therapy, medical supplies and pharmaceutical goods and services (collectively, the "Ancillary Services") and that certain of Manager's affiliates are in the business of providing Ancillary Services to long term care facilities. Emeritus hereby authorizes Manager, in the course of its operation of the Facility, to contact on Emeritus' behalf and in Emeritus' name with such affiliates or with any other party for the provision of Ancillary Services provided, however, that any such contact shall provide that it is terminable on no more than thirty (30) days notice without penalty or premium. Emeritus represents that it is, as of the date hereof, a party to the contracts for the provision of Ancillary Services at the Facility which are described in Exhibit B, and that from and after the date hereof and throughout the term of this Agreement, it shall not enter into any other contracts for the provision of Ancillary Services at the Facility. Manager shall ensure that the execution of such Ancillary Services agreements does not constitute or create a default under any pre-existing contracts which relate to such services entered into by Emeritus with other third party provides; provided, however, that with respect to contracts for the provision of pharmaceutical services, respiratory therapy services and medical supplies, Manager shall not be in breach of this Paragraph VIII(d), in the event it enters into contracts (which otherwise comply with the terms of this Paragraph VIII(d)) for such Ancillary Services at any time on or after February 1, 1998 even if the execution of such contracts would give rise to a breach under any existing agreements for such services to which Emeritus or the Facility may be a party; and provided, further, that in the event of any such breath, Emeritus shall indemnify, defend and hold harmless Manager from and against any and all losses, costs, damages and expenses, including, but not limited to, reasonable attorneys fees, which Manager may incur as a result thereof. Manager shall further ensure, in the case of any contract for Ancillary Services with an affiliate of Manager that the costs charged do not exceed those which would be charged to Emeritus by an unrelated third party in an arms length transaction. IX. WITHDRAWAL OF FUNDS BY EMERITUS; MINIMUM BANK BALANCE: (a) Emeritus may withdraw the then accumulated operating cash surplus (as determined by Manager) from the Facility bank account subject to the limitations set forth in clause (b) below and to the right of Manager to restrict withdrawal by Emeritus of any Facility funds in accordance with the provisions of subparagraph B, below. (b) At all times Manager shall maintain a minimum cash balance in the checking account established for the Facility equal to the sum of (i) All current and unpaid invoices (both those received and those pending), any mortgage 7 or lease payments, note or installment payments, payrolls, rents, expenses, management fees and other charges incident To the operation of the Facility which will become due and payable within the ensuing forty- five (45) days; plus (ii) An amount not to exceed $50,000 deemed necessary by Manager to be adequate for unanticipated contingencies. X. MANAGEMENT FEE: (a) INITIAL FEE. During the Term of This Agreement Manager shall be entitled to a monthly management fee equal to five percent (5%) of the gross revenues generated each month by the Facility. For purposes hereof, "gross revenues" shall mean all revenues generated by the Facility, including revenues from routine patient care and ancillary services, but shall specifically exclude the proceeds from the sale of any Facility equipment and any insurance and condemnation proceeds. (b) PRORATION OF FEE. If the services of Manager commence or terminate (for any reason, including those set forth in Paragraph V) other than on the first day of the month, the fee shall be prorated in proportion to the number of days for which services are actually rendered. (c) PAYMENT OF FEE. The Management fee provided for herein shall be disbursed by Manager to itself out of the Facility bank account on a priority basis prior to the payment of any other Facility expenses and to the repayment of any working capital loans made by Emeritus pursuant to the terms hereof. (d) ADJUSTMENT OF FEE. (i) In conjunction with the delivery of the annual financial statements required under Paragraph 1(f), Manager shall deliver to Emeritus a review prepared by Manager's independent certified public accountants of the outstanding "patient" (as compared to "settlement") accounts receivable of the Facility for the immediately preceding year, along with a statement of the amount of the "specific" (as compared to "general") bad debt reserve recommended by such accountants to be established with respect thereto (the "Reserve Amount"). Any costs and expenses of such accountants' review shall be borne an operating expense of the Facility. (ii) In the event the accountant recommends a range of specific bad debt reserves, for purposes hereof, the Reserve Amount shall be the minimum specific bad debt reserve recommended by the accountant. In the event the Reserve Amount, plus any write offs for bad debts occurring during the preceding year, exceeds 3% of the gross revenues of the applicable year end (the "Bad Debt Threshold"), such excess shall hereinafter be referred to as the Excess Reserve Amount. (iii) Manager shall remit to Emeritus, concurrently with the delivery of such accounts receivable review, an amount equal to the lesser of (i) five percent (5%) of the Excess Reserve Amount and (ii) the difference between the management fees paid to Manager during the applicable year and the management fees which would have been paid to Manager during the applicable year had the fee been calculated at the rate of 4% of gross revenues, it being understood and agreed that in no event shall the fee paid to Manager after taking into consideration the adjustment provided for in this Paragraph X(d), be less than 4% of the Facility gross revenues. (iv) With respect to the settlement receivables which are excluded from the calculation of 8 the Reserve Amount pursuant to Paragraph X(d), Manager and Emeritus agree that at such time as payment is made by the appropriate third party payor with respect to such settlement receivables, the following provisions shall apply: (A) to the extent the amount paid is equal to the amount of the settlement receivable, no adjustment shall be made to the management fee previously paid to Manager; (B) to the extent the amount paid is less than the amount of the settlement receivable and the difference between the amount of the settlement receivable and the amount paid, when aggregated with the Reserve Amount for the year to which such settlement receivables relate, is equal to or less than the Bad Debt Threshold, no adjustment shall be made to the management fee previously paid to Manager; (C) to the extent the amount paid is less than the amount of the settlement receivable and the difference between the amount of the settlement receivable and the amount paid, when aggregated with the Reserve Amount for the year to which such settlement receivables relate, exceeds the Bad Debt Threshold, Emeritus shall so advise Manager in writing, which notice shall include such supporting documentation as may be reasonably requested by Manager, and the management fee paid in such year shall be subject to adjustment in the manner set forth in Paragraph X(d), in which case Manager shall remit to Emeritus on demand the amount of such adjustment; (D) to the extent the amount paid is more than the amount of the settlement receivable, an amount equal to 5% of the excess shall be paid to Manager as an additional management fee. (v) The provisions of this Paragraph X(d) shall survive the expiration or earlier termination of the term of this Management Agreement. XI. ASSIGNMENT: This Agreement shall not be assigned by Manager without the prior written consent of the other party, which consent shall not be unreasonably withheld. In the event of the transfer or assignment by Emeritus of its leasehold rights in the Facility to any person or entity other than Manager, such transfer or assignment shall not require the consent of Manager but such transfer of assignment shall be subject to the rights of Manager under this Agreement. XII. NOTICES: All notices required or permitted hereunder shall be given in writing by hand delivery, by registered or certified mail, postage prepaid, by overnight delivery or by. facsimile transmission (with receipt confirmed with the recipient). Notice shall be delivered or mailed to the parties at the following addresses or at such other places as either party shall designate in writing. To Manager: Sunrise Healthcare Corporation 101 Sun Lane, NE Albuquerque, NM 87109 Attn: Warren Mclnteer Phone: 505-856-2370 Fax: 505-858-4998 To Emeritus: Emeritus Corporation 313 I Elliott Avenue, Suite 500 Seattle, WA 98101 9 Attn: Gary Witte Phone: 206-298-2909 Fax: 206-301-4500 XIII. RELATIONSHIP OF THE PARTIES: The relationship of the parties shall be that of principal and independent contractor and all acts performed by Manager during the term hereof as Manager of the Facility shall be deemed to be performed in its capacity as an independent contractor. Nothing contained in this Agreement is intended to or shall be construed to give rise to or create a partnership or joint venture or lease between Emeritus, its successors and assigns on the one hand, and Manager, its successors and assigns on the other hand. Manager will not be liable in the performance of its duties for any loss incurred by or damage to Emeritus, unless such loss or damage results from the negligence or willful misconduct of Manager. Manager shall indemnify, defend and hold harmless Emeritus from any loss or damage resulting from the acts or omissions of Manager's officers, agents or employees in connection with the operation of the Facility by Manager. Emeritus shall indemnify, defend and hold Manager harmless from any loss incurred by or damage to Manager where such loss or damage result from the negligence or willful misconduct of Emeritus in performing its obligations under the Agreement and from any and all damages, losses, costs and expenses which Manager may incur in the event of any litigation related to the termination of the Management Agreement with the Current Manager (as defined below). XIV. ENTIRE AGREEMENT: This Agreement contains the entire agreement between the parties and shall be binding upon and inure to the benefit of their successors and assigns, and shall be construed in accordance with the laws of the State of North Carolina. This Agreement may not be modified or amended except by written instrument signed by both of the parties hereto. XV. CAPTIONS: The captions used herein are for convenience of reference only and shall not be construed in any manner to limit or modify any of the terms hereof. XVI. ATTORNEY'S FEES: In the event either party brings an action to enforce this Agreement, the prevailing party in such action shall be entitled to recover from the other all costs incurred in connection therewith, including reasonable attorney's fees. XVII. SEVERABILITY: In the event one or more of the provisions contained in this Agreement is deemed to be invalid, illegal or unenforceable in any respect under applicable law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be impaired thereby. XVIII. CUMULATIVE; NO WAIVER: A right or remedy herein conferred upon or reserved to either of the parties hereto is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of an Event of Default hereunder. The failure of either party hereto to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy or be construed as a waiver or relinquishment thereof with respect to subsequent defaults. Every right and remedy given by this Agreement to the parties hereof may be exercised from time to time and as often as may be deemed expedient by the parties thereto, as the case may be. XIX. AUTHORIZATION FOR AGREEMENT: The execution and performance of this Agreement by Emeritus and Manager have been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid and enforceable obligations of 10 Emeritus and Manager in accordance with its terms. XX. ACCESS OF THE GOVERNMENT TO BOOKS AND RECORDS: In the event the services provided hereunder have a 12- month cost or value of $10,000 or more (or such other amount as may hereafter be established by law): (a) Until the expiration of four years after the furnishing of services pursuant to this Agreement, Manager shall make available upon written request to the Secretary of the United States Department of Health and Human Services, or upon request to the Comptroller General of the United States, or any of their duly authorized representatives, this Agreement, and books, documents and records that are necessary to certify the nature and extent of such costs. (b) If Manager or its affiliates carries out any of the duties of this Agreement through a subcontract, with a related organization, such subcontract shall contain a clause to the effect that until the expiration of four years after the furnishing of such services pursuant to such subcontract, the related organization shall make available, upon written request to the Secretary of the United States Department of Health and Human Services, or upon request to the Comptroller General of the United States, or any of their duly authorized representatives, the subcontract, and books, documents and records of such organization that are necessary to certify the nature and extent of such costs. (c) The parties agree that any applicable attorney- client or other legal privileges shall not be deemed waived by virtue of this Agreement. XXI. COUNTERPARTS: This Agreement may be executed in any number of counterparts, each of which shall be an original, and each such counterpart shall together constitute but one and the same Agreement. XXII. THIRD PARTY BENEFICIARY. Nothing in this Agreement express or implied is intended to and shall not be construed to confer upon or create in any person, other than the parties hereto, any rights or remedies under or by reason of this Agreement, including without limitation, any right to enforce this Agreement. XXIII. CONSTRUCTION. Each of Emeritus and Manager acknowledges and agrees that it has participated in the drafting and negotiation of this Agreement and accordingly that in the event of any dispute between Emeritus and Manager with respect to the interpretation or enforcement of the terms hereof, no provision shall be construed so as to favor or disfavor either party hereto. In addition, each of Emeritus and Manager acknowledges and agrees that it has been represented by the same counsel in the drafting and negotiation of this Agreement and that it has each knowingly and voluntarily consented thereto and accordingly neither shall raise such fact as a defense to the enforcement of any obligation imposed by it under this Agreement or as a factor in the interpretation or any provision of this Agreement. XXIV. REPRESENTATIONS, WARRANTIES AND COVENANTS OF EMERITUS. As a material inducement to Manager to enter into this Agreement, Emeritus does hereby represent, warrant and covenant as follows to Manager in connection with this Agreement and the Facility: (a) Emeritus is the due and lawful lessee of the Facility under the terms of the Lease, a true and correct copy of which is attached hereto as Exhibit C; 11 (b) The Lease is in full force and effect as of the date hereof and has not been amended or modified except as set forth in Exhibit C; (c) Neither Emeritus nor HCPI is in default in any of its obligations under the Lease nor is Emeritus aware of any event which, with the giving of notice or the passage of time or both, would constitute an Event of Default under the Lease; (d) The Facility is a skilled nursing facility with 134 licensed and operational beds and is certified to participate in the Medicare and Medicaid Programs. As of the date hereof, there is no action pending or threatened to revoke or suspend the Facility's license or to terminate or to not renew the participation of the Facility in the Medicare and/or Medicaid Programs nor are there any outstanding deficiencies which are not the subject of a Plan of Correction which has been approved by the applicable governmental authority. A true and correct copy of the Facility's license and of its most recent licensure and certification survey(s) are attached hereto as Exhibit D; (e) Set forth in Exhibit E is a true and accurate description of all litigation currently pending or threatened with respect to the Facility. Emeritus shall be and remain solely responsible for the resolution of all such litigation, subject to any indemnity rights which Emeritus may have against the Current Manager (as defined below) but Manager shall cooperate, upon request, in Emeritus' efforts to defend the same, including, but not limited to, providing copies of Facility records and access to the Facility to Emeritus' counsel or any other party designated by Emeritus. Any litigation filed after the Commencement Date, whether the same relates to the period prior to or after the Commencement Date, shall also be and remain the sole responsibility of Emeritus subject, however, in the case of any litigation which relates to the period after the Commencement Date to any indemnity rights which Emeritus may have against Manager under the terms of this Agreement; (f) The Facility includes all personal property and inventory necessary for its lawful operation in accordance with applicable state and federal laws; (g) A true and correct copy of the financial statements of the Facility dated as of October 31,1997 have been provided to Manager, including a true and correct census report as of October 31,1997, which accurately identifies each of the residents of the Facility, the daily rate paid by said residents and the date to which said rate has been paid, the payor status of said resident, i. e. , private, Medicare, Medicaid or other (the "Facility Financials"). Since the date of the Facility Financials there has not been any material adverse change in the financial condition (including, but not limited to, the working capital), business, assets, liabilities or results of operations of any or all of the Facility, whether in the ordinary course of business or otherwise; (h) There are no union contracts in effect between Emeritus, on the one hand, and the employees of the Facility, on the other hand. To the best of Emeritus' knowledge, none of its employees who are not currently members of a labor union are actively seeking the formation of a labor union at the Facility. Except as set forth in Exhibit E, Emeritus is not a party to any labor dispute at the Facility, it being agreed that a claim for wrongful termination shall not be deemed to be a labor dispute but that an unfair labor practice and/or an EEOC charge shall be deemed to be a labor dispute; (i) Emeritus has not made any contributions, payments or gifts to or for the private use of any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift is illegal under the laws of the United States or the jurisdiction in which made or given or received any payments or other forms of remuneration in connection with the referral of patients which would violate the Medicare/Medicaid Anti-kickback Law, Section 12 1128(b) of the Social Security Act, 42 USC Section 1320a-7b(b) or any analogous state statute; (j) The Facility is currently subject to a Management Agreement in favor of Diversified Health Services, Inc. (the "Current Manager"), which shall be terminated on or prior to the Commencement Date and as to which Emeritus shall retain full responsibility for any costs or expenses owing under such Management Agreement. Emeritus shall provide Manager with evidence of the termination of the Management Agreement with the Current Manager as of the Commencement Date. Emeritus shall take such action as may be necessary to cause the Current Manager of the Facility to cooperate with Manager at no cost to Manager in a smooth transition of operational responsibility for the Facility as of the Commencement Date. If requested by Manager, Emeritus shall cause the Current Manager to enter into a Transfer of Operations Agreement with Manager in form and substance acceptable to Manager; (k) Emeritus is a duly organized, validly existing Washington corporation and is in good standing under the laws thereof and is duly qualified to do business as a foreign corporation in the State of North Carolina and is in good standing under the laws thereof. Subject to obtaining the consent of HCPI under the Lease, Emeritus has full corporate power and authority to enter into this Agreement and to carry out the transaction provided for herein and the same do not conflict with Emeritus' Articles of Incorporation or Bylaws or any agreement, note, document, contract or instrument to which Emeritus is a party or by which its assets may be bound or affected, including, but not limited to the Management Agreement in effect with the Current Manager. This Management Agreement is the valid and binding obligation of Emeritus enforceable in accordance with the terms hereof, except as such enforceability may be limited by applicable creditors rights laws and general principles of equity; (1) The person executing this Agreement on behalf of Emeritus is duly authorized to do so and holds the position set forth below his/her name; (m) Emeritus shall proceed with all due diligence and at its sole cost and expense to secure the consent of HCPI to this Management Agreement and shall provide Manager on or prior to the Commencement Date with evidence of the issuance thereof; (n) Emeritus is not a party to any litigation which would interfere with the consummation of the transaction contemplated by this Agreement. (o) No representation or warranty by or on behalf of Emeritus contained in this Agreement or in the exhibits hereto and no statement contained in any certificate, list, exhibit, or other instrument furnished or to be furnished to Manager pursuant hereto contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts which are necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. XXV. REPRESENTATIONS, WARRANTIES AND COVENANTS OF MANAGER. As a material inducement to Emeritus to enter into this Agreement, Manager does hereby represent, warrant and covenant as follows to Emeritus in connection with this Agreement and the Facility: (a) Manager is a duly organized, validly existing New Mexico corporation and is in good standing under the laws thereof and is duly qualified to do business as a foreign corporation in the State of North Carolina and is in good standing under the laws thereof. Manager has full corporate power and authority to enter into this Agreement and to carry out the transaction provided for herein and the same do not conflict with Manager's Articles of Incorporation or Bylaws or any 14 agreement, note, document, contract or instrument to which Manager is a party or by which its assets may be bound or affected. This Management Agreement is the valid and binding obligation of Manager enforceable in accordance with the terms hereof, except as such enforceability may be limited by applicable creditors rights laws and general principles of equity; (b) The person executing this Agreement on behalf of Manager is duly authorized to do so and holds the position set forth below his/her name. (c) Manager shall provide Emeritus with such information as it may reasonably request in connection with securing the consent of HCPI to this Management Agreement (d) Manager is not a party to any litigation which would interfere with the- consummation of the transaction contemplated by this Agreement. (e) No representation or warranty by or on behalf of Manager contained in this Agreement or in the exhibits hereto and no statement contained in any certificate, list, exhibit, or other instrument furnished or to be furnished to Emeritus pursuant hereto contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts which are necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed, as of the day and year first above written. EMERITUS : EMERITUS CORPORATION By: /s/ Gary D. Witte ------------------------- Its: Vice President Operations MANAGER: SUNRISE HEALTHCARE CORPORATION By: /s/ ------------------------ - -------- Its: V.P. 15 EX-10.53.2 3 EX 10.53.2 AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO AN ASSISTED LIVING FACILITY (YORK, SOUTH CAROLINA) This Agreement to Provide Management Services to an Assisted Living Facility ("Agreement") dated as of January 1, 1998, is made and entered into by and between YORK CARE, L.L.C., a Washington limited liability company ("Owner") and ACORN SERVICE CORPORATION, a Washington corporation ("Manager"). RECITALS A. Owner is the owner of that certain real property located at 40 - 42 Ross Cannon Street (the "Real Property") including the improvements on the Real Property that constitute the 50 unit assisted living facility commonly known as "York Care Facility" and located in York, South Carolina (the "Facility"); B. Owner desires to engage the services of a person or entity to manage the Facility on Owner' s behalf and to provide certain consulting services to Owner in connection therewith; C. Manager is experienced and qualified in the field of assisted living facility management; D. Owner has determined that Manager's fee is economical in light of the range of services which Manager is willing to provide to Owner; and E. Manager is willing to operate the Facility on Owner's behalf and provide consulting services to Owner in connection therewith, pursuant to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, IT IS AGREED AS FOLLOWS: 1. MANAGEMENT AND CONSULTING RESPONSIBILITIES OF MANAGER. Owner hereby engages Manager to provide, and Manager hereby accepts such engagement and agrees to provide, management, consulting, advisory and supervisory services to Owner in connection with the operation of the Facility, upon the terms and conditions set forth in this Agreement. By entering into this Agreement, Owner does not delegate to Manager any powers, duties, or responsibilities which Owner is prohibited by law from delegating. Owner also retains such other authority as shall not have been expressly delegated to Manager pursuant to this Agreement. Subject to the foregoing, and commencing on January I, 1998 (the "Commencement Date") Manager shall provide the following services to, or on behalf of Owner: 1.1 Operational Policies and Forms. Manager shall implement operational policies and procedures and develop such new policies and procedures as Manager deems necessary to insure the establishment and maintenance of operational standards appropriate for the nature of the Facility. 1.2 Charges. Manager shall establish the schedules of recommended charges, including any and all special charges for services rendered to residents at the Facility. Owner shall have the right to review and approve the charge schedules established by Manager. 1.3 Information. Manager shall develop any informational material, mass media releases, and other related publicity materials, which Manager deems necessary for the operation of the Facility. 1.4 Regulatory Compliance. Manager, with the assistance of Owner if requested by Manager, shall use its best efforts to obtain and maintain all licenses, permits, qualifications, and approvals from any applicable governmental or regulatory authority for the operation of the Facility and to manage the operations of the Facility in full compliance with a11 applicable laws and regulations, and in accordance with all such licenses, permits, qualifications, and approvals. 1.5 Equipment and Improvements. Manager shall advise Owner as to equipment and improvements which are needed to maintain or upgrade the quality of the Facility, to replace obsolete or run-down equipment, or to correct any deficiencies (including, without limitation, any survey deficiencies) which may be observed or cited during the term of this Agreement. Owner shall review and act upon Manager's recommendations as expeditiously as possible. Manager shall not be liable for any cost or liability which Owner may incur in the event Owner disregards Manager's recommendations. Manager shall, as a Facility Expense (such term as used in this Agreement shall have the meaning specified in Paragraph 8.2 below), make all necessary and approved repairs, replacements and maintenance within the budgetary limits set forth in the annual capital expenditure budget prepared by Manager pursuant to Paragraph 1.12. hereof and in a workmanlike and lien-free manner. 1.6 Accounting. Manager shall provide home office and accounting support to the Facility. All accounting procedures and systems utilized in providing said support shall be in accordance with the operating capital and cash programs developed by Manager, which programs shall conform to generally accepted accounting principles and shall not materially distort income or loss. If Owner so elects by notice to Manager, Manager shall prepare or cause to be prepared all tax returns required in connection with operation of the Facility, including payroll tax returns (but excluding Owner's income tax returns, which Manager shall prepare only if Owner and Manager agree upon separate compensation to be paid to Manager for preparing such income tax returns) and, at Owner's sole cost and expense, Manager shall cause all local, state and federal taxes to be timely paid or contested, as appropriate. Such taxes shall be deemed to be Facility Expenses and shall be paid out of the revenues of the Facility or the working capital for the Facility provided by Owner. Nothing herein shall preclude Manager from delegating to a third party a portion of the accounting duties provided for in this section; provided, that such delegation shall not relieve Manager from Manager's ultimate liability for the timely and complete performance of the obligations provided for herein. 1.7 Reports. Manager shall prepare and provide to the Owner any reasonable operational information which may from time to time be specifically requested by Owner, including any information needed to assist Owner in completing its tax returns and in complying with any reporting obligations imposed by any mortgagees of the Facility. In addition: (i) within thirty (30) days after the end of each calendar month, Manager shall provide Owner with an unaudited balance sheet of the Facility, dated the last day of such month, and an unaudited statement of income and expenses for such month relating to the operation of the Facility; and (ii) within ninety (90) days after the end of the fiscal year of the Facility, Manager shall provide Owner with unaudited financial statements including a balance sheet of the Facility, dated the last day of said fiscal year, and an unaudited statement of income and expense for the fiscal year then-ended relating to the operation of the Facility. 1.8 Bank Accounts. Manager shall open a new checking account in the name of the Facility ("Facility Checking Account") and shall deposit in the Facility Checking Account all 2 money received during the term of this Agreement in the course of the operation of the Facility; provided, however, that during the term hereof, withdrawals and payments from the Facility Checking Account shall be made only on checks signed by a person or persons authorized by Manager. Owner shall be given notice as to the identity of said authorized signatories. All Facility Expenses incurred in the operation of the Facility in accordance with the terms of the budgets submitted to Owner under Paragraph 1.12 hereof, shall be paid by check drawn on the Facility Checking Account. Withdrawals from the Facility Checking Account shall be made first to pay the Base Management Fee (as that term is defined in Subparagraph 9.2, below), and, thereafter, to pay Facility Expenses in such order of priority as Manager deems appropriate to the operation of the Facility. In the event the revenues generated by the Facility are at any time insufficient to pay all of the Facility Expenses, Owner shall, within five (5) days of Owner's receipt of a written demand by Manager, deposit in the Facility Checking Account sufficient funds to satisfy the then working capital needs of the Facility. 1.9 Personnel. Manager shall: (i) recruit, employ, train, promote, direct, discipline, suspend, and discharge Facility personnel; (ii) establish salary levels, personnel policies, and employee benefits; and (iii) establish employee performance standards, all as needed during the term of this Agreement to ensure the efficient operation of all departments within and services offered by the Facility. All Facility personnel shall be employees of Manager, not Owner, and all salaries, benefits, payroll taxes and other costs related to Facility personnel (including, without limitation, computer training and other employee training and education, including tuition, travel and other expenses relating thereto if such expenses are incurred with Owner's approval) shall not be included in the Base Management Fee, but shall be separately reimbursed by Owner as a Facility Expense. In addition, the costs and expenses (including, without limitation, travel expenses) of consultants, independent contractors or other providers of services engaged by Manager with Owner's approval shall be separately reimbursed as Facility Expenses. 1.10 Supplies and Equipment. Manager shall purchase, as a Facility Expense, supplies and non- capital equipment (including, without limitation, computer hardware and software) needed to operate the Facility within the budgetary limits set forth in the annual operating budget prepared by Manager pursuant to Paragraph 1.12 hereof. In purchasing said supplies and equipment Manager shall, if possible, take advantage of any national or group purchasing agreements to which Manager may be a party. 1.11 Legal Proceedings. If approved by Owner, Manager shall, as a Facility Expense and through its legal counsel, coordinate all legal matters and proceedings with Owner's counsel; if Owner does not approve the same, Owner shall indemnify, protect, defend and hold Manager harmless with respect to such legal matters and proceedings. . 1.12 Budgets. The Facility shall be operated on a fiscal year of January 1 through December 31. Within forty-five (45) days prior to the start of each fiscal year, Manager shall prepare and submit to Owner for Owner's review and agreement, which agreement shall not be unreasonably withheld (i) an annual operating budget, (ii) an annual capital expenditure budget, and (iii) an annual cash flow projection. In the event the operating budget or the capital expenditure budget (or both) have not been agreed upon prior to the first day of the then-current fiscal year, beginning in fiscal year 1998, the operating budget or capital expenditure budget in effect for the prior fiscal year, as appropriate, shall continue in effect until the new operating budget or capital expenditure budget, as appropriate, is agreed upon by Owner and Manager. Thereafter, any expenditures made during the year pursuant to said agreed-upon budgets and/or any expenditures on an item-by-item basis exceeding by no more than 10% the amounts set forth therein for the applicable expense item (the "Budget Threshold") may be made without Owner's prior approval. Any unbudgeted expenditures and/or any expenditures in excess of the Budget 3 Threshold shall be subject to Owner's prior approval, which approval shall not be unreasonably withheld. 1.13 Collection of Accounts. Manager shall issue bills and collect accounts and monies owed for goods and services furnished by the Facility, including, but not limited to, enforcing the rights of Owner and the Facility as creditor under any contract or in connection with the rendering of any services; provided, however, that any expenses incurred by Manager shall not be included in the Base Management Fee, but shall be separately reimbursed by Owner as a Facility Expense. Notwithstanding any other provision of this Agreement to the contrary, Manager does not guaranty the collectability of such accounts or monies and shall have no liability to Owner for Manager's inability to so collect such accounts or monies. 1.14 Construction Supervision. Owner and Manager may agree that Manager shall act as construction supervisor with respect to any construction work for the Facility or on the Real Property after the Commencement Date (as defined in Paragraph 1, above), in which event Manager will supervise, oversee and administer each and every aspect of any such improvements and construction work. For the purposes of this Agreement, "construction work" shall include any construction, reconstruction or alteration of any improvements constituting part of the Real Property, but shall not include usual maintenance and repairs made to the Facility or the Real Property. Without limitation of the foregoing, if Owner and Manager agree that Manager shall act as construction supervisor, and subject to Owner's approval in each instance, Manager will: (a) negotiate contracts for architectural, design, engineering and construction services; (b) secure any and all necessary consents and approvals; (c) oversee the administration of construction contracts; and (d) act as project manager with respect to the construction work. 1.15 Extraordinary Costs. Except as otherwise specifically provided herein, all extraordinary costs incurred by Manager with respect to the Facility shall be separately reimbursed as Facility Expenses (and not included in the Base Management Fee) after first having been approved by Owner. 2. INSURANCE. Upon request, Manager, at Owner's sole cost and expense, shall arrange for and maintain all necessary and proper hazard insurance covering the Facility, the furniture, fixtures, and equipment situated thereon, and all necessary and proper malpractice and public liability insurance for Owner's protection and for the protection of Owner's officers, agents and employees. Until such a request is made and/or in the event Manager is unable to secure insurance coverage for the Facility for any reason whatsoever, Owner shall be responsible for obtaining and maintaining said insurance. In addition, Manager shall provide employee health and worker's compensation insurance for all Manager employees at the Facility in accordance with Manager's policies therefor, and the costs thereof shall not be included in the Base Management Fee, but shall be separately reimbursed by Owner as a Facility Expense. Manager shall, at Manager's sole cost and expense, arrange for and maintain all necessary and proper malpractice and public liability insurance for the protection of Manager, and Manager's officers, agents, and employees. Any insurance provided by Owner pursuant to this Paragraph 2. shall comply with the requirements of any mortgage or deed of trust encumbering the Facility, and any insurance provided by Manager pursuant to this Paragraph 2 shall comply with such requirements provided that Owner shall have provided Manager with a copy of such mortgage or deed of trust. 3. PROPRIETARY INTEREST. 4 The systems, methods, procedures, and controls employed by Manager and any written materials or brochures developed by Manager to document the same are, and shall remain, the property of Manager and are not, at any time during or after the term of this Agreement, to be utilized, distributed, copied, or otherwise employed or acquired by Owner, except as authorized by Manager. 4. TERM AND TERMINATION OF AGREEMENT. 4.1 Term. The term of this Agreement ("Term") shall commence on the Commencement Date and expire on the fifth (5th) anniversary of the Commencement Date; provided, however, that the Term shall be extended automatically for successive two (2) year periods unless terminated prior to expiration of the Term (as the same may have be extended) pursuant to this Paragraph 4. 4.2 Termination. The Term (as the same may be have been extended ) may be terminated by either Manager or Owner (a) at any time, with or without cause, by giving notice of termination not. less than thirty (30) days prior to the effective date of such termination; (b) if fifty percent (50%) or more of the Facility is either (i) damaged or destroyed or (ii) taken by condemnation, proceedings or otherwise, whether or not Owner elects to rebuild or repair the Facility, by giving notice of termination not less than ten ( 10) days prior to the effective date of such termination; (c) immediately upon the occurrence of an Event of Default by the other party (as defined in Paragraph 5, below), by giving notice of termination, effective the date of receipt (or deemed receipt) by the defaulting party of such notice of termination. 4.3 Effect of Termination. In the event of a termination of Term pursuant to Subparagraphs 4.2(a) or 4.2(b), above, upon the effective date of such termination, neither party shall have any further obligations whatsoever under this Agreement; provided, however, that Manager shall be entitled to receive immediate payment of all amounts theretofore unpaid by Owner but earned by Manager as of the effective date of such termination. In the event of a termination of the Term pursuant to Subparagraph 4.2(c), above, except as expressly provided in Paragraph 5.3, below, neither party shall have any further obligation whatsoever under this Agreement; provided, however, that Manager shall be entitled to receive immediate payment of all amounts theretofore unpaid by Owner but earned by Manager as of the effective date of such termination. In the event that Owner desires Manager to leave any equipment owned by Manager at the Facility upon such termination, Owner shall pay to Manager the fair market value of such equipment to be left at the Facility and Manager shall transfer title thereto to Owner upon such payment. 5. DEFAULT, REMEDIES UPON DEFAULT. 5.1 Manager's Events of Default. With respect to Manager, it shall be an "Event of Default" under this Agreement: (a) If Manager shall fail to keep, observe, or perform any material agreement, term, or provision of this Agreement, and such default shall continue 5 for a period of thirty (30) days after Manager's receipt of notice of such default from Owner, which notice shall specify the event or events constituting the default; or (b) If (i) Manager shall: (A) apply for, or consent to, the appointment of a receiver, trustee, or liquidator of Manager of all or a substantial part of Manager's assets, (B) file a voluntary petition in bankruptcy, or admit in writing Manager's inability to pay Manager's debts as they become due, (C) make a general assignment for the benefit of creditors, or (D) file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law; or (ii) an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor (A) adjudicating Manager as bankrupt or insolvent, (B) approving a petition seeking reorganization of Manager, or (C) appointing a receiver, trustee, or liquidator for Manager or for all or a substantial part of Manager's assets. 5.2 Owner's Events of Default. With respect to Owner, it shall be an Event of Default under this Agreement: (a) If Owner shall fail to make or cause to be made any payment to Manager required to be made hereunder (other than Owner's obligation, pursuant to Paragraph 1.8, above, to deposit working capital into the Facility Checking Account, which circumstance shall be handled in accordance with Subparagraph 5.2(b), below), and such failure shall continue for a period of thirty (30) days; (b) If Owner shall fail to keep, observe, or perform any material agreement, term, or provision of this Agreement and such default shall continue for a period of thirty (30) days after Owner's receipt of notice of such default from Manager, which notice shall specify an event or events constituting the default provided, however, that in the case of Owner s failure to provide, pursuant to Paragraph 1.8, above, necessary working capital upon demand by Manager, it shall be deemed to be an Event of Default hereunder if the such necessary working capital is not deposited in the Facility Checking Account within ten ( 10) days of Manager's initial demand therefor without any further notice from Manager being required; (c) If Owner shall fail to make payments, or keep any covenants, owing to any third party which are beyond the control of Manager to make or keep, and which would cause Owner to lose possession of the Facility or any personal property required to operate the Facility in the normal course of operation; or (d) If.. (i) Owner shall (A) be dissolved, (B) apply for or consent to the appointment of a receiver, trustee or liquidator for Owner or for all or a substantial part of Owner's assets, (C) file a voluntary petition in bankruptcy or admit in writing its inability to pay Owner's debts as they become due, (D) make a general assignment for the benefit or creditors, or (E) file a petition or an answer seeking reorganization or 6 arrangement with creditors or taking advantage of any insolvency law; or (ii) an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor (A) adjudicating Owner as bankrupt or insolvent, (B) approving a petition seeking reorganization of Owner, or (C) appointing a receiver, trustee or liquidator for Owner or of all or a substantial part of Owner's assets. 5.3 Remedies Upon Default by Owner. In the event of an Event of Default by a party, the non-defaulting party shall have, in addition to the right to terminate the Term pursuant to Subparagraph 4.2(c), above, all rights and remedies available to such non-defaulting party at law or in equity. 6. OWNER'S RIGHT TO INSPECT FACILITY/BOOKS AND RECORDS. During the Term, Owner shall have the right, upon not less than forty-eight (48) hours prior notice to Manager and at reasonable times during normal business hours, to inspect the Facility and to inspect and/or audit all books and records pertaining to the operation thereof. 7. FACILITY OPERATIONS. 7.1 No Guarantee of Profitability. Manager does not guarantee, and shall not be construed to have guaranteed, to Owner or any third party (including any mortgagee) that operation of the Facility will be profitable, but Manager shall use Manager' s commercially reasonable, diligent, and good faith efforts to operate the Facility in as cost-efficient and profitable a manner as possible in light of all of the circumstances then-existing. 7.2 Standard of Performance. In performing Manager's obligations under this Agreement, Manager shall use Manager's commercially reasonable, diligent, and good faith efforts, and act with professionalism, in undertaking management of the Facility, all in accordance with accepted and prevailing standards of health care in the general location of the Facility and with the policies adopted by, and resources available to, the Facility. 7.3 Force Majeure. Manager will not be deemed to be in violation of this Management Agreement if Manager is prevented from performing any of Manager' s obligations hereunder for any reason beyond Manager's reasonable control, including, without limitation: strikes, sick-outs, or labor disputes; material or supply shortages; war, insurrection or civil unrest; fire, earthquakes, severe weather, flooding; acts of God; Owner's failure to perform Owner obligations under this Agreement; or any law, statute, regulation, ordinance, or rule of any federal, state or local government or agency thereof, or any order, decree, or judgment of any court with jurisdiction. 8. WITHDRAWAL OF FUNDS BY OWNER; MINIMUM BANK BALANCE. 8.1 Withdrawal by Owner. From time to time, Owner may withdraw the then accumulated operating cash surplus (as determined by Manager) from the Facility Checking Account subject to the right of Manager to restrict withdrawal by Owner of any Facility funds in accordance with the provisions of Paragraph 8.2, below. 8.2. Minimum Cash Balance. At all times (subject to Manager's right, pursuant to Paragraph 1.8, above, to demand working capital from Owner in the event of a shortfall), Manager shall maintain a minimum cash balance in the Facility Checking Account equal to the sum of.. 7 (a) All costs and expenses associated with the ownership or operation of the Facility (each a "Facility Expense" and any two or more or all the "Facility Expenses"), including, without limitation, any principal and interest payments due in connection with any loan secured by a mortgage on the Facility, payroll, insurance, supplies, services, taxes (but excluding all federal, state, and local income taxes assessed against Owner), and the Base Management Fee, all of which Facility Expenses are unpaid but will become due and payable within the ensuing forty-five (45) days; plus (b) An amount deemed necessary by Manager to be adequate for unanticipated contingencies, which amount initially shall be $5,000 and which amount shall be adjusted as reasonably determined by Manager. 9. MANAGEMENT FEES. 9.1 Construction Supervision Fee. For any services performed by Manager pursuant to Paragraph 1.14, above, Manager shall receive a construction supervision fee equal to five percent (5"%)of the total amount of construction costs approved by Owner, due payable concurrently with the applicable payments to the construction contractor(s) and materialmen. 9.2 Base Management Fee. Throughout the term of this Agreement, Manager shall receive a monthly fee ("Base Management Fee") equal to six percent (6%) of the gross revenues generated for the prior month by the Facility, payable on or before the 10th day of each month. For purposes hereof, "gross revenues" shall mean all revenues generated by the Facility, but shall specifically exclude the proceeds from the sale of any Facility equipment and any insurance and condemnation proceeds. 9.3 Proration of Fees. If the services of Manager commence or terminate for any reason (including, without limitation, those set forth in Paragraph 5 hereof other than on the first day of any calendar month, the Base Management Fee for such partial month shall be prorated based upon the number of days for which services are actually rendered by Manager during such partial month. 9.4 Payment of Fees. Notwithstanding any other provision of this Agreement to the contrary, the Base Management Fee shall be disbursed by Manager to itself out of the Facility Checking Account prior to the payment of any other Facility Expenses and prior to the repayment to Owner of any working capital deposits made by Owner pursuant to the terms hereof(without limiting the generality of the foregoing, the Base Management Fee shall be paid to Manager on a priority basis, and Manager may disburse the Base Management Fee to itself without regard for the minimum cash balance requirement, or the need to demand additional working capital from Owner, pursuant to Paragraph 8.2, above). 10. INDEMNIFICATION. 10.1 By Manager. Manager shall indemnify, defend, and hold harmless Owner from and against any loss incurred by or damage to Owner where such loss or damage results from the negligent acts or omissions or the willful misconduct of Manager in performing Manager's obligations under this Agreement. 10.2 By Owner. Owner shall indemnify, defend and hold harmless Manager from and against any loss incurred by or damage to Manager where such loss or damage results from the 8 negligent act or omissions or the willful misconduct of Owner in performing Owner's obligations under the Agreement. 10.3 Survival of Indemnification Obligations. Notwithstanding any other provision of this Agreement to the contrary (including, without limitation, Paragraph 4.3, above), each party's obligation to indemnify, defend and hold harmless the other party shall survive the termination of the Term and this Agreement with respect to the negligent acts or omissions or willful misconduct of the indemnifying party prior to the effective date of such termination. 11. RIGHT OF FIRST REFUSAL In the event Owner desires to sell, convey or lease ("Transfer") the Facility prior to the expiration of the Term, and Owner receives a bona fide offer to effect a Transfer of the Facility from a third party capable of performing such offer ("Transfer Offer") which Owner desires to accept, Owner shall first give written notice of such Transfer Offer to Manager. Such notice shall include all of the material terms and conditions of the Transfer Offer (e.g. , purchase price or lease rate, terms of payments, closing date, earnest money or other deposits, documents required for Closing, options to purchase). For a period of thirty (30) days after Manager's receipt of such notice, Manager shall have the right to elect to acquire the Facility or interest therein upon the same terms and conditions as are contained in the Transfer Offer, which election shall be made by giving written notice thereof to Owner within such thirty (30) day period. If Owner does not timely receive Manager's written notice of Manager's election to acquire the Facility or interest therein on the terms and conditions of the Transfer Offer, Owner shall have the right to accept such Transfer Offer and Transfer the Facility to such third party in accordance with the terms of the Transfer Offer free and clear of Manager' s right of first refusal hereunder. Notwithstanding any other provision of this Paragraph 11, in no event shall Owner be entitled to Transfer the Facility to any third party on terms or conditions materially different from those set out in the notice of Transfer Offer provided by Owner to Manager, unless Owner has given Manager written notice of such materially different terms and conditions and provided Manager an additional thirty (30) days in which to elect to effect a Transfer on such materially different terms and conditions. 12. MISCELLANEOUS 12.1 Notices. All notices required or permitted pursuant to this Agreement: (a) shall be given in writing; and (b) delivered by (i) hand delivery, (ii) registered or certified mail, postage prepaid, (iii) nationally recognized courier guaranteeing next- business day delivery), or (iv) facsimile transmission (with receipt confirmed telephonically by the recipient). Notice shall be delivered or mailed to the parties at the following addresses or at such other places as either party shall designate by giving notice in accordance with this Paragraph 12. I. To Manager: Acorn Service Corporation 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 Phone: 206-301-4495 Fax: 206-301-4500 Attn: Jeff Mikus To Owner: York Care, L.L.C. 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 Phone: 206-301-4095 9 Fax: 206-301-4545 Attn: Keith James 12.2 Assignment. Except as otherwise provided in Paragraph 1.6, above, this Agreement shall not be assigned by either party without the prior written consent of the non assigning party, which consent shall not be unreasonably withheld, conditioned, delayed. 12.3 Relationship of the Parties. The relationship of the parties shall be that of Owner and independent contractor and all acts performed by Manager during the term hereof as Manager of the Facility shall be deemed to be performed by Manager in Manager's capacity as an independent contractor. Nothing contained in this Agreement is intended to, or shall be construed to, give rise to or create a partnership or joint venture or lease between Owner, and Owner's successors and assigns on the one hand, and Manager, and Manager's successors and assigns on the other hand. 12.4 Entire Agreement. This Agreement contains the entire agreement between the parties and shall be binding upon and inure to the benefit of their successors and, to the extent permitted hereby, their assigns, and shall be construed in accordance with the laws of the State of Washington. This Agreement may not be modified or amended except by written instrument signed by both of the parties hereto. (a) The parties hereby acknowledge that effective as of the Commencement Date, the Agreement to Provide Accounting and Administrative Services to an Independent/Assisted Living Facility dated as of March 31,1997, and as amended by that certain First Amendment dated as of September 1, I 997, entered into by and between the parties, shall terminate and be of no further force and effect. 12.5 Headings/Captions. The headings and captions used in this Agreement are for convenience of reference only and shall not be construed in any manner to limit or modify any of the provisions hereof. 12.6 Attorneys' Fees. In the event either party brings an action to enforce or interpret this Agreement, the prevailing party in such action shall be entitled to recover from the other party all costs incurred in connection therewith, including reasonable attorneys' fees incurred in the preparation, conduct, and/or settlement thereof. 12.7 Severability. In the event one or more of the provisions contained in this Agreement is deemed to be invalid, illegal, or unenforceable in any respect under applicable law, the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be impaired thereby. 12.8 Cumulative; No Waiver. No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of an Event of Default. The failure of either party to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy or be construed as a waiver or relinquishment thereof with respect to subsequent Event of Default. Each and every right and remedy given by this Agreement to a party may be exercised from time to time and as often as may be deemed expedient by such party. 10 12.9 Authorization for Agreement. The execution and performance of this Agreement by Owner and Manager have been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid, binding and enforceable obligations of Owner and Manager, respectively, in accordance with its terms. 12.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but collectively shall constitute but one and the same Agreement. IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed, as of the day and year first above written. Owner: YORK CARE, L.L.C., a Washington limited liability company By: /s/ Daniel R. Baty -------------------- -------------- Its: Manager Manager: ACORN SERVICE CORPORATION, a Washington corporation By: /s/ Michelle A. Bickford ------------------ ------------------- Its: V.P. New Business Development 11 EX-10.53.6 4 EX 10.53.6 ASSIGNMENT AND FIRST AMENDMENT TO AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO AN INDEPENDENT LIVING FACILITY THIS ASSIGNMENT AND FIRST AMENDMENT TO AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO AN INDEPENDENT LIVING FACILITY (the "Assignment and Amendment") is made and entered into as of this 1st day of September, 1997 by and among EMERITUS CORPORATION, a Washington corporation, COLUMBIA HOUSE, L.L.C., a Washington limited liability company, ACORN SERVICE CORPORATION, a Washington corporation ("Acorn"), and CAMLU COEUR D'ALENE, L.L.C., a Washington limited liability company ("Camlu"). Emeritus Corporation, as the manager, and Columbia House, LLC, as the lessee, previously entered into the Agreement to Provide Management Services to an Independent Living Facility dated November 1, 1996 for that certain independent living facility located in Coeur d'Alene, Idaho, commonly known and described as Camlu Retirement Apartments (the "Management Agreement"). Defined terms used herein and not otherwise defined herein shall have the meaning specified in the Management Agreement. Camlu has acquired the interest of Columbia House, LLC in the Facility and Camlu wishes to have Acorn, an affiliate of Emeritus Corporation, act as the manager of the Facility, and the parties wish to make certain other changes in the Management Agreement as provided herein. Accordingly, Emeritus Corporation hereby assigns its interest in the Management Agreement to Acorn and Acorn hereby assumes and agrees to perform all of Emeritus Corporation' s obligations thereunder, and Columbia House, L.L.C. hereby assigns its interest in the Management Agreement to Camlu and Camlu hereby assumes and agrees to perform all of Columbia House, L.L.C.'s obligations thereunder. Acorn and Camlu agree that the Management Agreement is hereby amended as follows : 1. Acorn shall be substituted for the Manager and Camlu shall be substituted for the Lessee as referenced in the Management Agreement. Camlu shall look solely to Acorn to perform Manager's obligations under the Management Agreement, and Acorn shall look solely to Camlu to perform Lessee's obligations under the Management Agreement, and neither Emeritus Corporation nor Columbia House, L.L.C. shall have any further liability or obligation under the Management Agreement. 2. The following sentence is hereby inserted as the last sentence of Paragraph I.F. of the Management Agreement: "If Lessee so elects by notice to Manager, Manager shall prepare or cause to be prepared Lessee's income tax returns, but only if Lessee and Manager agree upon separate compensation to be paid to Manager for preparing such income tax returns." 3. The following is hereby inserted as Paragraph I.O. of the Management Agreement: "O. EXTRAORDINARY COSTS. Except as otherwise specifically provided herein, all extraordinary costs incurred by Manager with respect to the Facility shall be separately reimbursed as Facility expenses (and not included in the management fee) after first having been approved by Lessee. 4. The following is hereby inserted as Paragraph I.P. of the Management Agreement: "P. LEGAL PROCEEDINGS. If approved by Owner, Manager shall, as a Facility Expense and through its legal counsel, coordinate all legal matters and proceedings with Owner's counsel; if Owner does not approve the same, Owner shall indemnify, protect, defend and hold Manager harmless with respect to such legal matters and proceedings except any such legal matters and proceedings resulting from Manager's negligent acts or omissions or willful misconduct." 5. The Management Agreement and all of the terms thereof as hereby amended shall remain in full force and effect upon and subject to the terms and conditions thereof as so amended. 6. This Assignment and Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. IN WITNESS WHEREOF, the parties hereby execute this Assignment and Amendment on the day and year first written above. CAMLU: ACORN CAMLU COUER D'ALENE, L.L.C. ACORN SERVICE CORPORATION By: /s/ Daniel R. Baty By: /s/ Raymond R. Brandstrom ----------------------------------- - ------------------------------------------ Its: Manger Its: President CONSENT AND AGREEMENT OF ORIGINAL PARTIES: Emeritus Corporation and Columbia House, L.L.C. hereby consent and agree to the foregoing effective as of the date first set forth above. EMERITUS CORPORATION COLUMBIA HOUSE L.L.C. By: /s/ Raymond R. Brandstrom By: /s/ Daniel R. Baty ----------------------------------- - ---------------------------------- Its: President Its: Manager 2 EX-10.53.7 5 EX 10.53.7 ASSIGNMENT AND FIRST AMENDMENT TO AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO AN ASSISTED LIVING AND INDEPENDENT LIVING FACILITY THIS ASSIGNMENT AND FIRST AMENDMENT TO AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO AN ASSISTED LIVING AND INDEPENDENT LIVING FACILITY (the "Assignment and Amendment") is made and entered into as of this 1st day of September, 1997 by and among EMERITUS CORPORATION, a Washington corporation, COLUMBIA HOUSE, L.L.C., a Washington limited liability company, ACORN SERVICE CORPORATION, a Washington corporation ("Acorn"), and AUTUMN RIDGE HERCULANEUM, L.L.C., a Washington limited liability company ("Autumn Ridge"). Emeritus Corporation, as the manager, and Columbia House, LLC, as the Owner, previously entered into the Agreement to Provide Management Services to an Assisted Living and Independent Living Facility dated June 1,1997 for that certain congregate care and assisted living facility located at 300 Autumn Ridge Drive, Herculaneum, Missouri, commonly known and described as "Autumn Ridge Retirement Home" or "Autumn Ridge Residential Care Apartments" (the "Management Agreement"). Defined terms used herein and not otherwise defined herein shall have the meaning specified in the Management Agreement. Autumn Ridge has acquired the interest of Columbia House, LLC in the Facility and Autumn Ridge wishes to have Acorn, an affiliate of Emeritus Corporation, act as the manager of the Facility, and the parties wish to make certain other changes in the Management Agreement as provided herein. Accordingly, Emeritus Corporation hereby assigns its interest in the Management Agreement to Acorn and Acorn hereby assumes and agrees to perform all of Emeritus Corporation' s obligations thereunder, and Columbia House, L.L.C. hereby assigns its interest in the Management Agreement to Autumn Ridge and Autumn Ridge hereby assumes and agrees to perform all of Columbia House, L.L.C.'s obligations thereunder. Acorn and Autumn Ridge agree that the Management Agreement is hereby amended as follows: 1. Acorn shall be substituted for the Manager and Autumn Ridge shall be substituted for the Owner as referenced in the Management Agreement. Autumn Ridge shall look solely to Acorn to perform Manager' s obligations under the Management Agreement, and Acorn shall look solely to Autumn Ridge to perform Owner's obligations under the Management Agreement, and neither Emeritus Corporation nor Columbia House, L.L.C. shall have any further liability or obligation under the Management Agreement. 2. The following is hereby inserted as Paragraph 1. I 5 of the Management Agreement: "1.15. EXTRAORDINARY COSTS. Except as otherwise specifically provided herein, all extraordinary costs incurred by Manager with respect to the Facility shall be separately reimbursed as Facility expenses (and not included in the management fee) after first having been approved by Owner." 3. The following is hereby inserted as Paragraph 1.16 of the Management Agreement: "1.16 LEGAL PROCEEDINGS. If approved by Owner, Manager shall, as a Facility Expense and through its legal counsel, coordinate all legal matters and proceedings with Owner's counsel; if Owner does not approve the same, Owner shall indemnify, protect, defend and hold Manager harmless with respect to such legal matters and proceedings except any such legal matters and proceedings resulting from Manager's negligent acts or omissions or willful misconduct." 1 4. EFFECT OF AMENDMENT. The Management Agreement and all of the terms thereof as hereby amended shall remain in full force and effect upon and subject to the terms and conditions thereof as so amended. 5. COUNTERPARTS. This Assignment and Amendment may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. IN WITNESS WHEREOF, the parties hereby execute this Assignment and Amendment on the day and year first written above. AUTUMN RIDGE: ACORN: AUTUMN RIDGE HERCULANEUM, .L.C. ACORN SERVICE CORPORATION: By: /s/ Daniel R. Baty By: /s/ Raymond R. Brandstrom ----------------------------------- - ----------------------------------------- Its: Manager Its: President CONSENT AND AGREEMENT OF ORIGINAL PARTIES: Emeritus Corporation and Columbia House, L.L.C. hereby consent and agree to the foregoing effective as of the date first set forth above. EMERITUS CORPORATION COLUMBIA HOUSE, L.L.C. By: /s/ Raymond R. Brandstrom By: /s/ Daniel R. Baty ---------------------------------------- - -------------------------------- Its: President Its: Manager 2 EX-10.53.8 6 EX 10.53.8 AGREEMENT TO PROVIDE MANAGEMENT SERVICES TO AN INDEPENDENT AND ASSISTED LIVING FACILITY (TOLEDO, OHIO) This Agreement to Provide Management Services to an Independent and Assisted Living Facility ("Agreement") dated as of January 1, 1998, is made and entered into by and between PARK LANE TOLEDO L.L.C., a Washington limited liability company ("Owner") and ACORN SERVICE CORPORATION, a Washington corporation ("Manager"). RECITALS A. Owner is the owner of that certain real property located at 142 - 23rd at Jefferson in Toledo, Ohio (the "Real Property") including the improvements on the Real Property that constitute the 92 unit independent and assisted living facility commonly known as "Park Lane" and located in Toledo, Ohio (the "Facility"); B. Owner desires to engage the services of a person or entity to manage the Facility on Owner's behalf and to provide certain consulting services to Owner in connection therewith. C. Manager is experienced and qualified in the field of assisted living facility management; D. Owner has determined that Manager's fee is economical in light of the range of services which Manager is willing to provide to Owner; and E. Manager is willing to operate the Facility on Owner's behalf and provide consulting services to Owner in connection therewith, pursuant to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, IT IS AGREED AS FOLLOWS: 1. MANAGEMENT AND CONSULTING RESPONSIBILITIES OF MANAGER. Owner hereby engages Manager to provide, and Manager hereby accepts such engagement and agrees to provide, management, consulting, advisory and supervisory services to Owner in connection with the operation of the Facility, upon the terms and conditions set forth in this Agreement. By entering into this Agreement, Owner does not delegate to Manager any powers, duties, or responsibilities which Owner is prohibited by law from delegating. Owner also retains such other authority as shall not have been expressly delegated to Manager pursuant to this Agreement. Subject to the foregoing, and commencing on January 1, 1998 (the "Commencement Date") Manager shall provide the following services to, or on behalf of Owner: 1.1 Operational Policies and Forms. Manager shall implement operational policies and procedures and develop such new policies and procedures as Manager deems necessary to insure the establishment and maintenance of operational standards appropriate for the nature of the Facility. 1.2 Charges. Manager shall establish the schedules of recommended charges, including any and all special charges for services rendered to residents at the Facility. Owner shall have the right to review and approve the charge schedules established by Manager. 1.3 Information. Manager shall develop any informational material, mass media releases, and other related publicity materials, which Manager deems necessary for the operation of the Facility. 1.4 Regulatory Compliance. Manager, with the assistance of Owner if requested by Manager, shall use its best efforts to obtain and maintain all licenses, permits, qualifications, and approvals from any applicable governmental or regulatory authority for the operation of the Facility and to manage the operations of the Facility in full compliance with all applicable laws and regulations, and in accordance with all such licenses, permits, qualifications, and approvals. 1.5 Equipment and Improvements. Manager shall advise Owner as to equipment and improvements which are needed to maintain or upgrade the quality of the Facility, to replace obsolete or run-down equipment, or to correct any deficiencies (including, without limitation, any survey deficiencies) which may be observed or cited during the term of this Agreement. Owner shall review and act upon Manager's recommendations as expeditiously as possible. Manager shall not be liable for any cost or liability which Owner may incur in the event Owner disregards Manager's recommendations. Manager shall, as a Facility Expense (such term as used in this Agreement shall have the meaning specified in Paragraph 8.2 below), make all necessary and approved repairs, replacements and maintenance within the budgetary limits set forth in the annual capital expenditure budget prepared by Manager pursuant to Paragraph 1.12. hereof and in a workmanlike and lien-free manner. 1.6 Accounting. Manager shall provide home office and accounting support to the Facility. All accounting procedures and systems utilized in providing said support shall be in accordance with the operating capital and cash programs developed by Manager, which programs shall conform to generally accepted accounting principles and shall not materially distort income or loss. If Owner so elects by notice to Manager, Manager shall prepare or cause to be prepared all tax returns required in connection with operation of the Facility, including payroll tax returns (but excluding Owner's income tax returns, which Manager shall prepare only if Owner and Manager agree upon separate compensation to be paid to Manager for preparing such income tax returns) and, at Owner's sole cost and expense, Manager shall cause all local, state and federal taxes to be timely paid or contested, as appropriate. Such taxes shall be deemed to be Facility Expenses and shall be paid out of the revenues of the Facility or the working capital for the Facility provided by Owner. Nothing herein shall preclude Manager from delegating to a third party a portion of the accounting duties provided for in this section; provided, that such delegation shall not relieve Manager from Manager's ultimate liability for the timely and complete performance of the obligations provided for herein. 1.7 Reports. Manager shall prepare and provide to the Owner any reasonable operational information which may from time to time be specifically requested by Owner, including any information needed to assist Owner in completing its tax returns and in complying with any reporting obligations imposed by any mortgagees of the Facility. In addition: (i) within thirty (30) days after the end of each calendar month, Manager shall provide Owner with an unaudited balance sheet of the Facility, dated the last day of such month, and an unaudited statement of income and expenses for such month relating to the operation of the Facility; and (ii) within ninety (90) days after the end of the fiscal year of the Facility, Manager shall provide Owner with unaudited financial statements including a balance sheet of the Facility, dated the last day of said fiscal year, and an unaudited statement of income and expense for the fiscal year then-ended relating to the operation of the Facility. 1.8 Bank Accounts. Manager shall open a new checking account in the name of the Facility ("Facility Checking Account") and shall deposit in the Facility Checking Account all money received during the term of this Agreement in the course of the operation of the Facility; provided, however, that during the term hereof, withdrawals and payments from the Facility 2 Checking Account shall be made only on checks signed by a person or persons authorized by Manager. Owner shall be given notice as to the identity of said authorized signatories. All Facility Expenses incurred in the operation of the Facility in accordance with the terms of the budgets submitted to Owner under Paragraph 1.12 hereof, shall be paid by check drawn on the Facility Checking Account. Withdrawals from the Facility Checking Account shall be made first to pay the Base Management Fee (as that term is defined in Subparagraph 9.2, below), and, thereafter, to pay Facility Expenses in such order of priority as Manager deems appropriate to the operation of the Facility. In the event the revenues generated by the Facility are at any time insufficient to pay all of the Facility Expenses, Owner shall, within five (5) days of Owner's receipt of a written demand by Manager, deposit in the Facility Checking Account sufficient funds to satisfy the then working capital needs of the Facility. 1.9 Personnel. Manager shall: (i) recruit, employ, train, promote, direct, discipline, suspend, and discharge Facility personnel; (ii) establish salary levels, personnel policies, and employee benefits; and (iii) establish employee performance standards, all as needed during the term of this Agreement to ensure the efficient operation of all departments within and services offered by the Facility. All Facility personnel shall be employees of Manager, not Owner, and all salaries, benefits, payroll taxes and other costs related to Facility personnel (including, without limitation, computer training and other employee training and education, including tuition, travel and other expenses relating thereto if such expenses are incurred with Owner's approval) shall not be included in the Base Management Fee, but shall be separately reimbursed by Owner as a Facility Expense. In addition, the costs and expenses (including, without limitation, travel expenses) of consultants, independent contractors or other providers of services engaged by Manager with Owner's approval shall be separately reimbursed as Facility Expenses. 1.10 Supplies and Equipment. Manager shall purchase, as a Facility Expense, supplies and non- capital equipment (including, without limitation, computer hardware and software) needed to operate the Facility within the budgetary limits set forth in the annual operating budget prepared by Manager pursuant to Paragraph 1.12 hereof. In purchasing said supplies and equipment Manager shall, if possible, take advantage of any national or group purchasing agreements to which Manager may be a party. 1.11 Legal Proceedings. If approved by Owner, Manager shall, as a Facility Expense and through its legal counsel, coordinate all legal matters and proceedings with Owner's counsel; if Owner does not approve the same, Owner shall indemnify, protect, defend and hold Manager harmless with respect to such legal matters and proceedings. 1.12 Budgets. The Facility shall be operated on a fiscal year of January 1 through December 31. Within forty-five (45) days prior to the start of each fiscal year, Manager shall prepare and submit to Owner for Owner's review and agreement, which agreement shall not be unreasonably withheld (i) an annual operating budget, (ii) an annual capital expenditure budget, and (iii) an annual cash flow projection. In the event the operating budget or the capital expenditure budget (or both) have not been agreed upon prior to the first day of the then-current fiscal year, beginning in fiscal year 1998, the operating budget or capital expenditure budget in effect for the prior fiscal year, as appropriate., shall continue in effect until the new operating budget or capital expenditure budget, as appropriate, is agreed upon by Owner and Manager. Thereafter, any expenditures made during the year pursuant to said agreed-upon budgets and/or any expenditures on an item-by-item basis exceeding by no more than 10"% the amounts set forth therein for the applicable expense item (the "Budget Threshold") may be made without Owner's prior approval. Any unbudgeted expenditures and/or any expenditures in excess of the Budget Threshold shall be subject to Owner's prior approval, which approval shall not be unreasonably withheld. 3 1.13 Collection of Accounts. Manager shall issue bills and collect accounts and monies owed for goods and services furnished by the Facility, including, but not limited to, enforcing the rights of Owner and the Facility as creditor under any contract or in connection with the rendering of any services; provided, however, that any expenses incurred by Manager shall not be included in the Base Management Fee, but shall be separately reimbursed by Owner as a Facility Expense. Notwithstanding any other provision of this Agreement to the contrary, Manager does not guaranty the collectability of such accounts or monies and shall have no liability to Owner for Manager's inability to so collect such accounts or monies. 1.14 Construction Supervision. Owner and Manager may agree that Manager shall act as construction supervisor with respect to any construction work for the Facility or on the Real Property after the Commencement Date (as defined in Paragraph 3, below), in which event Manager will supervise, oversee and administer each and every aspect of any such improvements and construction work. For the purposes of this Agreement, "construction work" shall include any construction, reconstruction or alteration of any improvements constituting part of the Real Property, but shall not include usual maintenance and repairs made to the Facility or the Real Property. Without limitation of the foregoing, if Owner and Manager agree that Manager shall act as construction supervisor, and subject to Owner's approval in each instance, Manager will: (a) negotiate contracts for architectural, design, engineering and construction services; (b) secure any and all necessary consents and approvals; (c) oversee the administration of construction contracts; and (d) act as project manager with respect to the construction work. 1.15 Extraordinary Costs. Except as otherwise specifically provided herein, all extraordinary costs incurred by Manager with respect to the Facility shall be separately reimbursed as Facility Expenses (and not included in the Base Management Fee) after first having been approved by Owner. 2. INSURANCE. Upon request, Manager, at Owner's sole cost and expense, shall arrange for and maintain all necessary and proper hazard insurance covering the Facility, the furniture, fixtures, and equipment situated thereon, and all necessary and proper malpractice and public liability insurance for Owner's protection and for the protection of Owner's officers, agents and employees. Until such a request is made and/or in the event Manager is unable to secure insurance coverage for the Facility for any reason whatsoever, Owner shall be responsible for obtaining and maintaining said insurance. In addition, Manager shall provide employee health and worker's compensation insurance for all Manager employees at the Facility in accordance with Manager's policies therefor, and the costs thereof shall not be included in the Base Management Fee, but shall be separately reimbursed by Owner as a Facility Expense. Manager shall, at Manager's sole cost and expense, arrange for and maintain all necessary and proper malpractice and public liability insurance for the protection of Manager, and Manager's officers, agents, and employees. Any insurance provided by Owner pursuant to this Paragraph 2 shall comply with the requirements of any mortgage or deed of trust encumbering the Facility, and any insurance provided by Manager pursuant to this Paragraph 2 shall comply with such requirements provided that Owner shall have provided Manager with a copy of such mortgage or deed of trust. 3. PROPRIETARY INTEREST. The systems, methods, procedures, and controls employed by Manager and any written materials or brochures developed by Manager to document the same are, and shall remain, the property of Manager and are not, at any time during or after the term of this Agreement, to be utilized, distributed, copied, or otherwise employed or acquired by Owner, except as authorized by Manager. 4 4. TERM AND TERMINATION OF AGREEMENT. 4.1 Term. The term of this Agreement ("Term") shall commence on the Commencement Date and expire on the fifth (5th) anniversary of the Commencement Date; provided, however, that the Term shall be extended automatically for successive two (2) year periods unless terminated prior to expiration of the Term (as the same may have be extended) pursuant to this Paragraph 4. 4.2 Termination. The Term (as the same may be have been extended ) may be terminated by either Manager or Owner (a) at any time, with or without cause, by giving notice of termination not less than thirty (30) days prior to the effective date of such termination; (b) if fifty percent (50%) or more of the Facility is either (i) damaged or destroyed or (ii) taken by condemnation proceedings or otherwise, whether or not Owner elects to rebuild or repair the Facility, by giving notice of termination not less than ten ( 10) days prior to the effective date of such termination; (c) immediately upon the occurrence of an Event of Default by the other party (as defined in Paragraph 5, below), by giving notice of termination, effective the date of receipt (or deemed receipt) by the defaulting party of such notice of termination. 4.3 Effect of Termination. In the event of a termination of Term pursuant to Subparagraphs 4.2(a) or 4.2(b), above, upon the effective date of such termination, neither party shall have any further obligations whatsoever under this Agreement; provided, however, that Manager shall be entitled to receive immediate payment of all amounts theretofore unpaid by Owner but earned by Manager as of the effective date of such termination. In the event of a termination of the Term pursuant to Subparagraph 4.2(c), above, except as expressly provided in Paragraph 5.3, below, neither party shall have any further obligation whatsoever under this Agreement; provided, however, that Manager shall be entitled to receive immediate payment of all amounts theretofore unpaid by Owner but earned by Manager as of the effective date of such termination. In the event that Owner desires Manager to leave any equipment owned by Manager at the Facility upon such termination, Owner shall pay to Manager the fair market value of such equipment to be left at the Facility and Manager shall transfer title thereto to Owner upon such payment. 5. DEFAULT, REMEDIES UPON DEFAULT. 5.1 Manager's Events of Default. With respect to Manager, it shall be an "Event of Default" under this Agreement: (a) If Manager shall fail to keep, observe, or perform any material agreement, term, or provision of this Agreement, and such default shall continue for a period of thirty (30) days after Manager' s receipt of notice of such default from Owner, which notice shall specify the event or events constituting the default; or (b) If (i) Manager shall: (A) apply for, or consent to, the appointment of a receiver, trustee, or liquidator of Manager of all or a substantial part of Manager's assets, (B) file a voluntary petition in bankruptcy, or admit 5 in writing Manager's inability to pay Manager's debts as they become due, (C) make a general assignment for the benefit of creditors, or (D). file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law; or (ii) an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor (A) adjudicating Manager as bankrupt or insolvent, (B).approving a petition seeking reorganization of Manager, or (C) appointing a receiver, trustee, or liquidator for Manager or for all or a substantial part of Manager's assets. 5.2 Owner's Events of Default. With respect to Owner, it shall be an Event of Default under this Agreement: (a) If Owner shall fail to make or cause to be made any payment to Manager required to be made hereunder (other than Owner's obligation, pursuant to Paragraph 1.8, above, to deposit working capital into the Facility Checking Account, which circumstance shall be handled in accordance with Subparagraph 5.2(b), below), and such failure shall continue for a period of thirty (30) days; (b) If Owner shall fail to keep, observe, or perform any material agreement, term, or provision of this Agreement and such default shall continue for a period of thirty (30) days after Owner' s receipt of notice of such default from Manager, which notice shall specify an event or events constituting the default; provided, however, that in the case of Owner's failure to provide, pursuant to Paragraph 1.8, above, necessary working capital upon demand by Manager, it shall be deemed to be an Event of Default hereunder if the such necessary working capital is not deposited in the Facility Checking Account within ten ( I 0) days of Manager's initial demand therefor without any further notice from Manager being required; (c) If Owner shall fail to make payments, or keep any covenants, owing to any third party which are beyond the control of Manager to make or keep, and which would cause Owner to lose possession of the Facility or any personal property required to operate the Facility in the normal course of operation; or (d) If: (i) Owner shall (A) be dissolved, (B) apply for or consent to the appointment of a receiver, trustee or liquidator for Owner or for all or a substantial part of Owner's assets, (C) file a voluntary petition in bankruptcy or admit in writing its inability to pay Owner's debts as they become due, (D) make a general assignment for the benefit or creditors, or (E) file a petition or an answer seeking reorganization or arrangement with creditors or taking advantage of any insolvency law; or (ii) an order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor (A) adjudicating Owner as bankrupt or insolvent, (B) approving a petition seeking reorganization of Owner, or (C) appointing a receiver, trustee or liquidator for Owner or of all or a substantial part of Owner's assets. 6 5.3 Remedies Upon Default by Owner. In the event of an Event of Default by a party, the non-defaulting party shall have, in addition to the right to terminate the Term pursuant to Subparagraph 4.2(c), above, all rights and remedies available to such non-defaulting party at law or in equity. 6. OWNER'S RIGHT TO INSPECT FACILITY/BOOKS AND RECORDS. During the Term, Owner shall have the right, upon not less than forty-eight (48) hours prior notice to Manager and at reasonable times during normal business hours, to inspect the Facility and to inspect and/or audit all books and records pertaining to the operation thereof. 7. FACILITY OPERATIONS. 7.1 No Guarantee of Profitability. Manager does not guarantee, and shall not be construed to have guaranteed, to Owner or any third party (including any mortgagee) that operation of the Facility will be profitable, but Manager shall use Manager's commercially reasonable, diligent, and good faith efforts to operate the Facility in as cost-efficient and profitable a manner as possible in light of all of the circumstances then-existing. 7.2 Standard of Performance. In performing Manager's obligations under this Agreement, Manager shall use Manager's commercially reasonable, diligent, and good faith efforts, and act with professionalism, in undertaking management of the Facility, all in accordance with accepted and prevailing standards of health care in the general location of the Facility and with the policies adopted by, and resources available to, the Facility. 7.3 Force Majeure. Manager will not be deemed to be in violation of this Management Agreement if Manager is prevented from performing any of Manager' s obligations hereunder for any reason beyond Manager's reasonable control, including, without limitation: strikes, sick-outs, or labor disputes; material or supply shortages; war, insurrection or civil unrest; fire, earthquakes, severe weather, flooding; acts of God; Owner's failure to perform Owner obligations under this Agreement; or any law, statute, regulation, ordinance, or rule of any federal, state or local government or agency thereof, or any order, decree, or judgment of any court with jurisdiction. 8. WITHDRAWAL OF FUNDS BY OWNER; MINIMUM BANK BALANCE. 8.1 Withdrawal by Owner. From time to time, Owner may withdraw the then accumulated operating cash surplus (as determined by Manager) from the Facility Checking Account subject to the right of Manager to restrict withdrawal by Owner of any Facility funds in accordance with the provisions of Paragraph 8.2, below. 8.2. Minimum Cash Balance. At a11 times (subject to Manager's right, pursuant to Paragraph I.8, above, to demand working capital from Owner in the event of a shortfall), Manager shall maintain a minimum cash balance in the Facility Checking Account equal to the sum of: (a) All costs and expenses associated with the ownership or operation of the Facility (each a "Facility Expense" and any two or more or all the "Facility Expenses"), including, without limitation, any principal and interest payments due in connection with any loan secured by a mortgage on the Facility, payroll, insurance, supplies, services, taxes (but excluding all federal, state, and local income taxes assessed against Owner), and the Base Management Fee, all of which Facility Expenses 7 are unpaid but will become due and payable within the ensuing forty-five (45) days; plus (b) An amount deemed necessary by Manager to be adequate for unanticipated contingencies, which amount initially shall be $5,000 and which amount shall be adjusted as reasonably determined by Manager. 9. MANAGEMENT FEES. 9.1 Construction Supervision Fee. For any services performed by Manager pursuant to Paragraph I.14, above, Manager shall receive a construction supervision fee equal to five percent (5%)of the total amount of construction costs approved by Owner, due payable concurrently with the applicable payments to the construction contractor(s) and materialmen. 9.2 Base Management Fee. Throughout the term of this Agreement, Manager shall receive a monthly fee ("Base Management Fee") equal to the greater of: i) six percent (6%) of the gross revenues generated for the prior month by the Facility; or ii) $5,000, payable on or before the 10th day of each month. For purposes hereof, "gross revenues" shall mean all revenues generated by the Facility, but shall specifically exclude the proceeds from the sale of any Facility equipment and any insurance and condemnation proceeds. 9.3 Proration of Fees. If the services of Manager commence or terminate for any reason (including, without limitation, those set forth in Paragraph 5 hereof other than on the first day of any calendar month, the Base Management Fee for such partial month shall be prorated based upon the number of days for which services are actually rendered by Manager during such partial month. 9.4 Payment of Fees. Notwithstanding any other provision of this Agreement to the contrary, the Base Management Fee shall be disbursed by Manager to itself out of the Facility Checking Account prior to the payment of any other Facility Expenses and prior to the repayment to Owner of any working capital deposits made by Owner pursuant to the terms hereof (without limiting the generality of the foregoing, the Base Management Fee shall be paid to Manager on a priority basis, and Manager may disburse the Base Management Fee to itself without regard for the minimum cash balance requirement, or the need to demand additional working capital from Owner, pursuant to Paragraph 8.2, above). 10. INDEMNIFICATION. 10.1 By Manager. Manager shall indemnify, defend, and hold harmless Owner from and against any loss incurred by or damage to Owner where such loss or damage results from the negligent acts or omissions or the willful misconduct of Manager in performing Manager's obligations under this Agreement. 10.2 By Owner. Owner shall indemnify, defend and hold harmless Manager from and against any loss incurred by or damage to Manager where such loss or damage results from the negligent act or omissions or the willful misconduct of Owner in performing Owner's obligations under the Agreement. 10.3 Survival of Indemnification Obligations. Notwithstanding any other provision of this Agreement to the contrary (including, without limitation, Paragraph 4.3, above), each party's obligation to indemnify, defend and hold harmless the other party shall survive the termination of the Term and this Agreement with respect to the negligent acts or omissions or willful misconduct 8 of the indemnifying party prior to the effective date of such termination. 11. RIGHT OF FIRST REFUSAL In the event Owner desires to sell, convey or lease ("Transfer") the Facility prior to the expiration of the Term, and Owner receives a bona fide offer to effect a Transfer of the Facility from a third party capable of performing such offer ("Transfer Offer") which Owner desires to accept, Owner shall first give written notice of such Transfer Offer to Manager. Such notice shall include all of the material terms and conditions of the Transfer Offer (e. g. , purchase price or lease rate, terms of payments, closing date, earnest money or other deposits, documents required for Closing, options to purchase). For a period of thirty (30) days after Manager's receipt of such notice, Manager shall have the right to elect to acquire the Facility or interest therein upon the same terms and conditions as are contained in the Transfer Offer, which election shall be made by giving written notice thereof to Owner within such thirty (30) day period. If Owner does not timely receive Manager's written notice of Manager's election to acquire the Facility or interest therein on the terms and conditions of the Transfer Offer, Owner shall have the right to accept such Transfer Offer and Transfer the Facility to such third party in accordance with the terms of the Transfer Offer free and clear of Manager' s right of first refusal hereunder. Notwithstanding any other provision of this Paragraph 11, in no event shall Owner be entitled to Transfer the Facility to any third party on terms or conditions materially different from those set out in the notice of Transfer Offer provided by Owner to Manager, unless Owner has given Manager written notice of such materially different terms and conditions and provided Manager an additional thirty (30) days in which to elect to effect a Transfer on such materially different terms and conditions. 12. MISCELLANEOUS 12.1 Notices. All notices required or permitted pursuant to this Agreement: (a) shall be given in writing; and (b) delivered by (i) hand delivery, (ii) registered or certified mail, postage prepaid, (iii) nationally recognized courier guaranteeing next- business day delivery), or (iv) facsimile transmission (with receipt confirmed telephonically by the recipient). Notice shall be delivered or mailed to the parties at the following addresses or at such other places as either party shall designate by giving notice in accordance with this Paragraph I 2.1. To Manager: Acorn Service Corporation 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 Phone: 206-301-4495 Fax: 206-301-4500 Attn: Jeff Mikus To Owner: Park Lane Toledo, L.L.C. 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 Phone: 206-301-4095 Fax: 206-301-4545 Attn: Keith James 12.2 Assignment. Except as otherwise provided in Paragraph 1.6, above, this Agreement shall not be assigned by either party without the prior written consent of the non assigning party, 9 which consent shall not be unreasonably withheld, conditioned, delayed. 12.3 Relationship of the Parties. The relationship of the parties shall be that of Owner and independent contractor and all acts performed by Manager during the term hereof as Manager of the Facility shall be deemed to be performed by Manager in Manager's capacity as an independent contractor. Nothing contained in this Agreement is intended to, or shall be construed to, give rise to or create a partnership or joint venture or lease between Owner, and Owner's successors and assigns on the one hand, and Manager; and Manager's successors and assigns on the other hand. 12.4 Entire Agreement. This Agreement contains the entire agreement between the parties and shall be binding upon and inure to the benefit of their successors and, to the extent permitted hereby, their assigns, and shall be construed in accordance with the laws of the State of Washington. This Agreement may not be modified or amended except by written instrument signed by both of the parties hereto. 12.5 Headings/Captions. The headings and captions used in this Agreement are for convenience of reference only and shall not be construed in any manner to limit or modify any of the provisions hereof. 12.6 Attorneys' Fees. In the event either party brings an action to enforce or interpret this Agreement, the prevailing party in such action shall be entitled to recover from the other party all costs incurred in connection therewith, including reasonable attorneys' fees incurred in the preparation, conduct, and/or settlement thereof. 12.7 Severability. In the event one or more of the provisions contained in this Agreement is deemed to be invalid, illegal, or unenforceable in any respect under applicable law, the validity, legality, and enforceability of the remaining provisions hereof shall not in any way be impaired thereby. 12.8 Cumulative; No Waiver. No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder, or now or hereafter legally existing upon the occurrence of an Event of Default. The failure of either party to insist at any time upon the strict observance or performance of any of the provisions of this Agreement or to exercise any right or remedy as provided in this Agreement shall not impair any such right or remedy or be construed as a waiver or relinquishment thereof with respect to subsequent Event of Default. Each and every right and remedy given by this Agreement to a party may be exercised from time to time and as often as may be deemed expedient by such party. 12.9 Authorization for Agreement. The execution and performance of this Agreement by Owner and Manager have been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid, binding and enforceable obligations of Owner and Manager, respectively, in accordance with its terms. 12.10 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but collectively shall constitute but one and the same Agreement. 10 IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed, as of the day and year first above written. Owner: PARK LANE TOLEDO, L.L.C., a Washington limited liability company By: /s/ Daniel R. Baty ------------ ------------------------- - Its: Manager Manager: ACORN SERVICE CORPORATION, a Washington corporation By: /s/ Michelle A. Bickford ------------------ - --------------------- Its: V.P. New Business Development 11 EX-10.63.12 7 EX 10.63.2 925 South River Road, Englewood, Sarasota County, Florida 7G Q State of Florida Intangible Taxes in the amount of $52,000 and State of Florida Documentary Stamps in the amount of $9 l,000 applicable to this transaction have been paid and affixed to that certain mortgage of even date herewith between the mortgagor and the mortgagee and recorded in Seminole County, Florida. MORTGAGE DEED AND SECURITY AGREEMENT 925 South River Road, Englewood, Sarasota County, Florida 6400 Trouble Creek Road, New Port Richey, Pasco County, Florida 433 Orange Drive, Altamonte Springs, Seminole County, Florida (This Mortgage Deed and Security Agreement also serves as a fixture filing) KNOW ALL MEN BY THESE PRESENTS that EMERITUS PROPERTIES V, INC., a Washington corporation having an address at c/o Emeritus Corporation, 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121 hereinafter called "Mortgagor" or "Borrower") for consideration paid, hereby grants, conveys, transfers, assigns and sets-over unto FLEET NATIONAL BANK, a national banking association with an office at 75 State Street, Boston, Massachusetts 02 I 09 hereinafter called "Lender", the Mortgaged Property (as defined below) to secure the Obligations (as defined below). The term Borrower shall include wherever the context permits its successors and assigns. The term Lender shall include, wherever the context permits, its successors and assigns as the holder for the time being of this Mortgage Deed and Security Agreement and the Note and other Obligations hereby secured. This Mortgage Deed and Security Agreement is granted pursuant to the terms, provisions and conditions of that certain Term Loan Agreement (the "Loan Agreement") dated as of even date herewith between Borrower and Lender. Capitalized terms used herein which are not otherwise specifically defined shall have the same meaning herein as in the Loan Agreement. The term "Mortgaged Property" shall mean and include all of the following described property: A. REAL ESTATE. The parcels of land more particularly described on Exhibit A which is annexed hereto and made a part hereof ("Land") together with the improvements and other structures now or hereafter situated thereon (such improvements being sometimes called the "Improvements") together with all rights, privileges, tenements, hereditaments, appurtenances, easements, including, but not limited to, rights and easements for access and egress and utility connections, and other rights now or hereafter appurtenant thereto ("Real Estate"); B. FIXTURES. All real estate fixtures or items which by agreement of the parties may be deemed to be such fixtures, now or hereafter owned by Borrower, or in which Borrower has or hereafter obtains an interest, and now or hereafter located in or upon the Real Estate, or now or hereafter attached to, installed in, or used in connection with any of the Real Estate, including, but not limited to, any and all portable or sectional buildings, bathroom, plumbing, heating, lighting, refrigerating, ventilating and air- conditioning apparatus and equipment, garbage incinerators and receptacles, elevators and elevator machinery, boilers, furnaces, stoves, tanks, motors, sprinkler and fire detection and extinguishing systems, doorbell and alarm systems, window shades, screens, awnings, screen doors, storm and other detachable windows and doors, mantels, partitions, built-in cases, counters and other fixtures whether or not included in the foregoing enumeration ("Fixtures"); C. ADDITIONAL APPURTENANCES. All bridges, easements, rights of way, licenses, privileges, hereditaments, permits and appurtenances hereafter belonging to or inuring to the benefit of the Real Estate and all right, title and interest of Borrower in and to the land lying within any street or roadway adjoining any of the Real Estate and all right, title and interest of Borrower in and to any vacated or hereafter vacated streets or roads adjoining any of the Real Estate and any and all reversionary or remainder rights ("Additional Appurtenances"); D. AWARDS. All of the right, title and interest of Borrower in and to any award or awards heretofore made or hereafter to be made by any municipal, county, state or federal authorities to the present or any subsequent owners of any of the Real Estate or the Land, or the Improvements, or the Fixtures, or the Additional Appurtenances, or the Leases or the Personal Property, including, without limitation, any award or awards, or settlements or payments, or other compensation hereafter made resulting from (x) condemnation proceedings or the taking of the Real Estate, or the Land, or the Improvements, or the Fixtures, or the Additional Appurtenances, or the Leases or the Personal Property, or any part thereof, under the power of eminent domain, or (y) the alteration of grade or the location or discontinuance of any street adjoining the Land or any portion thereof, or (z) any other injury to or decrease in value of the Mortgaged Property ("Awards"); E. LEASES. All leases now or hereafter entered into of the Real Estate, or any portion thereof, and all rents, issues, profits, revenues, earnings and royalties therefrom, and all right, title and interest of Borrower thereunder, including, without limitation, cash, letters of credit, or securities deposited thereunder to secure performance by the tenants or occupants of their obligations thereunder, whether such cash, letters of credit, or securities are to be held until the expiration of the terms of such leases or occupancy agreements or applied to one or more of the installments of rent coming due prior to the expiration of such terms including, without limitation, the right to receive and collect the rents thereunder ("Leases"); and F. PERSONAL PROPERTY. All tangible and intangible personal property now owned or at any time hereafter acquired by Borrower of every nature and description, and whether or not used in any way in connection with the Real Estate, the Fixtures, the Additional Appurtenances, or any other portion of the Mortgaged Property, including, without limitation express or implied upon the generality of the foregoing, all Equipment, Goods, Inventory, Fixtures, Accounts, Instruments, Documents and General Intangibles (as each such capitalized term is defined in the Uniform Commercial Code in effect in the state where the Real Estate is situated) and further including, without any such limitation, the following whether or not included in the foregoing: materials; supplies; furnishings; chattel paper; money; bank accounts; security deposits; utility deposits; any insurance or tax reserves deposited with Lender; any cash collateral deposited with Lender; claims to rebates, refunds or abatements of real estate taxes or any other taxes; contract rights; plans and specifications; licenses, permits, approvals and other rights; the rights of Borrower under contracts with respect to the Real Estate or any other portion of the Mortgaged Property, or the Project; signs, brochures, advertising, the name by which the Mortgaged Property is known and any variation of the words thereof, and good will; copyrights, service marks, and all goodwill associates therewith; and trademarks; all proceeds paid for any damage or loss to all or any portion of the Real Estate, the Fixtures, the Additional Appurtenances, any other Personal Property or any other portion of the Mortgaged Property ("Insurance Proceeds"); all Awards; all Leases; all books and records; and all proceeds, products, additions, accessions, substitutions and replacements to any one or more of the foregoing (collectively, the "Personal Property"). The term "Obligations" shall mean and include: 2 A. The payment of the principal sum, interest at variable rates, charges and indebtedness evidenced by a promissory note ("Note") dated as of even date herewith, including any extensions, renewals, replacements, modifications and amendments thereof, in the original amount of TWENTY SIX MILLION DOLLARS ($26,000,000) given by Borrower to the order of Lender. A portion of the principal outstanding under such Note is anticipated to be payable as a balloon payment upon maturity; B. The payment, performance, discharge and satisfaction of each covenant, warranty, representation, undertaking and condition to be paid, performed, satisfied and complied with by Borrower under and pursuant to this Mortgage or the Loan Agreement and also by Borrower under and pursuant to each of the other Loan Documents referred to in, or executed in connection with, the Loan Agreement; C. The payment of all costs, expenses, legal fees and liabilities incurred by Lender in connection with the enforcement of any of Lender's rights or remedies under this Mortgage, the other Loan Documents, or any other instrument, agreement or document which evidences or secures any other Obligations or collateral therefor, whether now in effect or hereafter executed; and D. The payment, performance, discharge and satisfaction of all other liabilities and obligations of Borrower to Lender, whether now existing or hereafter arising, direct or indirect, absolute or contingent, under any one or more of the Loan Documents and any amendment, extension, modification, replacement or recasting of any one or more of the instruments, agreements and documents referred to herein or therein or executed in connection with the transactions contemplated hereby or thereby. This instrument is sometimes referred to as "this Mortgage". Borrower hereby grants to Lender a continuing security interest in all of the Mortgaged Property in which a security interest may be granted under the Uniform Commercial Code as such is in effect in the State of Florida including, without limitation, the Fixtures and the Personal Property, together with all proceeds and products, whether now or at any time hereafter acquired and whether or not used in any way in connection with the development, construction, marketing or operation of the Real Estate, or in connection with the Improvements, to secure all Obligations. Borrower covenants, warrants, represents and agrees with Lender, its successors and assigns, that: 1. TITLE. Borrower has good record and marketable title to the Mortgaged Property and has good right, full power and lawful authority to grant and convey the same in the manner aforesaid; and that the Mortgaged Property is free and clear of all encumbrances and exceptions, except for the Permitted Title Exceptions, if any, as set forth on Exhibit B which is annexed hereto and made a part hereof. Borrower shall make any further assurances of title that Lender may reasonably and in good faith require including, without limitation, such further instruments as may be requested by Lender to confirm the assignment to Lender of all Awards. 2. PERFORMANCE OF OBLIGATIONS. Borrower shall pay the Note and interest thereon as the same shall become due and payable or within any applicable cured period, and pay and perform and observe when due or within any applicable cure period all of the obligations and conditions set forth in each of the Note, this Mortgage Deed and Security Agreement, the Assignment of Leases and Rents, the Loan Agreement, and each of the other Loan Documents or 3 other agreements, if any, executed by Borrower in connection with the Loan. 3. PROTECTION AND MAINTENANCE. Borrower shall protect and maintain, or cause to be maintained, in good, order, repair and tenantable condition at all times, the buildings and structures now standing or hereafter erected on the Mortgaged Property, and any additions and improvements thereto, and all Personal Property now or hereafter situated therein, and the utility services, the parking areas and access roads, and all building fixtures and equipment and articles of personal property now or hereafter acquired and used in connection with the operation of the Mortgaged Property. Borrower shall, subject to the limitations of applicable law promptly replace any of the aforesaid which may become lost, destroyed or unsuitable for use with other property of similar character. 4. INSURANCE COVERAGES. Borrower shall insure the Mortgaged Property and the operation thereof with such coverages and in such amounts as are required by the provisions of the Loan Agreement and shall at all times keep such insurance in full force and effect and pay all premiums therefor as and when due. The original or certified copies of all such policies of insurance (or certificates or binders thereof issued by the insurer in form, content and manner of execution reasonably satisfactory to Lender) shall be delivered to Lender, and Borrower shall deliver to the Lender a new policy or certified copy thereof (or such a certificate) as replacement for an expiring policy (or such a certificate) required to be deposited hereunder at least ten ( 10) days before the date of such expiration. Borrower hereby irrevocably appoints Lender its true and lawful attorney-in-fact, with full power of substitution, to assign any such policy (to the extent assignable) in the event of the foreclosure of this Mortgage. 5. INSURANCE PROCEEDS. The proceeds of any hazard insurance shall be applied to or toward the indebtedness secured hereby or to the repair or restoration of the Mortgaged Property in accordance with the terms of the Loan Agreement. Notwithstanding anything in this Section 5 to the contrary, however, if the insurer denies liability to Borrower, Borrower shall not be relieved of any obligation under Section 3 of this Mortgage. If, pursuant to the provisions hereof and of the Loan Agreement, Lender applies insurance proceeds to the Loan and does not release the same to Borrower, the obligation of Borrower to repair, restore or rebuild shall be limited to taking all actions reasonably required to make the Mortgaged Property under applicable Legal Requirements safe and to restore the undamaged portion to an economically functional unit to the extent that it is reasonably possible to do so. 6. EMINENT DOMAIN. The awards of damages on account of any condemnation for public use of, or injury to, the Mortgaged Property shall be paid to Lender; such Awards shall, be applied to or toward the indebtedness secured hereby or released to Borrower to be applied to restoration of that part of the Mortgaged Property in accordance with the terms of the Loan Agreement.. If Lender applies such Awards to the Loan and does not release the same to Borrower, the obligation of Borrower to repair, restore or rebuild shall be limited to taking all actions reasonably required to make the Mortgaged Property, or what remains thereof, safe under applicable Legal Requirements and to restore the remaining portion to an economically functional unit to the extent that it is reasonably possible to do so. 7. NO WASTE: COMPLIANCE WITH LAW. Borrower shall not commit or suffer any strip or waste of the Mortgaged Property, or any portion thereof, or any violation of any law, rule, regulation, ordinance, license or permit, or the requirements of any licensing authority affecting the Mortgaged Property or any business conducted thereon, and shall not commit or suffer any demolition, removal or material alteration of any of the Mortgaged Property (except for the replacement of Fixtures and Personal Property in the ordinary course of business, so long as items of comparable value and quality are installed free and clear of liens in favor of any other party), 4 without the express prior written consent of Lender in each instance which consent shall not be unreasonably withheld or delayed, and shall not violate nor suffer the violation of the covenants and agreements, if any, of record against the Mortgaged Property, and in all respects Borrower shall do all things necessary to comply with, and keep in full force and effect all licenses, permits and other governmental authorizations for the operation of the Mortgaged Property for its intended purposes, including, without limitation express or implied, the licenses, permits and authorizations referenced in the Loan Agreement. 8. ENVIRONMENTAL AND RELATED MATTERS. Indemnification. Borrower shall at all times comply with all of the terms, conditions and provisions imposed on the Indemnitors under the Environmental Indemnity and both before and after the repayment of the Loan, at Borrower's sole cost and expense, indemnify, exonerate and save harmless Lender and each other Indemnified Party (as defined in the Environmental Indemnity) against and from all damages, losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, disbursements or expenses of any kind whatsoever, including, without limitation, reasonable attorneys' fees and experts' fees and disbursements which may at time (including, without limitation, before or after the discharge or foreclosure of this Mortgage) be imposed upon, incurred by or asserted or awarded against Lender or any other Indemnified Party and arising from or out of any of the matters for which indemnification is provided by Borrower pursuant to the Environmental Indemnity or on account of any liability for damage to person or property arising out of any act, omission, negligence or conduct at or related to the Mortgaged Property, or arising or claim to have arisen, out of any act, omission, negligence or conduct of Borrower, or any contractor, subcontractor, tenant, occupant or invitee thereof which is in any way related to the Mortgaged Property during the Borrower's period of ownership. 9. PAYMENT OF TAXES AND PREVENTION OF LIENS. Borrower shall pay before delinquent or before any penalty for nonpayment attaches thereto, all taxes, assessments and charges of every nature and to whomever assessed that may now or hereafter be levied or assessed upon the Mortgaged Property or any part thereof, or upon the rents, issues, income or profits thereof or upon the lien or estate hereby created, whether any or all of said taxes, assessments or charges be levied directly or indirectly or as excise taxes or as income taxes. Borrower may apply for tax abatements and prosecute diligently and in good faith claims for refund so long as: Borrower complies with the provisions of Section 10.1.1 of the Loan Agreement. Borrower shall pay all sums which, if unpaid, may result in the imposition of a lien on the Mortgaged Property before such lien may attach (except that real estate taxes need not be paid prior to the due date thereof and except to the extent such lien is being duly contested in accordance with the terms of the Loan Agreement) or which may result in conferring upon a tenant of any part or all of the Mortgaged Property a right to recover such sums as prepaid rent. 10. DUE ON SALE; NO OTHER ENCUMBRANCES; NO TRANSFER OF OWNERSHIP INTERESTS: FAILURE TO COMPLY WITH PERMITTED EXCEPTIONS. Except as otherwise specifically provided for in the Loan Agreement with respect to Permitted Transactions, or in this Mortgage, it shall be an Event of Default under the Loan Agreement, a breach of the conditions of this Mortgage and an event permitting Lender to accelerate all indebtedness secured hereby, if, without Lender's prior written consent in each instance, which consent may be granted, withheld or conditionally granted in Lender's sole discretion: (a) there is any sale, conveyance, transfer or encumbrance of, or lien imposed upon, all or any portion of the Mortgaged Property; or (b) there is any transfer or assignment of, or grant of any security interest in, any of the direct or indirect ownership interests in Borrower other than in connection with the Mezzanine Loan; or (c) there is a failure to comply with the provisions of, or there is a default under, any of the Permitted Title Exceptions unless cured within any applicable grace period provided for in the applicable 5 Permitted Title Exception. 11. LENDER'S RIGHTS. If Borrower shall neglect or refuse: (a) to maintain and keep in good repair the Mortgaged Property or any part thereof as required by this Mortgage or the Loan Agreement, or (b) to maintain and pay the premiums for insurance which may be required by this Mortgage or the Loan Agreement, or (c) to pay and discharge all taxes of whatsoever nature, assessments and charges of every nature and to whomever assessed, as required by this Mortgage or the Loan Agreement except to the extent being contested in accordance with the Loan Agreement, or (d) to pay the sums required to be paid by this Mortgage or the Loan Agreement when due or within any applicable cure period, or (e) to satisfy any other terms or conditions of this Mortgage, or any instrument secured hereby, Lender may, at its election in each instance, but without any obligation whatsoever to do so, upon thirty (30) days prior written notice (except in the case of (i) an emergency where there is danger to person or property, or (ii) required insurance coverage would lapse, or (iii) an Event of Default exists, in each of which events no further notice shall be required), cause such repairs or replacements to be made, obtain such insurance or pay said taxes, assessments, charges, and sums, incur and pay reasonable amounts in protecting its rights hereunder and the security hereby granted, pay any balance due under any conditional agreement of sale (or lease) of any property included as a part of the Mortgaged Property, and pay any amounts as Lender deems reasonably necessary or appropriate to satisfy any term or condition of this Mortgage, which Borrower shall have failed to satisfy when due or within any applicable cure period, or to remedy any breach of such term or condition which was not cured within any applicable cure period and any amounts or expenses so paid or incurred, together with interest thereon from the date of payment by Lender at the Default Rate as provided in the Note or Loan Agreement shall be immediately due and payable by Borrower to Lender and until paid shall be secured hereby equally and ratably, and the same may be collected as part of said principal debt in any suit hereon or upon the Note. No payment by Lender shall relieve Borrower from any default hereunder or impair any right or remedy of Lender consequent thereon. 12. TAX RESERVE AND INSURANCE RESERVE. Upon the occurrence of an Event of Default, Borrower shall, upon the request of Lender, from time to time, pay to Lender on dates upon which installments of interest are payable under the Note or the Loan Agreement, such amount as Lender from time to time estimates as necessary to create and maintain a reserve fund from which to pay before the same become due: (a) all taxes, assessments, liens and charges on or against the Mortgaged Property, and (b) all premiums for insurance policies which are required by this Mortgage. Such payments, if so requested, shall be invested in a non- interest bearing account which shall be held by Lender as Cash Collateral, and so long as no Event of Default exists hereunder or under any of other Loan Documents, shall be paid to or for Borrower's benefit as set forth below. Payments from such reserve fund for said purposes may be made by Lender at its discretion. In the event of any Event of Default under the Loan Agreement or under the terms of this Mortgage, any part or all of such reserve fund may be applied, at the option of Lender, to cure any such Event of Default or to any part of the indebtedness hereby secured. 13. CERTAIN EXPENSES. If any action or proceeding is commenced, including, without limitation, an action to foreclose this Mortgage Deed and Security Agreement or to collect the debt hereby secured, to which action or proceeding Lender is made a party by reason of the execution of this Mortgage Deed and Security Agreement, or by reason of any obligation which it secures, or by reason of entry or any other action under this Mortgage Deed and Security Agreement, or if in Lender's judgment it becomes necessary in connection with legal proceedings or otherwise to defend or uphold the mortgage hereby granted or the lien hereby created or any act taken to defend or uphold the mortgage hereby granted or the lien hereby created or any act taken under this Mortgage Deed and Security Agreement, all sums reasonably paid or incurred by Lender for the expense of any litigation or otherwise, in connection with any rights created by this Mortgage 6 Deed and Security Agreement or any other Loan Document, shall be paid by Borrower, or may at the option of Lender, if not so paid, be added to the debt secured hereby and shall be secured hereby equally and ratably and shall bear interest until paid at the Default Rate set forth in the Note or the Loan Agreement. 14. REGARDING LEASES. Except as otherwise provided in the Loan Agreement, Borrower shall not enter into any leases or occupancy agreements with respect to the Mortgaged Property and shall not modify or amend any such leases or occupancy agreements without Lender's prior written consent in each instance. As to each permitted lease or occupancy agreement, Borrower will perform every material obligation of the lessor and, to the extent commercially reasonable, will enforce every material obligation of the lessee in the leases in effect with respect to all or any part or all of the Mortgaged Property and, except as otherwise provided in the Loan Agreement, Borrower will not: (i) cancel any such lease, nor terminate or accept a surrender thereof, or reduce the rent payable thereunder or modify or amend any such lease; (ii) accept any prepayment of rent thereunder (except any rent which may be required to be prepaid by the terms of any such lease); or (iii) enter into any new leases, without first obtaining on each occasion the prior written consent of Lender. If any portion of the Mortgaged Property are leased or rented for residential purposes, Borrower shall comply with all legal requirements pertaining to security deposits, last month's rent, and interest thereon, and Borrower shall defend, indemnify and save harmless Lender with respect to all claims relating thereto. As to all leases and occupancy agreements, Lender, at its option from time to time, may require that all security deposits and similar funds or security provided by a lessee or occupant be deposited with Lender, or with an escrow agent satisfactory to Lender, subject to the rights of the lessee or occupant, but otherwise subject to a security interest in favor of Lender. 15. DECLARATION OF SUBORDINATION. At the option of Lender, which may be exercised at any time or from time to time, by written notice to Borrower and to any applicable tenant, this Mortgage shall become subject and subordinate, in whole or in part (but not with respect to priority of entitlement to insurance proceeds or condemnation proceeds), to any and all leases of all or any part of the Mortgaged Property upon the execution by Lender and recording or filing thereof, at any time hereafter in the appropriate official records of the county wherein the Mortgaged Property is situated of a unilateral declaration to that effect. 16. FURTHER ASSIGNMENT BY BORROWER. Borrower hereby further. assigns to Lender as security for the Obligations the lessor's interests in any or all leases, now or hereafter outstanding, and to the extent it may lawfully do so Borrower's interests in all agreements, contracts, licenses and permits, now or hereafter outstanding, affecting all or any portion of the Mortgaged Property. Borrower shall execute, acknowledge and deliver such further or confirmatory assignments thereof, by instruments in form reasonably satisfactory to the Lender, as Lender may reasonably require. Borrower hereby authorizes Lender in the event of foreclosure, to sell and assign said interests to the purchaser at foreclosure, but neither such assignment nor any such future assignment shall be construed as binding Lender to any lease, agreement, contract, license or permit so assigned, or to impose upon Lender any obligations with respect thereto. Borrower hereby irrevocably appoints Lender, or any agent designated by Lender, the true and lawful attorney-in-fact of Borrower, with full power of substitution, to execute, acknowledge and deliver any such assignment on behalf of Borrower which Borrower fails or refuses to do. 17. UCC FILING. Borrower upon Lender's written request shall promptly cause this Mortgage Deed and Security Agreement and any required financing statements to be recorded and re-recorded, registered and re-registered, filed and re-filed at such times and places as may be required by law or reasonably deemed advisable by Lender to create, preserve or protect the priority hereof and of any lien created hereby upon the Mortgaged Property or any part thereof; 7 and Borrower shall from time to time do and cause to be done all such things as may be reasonably required by Lender, or required by law, including all things which may from time to time be necessary under the Uniform Commercial Code of Florida fully to create, preserve and protect the priority hereof and of any lien created hereby upon said property. Borrower hereby irrevocably appoints Lender, or any agent designated by Lender, the true and lawful attorney-in- fact of Borrower, with full power of substitution, to execute, acknowledge and deliver any such 18. RIGHT TO DEAL WITH SUCCESSOR. Lender may, without notice to any person, deal with any successor in interest of Borrower herein regarding this Mortgage and the debt hereby secured in all respects as it might deal with Borrower herein, without in any way affecting the liability hereunder or upon the debt hereby secured of any predecessor in interest of the person so dealt with; and no sale of the premises hereby mortgaged, nor any forbearance on the part of Lender, nor any extension by Lender of the time for payment of the debt hereby secured, shall operate to release, discharge, modify, change or affect the original liability of any predecessor in interest of the equity owner at the time of such sale, forbearance or extension. 19. PERSONAL PROPERTY KEPT ON PROPERTY. The Personal Property will be kept on or at the Property and Borrower will not remove the Personal Property from the Property without the prior written consent of Lender, except such portions or items of Personal Property which are consumed or worn out in ordinary usage, all of which shall be promptly replaced by Borrower. 20. BUSINESS IN STATE. Borrower's only place of business in the state is at the Mortgaged Property. Borrower will immediately notify Lender in writing of any change in its principal place of business as set forth in the beginning of this Mortgage. 21. FINANCING STATEMENTS. At the request of Lender, Borrower will join Lender in executing one or more financing statements and renewals and amendments thereof pursuant to the Uniform Commercial Code of Florida in form reasonably satisfactory to Lender, and will pay the cost of filing the same in all public offices wherever filing is deemed by Lender to be necessary or desirable. 22. COVENANTS APPLY TO PERSONAL PROPERTY. All covenants and obligations of Borrower contained herein relating to the Mortgaged Property shall be deemed to apply to the Personal Property whether or not expressly referred to herein. 23. SECURITY AGREEMENT. This Mortgage constitutes a security agreement as that term is used in the Uniform Commercial Code of Florida. 24. ACCELERATION OF DEBT. If there is an Event of Default under the Note or the Loan Agreement or if an event occurs which pursuant to the Note or the Loan Agreement entitles Lender to accelerate the Loan, then, at the option of Lender, the entire indebtedness hereby secured shall become immediately due and payable without further notice. 25. ADDITIONAL RIGHTS OF LENDER. 25.1 ENTER AND PERFORM. Borrower authorizes Lender, in addition to all other rights granted by law or by this Mortgage, or by any of the other Loan Documents, whenever and as long as any Event of Default hereunder or under the Loan Agreement shall exist to enter and take possession of all or any part of the Mortgaged Property and to use, lease, operate, manage and control the same and conduct the business thereof, and perform Borrower's obligations as lessor under any lease or Borrower's obligations under any other agreement affecting all or any part of 8 the Mortgaged Property, and collect the rents, profits and all receipts of every nature therefrom as Lender shall deem best. 25.2 REPAIRS AND IMPROVEMENTS. Upon every such entry, Lender may from time to time at the expense of Borrower make all such repairs, replacements, alterations, additions and improvements to the Mortgaged Property as Lender may deem proper, but in no event shall Lender be obligated to do so, and may, but shall not be obligated to, exercise all rights and powers of Borrower, either in the name of Borrower, or otherwise as Lender shall determine. Without limitation express or implied upon the generality of the foregoing, Lender shall have the right to do all things necessary or desirable in order to keep in full force and effect all applicable licenses, permits and authorizations and any amendments thereto. 25.3 PAY COSTS AND EXPENSES. Upon such entry, Lender may, at its option, but without any obligation to do so, do any one or more of the following: pay and incur all expenses necessary or deemed by it appropriate for the holding and operating of the Mortgaged Property, the conduct of any business thereon, the maintenance, repair, replacement, alteration, addition and improvement of the Mortgaged Property, including without limitation payments of taxes, assessments, insurance, wages of employees connected with the Mortgaged Property or any business conducted thereon, charges and reasonable compensation for services of Lender, its attorneys and accountants and all other persons engaged or employed in connection with the Mortgaged Property or of any business conducted thereon and, in addition, Lender, at its option, may, but shall not be obligated to, make payments or incur liability with respect to obligations arising prior to the date it takes possession. 25.4 ADD TO SECURED INDEBTEDNESS. All obligations so paid or incurred by Lender shall be reimbursed or paid for by Borrower upon demand and prior to the repayment thereof shall be added to the debt secured hereby and shall bear interest at the Default Rate provided for in the Note or the Loan Agreement, and shall be secured hereby equally and ratably. Lender may also reimburse itself therefor from the income or receipts of the Mortgaged Property or any business conducted thereon, or from the sale of all or any portion of the Mortgaged Property. Lender may also apply toward any of the Obligations any tax or insurance reserve account, deposit or any sum credited or due from Lender to Borrower without first enforcing any other rights of Lender against Borrower or the against any endorser or guarantor of any of the Obligations or against the Mortgaged Property. 25.5 ATTORNEY-IN-FACT. Borrower hereby irrevocably constitutes and appoints Lender, or any agent designated by Lender, for so long as this Mortgage remains undischarged of record, as attorney-in-fact of Borrower to execute, acknowledge, seal and deliver all instruments, agreements, deeds, certificates and other documents of every nature and description in order to carry out or implement the exercise of Lender's rights hereunder and under the other Loan Documents from and after the occurrence of an Event of Default. 26. CONTEST OF LAWS. Borrower shall have the right to contest by appropriate legal proceedings, but without cost or expense to Lender, the validity of any Legal Requirements affecting the Mortgaged Property subject to the provisions of the Loan Agreement and the Environmental Indemnity dealing with the right to contest. 27. NOTICES. Any demand, notice or request by either party to the other shall be given in the manner provided therefor in the Loan Agreement. 28. LENDER NOT OBLIGATED; CUMULATIVE RIGHTS. Nothing in this instrument 9 shall be construed as obligating Lender to take any action or incur any liability with respect to the Mortgaged Property or any business conducted thereon, and all options given to Lender are for its benefit and shall and may be exercised in such order and in such combination as Lender in its sole discretion may from time to time decide. 29. SEVERABILITY. In case any one or more of the provisions of this Mortgage Deed and Security Agreement, the Note, the Assignment of Leases and Rents, the Loan Agreement, any of the other Loan Documents, or any other agreement now or hereafter executed in connection with any one or more of the foregoing are held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof. Each of the provisions of every such agreement, document or instrument shall be enforceable by Lender to the fullest extent now or hereafter not prohibited by applicable law. 30. APPOINTMENT OF RECEIVER. Upon, or at any time after the filing of a complaint to foreclose this Mortgage, the court in which such complaint is filed may appoint a receiver of the Mortgaged Property. Such appointment may be made either before or after sale, without notice, without regard to the solvency or insolvency of Borrower at the time of application for such receiver and without regard to the then value of the Mortgaged Property or whether the same shall be then occupied as a homestead or not and Lender hereunder or any holders may be appointed as such receiver. Such receiver shall have power: (a) to collect the rents, issues and profits of the Mortgaged Property during the pendency of such foreclosure suit and, in case of a sale and a deficiency, during the full statutory period of redemption, whether there be redemption or not, as well as during any further times when Borrower, except for the intervention of such receiver, would be entitled to collect such rents, issues and profits; (b) to extend or modify any then existing leases and to make new leases, which extensions, modifications and new leases may provide for terms to expire, or for options to lessees to extend or renew terms to expire, beyond the maturity date of the indebtedness hereunder and beyond the date of the issuance of a deed or deeds to a purchaser or purchasers at a foreclosure sale, it being understood and agreed that any such leases, and the options or other such provisions to be contained therein, shall be binding upon Borrower and all persons whose interests in the premises are subject to the lien hereof and upon the purchaser or purchasers at any foreclosure sale, notwithstanding any redemption from sale, discharge of the mortgage indebtedness, satisfaction of any foreclosure decree, or issuance of any certificate of sale or deed to any purchaser; and (c) all other powers which may be necessary or are usual in such cases for the protection, possession, control, management; and operation of the premises during the whole of said period. The court from time to time may authorize the receiver to apply the net income in his hands in payment in whole or, in part of (a) the indebtedness secured hereby, or by any decree foreclosing this mortgage, or any tax, special assessment or other lien which may be or become superior to the lien hereof or of such decree, provided such application is made prior to foreclosure sale; (b) the deficiency in case of a sale and deficiency. 31. STAMP TAX, ETC. If at any time any governmental body shall impose a stamp, documentary or other similar tax on the Note, this Mortgage, the debt secured hereby or the income generated therefrom, or any modification, amendment, extension or consolidation of either thereof, Borrower will pay the same within ten (10) days after demand by the Lender. 32. RECOVERY OF SUMS. Lender shall have the right from time to time to take action to recover any sums, whether interest, principal or any installment of either, or any other sums required to be paid under the terms of this Mortgage which is not paid, as the same become due or within any applicable cure period and without prejudice to the right of Lender thereafter to bring an action of foreclosure, or any other action, for a default or defaults by Borrower existing at the time such earlier action was commenced. 10 33. GOVERNING LAW. This Mortgage and the rights and obligations of the parties hereto shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Massachusetts, except to the extent that the laws of the State of Florida may govern matters of title, enforcement, remedies, and similar matters. 34. CONSENT TO JURISDICTION. Borrower, to the extent that it may lawfully do so, hereby submits to the jurisdiction of the courts of the Commonwealth of Massachusetts and the State of Florida and the United States District Courts for the Districts of Commonwealth of Massachusetts and Florida, as well as to the jurisdiction of all courts from which an appeal may be taken from the aforesaid courts, for the purpose of any suit, action or other proceeding arising out of the breach by Borrower of any of obligations under or with respect to the Note or this Mortgage, and expressly waives any and all objections it may have as to venue in any of such courts. 3 5. LIMITATION OF INTEREST. It is the intent of Borrower and Lender in the execution of this Mortgage and the Note and all other instruments securing the Note to contract in strict compliance with the usury laws of the Commonwealth of Massachusetts governing the loan evidenced by the Note. In furtherance thereof, Lender and Borrower stipulate and agree that none of the terms and provisions contained in the Loan Documents shall ever be construed to create a contract for the use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the laws of the Commonwealth of Massachusetts governing the loan evidenced by the Note. Borrower or any guarantor, endorser or other party now or hereafter becoming liable for the payment of the Note shall never be liable for unearned interest on the Note and shall never be required to pay interest on the Note at a rate in excess of the maximum interest that may be lawfully charged under the laws of the Commonwealth of Massachusetts and the provisions of this Section shall control over all other provisions of the Note and any other instrument executed in connection herewith which may be in apparent conflict herewith. In the event any holder of the Note shall collect monies which are deemed to constitute interest in excess of the maximum rate permitted by the laws of the Commonwealth of Massachusetts, all such sums deemed to constitute interest in excess of the legal rate shall be immediately returned to Borrower upon such determination. 36. LENDER'S RIGHTS. Borrower acknowledges its understanding that Lender may have rights against Borrower, now or in the future, in its capacity as secured party, creditor, or in any other capacities. Such rights may include the right to deprive Borrower of or affect the use of or possession or enjoyment of Borrower's Mortgaged Property; and in the event Lender deems it necessary to exercise any of such rights prior to the rendition of a final judgment against Borrower, or otherwise, Borrower may be entitled to notice and/or hearing under the Constitution of the United States and/or Commonwealth of Massachusetts, and/or Commonwealth of Massachusetts statutes (to determine whether or not Lender has a probable cause to sustain the validity of Lender's claim), or the right to notice and/or hearing under other applicable state or federal laws pertaining to prejudgment remedies, prior to the exercise by Lender of any such rights. Borrower expressly waives any such right to prejudgment remedy notice or hearing to which Borrower may be entitled; provided, however, that this waiver shall not include a waiver of such rights as Borrower shall have to prior notice of the proposed disposition of Mortgaged Property by Lender. Specifically and without limiting, the generality of the foregoing, Borrower recognizes that Lender has and shall continue to have an absolute right to effect collection of any of the Mortgaged Property with respect to which Lender holds a security interest without the necessity of according to Borrower any prior notice or hearing. This shall be a continuing waiver and remain in full force and effect so long as Borrower is obligated to Lender. 37. REINSTATEMENT OF LIEN. Lender's rights hereunder shall be reinstated and 11 reviewed, and the enforceability of this Mortgage shall continue with respect to any amount at any time paid on account of the Obligations which Borrower is thereafter required to restore or return in connection with a bankruptcy, insolvency, reorganization or similar proceedings with respect to the Borrower. 38. RELEASE. Upon payment in full of the indebtedness secured hereby, subject to Section 38 above, this instrument shall become null and void and shall be released by the Lender at Borrower's expense. 39. NO WAIVER. No consent or waiver, express or implied, by Lender to or of any Default by Borrower shall be construed as a consent or waiver to or of any other Default at the same time or upon any future occasion. 40. WAIVERS BY BORROWER. Borrower, to the fullest extent that Borrower may do so, hereby: (a) agrees that Borrower will not at any time insist upon, plead, claim or take the benefit or advantage of any law now or hereafter in force providing for any appraisement, valuation, stay or extension, or any redemption after foreclosure sale, and waives and releases all rights of redemption after foreclosure sale, valuation, appraisement, stay of execution, notice of election to mature or declare due the debt secured hereby; and (b) waives all rights to a marshalling of the assets of Borrower, including the Mortgaged Property, or to a sale in inverse order of alienation in the event of a sale hereunder of the Mortgaged Property, and agrees not to assert any right under any statute or rule of law pertaining to the marshalling of assets, sale in inverse order of alienation, or other matters whatever to defeat, reduce or affect the right of Lender under the terms of this Mortgage Deed and Security Agreement or the Note to a sale of the Mortgaged Property for the collection of the indebtedness evidenced by the Note without any prior or different resort for collection, or the right of Lender to the payment of such indebtedness out of the proceeds of sale of the Mortgaged Property in preference to every other claimant whatever. 41. BUSINESS LOAN: NOT PERSONAL RESIDENCE. Borrower covenants, warrants and represents that all of the proceeds of the Loan secured hereby shall be used for business or commercial purposes, none of the proceeds of the Loan secured hereby shall be used for personal, family or household purposes, and that no individual liable for the Loan resides or intends to reside in any portion of the Mortgaged Property. 42. CERTIFICATION. The undersigned hereby certifies that Borrower is a duly organized, validly existing corporation organized and in good standing under the laws of the State of Washington and duly qualified to do business in the State of Florida and that the execution and delivery hereof and of all of the other Loan Documents by Borrower has been duly authorized by a resolution of the board of directors of the general partner of the Borrower which is in full force and effect. 43. HEADINGS. Headings and captions in this Mortgage are for convenience and reference only and the words and phrases contained therein shall in no way be held to explain, modify, amplify or aid in the interpretation, construction or meaning of any of the provisions hereof. 44. TIME OF ESSENCE. Time shall be of the essence of each and every provision of the Loan Agreement, the Note, this Mortgage and each of the other Loan Documents subject to any cure period provided for therein. NEXT PAGE IS SIGNATURE PAGE 12 IN WITNESS WHEREOF, the Borrower has caused this Mortgage to be duly executed and delivered as a sealed instrument as of the 30th day of April, 1997 WITNESSES: BORROWER: /s/ Jennifer A. Valenta By: /s/ Raymond R. Brandstrom - -------------------------------------- - --------------------------------------- Name: Jennifer A. Valenta Raymond R. Brandstrom Its: President /s/ Susan Griffin - ------------------------------------- Name: Susan Griffin * This document has been executed on the 30th day of April, 1997, but is to be effective as of May 1, 1997 upon the filing with the Secretary of State, Corporations Division, in the State of Washington and with the Department of State of the State of Florida of the Articles Merger with NPR Retirement Center, Inc., Stanford Centre, Inc. and Englewood Retirement Center, Inc. merged into Emeritus Properties V, Inc., a Washington corporation. 13 STATE OF Washington COUNTY OF King On the 30th day of April, 1997, before me personally appeared Raymond R. Brandstrom, the President f Emeritus Properties V, Inc., to me known and known by me to be the party executing the foregoing instrument on behalf of said partnership and acknowledged said instrument so executed to be his free act and deed in said capacity and the free act and deed of said corporation. /s/ Catherine L. Pasquan --------------------------------- ---------- Notary Public Print Name Catherine L. Pasquan My commission expires 3-30-99 This instrument prepared by: Lorne W. McDougall, Esq. Edwards & Angell 101 Federal Street [SEAL] Boston, MA 02110 14 EX-10.68 8 EX 10.68 SETTLEMENT AGREEMENT THIS SETTLEMENT AGREEMENT (this "Agreement") is made and entered into as of the 25th day of April, 1997, by and between EMERITUS CORPORATION (formerly known as Assisted Living of America, Inc.), a Washington corporation, with a place of business at 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121 ("Emeritus") and CAREMATRIX CORPORATION (formerly known as The Standish Care Company), a Delaware corporation, with a place of business at 197 First Avenue, Needham, Massachusetts 02194 ("CareMatrix"). RECITALS : WHEREAS, Emeritus and CareMatrix entered into that certain Development Agreement dated June 9,1995 (the "Tewksbury Development Agreement"), a copy of which is attached hereto as Exhibit A, pursuant to which CareMatrix agreed to rehabilitate an assisted living community located in Tewksbury, Massachusetts (the "Tewksbury Facility"); WHEREAS, Emeritus and CareMatrix entered into that certain Management & Marketing Agreement dated June 9,1995 pursuant to which CareMatrix agreed to establish, market and manage the Tewksbury Facility (the "Tewksbury Management & Marketing Agreement"), a copy of which is attached hereto as Exhibit B; WHEREAS, Emeritus and CareMatrix entered into that certain Equity Participation Agreement dated June 26, 1995 (the "Equity Participation Agreement"), a copy of which is attached hereto as Exhibit C, pursuant to which Emeritus and CareMatrix agreed that Emeritus would receive eighty-five percent (85%) and CareMatrix would receive fifteen percent (15%) of, among other things, the Net Cash Flow, as defined in the Equity Participation Agreement, and the proceeds from any Capital Item, as defined in the Equity Participation Agreement, from the Tewksbury Facility, in the manner provided, and upon the terms and conditions set forth, in the Equity Participation Agreement; WHEREAS Emeritus and CareMatrix entered into that certain Development Agreement dated as of November 7,1994 (the "Pikesville Development Agreement"), a copy of which is attached hereto as Exhibit D, pursuant to which CareMatrix agreed to develop a facility to be located in Pikesville, Maryland (the "Pikesville Facility"). WHEREAS Emeritus and CareMatrix entered into that certain Management and Marketing Agreement dated as of June 29,1995 (the "Pikesville Management and Marketing Agreement"), a copy of which is attached hereto as Exhibit E, pursuant to which CareMatrix agreed to establish, market and manage the Pikesville Facility. WHEREAS, Emeritus and CareMatrix entered into that certain Management Agreement dated September 1,1994, a copy of which is attached hereto as Exhibit F, pursuant to which CareMatrix agreed to manage an assisted living community (the "Carriage Hill Facility") located in Bedford, Virginia (the "Carriage Hill Management Agreement"); WHEREAS, as of the date hereof, approximately Seventy-Five Thousand Four Hundred Ninety Dollars ($75,490) is due and owing to CareMatrix under the Tewksbury Development Agreement, the Tewksbury Management & Marketing Agreement and the Carriage Hill Management Agreement; WHEREAS, pursuant to that certain Limited Liability Company Agreement of Lakes Region Villages, L.L.C. (the "Lakes Region Villages Agreement"), a copy of which is attached hereto as Exhibit G, S Standish Lakes Region Villages, Inc., a wholly-owned subsidiary of CareMatrix Standish Lakes"), and Emeritus formed a limited liability company ("Lakes Region Villages"), in which Standish Lakes holds a fifty-one percent (51%) membership interest and Emeritus holds a forty-nine percent (49%) membership interest (the "Emeritus Membership Interest"); WHEREAS, Lakes Region Villages purchased a supportive sheltered care facility located in Franklin, New Hampshire (the "Sunny Knoll Facility") and simultaneously with such purchase, Emeritus made a loan in the original principal amount of Six Hundred Thousand Dollars ($600,000) to Standish Lakes, which loan is evidenced by a promissory note, dated May 1, 1995, by Standish Lakes in favor of Emeritus (the "Sunny Knoll Note"), a copy of which is attached hereto as Exhibit H; WHEREAS, in connection with the purchase, on an installment sales basis, of the Sunny Knoll Facility, Lakes Region Villages (i) executed a promissory note in the amount of $1,100,000.00 payable to Sunny Knoll Retirement Home, Inc. ("Retirement Home") and due and payable on April 30, 1997 (the "Retirement Home Note"), a copy of which is attached hereto as Exhibit I, (ii) executed a promissory note in the amount of $749,331.49 payable to Benjamin Bartley, L.L.C. ("Bartley") and due and payable April 30, 1997 (the "Bartley Note"), a copy of which is attached hereto as Exhibit J, which Bartley Note evidences Lakes Region Villages' assumption of an outstanding loan with Horizon Bank (the "Horizon Loan"), in the original principal amount of $800,000, secured by a first mortgage on the Sunny Knoll Facility, a copy of which is attached hereto as Exhibit K, at its then current outstanding principal balance; (iii) entered into a Business Lease and Agreement dated May 1, 1995 with Retirement Home (the "Retirement Home Agreement"), a copy of which is attached hereto as Exhibit L, providing for the conveyance of the business assets related to the Sunny Knoll Facility and an interim lease thereof expiring April 30, 1997, and (iv) entered into a Real Estate Lease and Agreement dated May l,1995 with Bartley (the "Bartley Agreement"), a copy of which is attached hereto as Exhibit M, providing for the conveyance of the real estate related to the Sunny Knoll Facility and an interim lease thereof expiring April 30, 1997. Lakes Region Villages holds a mortgage encumbering the real estate related to the Sunny Knoll Facility to secure the obligations of Retirement Home and Bartley under their respective agreements, a copy of which is attached hereto as Exhibit N. Lakes Region Villages and CareMatrix are parties to a Management Agreement dated May l,1995 (the "Sunny Knoll Management Agreement"), pursuant to which CareMatrix manages the Sunny Knoll Facility, a copy of which is attached hereto as Exhibit O. Emeritus has executed a Guaranty dated May 1,1995 (the "Emeritus Guaranty"), a copy of which is attached hereto as Exhibit P, pursuant to which it has guaranteed the performance and payment of the Retirement Home Note. WHEREAS Emeritus is owner and holder (i) of an aggregate principal amount of $2,000,000.00 of Convertible Debentures of CareMatrix (the "Debentures") the terms of which are governed by a Convertible Debenture Agreement dated June 10, 1994 (the "Convertible Debenture Agreement"), a copy of which are attached hereto as Exhibit Q, and (ii) Warrants to purchase 10,000 post-split shares of CareMatrix Common Stock (the Warrants"), a copy of which are attached hereto as Exhibit R, which Debentures and Warrants were in part issued to Columbia-Pacific Group, Inc., an affiliate of Emeritus, and later assigned to Emeritus. Daniel R. Baty ("Baty"), the Chief Executive Officer of Emeritus, also hold warrants to purchase 10,000 post split shares of CareMatrix Common Stock (the "Baty Warrants"), a copy of which are attached hereto as Exhibit S. Emeritus, Baty and CareMatrix are parties to a Registration Rights Agreements dated June 10,1994 relating to the registration of the securities described above (the "Registration Rights Agreement"), a copy of which are attached hereto ss Exhibit T. WHEREAS, CareMatrix assigned to Emeritus and Emeritus assumed an and all of CareMatrix's rights, obligations and liabilities under a certain Asset Purchase Agreement (the "Green Meadows Agreement"), a copy of which is attached hereto as Exhibit U, dated July 31, 1995 with P. Jules Patt and related entities respecting certain senior living facilities in New York, 2 Pennsylvania and Delaware known collectively as the "Green Meadows Facilities". WHEREAS, certain claims have been made against CareMatrix and Emeritus by Russell J. Biggica, a partner of P. Jules Patt, in the matter of Russell J. Biggica v. P. Jules Patt L Robbins Allentown Personal Care General Partnership Painted Post Partnership Unit Partnership Salisbury General Partnership The Standish Care Company and Emeritus Corporation Court of Common Pleas, Blair County, Pennsylvania, C.A. No. 96 CP 000661 (the "Biggica Lawsuit"). WHEREAS, CareMatrix and Emeritus acknowledge and agree that the Tewksbury Development Agreement, the Tewksbury Management & Marketing Agreement, the Equity Participation Agreement, the Pikesville Development Agreement, the Pikesville Management & Marketing Agreement, the Carriage Hill Management Agreement, and the Sunny Knoll Management Agreement, represent all of the service agreements between the parties, which shall be referred to herein, collectively, as the "Service Agreements; and the Tewksbury Facility, the Sunny Knoll Facility, the Pikesville Facility, the Carnage Hill Facility, and the Green Meadows Facilities, shall be referred to herein, collectively, as the "Facilities". WHEREAS, CareMatrix and Emeritus desire to enter into this Agreement to (i) acknowledge the termination of the Service Agreements, (ii) to settle any and all matters outstanding in connection with the Facilities, and (iii) to ratify and confirm certain other agreements and understandings between them, all as specifically set forth herein. NOW, THEREFORE, in consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Emeritus and CareMatrix agree as follows: l. CONVERTIBLE DEBENTURES. Emeritus and CareMatrix acknowledge and agree (i) that the Convertible Debentures shall remain in effect in accordance with the terms and provisions of the Convertible Debenture Agreement, (ii) that the Warrants and Baty Warrants shall remain in effect in accordance with their terms and (iii) that the Registration Rights Agreements shall remain in effect in accordance with its terms. 2. TRANSFER OF MEMBERSHIP INTERESTS. Emeritus agrees that promptly after the date hereof, it shall transfer the entire Emeritus Membership Interest to an entity designated by CareMatrix. Emeritus shall execute such instruments of transfer, and such other certificates as CareMatrix shall reasonably request to effectuate such transfer, including, without limitation, the documents, certificates and instruments contemplated by Section 9.2(c) of the Lakes Region Villages Agreement. The date on which such transfer is consummated is referred to herein as the "Effective Date." It is the parties' intention that the transfer of such Emeritus Membership Interest shall constitute the complete transfer and relinquishment by Emeritus to CareMatrix of any and all of Emeritus' right, title and interest in and related to the Sunny Knoll Facility. 3. PAYMENT AND SATISFACTION OF SUNNY KNOLL NOTE AND OTHER OUTSTANDING OBLIGATIONS. On the Effective Date, CareMatrix shall make a cash settlement payment (the "Settlement Payment") to Emeritus in an amount equal to the sum of (i) Four Hundred Nine Thousand Eight Hundred Twenty-Eight Dollars ($409,828), plus (ii) accrued but unpaid interest from the date hereof through the Effective Date. The Settlement Payment shall be full and complete satisfaction of all outstanding obligations between the parties except as specifically set forth herein. CareMatrix hereby waives the sum of Seventy-Five Thousand Four Hundred Ninety Dollars ($75,490) due and owing to it under the Tewksbury Development Agreement, the Tewksbury Management & Marketing Agreement and the Carriage Hill 3 Management Agreement. 4. INDEMNIFICATION RELATING TO OTHER SUNNY KNOLL OBLIGATIONS. CareMatrix hereby indemnifies and holds Emeritus harmless from any and all liabilities, damages, losses, payments and expenses (including reasonable attorneys fees) relating to or arising out of the operation of the Sunny Knoll Facility, the Retirement Home Note, the Bartley Note, the Retirement Home Agreement, the Bartley Agreement, the Horizon Loan, the Sunny Knoll Management Agreement, the Emeritus Guaranty or any other documents, agreements or obligations related to the Sunny Knoll Facility or its operation or acquisition. 5. INDEMNIFICATION RELATING TO THE TEWKSBURY PIKESVILLE CARRIAGE HILL AND GREEN MEADOWS FACILITIES OBLIGATIONS. Emeritus hereby indemnifies and holds CareMatrix harmless from any and all liabilities, damages, losses, payments and expenses (including reasonable attorneys fees) relating to or arising out of the operation of the Tewksbury Facility, the Pikesville Facility, the Carriage Hill Facility, the Green Meadows Facilities or any other documents, agreements or obligations related to the Tewksbury Facility the Pikesville Facility, the Carriage Hill Facility, the Green Meadows Facilities or its operation or acquisition, provided however, Emeritus' indemnification obligation hereunder shall not be deemed to include any claims, liabilities, damages losses, payments or expenses relating to or arising out of the Biggica Lawsuit. 6. RELEASE. (a) As of the Effective Date, Emeritus releases CareMatrix and all of its shareholders, directors, officers, agents, affiliates, employees, attorneys, successors and assigns (collectively, the "CareMatrix Released Parties") from all liabilities, actions, causes of action, claims, counterclaims, defenses, offsets, charges, obligations and demands whatsoever (whether known or unknown, direct or indirect, contingent or non-contingent) at law, in equity or otherwise (collectively, the "Claims") against the CareMatrix Released Parties, which Emeritus, its successors or assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason or on accident of or in any way related to any acts, omissions or circumstances occurring prior to or as of the Effective Date, including, without limitation, anything in connection with the Carriage Hill Facility, the Tewksbury Facility, the Pikesville Facility, the Sunny Knoll Facility, or the Green Meadows Facilities, including without limitation, all Claims arising out of, in connection with, or in any way relating to (i) the Tewksbury and Pikesville Development Agreements, (ii) the Tewksbury and Pikesville Management and Marketing Agreements, (iii) the Equity Participation Agreement, (iv) the Convertible Debenture Agreement, the Warrant, the Baty Warrant and the Registration Rights Agreement, (v) Lakes Region Villages Agreement and the Sunny Knoll Note, and (vi) the Carriage Hill Management Agreement; provided however, this release shall not be deemed to include any claims, liabilities, damages losses, payments or expenses relating to or arising out of the Biggica Lawsuit. (b) As of the Effective Date, CareMatrix releases Emeritus and all of its shareholders, directors, officers, agents, affiliates, employees, attorneys, successors and assigns (collectively, the "Emeritus Released Parties") from all liabilities, actions, causes of action, claims, counterclaims, defenses, offsets, charges, obligations and demands whatsoever (whether known or unknown, direct or indirect, contingent or non-contingent) at law, in equity or otherwise (collectively, the "Claims") against the Emeritus Released Patties, which CareMatrix, its successors or assigns ever had, now have or hereafter can, shall or may have for, upon, or by reason or on accident of or in any way related to any acts, omissions or circumstances occurring prior to or as of the Effective Date, including, without limitation, anything in connection with the Carriage Hill Facility, the Tewksbury Facility, the Pikesville Facility or the Sunny Knoll Facility, 4 including without limitation, all Claims arising out of, in connection with, or in any way relating to (i) the Tewksbury and Pikesville Development Agreements, (ii) the Tewksbury and Pikesville Management and Marketing Agreements, (iii) the Equity Participation Agreement, (iv) the Convertible Debenture Agreement, the Warrant, the Baty Warrant and the Registration Rights Agreement, (v) Lakes Region Village Agreement and the Sunny Knoll Note and (vi) the Carriage Hill Management Agreement. 7. ACKNOWLEDGMENT. The parties acknowledge that the Service Agreements are terminated and of no further force or effect. 8. REPRESENTATIONS AND WARRANTIES. (a) Emeritus represents to CareMatrix as follows: (i) Emeritus is a corporation duly organized, validly existing and in good standing under the laws of the state of Washington. (ii) The execution, delivery and performance by Emeritus of this Agreement have been duly authorized by Emeritus by any and all necessary corporate action, and this Agreement has been duly executed and delivered by an officer of Emeritus who is duly authorized to effect such execution and delivery on behalf of Emeritus. (iii) This Agreement constitutes a legal, valid and binding obligation of Emeritus enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability relating to or affecting creditors' rights or by general principles of equity. (iv) To Emeritus' knowledge, no consent, license, approval or authorization of, or filing, registration or declaration with, or exemption by, any governmental body, authority, bureau or agency is required in connection with the execution, delivery or performance by Emeritus of this Agreement. (v) The execution, delivery and performance of this Agreement by Emeritus does not and will not violate Emeritus' articles of incorporation, by-laws or, to Emeritus' knowledge, any law, governmental regulation, judgment, order or decree applicable to Emeritus. (b) CareMatrix represents to Emeritus as follows: (i) CareMatrix is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware. (ii) The execution, delivery and performance by CareMatrix of this Agreement have been duly authorized by CareMatrix by any and all necessary corporate action, and this Agreement has been duly executed and delivered by an officer of CareMatrix who is duly authorized to effect such execution and delivery on behalf of CareMatrix. (iii) This Agreement constitutes a legal, valid and binding obligation of CareMatrix enforceable against it in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws of general applicability relating to or affecting creditors' rights or by general principles of equity. 5 (iv) To CareMatrix's knowledge, no consent, license, approval or authorization of, or filing, registration or declaration with, or exemption by, any governmental body, authority, bureau or agency is required in a connection with the execution, delivery or performance by CareMatrix of this Agreement. (v) The execution, delivery and performance of this Agreement by CareMatrix does not and will not violate CareMatrix's articles of incorporation, by-laws or, to CareMatrix's knowledge, any law, governmental regulation, judgment, order or decree applicable to CareMatrix. 9. NOTICE. All notices to be given hereunder shall be given in writing, postage prepaid via certified mail, return receipt requested, by overnight courier, or by hand delivery, and addressed to the parties as follows: If to CareMatrix: CareMatrix Corporation 197 First Avenue Needham, MA 02194 Attention: President with a copy to: CareMatrix Corporation 197 First Avenue Needham, MA 02194 Attention: General Counsel If to Emeritus: Emeritus Corporation 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 Attention: Mr. Daniel Baty with a copy to: Perkins Coie 1201 Third Avenue Seattle, WA 98101 Attention: Michael E. Stansbury, Esquire Notices shall be considered received three days after their placement in the U.S. mail or one day after their mailing via overnight courier. Each party may, on notice to the other party, designate further or different addresses to which subsequent notices shall be sent. 10. MISCELLANEOUS. (a) SUCCESSORS AND ASSIGNS. All of the terms, covenants and conditions herein contained shall be for and shall inure to the benefit of and shall bind the respective parties hereto, and their officers, agents, directors, shareholders, employees, heirs, executors, administrators, personal or legal representatives, successors and assigns, respectively. (b) GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of The Commonwealth of Massachusetts. (c) AMENDMENT. This Agreement may not be released, discharged, changed or 6 modified in any manner, except by an instrument in writing signed by each of the parties hereto. (d) SEVERABILITY. If any of the provisions of this Agreement shall be held invalid, such invalidity shall not affect any other provision of this Agreement. (c) CAPTIONS. The captions and headings used in this Agreement are for convenience of reference only and are not part of this Agreement. (d) WAIVER. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. (e) COSTS. Each party hereto shall be responsible for all of the expenses incurred by it in connection with the negotiation and execution of this Agreement and any and all contemporaneous documents related hereto. (f) COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which shall constitute one and the same agreement. (g) FURTHER ASSURANCES. The parties shall execute and deliver such further instruments and do such further acts and things as may be reasonably required to carry out the intent and purpose of this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. WITNESS: EMERITUS CORPORATION /s/ Jennifer A. Valenta /s/ Kelly J. Price - ------------------------------- ----- - ----------------------------- By: Jennifer A. Valenta By: Kelly J. Price Title: Secretary WITNESS: CAREMATRIX CORPORATION /s/ Laurie I. Greib /s/ Richard - ----------------------------- ---------- - ------------------------- By: Laurie I. Greib By: Richard Title: V.P. 7 EX-10.69 9 EX 10.69 MARTIN SELIG REAL ESTATE September 6, 1996 Mr. Frank Ruffo, Executive Vice President EMERITUS CORPORATION 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 Dear Frank: Please refer to your lease dated April 29, 1996, and all subsequent amendments and addenda thereto for the space you occupy within the 3131 Elliott Building. Please consider this a further addendum to that lease. PREMISES Emeritus Corporation hereby agrees to lease the additional adjacent space of approximately 4,258 rentable square feet on the 5th floor of the 3131 Elliott Building. RENT The annual base rent for this additional space will be at the same rate that Lessee is paying for its other space under lease. COMMENCEMENT AND LEASE TERM Rent and lease term for this additional space shall commence July 1,1997, and shall run coterminous with your existing lease expiring June 30, 2006. Provided however, that the rent commencement date shall be extended one day for each day that Lessor delays delivery of the additional space beyond June 1,1997, in order to provide Lessee with 30 days within which to complete its tenant improvement work. FINISH WORK/TENANT IMPROVEMENT ALLOWANCE Pursuant to the existing lease, Lessee is allotted a prorata share of the initial tenant improvement allowance, which was $7.50 per rsf. Lessee's lease commenced exactly one year prior to the commencement of the lease for the expansion space so the remaining improvement allowance to be credited to Lessee in the way of rent offset is $6.75 per rsf. [($7.50I10 yrs.) x 9 yrs.] LEASING FEE Lessor agrees to pay Teutsch Partners a leasing fee equal to 2.5% of the gross Mr. Frank Ruffo EMERITUS CORPORATION September 6,1996 Page 2 lease value of the expansion space for the balance of the initial term. This amount shall be paid by Lessee and offset against its rent. PARKING Lessee shall be provided additional parking stalls at a rate of two (2) stalls per 1,000 rsf, with one (1 ) stall per 750 rsf inside the building garage, all at market rate and paid for by Lessee. Except as modified herein, all other terms and conditions of your original lease and addenda thereto shall remain unchanged. Please consider this document when fully executed, as an addendum to your lease. If you are in agreement with the above, please sign and date where indicated and return all three copies to me for Martin Selig's signature. Upon full execution, I shall return one copy to you for your files. Thank you, Frank, for this lease of additional space and please let me know if we can assist you further in any way. We look forward to continuing to satisfy your office space needs. Very truly yours, /s/ Mike Brixner Mike Brixner Attachment AGREED AND ACCEPTED: MARTIN SELIG REAL ESTATE EMERITUS CORPORATION /s/ /s/ Frank Ruffo - ------------------------------------ - ------------------------------------- Martin Selig By: Frank Ruffo Its: EVP 9/16/96 - ---------------------------------- - ------------------------------------- Dated Dated STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this __ day of ________, 19__, before me, a Notary Public in and for the State of Washington, personally appeared MARTIN SELIG, the individual who executed the within and foregoing instrument and acknowledged said instrument to be his free and voluntary act and deed for the uses and purposes therein mentioned. ------------------------------ - ------------------------------------------ Notary Public in and for the State of Washington, residing at _______________________________________. My commission expires: ___________ STATE OF WASHINGTON ) ) ss. COUNTY OF KING ) On this 16th day of September, 1996, before me, a Notary Public in and for the State of Washington, personally appeared Frank A. Ruffo, to me known to be the Executive Vice President, of Emeritus Corporation, the corporation that executed the within foregoing instrument, and acknowledged the same instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that they were authorized to execute said instrument and that the seal affixed thereto is the corporate seal of said corporation. IN WITNESS WHEREOF, I have here unto set my hand and affixed by official seal, the day and year first above written. Catherine L. Pasquan ------------------------- ----------------- Notary Public in and for the State of Washington, residing at Seattle. My commission expires: 3- 30-99 [SEAL] EX-10.72.1 10 EX 10.72.1 PURCHASE AND SALE AGREEMENT THIS AGREEMENT is dated for reference purposes only as of the 5th day of 1997 and is by and between Greencastle Retirement Partners, L.L.C., a Maryland corporation, or its assignee ("Purchaser") and Gail G. Brown ("Seller"). RECITALS A. Seller is the owner of a certain parcel of real property located in Augusta County, Virginia. B. Purchaser is interested in purchasing the real property owned by Seller on the terms and conditions specified herein. NOW, THEREFORE, in consideration of the foregoing promises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. PURCHASE AND SALE On the terms and conditions set forth herein, Seller shall sell to Purchaser and Purchaser shall purchase from Seller, the following; a. Real Property. The undeveloped real property totaling 22.593 acres consisting of two (2) parcels, Tax Map # 10024 ( 18. 993 acres) and Tax Map # 10792 (3. 60 acres) of real property as more particularly described on Exhibit "A" attached hereto which actual dimensions and total acreage of Real Property will be determined by a full survey, including all rights, title and interest, if any, of Seller in (collectively, the "Real Property"); and b. Property Rights. All contract rights, surveys, blue prints, studies, and other work in progress relating to any proposed development of the Real Property, and all licenses, permits, approvals and all other entitlements, rights or privileges appurtenant to or held by Seller in connection with, the Real Property and/or any proposed development thereof (collectively, the "Property Rights"). The Real Property and the Property Rights are sometimes collectively referred to herein as the "Property". 2. PURCHASE PRICE The purchase price for the Property shall be Two Hundred Thousand and 00/100 Dollars ($200,000.00). The purchase price shall be payable as follows: a. Initial Earnest Money Deposit. Five Thousand and 00/100 Dollars ($5,000.00) within five (5) business days of mutual execution of this Agreement, which shall be delivered in the form of a check made payable to Hallmark Title, Inc. Vienna, Virginia ("Escrow Agent"). All such funds shall be held by Escrow Agent in an interest bearing escrow account; b. Additional Earnest Money Deposit. Ten Thousand and 00/100 Dollars ($10,000.00) on or before conclusion of the Feasibility Period (as defined below), which shall be delivered in the form of a check made payable to the Escrow Agent. c. Extension Earnest Money Deposit. Five Thousand and 00/100 Dollars ($5,000.00) before each of the extensions of the Approval Period (as defined below), which shall be delivered in the form of a check made payable to the Escrow Agent. The Initial Earnest Money Deposit, Additional Earnest Money Deposit and Extension Earnest Money Deposit and any accrued interest thereon shall be applied against the purchase price at Closing or remitted to Seller or Purchaser, as appropriate, in accordance with the provisions of Paragraph 16 below; and e. Balance of Purchase Price. The balance of the purchase price shall be paid at the time of Closing by wire transfer, cashier's check or other certified funds. 3. CLOSING Provided that the conditions to Closing set forth in Paragraphs 12 and 13 have been satisfied or waived in writing by the party for whom the condition exists, closing of the purchase of the Property shall occur on the date fifteen ( 15) days following the expiration of the Approval Period (as defined below) or any extension thereof pursuant to Paragraph 12.f. (the "Closing Date") at such time and place as may be mutually agreed upon by Seller and Purchaser. In the event the scheduled Closing Date falls on a Saturday, Sunday or a legal holiday, the Closing Date shall be the next business day thereafter. 4. CONVEYANCES At Closing, Seller shall convey the Real Property to Purchaser by warranty deed, in form and substance acceptable to Purchaser. Title to the Real Property shall be conveyed free and clear of all liens or encumbrances other than those approved by Purchaser pursuant to Paragraph 12.c. 5. CLOSING COSTS AND PRORATIONS At Closing, Seller and Purchaser shall be responsible for the following costs and prorations: a. Recording and Transfer Taxes. Purchaser shall pay any state or county recording fees due and payable as a result of the sale of the Property. Assessments, revenue stamps and transfer taxes shall be paid by Seller. b. Agricultural Taxes. Seller shall pay any agricultural or roll-back taxes. c. Attorney's Fees. Seller and Purchaser shall each pay their own attorneys' fees and costs, if any. d. Escrow Fees. Seller and Purchaser shall share all escrow fees on a 50-50 basis. e. Real Property Taxes. Real property taxes with respect to the Real Property shall be prorated as of the Closing Date, with Seller responsible for any such taxes which relate to the period prior to the Closing Date, regardless of when payment therefor is due and with Purchaser responsible for any such taxes which relate to the period from and after the Closing Date. If the Real Property is required to be subdivided into a separate legal lot for the Closing, said pro ration 2 of real property taxes shall be calculated based on the latest available tax bill for the entire tax parcel of which the Real Property is a part by allocating to the Real Property a percentage of the real property taxes reflected in said tax bill. The percentage shall be determined by dividing the total number of acres contained in the Real Property by the total number acres contained in the entire tax parcel. As a matter which shall survive the Closing hereunder, the parties covenant and agree that, upon receipt of a separate tax bill for the Real Property, the actual amount owed by each of the parties for such pro ration of taxes shall be determined and any amount thus determined to be owed by one party to the other shall be paid within five (5) days following demand therefor. f. Title Insurance and Survey. Purchaser shall pay for the cost of the premium for the Title Policy and survey (as those terms are defined below). In the event any prorations between the parties at the time of Closing are made on the basis of incomplete, incorrect, estimated or preliminary information then, as a matter which shall survive the Closing, the parties agree to re-adjust and re- apportion such costs following the Closing promptly upon receipt of complete, correct or final information, which is verified by both parties. 6. POSSESSION At Closing, Purchaser shall be entitled to possession of the Real Property free and clear of all tenancies. 7. REPRESENTATIONS AND WARRANTIES OF SELLER Seller does hereby represent and warrant to Purchaser as follows: a. Status. Seller is an individual. b. Authority. Seller has full power and authority to enter into this Agreement and to carry out the terms hereof and the consummation of the transaction provided for herein does not violate any law, regulation, court order, mortgage, deed of trust, note, bond, indenture, agreement, license or other instrument or obligation to which Seller is a patty or by which its assets may be bound or affected. This Agreement is valid, binding and enforceable as against Seller in accordance with its terms, except as such enforceability may be affected by bankruptcy, receivership or creditors' rights laws generally. c. Health and Safety. Seller has not received any written notification from the Department of Building and Safety, Health department, or other such City, County or State authority having jurisdiction over the Real Property, requiring any work to be performed or affecting the Real Property or indicating any intent to condemn the Real Property or any portion of the Real Property. d. Title. Seller has good fee simple and marketable title to the Real Property, which title as of the Closing Date, will be free and clear of all liens and encumbrances other than those approved by Purchaser pursuant to Paragraph 12.c. e. Litigation. There is no litigation, investigation, or other proceeding pending or, to the best of Seller's knowledge, threatened against or relating to Seller which is material to the Real Property or this Agreement. In the event that a lien, claim, or cause of action affecting the Real 3 Property should arise prior to the Closing, and Purchaser elects not to terminate this Agreement as a result thereof, Seller, at its sole cost and expense, shall indemnify, defend and hold the Purchaser harmless therefrom, including without limitation, reasonable attorneys' fees, costs and expenses. f. Environmental Matters. Except in accordance with, and in full compliance with, any and all applicable governmental laws, regulations and requirements (collectively, the "Environmental Laws") relating to environmental and occupational health and safety matters and hazardous materials, substances or wastes (as defined from time to time under any applicable federal, state or local laws, regulations or ordinances) and except as disclosed in any environmental reports delivered to or obtained by Purchaser, Seller has not released into the environment, or discharged, placed or disposed of any such hazardous materials, substances or wastes or caused the same to be so released into the environment or discharged, placed or disposed of, at, on or under the Real Property. Except as disclosed in any environmental reports delivered to or obtained by Purchaser and to the best of Seller's knowledge: (i) no hazardous materials, substances or wastes are located on the Real Property or have been released into the environment or discharged, placed or disposed of in, on or under the Real Property, (ii) no underground storage tanks are or have been located on the Real Property, (iii) the Real Property has never been used as a dump for waste material, and (iv) the Real Property and its prior uses comply with, and at all times have complied with, all Environmental laws. g. Utilities. All utilities necessary for Purchaser's intended development and operation at the property are (or shall be as of the Closing) available to the Property and are (or shall be as of the Closing) located within ten (10) feet of the property line. h. Special Assessments. Seller has received no notice and has no knowledge of any pending special assessments to be made against the Real Property by any governmental authority. i. Tenancies. As of the date of this Agreement, none of the Real Property is under lease to any person, firm, or entity; and, no oral or written agreements have been entered into by Seller which commit to lease all or any portion of the Real Property subsequent to the date of this Agreement. To the best of Seller's knowledge, there is no adverse possession of all or any part of the Real Property. j. Mechanic's Liens. There are no unpaid bills or claims in connection with any construction or other work performed on the Real Property nor shall there be any on the date of Closing. Seller shall satisfy any and all mechanic's or materialmen's liens filed against the Real Property, or any part thereof, on or prior to Closing and shall indemnify and hold harmless and protect the Purchaser from any and a11 loss from any such liens. k. Taxes and Tax Returns. All tax returns and related filings of any kind require to be filed by Seller prior to the Closing Date with respect to its ownership of the Real Property have been properly completed and timely filed in material compliance with all applicable requirements and all taxes of other obligations which are due and payable by Seller have been, or as of the Closing Date, will be timely paid. l. Zoning. The current zoning for the Real Property is R-4; such zoning designation permits outright (e.g. without the need to obtain any special use permits, conditional use permits, or other zoning - or land use-related Governmental Approvals (as that term is defined below)) the use of the Real Property for an assisted living facility; and Seller has not received any notice of, nor become aware of, any proposed change or modification regarding such zoning designation. 4 8. REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser does hereby represent and warrant to Seller as follows: a. Status. Purchaser is a limited liability company duly organized and validly existing under the laws of the State of Maryland and is in good standing thereunder. b. Authority. Purchaser has full power and authority to execute and to deliver this Agreement and all related documents, and to carry out the transactions contemplated herein and the same do not result in a breach of the terms and conditions of nor constitute a default under or violation of Purchaser's Operating Agreement or By-laws or any law, regulations, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its assets may be bound or affected. This Agreement is valid, binding and enforceable as against Purchaser in accordance with its terms, except as such enforceability may be affected by bankruptcy, receivership or creditors' rights laws generally. c. Litigation. There is no litigation, investigation or other proceeding pending or threatened against or relating to Purchaser, its properties or business which is material to this Agreement, or which would prevent Purchaser from performing its obligations hereunder. 9. COVENANTS OF SELLER Seller does hereby covenant and agree as follows: a. Pre-Closing. Between the date hereof and the Closing Date: (i) as soon as practicable but in no event later than fifteen ( 15) days following the mutual execution of this Agreement, provide Purchaser with copies of the following documents relating the Real Property to the extent the same are in Seller's possession or reasonable control (collectively, the "Property Documents"): all title reports, commitments and policies and copies of all documents creating exceptions thereto, all permits, licenses, and other governmental approvals and entitlements relating to the use and/or development of the Real Property, all reports, studies and investigations performed at the Real Property, including all architectural drawings, plans and specifications, environmental reports, structural reports and geological reports, existing surveys of the Real Property, wetland reports, soils reports, engineering tests and reports, and appraisals prepared for the Real Property and all other books and records relating to any work performed in connection with any proposed development of the Real Property (simultaneously assigning to Purchaser the right to use any such materials and upon Closing hereunder, assigning to Purchaser all of Seller's right, title and interest in and to any such materials); (ii) satisfy and discharge all liens against the Property, other than those approved by Purchaser pursuant to Paragraph 12.c; (iii) file all tax returns, reports and filings required to be filed by Seller and timely pay all taxes or other obligations which are due and payable with respect to the Property; (iv) not take any action inconsistent with its obligations hereunder; (v) Seller shall generally participate in, and where necessary, execute, such 5 planning and zoning applications, plats and documents as are required by Purchaser to secure zoning and site plan approval, and, to the extent required, assist Purchaser in securing such other approvals as are required for the development of the Property, all at no additional cost to Purchaser or Seller. (vi) Seller shall take those steps which are necessary to clear title to the Property so that title, good of record and in fact and insurable at standard rates, may be conveyed at Closing. b. Closing. On the Closing Date, Seller agrees to: (i) Execute and deliver to Purchaser the warranty deed described in Paragraph 4 and such other instruments as shall be necessary to transfer the Property to Purchaser, including but not limited to an affidavit of Non-Foreign Status pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended; and (ii) Pay any Closing costs for which it is responsible under Paragraph 5. c. Post-Closing. After the Closing Date, Seller agrees that, at Purchaser's sole cost and expense, it will take such actions and properly execute and deliver to Purchaser such further instruments as may be reasonably necessary to evidence the transfer of the Property. 10. COVENANTS OF PURCHASER Purchaser does hereby covenant and agree as follows: a. Pre-Closing. Between the date hereof and the Closing Date, Purchaser will not take any action inconsistent with its obligations hereunder and will: (i) Purchaser will, at Purchaser's sole cost and expense, cause a surveyor to prepare and deliver to Purchaser (with a copy to Seller) a survey of the Real Property meeting the requirement set forth below (the "Survey"). The Survey shall show thereon: (a) the location of all boundaries, existing fences, all easements, pipelines, rights-of way, and roads which are of record or visible on the ground, (b) whether any of the Real Property lies within a 100 year flood plain or any special flood hazard area as designated by any governmental agency, (c) the number of acres and net square footage contained within the boundaries of the Real Property, (d) the location and dimensions of any protrusions from and encroachments on the Real Property; (e) the location of all public roads or highways adjacent to the Real Property and (f) such other matters as shall be required by the Title Company for the issuance of the Title Policy with no exception for matters as to survey. The Survey shall be certified to the Purchaser and the Title Company. The surveyor shall include in its certification its Registration Number, address, telephone number, the job number and that the Survey was made on the ground as per the field notes shown thereon and that, except as shown thereon, there are no visible easements, rights-of way, party walls, conflicts, or visible encroachments by an improvements onto an easement or neighboring property or by any improvements on adjoining property onto the Real Property and that the Real Property has direct access to all adjacent public streets. (ii) file with the appropriate governing authority an application for the subdivision of the Real Property into a separate legal lot, which application shall be accompanied 6 by all necessary back-up information which said application shall require in order to commence the process for the approval of said subdivision and Purchaser shall thereafter diligently pursue said subdivision in order that approval may be obtained by the Closing Date. In connection with such subdivision, Purchaser shall cause the Survey to be updated to reflect the precise dimensions of the Real Property as created by said subdivision and, If the Real Property is to be conveyed by a metes and bounds description, Purchaser shall cause the surveyor to prepare and deliver to Seller and the Title Company a certified metes and bounds description of the Real Property as shall be shown on the final Survey; b. Closing. On the Closing Date, Purchaser agrees that it will deliver the balance of the purchase price due at Closing together with its share of the Closing costs as herein provided. 11. MUTUAL COVENANTS Seller and Purchaser mutually covenant and agree as follows: a. Fulfillment of Conditions. If any event should occur, either within or without the knowledge or control of either party, which would prevent fulfillment of the conditions to Closing provided for herein, to use his, its or their reasonable efforts to cure the same as expeditiously as possible; b. Governmental Consents. To cooperate fully with each other in taking any actions which are or may be necessary to obtain the consent of any government instrumentality or any third party or to accomplish the transaction contemplated by this Agreement; and c. Escrow Instructions. To execute and deliver written instructions to Escrow Agent if necessary or desirable to complete the purchase and sale of the Property. 12. PURCHASER'S CONDITIONS TO CLOSING The obligation of Purchaser to acquire the Property shall be subject to the satisfaction by Seller or to the waiver by Purchaser of the following conditions: a. Seller's Representations and Warranties. Seller's representations and warranties set forth herein shall be true in all material respects at and as of the Closing Date as those made as of the date thereof. b. Seller's Performance. Seller shall have performed all of its obligations hereunder which are required to be performed as of the Closing Date. c. Title Approval. Purchaser shall cause Hallmark Title, Inc. Vienna, Virginia (the "Title Company") to issue a commitment for title insurance (including copies of all exception documents referenced in said commitment) in an amount equal to the purchase price, which commitment shall provide for the issuance of a final title policy as of the Closing Date, subject to no liens or encumbrances, other than those which may be approved by Purchaser (the "Title Commitment"). A copy of said Title Commitment shall be delivered to Seller at the address set forth in Section 16 below. Within fifteen ( 15) days following Purchaser' s receipt of (i) the Title Commitment, (ii) legible copies of all exception documents referenced in the Title Commitment, 7 and (iii) the Survey, Purchaser shall notify Seller of any items referenced in the Title Commitment and the Survey to which it disapproves. Within ten ( 10) days of Seller' s receipt of Purchaser' s objections, Seller shall advise Purchaser in writing as to whether it intends to correct the defects to which Purchaser has objected. If Seller refuses to correct some or all of such defects or fails to notify Purchaser within said ten ( 10) day period regarding its intentions to correct the disapproved matters, Purchaser shall have fifteen ( 15) days following the earlier to occur of (i) Purchaser' s receipt of Seller's written notice regarding its refusal to correct the disapproved matters or (ii) the expiration of said ten ( 10) day period, to advise Seller of Purchaser' s decision to close, notwithstanding the defects, or to terminate this Agreement, in which case neither party shall have any further rights or obligations hereunder. In the event Purchaser fails to timely advise Seller of its intention to terminate this Agreement, Purchaser shall be conclusively deemed to have rejected such title defect(s) and shall thereafter have the right to terminate this Agreement. In the event of any such termination, Purchaser shall be entitled to the return of its Earnest Money and the parties shall have no further rights or obligations hereunder. d. Title Policy. The Title Company shall issue to Purchaser as of the Closing Date, an ALTA Extended Owner's Policy of Title Insurance for the Real Property (the "Title Policy") which Title Policy shall have a policy amount of not less than the amount of the Purchase Price and be in a form acceptable to, and include such endorsements, affirmative coverages, and other modifications required by Purchaser and Purchaser's lender (including any REIT, as defined in Paragraph 20, below). Without limiting the generality of the foregoing, such Title Policy shall be subject to no exceptions other than those of the usual printed exceptions which are acceptable to Purchaser (the survey exception, parties in possession and mechanics' lien exceptions being specifically unacceptable to Purchaser) and those exceptions to which Purchaser has not objected as provided for in Paragraph 12.c. above. e. Feasibility Study. Purchaser shall conduct at its sole cost and expense a feasibility study of the Real Property (the "Feasibility Study"), which study may include but shall not be limited to, (i) reviewing and approving the Phase I Report and all Property Documents required to be provided to Purchaser by Seller, and (ii) conducting such engineering and soils studies, environmental assessments, utilities investigations, wetlands investigations, if applicable, surveys and regulatory reviews, as Purchaser deems appropriate to the development of an assisted living facility consisting of at least one hundred (100) units consistent with the development plans of Purchaser (the "Facility"). Within One Hundred Eighty (180) days following the mutual execution of this Agreement (the "Feasibility Period"), Purchaser shall have approved or disapproved the results of said Feasibility Study. In the event Purchaser disapproves the Feasibility Study, or if Purchaser fails to timely notify Seller of Purchaser's approval or disapproval regarding the Feasibility Study (in which event Purchaser shall be conclusively deemed to have disapproved such Feasibility Study), Purchaser shall have the right to terminate this Agreement, which right shall be exercised, if at all, within five (5) business days after the last day of the Feasibility Period. Upon such termination, Purchaser shall be entitled to the return of its Initial Earnest Money Deposit and the parties shall have no further rights or obligations hereunder. Seller hereby grants to Purchaser and/or its agents, consultants and contractors the right to enter the Real Property for the purpose of performing such tests, studies, assessments and investigations as Purchaser determines necessary in connection with its Feasibility Study of the Real Property; provided, however, that the activities conducted by Purchaser and/or any of its agents, consultants or contractors shall not materially change or alter the character of the Real Property. Seller further agrees to fully cooperate with Purchaser concerning the components of the Feasibility Study. f. Approvals. Upon or before completion of the Feasibility Period, Purchaser shall commence and proceed to obtain all necessary zoning, subdivision, site plan and building 8 approvals and permits (and any other requisite governmental or quasi-governmental approval) (collectively referred to herein as "Approvals") as are necessary to proceed with Purchaser's intended development of the Property. Within One Hundred Eighty ( 180) days following conclusion of the Feasibility Period (the "Approval Period"), Purchaser shall have obtained all such Approvals, except that such One Hundred Eighty (180) day Approval Period may be extended for three (3) additional periods of thirty (30) days each upon written notice by Purchaser to Seller and Escrow Agent prior to the expiration of the prior period. Upon extension of the Approval Period by Purchaser, only the Extension Earnest Money Deposit(s) shall be nonrefundable, except in the event of failure of Seller to perform its obligations under this Agreement. g. Zoning. On or before the Closing Date, Purchaser, with the cooperation of Seller, shall have caused the zoning for the Real Property to be appropriately designated so as to permit the development of the Facility or Purchaser shall have otherwise satisfied itself in its sole and absolute discretion that the development and operation of the Facility on the Real Property is permitted under the Real Property's current zoning designation. h. Board Approval. Prior to the conclusion of the Feasibility Period, Purchaser shall have obtained the approval of its Board of Directors to the acquisition of the Property pursuant to the terms of this Agreement. i. Readiness for Construction. Upon the Closing Date, there shall exist no impediments to the commencement of construction of the improvements contemplated to be constructed by Purchaser such that Purchaser shall be able to commence construction of said improvements immediately following the Closing (e.g., within 48 hours following the Closing Date). j. Financing. Prior to the Closing Date, Purchaser shall have secured financing, on terms acceptable to it, for the payment of the Purchase Price due at Closing and the construction of the proposed Facility and all of the documents necessary to evidence said financing shall have been executed and delivered into escrow by Purchaser and its Lender; provided, however, that Seller acknowledges and agrees that said financing may be in the form of sale/leaseback financing with a real estate investment trust (the "REIT"), in which case Purchaser shall have the right, in accordance with Paragraph 20 below, to assign its rights and obligations hereunder to said REIT and the financing documents shall include, but not be limited to, an assignment of this Purchase and Sale Agreement and a Lease between Purchaser and said REIT. 13. SELLER'S CONDITIONS TO CLOSING The obligation of Seller to convey the Property to Purchaser shall be subject to the satisfaction by Purchaser or the waiver by Seller of the following conditions: a. Purchaser's Representations and Warranties. Purchaser's representations and warranties set forth herein shall be true at and as of the Closing Date. b. Purchaser' s Performance. Purchaser shall have performed all of its obligations hereunder which are required to be performed as of the Closing Date. 14. INDEMNIFICATION BY SELLER Subject to the limitations set forth in Paragraph 16, Seller shall indemnify, defend and hold Purchaser harmless from and against: 9 a. Obligations Existing as of Closing Date: Any and all obligations relating to ownership of the Property which exist as of the Closing Date, except to the extent that such . obligations relate to a breach by Seller of a representation, warranty or covenant set forth in the Agreement, including, but not limited to, the representations and warranties with respect to the environmental condition of Real Property set forth in Paragraph 7.f., in which case Seller's obligation to indemnify, defend and hold harmless Purchaser shall be set forth in Paragraph 14.b.; b. Breach of Representations and Warranties. Any and all damage, loss, or liability resulting from any material breach of ant representation, warranty or covenant made by Seller in this Agreement or nonfulfillment of any agreement on the part of Seller under this Agreement or from any misrepresentation in or omission from any certificate furnished or to be furnished to Purchaser hereunder; c. Fees and Expenses. Any and all actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses, including, but not limited to, reasonable attorneys' fees, incident to any of the foregoing. For purposes of Paragraph 14.a., an obligation shall be deemed to "exist" as of the Closing Date if it relates to events which occur prior to the Closing Date even if it is not asserted until after the Closing Date. 15. INDEMNIFICATION BY PURCHASER Subject to the limitations set forth in Paragraph 16, Purchaser shall indemnify, defend and hold harmless from and against: a. Obligations Occurring After the Closing Date. Any and all obligations relating to the ownership of the Property accruing on or after the Closing Date; b. Breach of Representations and Warranties. Any and all damage, loss or liability resulting from a material breach of any representation, warranty or covenant of Purchaser in this Agreement or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any misrepresentation in or omission from any certificate furnished of to be furnished to Seller hereunder; and c. Fees and Expenses. Any and all actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses, including, but not limited to, reasonable attorney's fees, incident to any of the foregoing. 16. TERMINATION a. Termination by Parties. This Agreement may be terminated and the transaction contemplated herein abandoned at any time prior to Closing; (i) By mutual agreement of the parties; (ii) By Seller, if any of the conditions set forth in Paragraph 13 shall have become incapable of fulfillment prior to the Closing Date or such earlier date as may be specifically provided for the performance thereof(as the same may be extended) through no fault 10 of Seller and the same shall not have been waived by Seller; (iii) By Purchaser, if any of the conditions set forth in Paragraph 12 shall have become incapable of fulfillment prior to the Closing Date or such earlier date as may be specifically provided for the performance thereof (as the same may be extended) through no fault of Purchaser and the same shall not have been waived by Purchaser; (iv) By either Seller or Purchaser in the event of a material breach by the other party of its obligations hereunder; or b. Material Damage or Destruction. In the event that prior to the Closing Date, a material portion of the Real Property shall have been damaged or destroyed or shall have been taken or condemned by any public or quasi-public authority under the power of eminent domain, Purchaser shall have the right to terminate this Agreement on written notice to Seller which notice must be delivered within ten (10) days after Purchaser receives notice of such damage, destruction or condemnation. In the event Purchaser fails to exercise its termination rights hereunder, then it shall be conclusively deemed to have waived said right and Seller shall assign to Purchaser all of its rights to any insurance proceeds or condemnation award and all claims in the connection therewith. In the event Purchaser exercises its termination rights hereunder, the parties shall have no further rights or obligations hereunder other than Purchaser's right to the return of its Earnest Money. c. Notice. Neither party to this Agreement may claim termination or pursue any other remedy referred to in Paragraph 16. a. above on account of a breach of a condition, covenant or warranty by the other, without first giving such other party written notice of such breach and not less than ten (10) days within which to cure such breach. The Closing Date shall be postponed, if necessary, to afford such opportunity to cure. d. Seller's Liquidated Damages. In the event of the termination of this Agreement by Seller as a result of a material breach by Purchaser of its obligations hereunder, Seller' s sole remedy shall be to terminate this Agreement and to retain Purchaser's Initial Earnest Money Deposit and Additional Earnest Money Deposit (if applicable), together with all interest accrued thereon, as full and complete liquidated damages, the parties acknowledging and agreeing that the amount of damages which Seller may incur as a result of such termination may be difficult to ascertain and that the amount of the Initial Earnest Money Deposit and Additional Earnest Money Deposit (if applicable), together with all interest accrued thereon, is a reasonable and fair estimate thereof, after which the parties shall have no further rights or obligations hereunder. e. Purchaser's Remedies. In the event of the termination of this Agreement by Purchaser as a result of a material breach by Seller of its obligations hereunder, Purchaser shall have the right either to (i) terminate this Agreement and receive a full refund of its Initial Earnest Money Deposit and Additional Earnest Money Deposit (if applicable), together with all interest accrued thereon, after which neither party shall have any further rights or obligations hereunder or (ii) seek specific performance of Seller' s obligations hereunder and/or damages for Seller' s breach of its obligations hereunder. In the event of the termination of this Agreement by Purchaser as a result of a failure of any of the Purchaser' s conditions as set forth in Paragraph 12 above Purchaser shall be entitled to a full refund of its Initial Earnest Money Deposit and Additional Earnest Money Deposit (if applicable), together with all interest accrued thereon. 17. BROKER 11 Purchaser and Seller recognize David Brown and Century 21- Brown and Associates as procuring broker and seller shall pay a11 real estate commissions due per separate agreement. Seller and Purchaser agree to indemnify the other party against any claim for any commission made by any broker allegedly employed by it. 18. NOTICES Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight courier guaranteeing overnight delivery or by facsimile transmission (if confirmed verbally or in writing by mail as aforesaid), to the following address: To Seller: Gail G. Brown c/o Century 21- Brown and Associates 909 Richmond Avenue Staunton, Virginia 24401 Telephone No. : 540-885-7100 Facsimile No.: 540-885-I 130 To Purchaser: Greencastle Retirement Partners, L.L.C. c/o Greencastle Development Company 2661 Riva Road, Suite 1001 Annapolis, Maryland 21401 Telephone No. : (410) 573 -2485 Facsimile No. : (410) 224-653 9 With copies to: Emeritus Corporation 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 Attention: President Telephone No. : (206) 301-4490 Facsimile No. : (206) 301=4070 Notice shall be deemed given upon receipt or refusal if sent by mail, or by overnight courier and on receipt if sent by facsimile (and confirmed verbally or by mail as aforesaid). 19. AMENDMENT AND MODIFICATION This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior negotiations, discussions, writings and agreements between them. 20. ASSIGNMENT Purchaser shall have the right to assign its rights and delegate its obligations hereunder without the prior written consent of Seller, provided that the assignee agrees in writing to assume all of the obligations of Purchaser hereunder from and after the effective date of said assignment.. In the event of such an assignment, Seller agrees that Greencastle Retirement Partners, L.L.C. shall be relieved and released from any and all further obligations and/or liability hereunder. In the 12 event of any such assignment, all of the references to Purchaser herein shall be deemed to be references to Purchaser's assignee, the representations set forth in paragraph 8 shall be revised accordingly and the terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against said assignee. Notwithstanding the foregoing, Purchaser shall also have the right, on notice to Seller, to assign its rights hereunder to a real estate investment trust (the "REIT") in connection with its financing of the transaction provided for herein, it being understood and agreed that in the event of such an assignment to a REIT., the only right which the REIT will assume is Purchaser's obligation to pay the purchase price in accordance with the terms hereof and that, in any event, Purchaser shall not be relieved of any of its obligations hereunder in the event of such an assignment to a REIT. 21. WAIVER The waiver by any party of any breach of any of the provisions of this Agreement shall not constitute a continuing waiver or a waiver of any subsequent breach of any provision of this Agreement. 22. INCORPORATION BY REFERENCE Each recital set forth and exhibit referenced in this Agreement is incorporated and becomes an integral part of this Agreement. 23. CAPTIONS The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 24. SURVIVAL This Agreement shall survive the Closing Date and thereafter remain binding on both Seller and Purchaser. 25. ATTORNEYS' FEES If any litigation or other proceedings are commenced between parties to this Agreement regarding the rights and duties of any party pursuant to, related to or arising from this Agreement, then the prevailing party with respect to the litigation or other proceedings, shall be entitled, in addition to the relief granted, a reasonable sum for attorneys' fees and costs of the litigation or other proceedings. 26. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia. 27. SEVERABILITY Should any one or more of the provisions of this Agreement be determined to be invalid, unlawful or unenforceability in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 13 28. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 29. TIME OF THE ESSENCE, DATES. Time is of the essence. If this Agreement calls for, or establishes, a day or date on which an event occurs, or by which an action must be taken, and such day or date falls on a Saturday, Sunday or legal holiday (defined to be any day on which the United States Postal Services does not deliver regular mail), such day or date shall be, for the purposes of the Agreement, the next business day thereafter. 30. DISCLOSURE Keith T. Misner, an officer of Greencastle Retirement Partners L.L.C. and Greencastle Development Company, is a licensed Real Estate Broker in the Commonwealth of Virginia and the State of Maryland. David Brown, the procuring broker, is the husband of the Seller. Gail G. Brown, the Seller, is also a licensed Realtor in the State of Virginia 31. EXCHANGE COOPERATION CLAUSE Purchaser and Seller agree to the settlement of this contract under the provisions of section 1031 of the Internal Revenue Code. The exchange must be accomplished through a qualified intermediary. Settlement of this contract under the provisions of section 103 I of the Internal Revenue Code will be done at no additional expense (including attorney fees) or delay to the Purchaser. All related documents shall be in a form acceptable to Purchaser. [SIGNATURES ON FOLLOWING PAGE] 14 IN WITNESS THEREOF, the parties have executed this Agreement the date set forth opposite each party's signature below and the last date of execute deemed the date of mutual execution" as such term is used herein. PURCHASER: GREENCASTLE RETIREMENT PARTNERS, L.L.C., a Maryland . limited liability company Dated: 2/4/97 /s/ Chris P. Bell -------------------- - ------------------ By: Chris P. Bell Its: Managing Member SELLER: GAIL G. BROWN By: /s/ Gail G. Brown -------------------- - ------------------ Its: 15 EX-10.72.2 11 EX 10.72.2 ASSIGNMENT AND ASSUMPTION OF AGREEMENT OF SALE THIS ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (hereinafter referred to as this "Assignment"), made this 12th day of February, 1997, by and between GREENCASTLE RETIREMENT PARTNERS, L.L.C., a Maryland limited liability company (hereinafter referred to as the "Assignor") and EMERITUS CORPORATION, a Washington corporation (hereinafter referred to as the "Assignee"). WITNESSETH, THAT WHEREAS, by Purchase and Sale Agreement (hereinafter referred to as the "Agreement") dated February 5,1997, by and between GAIL G. BROWN (hereinafter referred to as the "Seller") and the Assignor, a true copy of which the Assignor has heretofore provided to the Assignee, the Seller agreed to sell to the Assignor and the Assignor agreed to purchase from the Seller all of that land, situate and lying in Augusta County, Virginia, comprised of Twenty Two and Five tenths (8 5/10) acres, more or less, which is more particularly described in the Agreement, together with all of the improvements thereon and all of the rights, alleys, ways, waters, privileges, appurtenances, and advantages, to the same belonging or in any way appertaining (the "Property"); and WHEREAS, the parties hereto desire by this Assignment for the Assignor to assign to the Assignee all of the rights and obligations of the Purchaser under the provisions of the Agreement and for the Assignee to accept such assignment and assume all rights and responsibility of Assignee under the Agreement, all upon the terms and subject to the conditions which are hereinafter set forth. . NOW THEREFORE, FOR AND IN CONSIDERATION of the mutual entry into this Assignment by the parties hereto, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by each party hereto, the parties hereto hereby agree as follows: Section 1. ASSIGNMENT AND ASSUMPTION. The Assignor hereby assigns to the Assignee, and the Assignee hereby accepts and assumes from the Assignor, all of the Assignor's rights and obligations under the provisions of the Agreement (including, by way of example rather than of limitation, all of the Assignor's right, title, and interest in and to any and all deposit moneys paid to the Seller, all of the Assignor's rights of access to the Property, and all of the Assignor's rights to certain remedies if the Seller defaults). Section 2. INDEMNIFICATION. 2.1. BY ASSIGNOR. The Assignor shall defend, indemnify, and hold harmless the Assignee against and from any and all liability to the Seller for any default by the Assignor in performing its obligations under the provisions of the Agreement occurring before the entry into this Assignment by the parties hereto. 2.2. BY ASSIGNEE. The Assignee shall defend, indemnify, and hold harmless the Assignor against and from any and all liability to the Seller for any default by the Assignee in performing its obligations under the provisions of the Agreement occurring after the entry into this Assignment by the parties hereto. Section 3. REPRESENTATIONS. 3.1. BY ASSIGNOR. The Assignor hereby represents and warrants to the Assignee that, as of the entry into this Assignment by the parties hereto, 3.1.1. the Assignor has not heretofore assigned, transferred, or encumbered any or all of its rights under the provisions of the Agreement; 3.1.2. the Agreement has not been amended or otherwise modified in any manner and is in full force and effect; and 3.1. 3. the settlement of the sale and purchase of the Property pursuant to the Agreement, and of the other matters contemplated thereby, has not occurred. 3.2. BY EACH PARTY. Each party hereto hereby represents and warrants to the other that it has been duly authorized to execute and deliver this Assignment, and to perform its obligations hereunder. Section 4. GENERAL. 4.1 EFFECTIVENESS. This Assignment shall become effective on and only on its execution and delivery by each party hereto. 4.2. COMPLETE UNDERSTANDING. This Assignment represents the complete understanding between the parties hereto as to the subject matter hereof, and supersedes all prior negotiations, representations, guaranties, warranties, promises, statements, or agreements, either written or oral, between the parties hereto with respect to the same. 4.3. AMENDMENT. This Assignment may be amended by and only by an instrument executed and delivered by each party hereto. 4.4. WAIVER. No party hereto shall be deemed to have waived the exercise of any right which it holds hereunder unless such waiver is made expressly and in writing (and, without limiting the generality of the foregoing, no delay or omission by any party hereto in exercising any such right shall be deemed a waiver of its future exercise). No such waiver made in any instance involving the exercise of any such right shall be deemed a waiver as to any other such instance, or any other such right. 4.5. APPLICABLE LAW. This Assignment shall be given effect and construed by application of the law of the state of Washington. 4.6. HEADINGS. The headings of the Sections, subsections, paragraphs, and subparagraphs hereof are provided herein for and only for convenience of reference, and shall not be considered in construing their contents. 4.7. ASSIGNMENT. This Assignment shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns hereunder. 4.8. SEVERABILITY. No determination by any court, governmental body or otherwise that any provision of this Assignment or any amendment hereof is invalid or unenforceable in any instance shall affect the validity or enforceability of (a) any other provision thereof, or (b) such provision in any circumstance not controlled by such determination. Each such 2 provision shall be valid and enforceable to the fullest extent allowed by, and shall be construed wherever possible as being consistent with applicable law. 4.9. CONSTRUCTION. As used herein, 4.9.1. the term "person" means a natural person, a trustee, a corporation, a partnership, and any other form of legal entity; and 4.9.2. all references made (a) in the neuter, masculine, or feminine gender shall be deemed to have been made in all such genders, (b) in the singular or plural number shall be deemed to have been made, respectively, in the plural or singular number as well, and (c) to any Section, subsection, paragraph, or subparagraph shall, unless therein expressly indicated to the contrary, be deemed to have been made to such Section, subsection, paragraph, or subparagraph of this Assignment. 4.10. DISCLAIMER OF PARTNERSHIP STATUS. Nothing in the provisions of this Assignment shall be deemed in any way to create between the parties hereto any relationship of partnership, joint venture or association, and the parties hereto hereby disclaim the existence of any such relationship. IN WITNESS WHEREOF, each party hereto has caused this Assignment to be executed and ensealed on its behalf by its duly authorized representations, the day and year first above written. WITNESS/ATTEST: GREENCASTLE RETIREMENT PARTNERS, L.L.C., a Maryland Limited liability company By: /s/ Christopher P. Bell, - ---------------------------------------- - ------------------------------------- (SEAL) Christopher P. Bell, Managing Member EMERITUS CORPORATION, a Washington corporation /s/ Susan Griffan By: /s/ Raymond R. Brandstrom - --------------------------------------- - ------------------------------------------ (SEAL) Name: Raymond R. Brandstrom Title: President 3 EX-10.73.1 12 EX 10.73.1 EXHIBIT A PURCHASE AGREEMENT THIS AGREEMENT (hereinafter referred to as "Agreement") is made and entered into by and between (hereinafter referred to as "Seller") and WEGMAN FAMILY LLC, a New York limited liability company with an office at 550 Latona Road, Rothester, New York 14626 (hereinafter referred to as "Buyer") on the day that this Agreement once fully executed by both Seller and Buyer has been delivered to each of them (hereinafter referred to as the "Full Execution Date"). 1. AGREEMENT OF PURCHASE AND SALE. Seller hereby agrees to sell to Buyer, and Buyer agrees to purchase from Seller, for the price and on the terms and conditions sec forth in this Agreement, Seller's interest in and to certain real estate situated in the Village of Lakewood, County of Chautauqua, State of New York containing approximately 16.5 acres located a in the area depicted on Exhibit 1 which is attached hereto and incorporated herein by reference (hereinafter called "the Property"). The exact legal description and dimensions of the Property are to be determined to the mutual satisfaction of Buyer and Seller on the basis of Buyer's site plan and the ALTA owner's title insurance policy and land survey to be provided in accordance with the terms hereof. The subdivision of the existing house; barn and one-half of the orchard will be completed at the Buyer's expense in the approximate acreage shown in Exhibit 1. 2. PURCHASE PRICE & EARNEST MONEY. The total purchase price for the Property shall be $525,000.00 payable by wire transfer or certified funds at closing. Buyer shall issue the sum of $5,000.00 (the Earnest Money) within 5 days of the Full Execution Date. The Earnest Money shall be held by Ticor Title Guarantee Company as escrow agent and distributed as follows: (a) Should Seller fail or refuse to perform its obligations hereunder, Buyer shall have the right of (i)accepting the return of the Earnest Money and all accrued interest thereon, and (u) Buyer may pursue any applicable remedy, to the extent provided in Section 12 hereof. (b) Should this transaction be consummated, the Earnest Money shall be applied toward the Purchase Price. Upon the expiration of 120 days from the signing of this Agreement, if the Purchaser has not terminated the Agreement, the initial deposit of $5,000.00 shall become nonrefundable. Thereafter, the buyer shall have an additional 90 days to complete any contingencies as set forth hereinafter. in the event that the Purchaser has not terminated the Agreement after the additional 90 days, then an additional $5,000.00 shall be deposited as additional non refundable deposit, but the total of $10,000.00 shall be applicable as a credit to the Purchase Price at closing. The initial deposit of $5,000.00 shall be released to Seller upon the expiration of the 120 days, unless the Agreement has been terminated according co its terms. The further deposit of the additional $5,000.00 shall be released to Seller upon the expiration of the additional ninety (90) days. 3. CLOSING CONTINGENCIES. Buyer's performance of this Agreement is contingent upon satisfaction of the following: (a) At the Closing Date, there shall be available at the Property line without additional cost to Buyer utility service lines for electricity, gas, sewer and water from the appropriate public utility or environmental body having jurisdiction in sufficient quantities and with sufficient pressure to permit the operation of an assisted living facility with all appurtenances and amenities in accordance with Buyer's plans (hereinafter referred to as the "Facility") with the storm and sanitary sewers being suitable for Buyer's intended usage. (b) Buyer obtaining within 90 days from the full Execution Date (the "Feasibility Date" a feasibility study for the construction and operation of the Facility at the Property site, which is satisfactory to Buyer in all respects. (c) The Property being zoned for Buyer's intended use as an assisted living facility with a11 related appurtenances and amenities with sufficient parking spaces to comply with local code requirements. Should the Property require rezoning, or a conditional or special use permit, Seller agrees to cooperate with Buyer in obtaining such rezoning or special or conditional us permit at Buyer's sole cost ad expense. Buyer shall, within ninety (90) days of the Feasibility Date, make application for such rezoning or special or conditional use permit and shall provide all necessary and required documentation in support of such application. (d) The soil and topographical conditions as presently exist would allow the construction of the Facility as contemplated by Buyer in accordance with Buyer's plans and specifications without unusual expense or preparation. (e) Buyer obtaining within twenty (20) days of the Feasibility Date, at Buyer's sole cost and expense, a topographic survey of the Property and an ALTA boundary survey prepared by a certified local surveyor showing all Property lines, improvements, if any, encroachments, setback lines, easements, adjoining roadways and utility installments located therein and all other matters which are revealed by the title insurance commitment described in paragraph 4 below. (f) Buyer obtaining satisfactory financing for Buyer's intended use and all requisite building, use and site permits and/or approvals from the local, county and state municipalities, commissions, departments and boards, as appropriate, to permit the construction and operation of the Facility with sufficient on-site parking spaces to comply with local code requirements. (g) Buyer obtaining approval from the appropriate Town, City or County Board or Commission for signage on the building acceptable to Buyer. (h) Buyer being assured that satisfactory ingress/egress access to the Property exists via public dedicated roadway(s) or non-exclusive easements(s) and curb cuts. (i) Seller providing to Buyer satisfactory evidence that all subdivision, platting or replatting requirements with respect to the Property have been completed in compliance with all governing law so as to permit the constriction and operation of the Facility in accordance with Buyer's intentions. Buyer agrees to cooperate with Seller, at Buyer's sole cost and expense, to accomplish such subdivision, platting or replatting. 2 (j) Buyer obtaining within thirty (30) days of the Full Execution Date, at Buyer's sole cost and expense, satisfactory evidence that the Property either: (i) does not lie within a 100-year flood plain, as established by the U.S. Army Corps of Engineers, or within any area subject to flooding; or (ii) that the cost of obtaining necessary flood plain insurance will not be, in Buyer's sole discretion, excessive. (k) Buyer obtaining within sixty (60) days of the Feasibility Date, at Buyer's sole cost and expense, a satisfactory environmental report dated after the Full Execution Date from a qualified environmental engineer certifying that there is no evidence of any storage tanks or solid, toxic or hazardous waste or any form of environmental contamination as defined by local, state or, federal regulator on the Property and that no further environmental investigation or remediation is recommended, necessary or required. (l) Seller's recording a deed restriction, in such form as is acceptable to Buyer, on property owned by Seller within a one (1) mile radius of the Property prohibiting construction and/or operation of other assisted living facilities. Buyer shall have one hundred eighty (180) days from the Feasibility Date (the "Contingency Period") to satisfy or waive each of the contingencies set forth in subparagraphs c d, f, g, h, i, and l, above. If Buyer is unable to satisfy or waive each of the contingencies within the Contingency Period and Buyer has made a good faith effort to satisfy them, Buyer shall have the right to exercise two (2) consecutive thirty (30) day extensions of the Contingency Period by notice to Seller within the Contingency Period, as may have been extended. If Buyer is unable to satisfy or waive any of the contingencies within the Contingency Period due to Seller's failure to perform any obligation or deliver any documents within the time period called for herein, the dates set forth herein for the Feasibility Date, the Contingency Period and the Closing Date shall be extended one day for each day Seller fails to deliver or perform as provided for herein. Should Buyer notify Seller in writing that Buyer is unable to proceed with this transaction due to the failure of any of the above- listed contingencies, Buyer may elect to declare this Agreement null and void. 4. TITLE. Within twenty (20) days of the Feasibility Date, Seller will deliver to Buyer and the surveyor, a current abstract of title to the Property together with legible copies of all instruments referred to in the abstract, or a commitment for title insurance in the amount of the purchase price issued by Ticor Title Guarantee Company or by a nationally recognized title insurer acceptable co Buyer (hereinafter called "Ticor Title"), which shall reveal that Seller has marketable or insurable title to the Property, without exception or qualification other than for. (a) the lien of taxes not yet due and payable, (b) easements, restrictions, reservations, covenants and conditions, if any, that are of public record and that will not materially and adversely interface with Buyer's contemplate use of the Properly and (c) Ticor Title's standard exceptions for zoning and other public land use regulations. The cost of the policy and any mortgage policy shall be the expense of the Buyer. The Seller shall purchase an updated Abstract of Title. If such abstract set forth a state of facts, or is such commitment contains exceptions, other than those specified above that cannot be removed by Seller at closing, then Buyer may elect at or prior to closing to (1) cancel this Agreement, or (2) waive all tide defects 1 and close this sale in the manner provided by this Agreement, without an abatement in price, or (3) request Seller to cure the title defects that Buyer specifies by written notice to Seller. Seller shall 3 have sixty (60) days in which to cure the defects specified to the satisfaction of Ticor Tide. If Seller cannot eliminate all the defects specified in the foregoing time period, then Buyer may elect to close this transaction in the manner otherwise provided, without a reduction in price, or to cancel this Agreement. If Seller does cure the defects specified within the time period provided, this sale will be closed within ten (10) days after notice of such cure to Buyer in the amount otherwise provided in this Agreement. 5. EXAMINATIONS. From and after the Full Execution Date and until the Closing Date, Buyer or its agents shall have the right to ingress and egress over, on and through the Property for the following purposes: (a) making soil test borings; (b) making drainage tests; (e) making surveys of the Property; (d) making engineering and/or architectural drawings of the Property; and (e) performing such other investigations, inspections and tests as Buyer deems necessary. Buyer agrees to return the Property to a similar condition as existed prior to the exercise of Buyer's rights hereunder following such exercise of rights in the event this transaction does not close. 6. CLOSING. Subject to the provisions of paragraph 4 above, this transaction shall be closed thirty (30) days after all contingencies have been satisfied or waived, or such earlier date as the parties may mutually agree (the "Closing Date"). The closing will be held ac such time and place as is mutually agreeable. Buyer and Seller agree that the title insurer referenced in paragraph 4 above shall be retained as Escrow Agent to facilitate the closing of this transaction. As soon as is reasonably possible after the Full Execution Date, Buyer and Seller shall open this escrow and deposit therein a fully executed original of this Agreement as well as such other escrow instructions and/or documents and showings required and contemplated under this Agreement. Buyer and Seller agree that the fees charged, if any, by the Escrow Agent for its services relative to this closing shall be paid by the Buyer. 7. SELLER REPRESENTATIONS AND WARRANTIES. Seller represents and warrants to Buyer, as a material condition to Buyer's obligations pursuant to this Agreement, the following as of the Full Execution Date and as of the Closing Date: (a) At closing, Seller will convey to Buyer good, marketable, insurable fee simple title to the Property free and clear of all liens and encumbrances except (i) the lien of real estate taxes not then due and payable, (ii) easements of record which do not interfere with Buyer's proposed development, and (iii) all applicable zoning and building laws, ordinances and regulations and any other requirements of any state or local governmental authority having jurisdiction over the real estate. (b) There are no adverse or other parties in, possession of the Property or any part thereof. No party has been granted any license, lease or other right or interest relating to the use or possession of the Property, or any part thereof, other than easement of record, which easements shall not interfere with Buyer's proposed development. (c) Seller has received no notice of, and has no other knowledge and information of, any pending or contemplated condemnation action with respect to the Property or any part thereof. (d) Seller has not received notice of, and has no other knowledge or information of' any pending or threatened judicial or administrative action, or of any action pending or threatened by adjacent land owners 4 or other persons, any of which would result in a material change in the condition of the Property or any part thereof, or in any way prevent or limit Buyer's intended use of the Properly, or any part thereof. (e) Seller bas the full right, power and authority to sell and convey the Property co Buyer as provided in this Agreement and to carry out Seller's obligations hereunder. All requisite corporate or other actions necessary to authorize Seller to enter into this Agreement and to perform its obligations hereunder have been taken; the joinder of no person or entity other than Seller will be necessary to convey the Property fully and completely to Buyer at closing; and the execution and delivery of this Agreement and the consummation of the transaction therein contemplated will not conflict with, or with or without notice of the passage of time, or both, result in a breach of any of the terms or provisions of, or constitute a default under any indenture. mortgage loan agreement or instrument to which Seller is a party or by which Seller or the Property is bound. (f) The Property is in compliance with all federal, state, local (including local sewer district) laws, rules, regulations, ordinances, codes and orders governing, establishing, limiting or otherwise affecting the discharge or disposal of air pollutants, water pollutants, process wastewater or solid and hazardous wastes. There are no pending or threatened actions or proceedings by the local municipality, sewage districts, state agencies, the U. S. Environmental Protection Agency or any other governmental entity having jurisdiction over the discharge ar disposal of air pollutants, water pollutants, process waste water or solid or hazardous wastes and there is no basis for any such action or proceeding. Seller has never disposed of any noxious, toxic, solid or hazardous waste on the Property, nor does Seller have any notice or knowledge of any solid or hazardous waste having ever been disposed of on the Property. (g) The Property is not located in a 100- year flood plain as established by the U. S. Army Corps of Engineers. 8. OCCUPANCY AND LEGAL POSSESSION. It is understood that the Property is now vacant, and that legal possession and the right to occupy the Property shall be given to Buyer on the Closing Date. However, in the event there are existing tenancies affecting the Property, Seller acknowledges it is Seller's obligation to terminate such tenancies prior to closing unless otherwise specifically agreed in writing by Buyer. Seller shall provide Buyer with sworn tenant estoppel letters within thirty (30) days of the Full Execution Date for any existing tenancies. 9. PRORATIONS. General taxes shall be prorated as of the Closing Date based on the net general taxes for the current year, if known, or otherwise substituting all figures that are elements of the net tax equation (hereinafter "figures') which are known for the current year together with unknown figures for the preceding year, or, if no figures are known for the current year then on the net general taxes for the preceding year. The proration of taxes will be final, and not subject to reproration. 10. SPECIAL ASSESSMENTS. Special assessments, if any, for work on site actually commenced or levied prior to the Closing Date shall be paid by Seller. All other special assessments, including any contemplated special assessments, shall be paid by Buyer. 5 11. CONVEYANCE. Upon payment of the full purchase price, Seller shall convey its title to the Property to Buyer by general warranty deed, free and clear of all liens and encumbrances, excepting municipal and zoning ordinances, recorded easements for public utilities, and recorded building and use restrictions and covenants (none of which adversely affect Buyer's intended use of the Property), and general taxes levied in the year of closing. Seller will pay for the Abstract of Title, update costs and revenue stamps and Buyer will pay all other fees or taxes required for this conveyance. . 12. DEFAULT. In the event that Buyer defaults and fails to carry out this Agreement then Seller shall have any and all remedies available at law or in equity In the event this closing does not occur due to a default by Seller, Buyer shall have as its remedies hereunder the right to seek specific performance of the Agreement or its actual damage and expenses incurred in its good faith efforts to comply with the requirements hereunder, or any other remedies available at law or in equity. 13. TIME IS OF THE ESSENCE. Time is of the essence under this Agreement as to acceptance, possession, occupancy and the Closing Date; provided, however, if the time within which any action, consent, approval or other activity herein contemplated, expires on a Saturday, Sunday or national holiday, such time period shall automatically be deemed extended to the first day after the scheduled termination of such time period which is not a Saturday, Sunday or national holiday. 14. BROKER COMMISSION. The parties agree that the total brokerage commission shall be payable to Remax Advantage/Pyramid Brokerage Inc., at an amount equal to 8% of selling price and shall be the sole responsibility of the Seller. Broker shall no be entitled to any commission hereunder unless and until this transaction closes, nor shall Broker(s) be entitled to any earnest money paid hereunder in a liquidated damages situation. 15. ASSIGNMENT. Buyer may assign this Agreement, and its right hereunder and upon written acceptance of the assignment of the assignee and delivery thereof to the Seller, the same shall operate as a novation of such assignee as Buyer hereunder. 16. EXECUTION AUTHORITY. Buyer and Seller represent and warrant to each other that the individual or individuals signing this Agreement on behalf of Buyer and Seller are duly authorized officers or partners and have full written authority to do so and to bind the respective patties to the provisions hereof. 17. SURVIVAL. The representations and warranties made herein shall survive the closing of the transaction contemplated hereby and the execution and delivery of the documents contemplated hereunder, and shall not be construed to be merged therein. 18. ENTIRE AGREEMENT. This Agreement contains the entire agreement and understanding between the parties with respect to the transactions contemplated hereby, supersedes all previous agreements, negotiations, representation and understandings with respect thereto, and may not be modified or amended except in writing executed by the parties to be bound thereby. 19. NOTICES. All notices required or permitted to be given hereunder shall be in writing, delivered in person, by facsimile transmission, or mailed postage or fees prepaid by certified mail, or by express mail service, return receipt requested, addressed to the mailing addresses and facsimile numbers given herein and shall be effective upon the date listed on the 6 return receipt, of the facsimile confirmation report or of the hand delivery. Notices shall be directed as follows: to Buyer: with a copy to: Wegman Family LLC Phillips, Lytle, Hitchcock, Blaine & Huber 550 Latona Road 1400 First Federal Plaza Rothester, New York 14626 Rochester, New York 14614 Attention: Mr. Philip R. Wegman Attention: Mr. Thomas R. Burns, Esq. (716) 225,7370 (Telephone) (716) 238-2000 (Telephone) (716) 225-0887 (Facsimile) (716) 232-3141 (Facsimile) to Seller: with a copy to: The parties shall be responsible for notifying each other of any change of address or facsimile number. 20. CONSTRUCTION. The Agreement shall be governed by, interpreted, construed and enforced in accordance with the laws of the State of New York. 21. PERSONS BOUND. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. 22. ACCEPTANCE. This Agreement shall be open for acceptance by Seller until 4:00 PM. Prevailing Eastern Standard Time as of December 12, 1996, at which time this Agreement shall expire and become null and void. 23. TIMBER. Seller shall have the right to remove fifteen (15) trees from the Property, The trees shall be removed within 180 days after the closing date, Any area that is damaged shall be repaired, graded and reseeded. 7 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date written below their respective signatures. WEGMAN FAMILY LLC (Buyer) Date: 12/5/96 By: /s/ Philip R. Wegman - ------------------------------------ Philip R. Wegman, Manager Date: 12/12/96 By: /s/ June Fagerstrom - ------------------------------------ June Fagerstrom 8 EX-10.73.2 13 EX 10.73.2 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT, made and entered into this 30th day of December 1997, between WEGMAN FAMILY LLC, a New York limited liability company with an office at 550 Latona Road, Bldg. A, Rochester, New York 14626 ("Assignor") and PAINTED POST PARTNERS, a Washington General Partnership with an office at 3131 Elliott Avenue, Suite 500, Seattle Washington 98121 ("Assignee"). WITNESSETH: That Assignor for ten dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, hereby conveys, grants, bargains, seeks, transfers, sets over, assigns and delivers to Assignee all of its rights, title and interest in, to and under that contract dated December 12, 1996, for the purchase of certain real estate from June Fagerstrom, said real estate being situate in Lakewood, New York, containing sixteen and one half (16.5) acres located at 200 Southwest Drive (the "Contract"), a true and correct copy of the same being attached hereto as Exhibit "A". TO HAVE AND TO HOLD unto Assignee and its successors and assigns to its and their own use and benefit forever. In connection with the assignment and assumption provided fore herein and as a material inducement to Assignee to enter into this Agreement, Assignor does hereby represent and warrant to Assignee as follows: 1. The Contract is in full force and effect and has been amended only as set forth in Exhibit "B". 2. Neither Assignor nor any other party to the Contract is in default in its obligations thereunder nor does any event or circumstance exist as of the date hereof which with the giving of notice or the passage of time or both would constitute a default thereunder. 3. None of the conditions to closing set forth in the contract has been waived by Assignor except those described in Exhibit "B". 4. Execution, delivery and performance are within Assignor's powers and have been duly authorized and are not in contravention of articles, bylaws or any other undertaking to which Assignor is a party or by which it is bound. Assignee hereby expressly assumes the obligations and duties of Assignor, from and after the date hereof, pursuant to said Contract and agrees to perform the same as and when due in accordance with and subject to the terms and conditions of such Contract. This Assignment is made without recourse and without any expressed or implied representation or warranty whatsoever except those representations and warranties set fourth herein. This agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment and Assumption Agreement as of the date first above written. ASSIGNOR: WEGMAN FAMILY LLC By: /s/ Philip R. Wegman -------------------- ---------------- Philip R. Wegman, Manager ASSIGNEE: PAINTED POST PARTNERS By: /s/ Raymond R. Brandstrom ------------------- ------------------- Name: Raymond R. Brandstrom Title: Partner By: /s/ Daniel R. Baty -------------------- ------------------ Name: Daniel R. Baty Title: Partner EX-10.74.1 14 EX 10.74.1 PURCHASE AND SALE AGREEMENT (Danville, Illinois) THIS AGREEMENT is dated for reference purposes only as of the 14th day of October, 1996 and is by and between SOUTH BAY PARTNERS, INC., a Texas corporation, or its assignee ("Purchaser"), and ELKS LODGE NO. 332, BPOE, an Illinois corporation ("Seller"). RECITALS A. Seller is the owner of a certain parcel of real property located in Danville, Illinois. B. Purchaser is interested in purchasing the real property owned by Seller on the terms and conditions specified herein. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. PURCHASE AND SALE. On the terms and conditions set forth herein, Seller shall sell to Purchaser and Purchaser shall purchase from Seller, the following: a. REAL PROPERTY. The undeveloped real property located at 332 E. Liberty Lane, in the City of Danville, State of Illinois, and consisting of (i) approximately 6.3 acres as legally described on Exhibit A attached hereto, and (ii) all right, title and interest, if any, of Seller in and to any land lying in the bed of any street, road or avenue opened or proposed, in front of or adjoining the same, to the center line thereof(collectively the Real Property ); and b. PROPERTY RIGHTS. All contract rights, surveys, blue prints, studies, and other work in progress relating to any proposed development of the Real Property, and all licenses, permits, approvals and all other entitlements, rights or privileges appurtenant to or held by Seller in connection with, the Real Property and/or any proposed development thereof (collectively, the "Property Rights"). The Real Property and the Property Rights are sometimes collectively referred to herein as the "Property". 2. PURCHASE PRICE. The purchase price for the Property shall be Eighty Thousand and No/100 Dollars ($80,000.00), payable as follows: a. EARNEST MONEY DEPOSIT. Five Thousand and no/100 Dollars ($5,000.00) upon mutual execution of this Agreement (the "Earnest Money), which shall be delivered in the form of a check made payable to Partners Title Company, located at 712 Main Street, Suite 2000, Houston, Texas 77002, Attn. : Ms. Karen Highfield ("Escrow Agent"). All such funds shall be held by Escrow Agent in an interest bearing escrow account. The Earnest Money and any accrued interest thereon shall be applied against the purchase price at Closing or remitted to Seller or Purchaser, as appropriate, in accordance with the provisions of Paragraph 16 below; and b. BALANCE OF PURCHASE PRICE. The balance of the purchase price shall be paid at the time of Closing by wire transfer, cashier's check or other certified funds. 3. CLOSING. Provided that the conditions to Closing set forth in Paragraphs 12 and 13 have been satisfied or waived in writing by the party for whom the condition exists, closing of the purchase of the Property shall occur on the date forty-five (45) days following the expiration of the Feasibility Period (as defined below) (the "Closing Date") at such time and place as may be mutually agreed upon by Seller and Purchaser. In the event the scheduled Closing Date falls on a Saturday, Sunday or a legal holiday, the Closing Date shall be the next business day thereafter. Time is of the essence. 4. CONVEYANCES. At Closing, Seller shall convey the Real Property to Purchaser by general warranty deed, in form and substance acceptable to Purchaser. Title to the Real Property shall be conveyed free and clear of all liens or encumbrances other than those approved by Purchaser pursuant to Paragraph 12.c. 5. CLOSING COSTS AND PRORATIONS. At Closing, Seller and Purchaser shall be responsible for the following costs and prorations: a. TRANSFER TAXES. Seller shall pay any state or county transfer taxes due and payable as a result of the sale of the Property. b. RECORDING FEES. Purchaser shall pay any recording fees assessed with respect to the recordation of the conveyance deed provided for herein. c. ATTORNEY'S FEES. Seller and Purchaser shall each pay their own attorneys fees and costs, if any. d. ESCROW FEES. Seller and Purchaser shall each pay one-half of all escrow fees. e. REAL PROPERTY TAXES. Real property taxes and assessments with respect to the Real Property shall be prorated as of the Closing Date, with Seller responsible for any such taxes and assessments which relate to the period prior to the Closing Date, regardless of when payment therefor is due and with Purchaser responsible for any such taxes and assessments which relate to the period from and after the Closing Date. f. TITLE INSURANCE AND SURVEY. Seller shall pay for the cost of the premium for the Title Policy (as that term is defined below), and Seller shall pay the cost of the Survey required to be delivered to Purchaser as provided herein, subject, however, to the right to reimbursement for Survey costs as provided for in Section 16. e. below. In the event any prorations between the parties at the time of Closing is made on the basis of incomplete, incorrect, estimated or preliminary information then, as a matter which shall survive the Closing, the parties agree to re-adjust and re-apportion such costs following the Closing promptly upon receipt of complete, correct or final information, which is verified by both parties. 2 6. POSSESSION. At Closing, Purchaser shall be entitled to possession of the Real Property free and clear of all tenancies. 7. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller does hereby represent and warrant to Purchaser as follows: a. AUTHORITY. Seller has full power and authority to enter into this Agreement and to carry out the terms hereof and the consummation of the transaction provided for herein does not violate Seller's articles of incorporation or bylaws nor any law, regulation, court order, mortgage, deed of trust, note, bond, indenture, agreement, license or other instrument or obligation to which Seller is a party or by which its assets may be bound or affected. This Agreement is valid, binding and enforceable as against Seller in accordance with its terms, except as such enforceability may be affected by bankruptcy, receivership or creditors' rights laws generally. b. HEALTH AND SAFETY. Seller has not received any written notification from the Department of Building and Safety, Health Department, or such other City, County or State authority having jurisdiction over the Real Property, requiring any work to be performed or affecting the Real Property or indicating any intent to condemn the Real Property or any portion of the Real Property. c. TITLE. Seller has good fee simple marketable title to the Real Property, which title as of the Closing Date, will be free and clear of all liens and encumbrances other than those approved by Purchaser pursuant to Paragraph 12.c. d. TAXES AND TAX RETURNS. All tax returns and related filings of any kind required to be filed by Seller prior to the Closing Date with respect to its ownership of the Real Property have been properly completed and timely filed in material compliance with all applicable requirements and all taxes or other obligations which are due and payable by Seller have been, or as of the Closing Date, will be timely paid. e. LITIGATION. There is no litigation, investigation, or other proceeding pending or, to the best of Seller's knowledge, threatened against or relating to Seller which is material to the Real Property or this Agreement. In the event that a lien, claim, or cause of action affecting the Real Property should arise prior to the Closing, and Purchaser elects not to terminate this Agreement as a result thereof, Seller, at its sole cost and expense, shall indemnify, defend and hold the Purchaser harmless therefrom, including without limitation, reasonable attorney's fees, costs and expenses. f. ENVIRONMENTAL MATTERS. Except in accordance with, and in full compliance with, any and all applicable governmental laws, regulations and requirements (collectively, the "Environmental Laws") relating to environmental and occupational health and safety matters and hazardous materials, substances or wastes (as defined from time to time under any applicable federal, state or local laws, regulations or ordinances) and except as disclosed in any environmental reports delivered to or obtained by Purchaser, Seller has not released into the environment, or discharged, placed or disposed of any such hazardous materials, substances or wastes or caused the same to be so released into the environment or discharged, placed or disposed of at, on or under the 3 Real Property. Seller further represents and warrants that: (i) no hazardous materials, substances or wastes are located on the Real Property or have been released into the environment or discharged, placed or disposed of in, on or under the Real Property, (ii) no underground storage tanks are or have been located on the Real Property, (iii) the Real Property has never been used as a dump for waste material, and (iv) the Real Property and its prior uses comply with, and at all times have complied with, all Environmental Laws. g. UTILITIES. All utilities necessary for Purchaser's intended development and operation at the Property are available to the Property and are located within five (5) feet of the property line. h. SPECIAL ASSESSMENTS. Seller has received no notice and has no knowledge of any pending special assessments to be made against the Real Property by any governmental authority. i. TENANCIES. As of the date of this Agreement, none of the Real Property is under lease to any person, firm, or entity; and, no oral or written agreements have been entered into by Seller which commit to lease all or any portion of the Real Property subsequent to the date of this Agreement. To the best of Seller's knowledge, there is no adverse possession of all or any part of the Real Property. j. MECHANIC'S LIENS. There are no unpaid bills or claims in connection with any construction or other work performed on the Real Property nor shall there be any on the date of Closing. Seller shall satisfy any and all mechanic's or materialmen's liens filed against the Real Property, or any part thereof, on or prior to Closing and shall indemnify and hold harmless and protect the Purchaser from any and all loss from any such liens. 8, REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser does hereby represent and warrant to Seller as follows: a. STATUS. Purchaser is a corporation duly organized and validly existing under the laws of the state of Texas and is in good standing thereunder. b. AUTHORITY. Purchaser has full power and authority to execute and to deliver this Agreement and all related documents, and to carry out the transactions contemplated herein and the same do not result in a breach of the terms and conditions of nor constitute a default under or violation of Purchaser's Articles of Incorporation or By-laws or any law, regulations, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its assets may be bound or affected. This Agreement is valid, binding and enforceable as against Purchaser in accordance with its terms, except as such enforceability may be affected by bankruptcy, receivership or creditors' rights laws generally. c. LITIGATION. There is no litigation, investigation or other proceeding pending or threatened against or relating to Purchaser, its properties or business which is material to this Agreement, or which would prevent Purchaser from performing its obligations hereunder. 4 9. COVENANTS OF SELLER. Seller does hereby covenant and agree as follows: a. PRE-CLOSING. Between the date hereof and the Closing Date, Seller will: (i) at Seller's sole cost and expense and as soon as practicable but in no event later than fifteen (15) days following the mutual execution of this Agreement, cause a surveyor acceptable to Purchaser (the "Surveyor") to prepare and deliver to Purchaser (with a copy to Purchaser's counsel) an ALTA/ACSM survey of the Real Property reflecting the size and dimensions of the Real Property Plan and meeting the requirements set forth below (the "Survey"). The Survey shall show thereon: (a) the location of all boundaries, existing fences, all easements, pipelines, rights- of way, and roads which are of record or visible on the ground, (b) whether any of the Real Property lies within a 100 year flood plain or any special flood hazard area as designated by any governmental agency, (c) the number of acres and net square footage contained within the boundaries of the Real Property, (d) the location and dimensions of any protrusions from and encroachments on the Real Property; (e) the location of all public roads or highways adjacent to the Real Property and (f) such other matters as shall be required by the Title Company for the issuance of the Title Policy. The Survey shall be certified to the Purchaser, Seller, and the Title Company. The Surveyor shall include in its certification its Registration Number, address, telephone number, the job number and that the Survey meets all ALTA/ACSM requirements and that the Survey was made on the ground as per the field notes shown thereon and that, except as shown thereon, there are no visible easements, rights-of way, party walls, conflicts, or visible encroachments by any improvements onto an easement or neighboring property or by any improvements on adjoining property onto the Real Property and that the Real Property has direct access to all adjacent public sheets; (ii) as soon as practicable but in no event later than fifteen (15) days following the mutual execution of this Agreement, provide Purchaser with copies of the following documents relating to the Real Property to the extent the same are in Seller's possession or reasonable control ( collectively, the "Property Documents"): all permits, licenses, and other governmental approvals and entitlements relating to the use and/or development of the Real Property, all reports, studies and investigations performed at the Real Property, including all architectural drawings, plans and specifications, environmental reports, structural reports and geological reports, existing surveys of the Real Property, wetland reports, soils reports, engineering tests and reports, and appraisals prepared for the Real Property and all other books and records relating to any work performed in connection with any proposed development of the Real Property; (iii) satisfy and discharge all liens against the Property, other than those approved by Purchaser pursuant to Paragraph 12.c.; (iv) file all tax returns, reports and filings required to be filed by Seller and timely pay all taxes or other obligations which are due and payable with respect to the Property; and (v) not take any action inconsistent with its obligations hereunder. b. CLOSING. On the Closing Date, Seller agrees to: 5 (i) execute and deliver to Purchaser the general warranty deed described in Paragraph 4 and such other instruments as shall be necessary to transfer the Property to Purchaser, including but not limited to an affidavit of Non-Foreign Status pursuant to Section 1445 of the Internal Revenue Code of 1986, as amended; and (ii) pay any Closing costs for which it is responsible under Paragraph 5. c. POST-CLOSING. After the Closing Date, Seller agrees that, at Purchaser's sole cost and expense, it will take such actions and properly execute and deliver to Purchaser such further instruments as may be reasonably necessary to evidence the transfer of the Property. 10. COVENANTS OF PURCHASER. Purchaser does hereby covenant and agree as follows: a. PRE-CLOSING. Between the date hereof and the Closing Date, Purchaser will not take any action inconsistent with its obligations hereunder. b. CLOSING. On the Closing Date; Purchaser agrees that it will deliver the balance of the purchase price due at Closing together with its share of the Closing costs as herein provided. 11. MUTUAL COVENANTS. Seller and Purchaser mutually covenant and agree as follows: a. FULFILLMENT OF CONDITIONS. If any event should occur, either within or without the knowledge or control of either party, which would prevent fulfillment of the conditions to Closing provided for herein, to use his, its or their reasonable efforts to cure the same as expeditiously as possible; b. GOVERNMENTAL CONSENTS. To cooperate fully with each other in taking any actions which are or may be necessary to obtain the consent of any government instrumentality or any third party or to accomplish the transaction contemplated by this Agreement; and c. ESCROW INSTRUCTIONS. To execute and deliver written instructions to Escrow Agent if necessary or desirable to complete the purchase and sale of the Property. 12. PURCHASER'S CONDITIONS TO CLOSING. The obligation of Purchaser to acquire the Property shall be subject to the satisfaction by Seller or to the waiver by Purchaser of the following conditions: a. SELLER' REPRESENTATIONS AND WARRANTIES. Seller's representations and warranties set forth herein shall be true in all material respects at and as of the Closing Date as those made as of the date thereof. b. SELLER'S PERFORMANCE. Seller shall have performed all of its obligations hereunder which are required to be performed as of the Closing Date. 6 c. TITLE APPROVAL. Within fifteen (15) days following the mutual execution of this Agreement, Seller shall cause Chicago Title Insurance Company (the Title Company ) to issue a commitment for title insurance (including copies of all exception documents referenced in said commitment) in an amount equal to the purchase price, which commitment shall provide for the issuance of a final title policy as of the Closing Date, subject to no liens or encumbrances, other than those which may be approved by Purchaser (the "Title Commitment"). The Title Commitment shall be issued by Chicago Title Insurance Company ("Chicago Title"), as the underwriter for the Title Policy to be issued, and prepared through Chicago Title's local agent, Vermillion County Abstract Company. Copies of said Title Commitment together with all exception documents shall be delivered to both Purchaser and to Purchaser's counsel, at the address set forth in Paragraph 18 below, within said fifteen (15) day period. Within fifteen (15) days following Purchaser's receipt of (i) the Title Commitment, (ii) legible copies of all exception documents referenced in the Title Commitment, and (iii) the Survey, Purchaser shall notify Seller of any items referenced in the Title Commitment and/or the Survey to which it disapproves. Within ten (10) days of Seller's receipt of Purchaser's objections, Seller shall advise Purchaser in writing as to whether it intends to correct the defects to which Purchaser has objected. If Seller refuses to correct some or all of such defects or fails to notify Purchaser within said ten (10) day period regarding its intentions to correct the disapproved matters, Purchaser shall have fifteen (15) days following the earlier to occur of(i) Purchaser's receipt of Seller's written notice regarding its refusal to correct the disapproved matters or (ii) the expiration of said ten (10) day period, to advise Seller of Purchaser's decision to close, notwithstanding the defects, or to terminate this Agreement, in which case neither party shall have any further rights or obligations hereunder. In the event Purchaser fails to timely advise Seller of its intention to terminate this Agreement, Purchaser shall be conclusively deemed to have rejected such title and survey defect(s) and shall thereafter have the right to terminate this Agreement. In the event of any such termination, Purchaser shall be entitled to the return of its Earnest Money and the parties shall have no further rights or obligations hereunder. d. TITLE POLICY. The Title Company shall issue to Purchaser as of the Closing Date, an ALTA Extended Owner's Policy of Title Insurance for the Real Property (the "Title Policy") with a policy amount of not less than the amount of the Purchase Price insuring Purchaser's interest in the Real Property and subject to no exceptions other than those of the usual printed exceptions which are acceptable to Purchaser (the survey exception, parties in possession and mechanics lien exceptions being specifically unacceptable to Purchaser) and those exceptions to which Purchaser has not objected as provided for in Paragraph 12.c. above. f. FEASIBILITY STUDY. Purchaser shall conduct at its sole cost and expense an intensive feasibility study of the Real Property (the "Feasibility Study"), which study shall include but not be limited to, (i) reviewing and approving the results of any environmental assessment report which Purchaser may elect to obtain, and all Property Documents required to be provided to Purchaser by Seller, (ii) conducting such engineering and soils studies, utilities investigations, wetlands investigations, if applicable, ALTA surveys and regulatory reviews, as Purchaser deems appropriate to the development of an assisted living facility consistent with the developments plans of Purchaser (the "Facility") and (iii) procuring approval for a Certificate of Need ("CON") for the Real Property in order to permit the construction and operation of the Facility, subject to only such conditions as shall be satisfactory to Purchaser. Within ninety (90) days following the mutual execution of this Agreement (the "Feasibility Period"), Purchaser shall have approved or disapproved the results of said Feasibility Study. 7 Notwithstanding the foregoing, if, despite Purchaser's good faith efforts, Purchaser is unable to secure final and non-appealable approval for the issuance of the CON within said ninety (90) day period, the Feasibility Period may be extended for up to three (3) consecutive periods of thirty (30) days each in order to permit Purchaser the necessary time to procure said CON approval. If at the end of the third such thirty (30) day extension, Purchaser determines that it shall need additional time in order to obtain said final approval for the CON, Purchaser shall be permitted to further extend the Feasibility Period as Purchaser determines reasonably necessary provided that, for each additional thirty (30) day extension, the purchase price payable hereunder shall be increased by an amount equal to Five Hundred Dollars ($500.00). Any extension of the Feasibility Period, as permitted hereunder, shall exercisable by written notice sent to Seller on or before the then current date for the expiration of the Feasibility Period. Seller agrees to grant to Purchaser and/or its agents, consultants and contractors the right to enter the Real Property for the purpose of performing such tests, studies and investigations as Purchaser determines necessary in connection with its Feasibility Study of the Real Property; provided, however, that the activities conducted by Purchaser and/or any of its agents, consultants or contractors shall not materially change or alter the character of the Real Property. Seller further agrees to fully cooperate with Purchaser concerning the components of the Feasibility Study. g. ZONING. On or before the Closing Date, Purchaser shall have satisfied itself in its sole and absolute discretion that the development and operation of the Facility on the Real Property is permitted under the Real Property's current zoning designation. h. BOARD APPROVAL. Prior to the Closing Date, Purchaser shall have obtained the approval of its Board of Directors to the acquisition of the Property pursuant to the terms of this Agreement. i. FINANCING. Prior to the Closing Date, Purchaser shall have obtained from an institutional lender, or other lender source acceptable to Purchaser, a commitment to provide construction financing for the improvements contemplated to be constructed by Purchaser on the Real Property on such terms and conditions as are acceptable to Purchaser. j. READINGS FOR CONSTRUCTION. Upon the Closing Date, there shall exist no impediments to the commencement of construction of the improvements contemplated to be constructed by Purchaser such that Purchaser shall be able to commence construction of said improvements immediately following the Closing (e.g. within 48 hours following the Closing Date); excluding, however, impediments resulting from weather conditions, Purchaser's inability to timely procure a building permit and other necessary and customary governmental approvals, lack of construction financing or any other impediment which is imposed or caused by, the actions of Purchaser. 13. SELLER'S CONDITIONS TO CLOSING. The obligation of Seller to convey the Property to Purchaser shall be subject to the satisfaction by Purchaser or the waiver by Seller of the following conditions: a. PURCHASER'S RE REPRESENTATIONS AND WARRANTIES. Purchaser's representations and warranties set forth herein shall be true at and as of the Closing Date. 8 b. PURCHASER'S PERFORMANCE. Purchaser shall have performed all of its obligations hereunder which are required to be performed as of the Closing Date. 14. INDEMNIFICATION BY SELLER. Subject to the limitations set forth in Paragraph 16, Seller shall indemnify, defend and hold Purchaser harmless from and against: a. OBLIGATIONS EXISTING AS OF CLOSING DATE. Any and all obligations relating to ownership of the Property which exist as of the Closing Date, except to the extent that such obligations relate to a breach by Seller of a representation, warranty or covenant set forth in this Agreement, including, but not limited to, the representations and warranties with respect to the environmental condition of Real Property set forth in Paragraph 7.f., in which case Seller's obligation to indemnity, defend and hold harmless Purchaser shall be as set forth in Paragraph 14.b. ; b. BREACH F REPRESENTATIONS AND WARRANTIES. Any and all damage, loss, or liability resulting from any material breach of any representation, warranty or covenant made by Seller in this Agreement or nonfulfillment of any agreement on the part of Seller under this Agreement or from any misrepresentation in or omission from any certificate furnished or to be furnished to Purchaser hereunder; c. FEES AND EXPENSES. Any and all actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses, including, but not limited to, reasonable attorneys' fees, incident to any of the foregoing. For purposes of Paragraph 14.a., an obligation shall be deemed to "exist" as of the Closing Date if it relates to events which occurred prior to the Closing Date even if it is not asserted until after the Closing Date. 15. INDEMNIFICATION BY PURCHASER. Subject to the limitations set forth in Paragraph 16, Purchaser shall indemnify, defend and hold Seller harmless from and against: a. OBLIGATIONS ACCRUING AFTER THE CLOSING DATE. Any and all obligations relating to the ownership of the Property accruing on or after the Closing Date; b. BREACH OF REPRESENTATION AND WARRANTIES. Any and all damage, loss or liability resulting from a material breach of any representation, warranty or covenant of Purchaser in this Agreement or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any misrepresentation in or omission from any certificate furnished or to be furnished to Seller hereunder; and c. FEES AND EXPENSES. Any and all actions, suits, proceedings, demands, assessments, judgments, costs and legal and other expenses, including, but not limited to, reasonable attorneys' fees, incident to any of the foregoing. 16. TERMINATION. 9 a. TERMINATION BY PARTIES. This Agreement may be terminated and the transaction contemplated herein abandoned at any time prior to Closing: (i) By mutual agreement of the parties; (ii) By Seller, if any of the conditions set forth in Paragraph 13 shall have become incapable of fulfillment prior to the Closing Date or such earlier date as may be specifically provided for the performance thereof (as the same may be extended) through no fault of Seller and the same shall not have been waived by Seller; (iii) By Purchaser, if any of the conditions set forth in Paragraph 12 shall have become incapable of fulfillment prior to the Closing Date or such earlier date as may be specifically provided for the performance thereof (as the same may be extended) through no fault of Purchaser and the same shall not have been waived by Purchaser; (iv) By either Seller or Purchaser in the event of a material breach by the other party of its obligations hereunder; or (v) If the Closing has not occurred by May 31,1997; subject, however, to any extensions to the Closing Date by reason of extensions to the Feasibility Period as provided for in Section 12. f. above. b. MATERIAL DAMAGE OR DESTRUCTION. In the event that prior to the Closing Date, a material portion of the Real Property shall have been damaged or destroyed or shall have been taken or condemned by any public or quasi-public authority under the power of eminent domain, Purchaser shall have the right to terminate this Agreement on written notice to Seller which notice must be delivered within ten (10) days after Purchaser receives notice of such damage, destruction or condemnation. In the event Purchaser fails to exercise its termination rights hereunder, then it shall be conclusively deemed to have waived said right and Seller shall assign to Purchaser all of its rights to any insurance proceeds or condemnation award and all claims in the connection therewith. In the event Purchaser exercises its termination rights hereunder, the parties shall have no further rights or obligations hereunder other than Purchaser's right to the return of its Earnest Money. c. WRITTEN NOTICE. Neither party to this Agreement may claim termination or pursue any other remedy referred to in Paragraph 16.a. on account of a breach of a condition, covenant or warranty by the other, without first giving such other party written notice of such breach and not less than ten (10) days within which to cure such breach. The Closing Date shall be postponed, if necessary, to afford such opportunity to cure. d. SELLER'S LIQUIDATED DAMAGES. In the event of the termination of this Agreement by Seller as a result of a material breach by Purchaser occurring at any time following the expiration of the Feasibility Period with respect to any of Purchaser's obligations hereunder Seller's sole remedy shall be to terminate this Agreement and to retain Purchaser's Earnest Money as full and complete liquidated damages, the parties acknowledging and agreeing that the amount of damages which Seller may incur as a result of such termination may be difficult to ascertain and that the amount of the Earnest Money is a reasonable and fair estimate thereof, after which the parties shall have no further rights or obligations hereunder. 10 e. PURCHASER'S REMEDIES. In the event of the termination of this Agreement by Purchaser as a result of a material breach by Seller of its obligations hereunder, Purchaser shall have the right either to (i) terminate this Agreement and receive a full refund of its Earnest Money, together with all interest accrued thereon, after which neither party shall have any further rights or obligations hereunder or (ii) seek specific performance of Seller's obligations hereunder or damages for Seller's breach of its obligations hereunder. In the event of the termination of this Agreement by Purchaser as a result of a failure of any of the Purchaser's conditions as set forth in Paragraph 12 above, Purchaser shall be entitled to a full refund of its Earnest Money, together with all interest accrued thereon; provided, however, in the event Purchaser terminates this Agreement as a result of the failure of any of Purchaser's conditions hereunder and Seller's in not in default hereunder, Purchaser shall reimburse Seller for the actual verifiable cost incurred by Seller for the preparation of the Survey (not to exceed $2,500.00). 17. BROKER. Seller shall be responsible for any fees or commissions claimed to Mr. Lester Fahey (the "Broker") in connection with this Agreement and shall pay such fees or commissions from the sale proceeds at the time of Closing to Mr. Lester Fahey or to others at his direction. Each party agrees to pay any commission or finder's fee which may be due on account of this Agreement to any other broker or finder employed by it (other than the Broker, whose commission is the responsibility of Seller) and each party agrees to indemnify the other party against any claim for any commission made by any broker allegedly employed by it. 18. NOTICES. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight courier guaranteeing overnight delivery or by facsimile transmission (if confirmed verbally or in writing by mail as aforesaid), to the following address: To Seller: Elks Lodge No. 332 c/o William L. Townsley, Esq. Sebat Swanson Banks Garman & Townsley 139 North Verznillion Street Danville, Illinois 61832 Telephone No.: (217) 443-0255 Facsimile No.: (217) 443-0263 To Purchaser: South Bay Partners, Inc. 5720 LBJ Freeway, Suite 450 Dallas, Texas 75240-6339 Attention: Mr. Craig Spaulding Telephone No.: (214) 702-8183 Facsimile No.: (214) 458-2233 With a copies to: The Nathanson Group 1411 Fourth Avenue, Suite 905 Seattle, Washington 98101 Attention: V. Anthony Unan, Esq. 11 Telephone No.: (206) 623-6239 Facsimile No.: (206) 623-1738 Notice shall be deemed given three (3) business days after deposit in the mail, on the next day if sent by overnight courier and on receipt if sent by facsimile (and confirmed verbally or by mail as aforesaid). 19. AMENDMENT AND MODIFICATION. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior negotiations, discussions, writings and agreements between them. 20. ASSIGNMENT. Purchaser shall have the right to assign its rights and delegate its obligations hereunder, without the prior written consent of Seller, provided that the assignee agrees in writing to assume all of the obligations of Purchaser hereunder from and after the effective date of said assignment. In the event of any such assignment, Seller agrees that South Bay Partners, Inc. shall be relieved and released from any and all further obligations and/or liability hereunder. In the event of any such assignment, all of the references to Purchaser herein shall be deemed to be references to Purchaser's assignee, the representations set forth in Paragraph 8 shall be revised accordingly and the terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against said assignee. Without limiting the generality of the foregoing, Seller acknowledges that Purchaser is contemplating assigning its rights and delegating its obligations hereunder to Emeritus Corporation, a Washington corporation. 21. WAIVER. The waiver by any party of any breach of any of the provisions of this Agreement shall not constitute a continuing waiver or a waiver of any subsequent breach of any provision of this Agreement. 22. INCORPORATION BY REFERENCE. Each recital set forth and exhibit referenced in this Agreement is incorporated and becomes an integral part of this Agreement. 23. CAPTIONS. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 24. SURVIVAL. This Agreement shall survive the Closing Date and thereafter remain binding on both Seller and Purchaser. 25. ATTORNEYS' FEES. 12 If any litigation or other proceedings are commenced between parties to this Agreement regarding the rights and duties of any party pursuant to, related to or arising from this Agreement, then the prevailing party with respect to the litigation or other proceedings, shall be entitled, in addition to the relief granted, a reasonable sum for attorneys' fees and costs of the litigation or other proceedings. 26. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 27. SEVERABILITY. Should any one or more of the provisions of this Agreement be determined to be invalid, unlawful or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 28. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. [Signatures of the parties on following page] 13 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth opposite each patty's signature below and the last date of execution shall be deemed the date of "mutual execution" as such term is used herein. Purchaser: SOUTH BAY PARTNERS, INC., a Texas corporation Dated: 10/4/96 By: /s/ Craig Spaulding, - -------------------------------------- President Seller: ELKS LODGE NO. 332, BPOE, an Illinois corporation Dated: 10/4/96 14 EX-10.74.2 15 EX 10.74.2 ASSIGNMENT AND ASSUMPTION OF PURCHASE AND SALE AGREEMENT (Danville, Illinois) This Assignment and Assumption of Purchase and Sale Agreement (the "Assignment") is entered into as of the 21 day of October ,1996 (the "Effective Date"), by and between SOUTH BAY PARTNERS, INC., a Texas corporation ("South Bay"), and EMERITUS CORPORATION, a Washington corporation ("Emeritus"), with reference to the following facts: A. South Bay and Elks Lodge No. 332, BPOE, an Illinois corporation ("Seller"), entered into that certain Purchase and Sale Agreement dated as of October 14, 1996 (the "Purchase Agreement"), pursuant to which South Bay agreed to purchase and Seller agreed to sell, that certain undeveloped land located in the City of Danville, State of Illinois, together with certain property rights associated therewith, all as more particularly described in the Purchase Agreement (collectively, the "Property"). Any term used herein which commences with an initial capital letter and is not otherwise defined herein shall have the same meaning in this Assignment as such term has in the Purchase Agreement. . B. Pursuant to Section 20 of the Purchase Agreement, South Bay has the right to assign all of its rights and to delegate all of its obligations, under the Purchase Agreement, to any assignee, provided that such assignee agrees in writing to assume all of South Bay's obligations under the Purchase Agreement from and after the effective date of any such assignment. Further, it was contemplated under Section 20 of the Purchase Agreement that such an assignment would be made to Emeritus. C. South Bay now desires to assign to Emeritus all of its rights and to delegate to Emeritus all of South Bay's obligations, under the Purchase Agreement and Emeritus desires to accept such an assignment and to assume all such obligations. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. ASSIGNMENT AND ACCEPTANCE As of the Effective Date, South Bay hereby assigns, sets over, conveys and transfers to Emeritus all of its right, title and interest, and hereby delegates to Emeritus all of its duties and obligations, as Purchaser, in, to, and under the Purchase Agreement including without limitation all right, title and interest of South Bay in and to the Earnest Money. Emeritus hereby accepts said assignment and hereby agrees to perform all of the duties and obligations of Purchaser under the Purchase Agreement to the extent they arise from and after the Effective Date. 2. EARNEST MONEY DEPOSIT Emeritus acknowledges and understands that South Bay has deposited with the Escrow Agent the sum of Five Thousand and No/100 Dollars ($5,000.00) representing the deposit of the Earnest Money and that South Bay has incurred attorney fees with the law firm of The Nathanson Group in connection with the preparation and negotiation of the Purchase Agreement. In consideration for this Assignment, Emeritus hereby agrees to reimburse South Bay the full amount of said Earnest Money so deposited with Escrow Agent and all such attorney's fees and associated legal costs incurred with The Nathanson Group. Said reimbursement shall be paid (i) with respect to the Earnest Money, within five (5) business days following the Effective Date and (ii) with respect to said attorney's fees and associated legal costs, within five (5) business days following receipt by Emeritus of a bill from South Bay. 1 3. REPRESENTATIONS AND WARRANTIES OF EMERITUS Emeritus hereby represents and warrants to South Bay as follows: a. Emeritus has received and reviewed a signed copy of the Purchase Agreement and, as of the Effective Date, Emeritus will be in compliance with the representations, warranties, covenants, and obligations of the Purchaser thereunder. b. The execution, delivery and performance of this Assignment are within Emeritus' powers, have been duly authorized and are not in contravention of any law or the terms of Emeritus' articles of incorporation or bylaws, or any undertaking to which Emeritus is a party or by which it is bound. 4. REPRESENTATIONS AND WARRANTIES OF SOUTH BAY South Bay hereby represents and warrants to Emeritus as follows: a. South Bay is in compliance with its representations, warranties, covenants, and obligations as the Purchaser under the Purchase Agreement and there are no defaults on the part of South Bay or the Seller under the Purchase Agreement that have not been waived or cured under the provisions thereof. As of the Effective Date, the Purchase Agreement is in full force and effect. b. The execution, delivery and performance of this Assignment are within South Bay's powers, have been duly authorized and are not in contravention of any law or the terms of South Bay's articles of incorporation or bylaws, or any undertaking to which South Bay is a party or by which it is bound. 5. MISCELLANEOUS a. NOTICES. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight courier guaranteeing overnight delivery or by facsimile transmission (if confirmed orally or in writing by mail as aforesaid), to the following address: To South Bay: South Bay Partners, Inc. 5720 LBJ Freeway, Suite 450 Dallas, Texas 75240-6339 Attention: Mr. Craig Spaulding Telephone No. : (214) 702-8183 Facsimile No.: (214) 458-2233 To Emeritus: Emeritus Corporation 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 Attention: Ms. Jean Fukuda Telephone No.: (206) 298-2909 Facsimile No.: (206) 301-4500 2 Notice shall be deemed given three (3) business days after deposit in the mail, on the next day if sent by overnight courier and on receipt if sent by facsimile (and confirmed orally or by mail as aforesaid). b. ENTIRE AGREEMENT. This Assignment constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes any and all prior written or oral agreements or understandings between the parties pertaining to the transactions contemplated herein. c. COUNTERPARTS. This Assignment may be executed in two (2) or more counterparts, each of which shall be an original for all purposes and all of which when taken together shall constitute one agreement. d. GOVERNING LAW. This Assignment and the rights and the duties of the parties hereunder shall be governed by, and construed in accordance with, the laws of the State of Washington. e. ATTORNEYS' FEES. Should either party institute any action or proceeding to enforce or interpret this Assignment or any provision hereof for damages by reason of any alleged breach of this Assignment or of any provision hereof, or for a declaration of rights hereunder, the prevailing party in any such action or proceeding shall be entitled to receive from the other party all costs and expenses, including reasonable attorneys' and other fees, incurred by the prevailing party in connection with such action or proceeding. The term "attorneys' and other fees" shall mean and include attorneys' fees, experts' fees, accountants' fees, and any and all other similar fees incurred in connection with the action or proceeding and the preparations therefor. The term "action or proceeding" shall mean and include actions, proceedings, suits, arbitrations, appeals and other similar proceedings. f. BINDING EFFECT. This Assignment shall be binding upon and shall inure to the benefit of the parties, their heirs, executors, administrators, successors and assigns. g. AMENDMENTS. This Assignment cannot be amended or modified unless in writing and signed by all parties hereto. 3 IN WITNESS WHEREOF, the parties have executed this Assignment effective as of the date first set forth above. "Emeritus": EMERITUS CORPORATION a Washington corporation By: /s/ Raymond R. Brandstrom - --------------------------------------- Its: President "South Bay": SOUTH BAY PARTNERS, INC., A Texas corporation By: /s/ Craig Spaulding - -------------------------------------- Its: President 4 EX-10.75.1 16 EX 10.75.1 MANAGEMENT AGREEMENT This Management Agreement (this "Agreement") is made and entered into as of December 18, 1997, between ALCO VII, L.L.C. , a North Carolina limited liability company with offices at 46 3rd Street, N.W., Hickory, North Carolina ("Owner"), and EMERITUS CORPORATION, a Washington corporation with offices at 3131 Elliott Avenue, Suite 500. Seattle Washington 98121 ("Manager"). WITNESSETH WHEREAS, Owner is the owner of a 83-unit assisted living facility being developed in Biloxi, Mississippi, together with the equipment, furnishings, and other tangible personal property that will be used in connection therewith (the "Facility"); and WHEREAS, Manager is engaged in the ownership and operation of similar facilities and is experienced in various phases of the management, operation and ownership thereof; and WHEREAS, Owner desires to engage Manager as an independent contractor to manage the Facility for Owner's account during the term herein provided, and Manager desires to accept such engagement, upon the terms and subject to the conditions contained herein. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, and intending to be legally bound hereby, the parties agree that the foregoing recitals are true and correct and constitute an integral part of this Agreement, and the parties further agree as follows: ARTICLE 1 ENGAGEMENT OF MANAGER 1.1 ENGAGEMENT. During the term of this Agreement and subject to a plan of operation for the Facility to be developed by Manager and approved by Owner (the "Plan of Operation"), Owner grants to Manager the sole and exclusive right, and engages Manager to supervise, manage, and operate the Facility in the name and for the account of Owner upon the terms and conditions hereinafter set forth. Owner is contracting herein for an end result, and does not intend to provide any day- to-day supervision of Manager. Manager shall provide its own management systems, which shall be considered proprietary material and will remain the property of Manager. The Plan of Operation shall include the program design (in accordance with the regulations of the state where the Facility is located (the "State")) and define the capital expenditure and operating budgets for the Facility, as agreed to by the parties. the Plan of Operation shall be reviewed on a monthly basis and, if necessary, revised, upon the mutual agreement of the parties. 1.2 ACCEPTANCE. Subject to the Plan of Operation, Manager accepts such engagement and agrees that it will (a) faithfully and diligently perform its duties and responsibilities hereunder; (b) use its best skills, efforts and attention to supervise and direct the management and operation of the Facility in an efficient manner, as an assisted living facility, in substantial compliance with all applicable laws and in Owner's best interest; and (c) consult with Owner and keep owner advised of all major policy matters relating to the Facility. Subject to the foregoing and to the other provisions of this Agreement, Manager, without the approval of the Owner (unless such approval is herein specifically required), shall have the control and discretion with regard to the operation and management of the Facility for all customary purposes (including the exercise of its rights and performance of its duties provided for in Article 3 hereof, and the right to determine policies affecting the appearance, maintenance, standards of operation, quality of service, and other matters reasonably relating to Manager's interest hereunder, which affect the Facility or the operation thereof, and Owner shall not attempt to assert management control over Facility or its employees during the term of this Agreement. ARTICLE 2 TERM The term of this Agreement shall be for a period of two years commencing on the date that the first resident occupies one of the units in the Facility (the "Commencement Date") and ending on the earlier to occur of (i) a date two years after the Commencement Date (ii) the occurrence of the Commencement Date (as defined in the Lease Agreement of even date herewith between Owner and Manager with respect to the Facility), unless terminated earlier pursuant to Article 8 or Section 11. 2 hereof. This Agreement shall be automatically extended for additional terms of one year each unless and until terminated pursuant to the terms herein, or upon written notice by Manager of its intent not to extend 90 days prior to the end of the then term. ARTICLE 3 RIGHTS AND DUTIES OF THE MANAGER During the term of this Agreement and in the course of its management and operation of the Facility, subject to the Plan of Operation: 3.1 EMPLOYEES. Manager shall hire, train, promote, discharge, and supervise the work of the Facility's executive director, department heads, and all operating and service employees performing services in and about the Facility. All of such employees shall be employees of Owner, except the executive director who shall be an employee of Manager, and the aggregate compensation, including fringe benefits with respect to such employees (including the executive director) shall, within the agreed Operating Budget, be charged to Owner as an expense of the operation of the Facility. Manager shall comply with all applicable laws concerning employees, their compensation, and any retirement or profit sharing plans, including payroll deductions and tax reporting. The term "fringe benefits" as used herein shall include but not be limited to the employer's contribution of FICA, unemployment compensation, and other employment taxes retirement plan contributions, worker's compensation, group life, accident, and health insurance premiums profit sharing contributions, disability, and other similar benefits. All such employees shall be covered by appropriate professional liability, workers compensation, unemployment and other liability insurance, including errors and omission coverage, as approved by Manager and Owner. The cost of same shall be charged to Owner as an additional expense of the operation of the Facility. Manager shall provide Owner with evidence of any such insurance upon request. 3.2 LABOR CONTRACTS. Manager, if requested by Owner, will negotiate, on Owner's behalf, with any labor union lawfully entitled to represent the employees at the Facility, but any collective bargaining agreement or labor contract resulting therefrom must first be approved by Owner, who shall be the only person authorized to execute the same. All such negotiations conducted by Manager shall be at Owner's expense and shall be subject to approval by Owner, which approval shall not be unreasonably withheld. 3.3 CONCESSIONAIRES, ETC. Manager shall negotiate and consummate in the name of the Owner contracts with concessionaires, licensees, tenants, residents and other intended users of the Facility. Any fees and expenses incurred in connection therewith shall, within the agreed Operating Budget, be charged to Owner as an expense of the operation of the Facility. 2 3.4 ANCILLARY SERVICES, UTILITIES, ETC. Manager shall, within the agreed Operating Budget, enter into such contracts in the name of and at the expense of Owner as may be deemed necessary or advisable for the furnishing of all ancillary services, utilities, concessions, supplies and other services as may be needed from time to time for the maintenance and operation of the Facility. manager is authorized to contract for or to provide ancillary services, including, but not limited to, pharmacy (drug and IV), rehabilitation and respiratory therapy services, and mobile diagnostic services, through providers which may be affiliates of Manager, provided that such services are rendered at levels of quality and pricing that are competitive with those provided in the community. 3.5 PURCHASES. Manager shall be solely responsible to arrange for the purchases of food, beverages, operating supplies, and other materials and supplies in the name of and for the account, and at the expense of Owner, within the agreed Operating Budget, as may be needed from time to time for the maintenance and operation of the Facility. 3.6 REPAIRS. At all times during the term of this Agreement, Manager shall, within the agreed Operating Budget, make or install or cause to be installed at Owner's expense and in the name of the Owner any proper repairs, replacements, and improvements in and to the Facility and the furnishings and equipment in order to keep and maintain the same in good repair, working order and condition, and outfitted and equipped for the proper operation thereof in accordance with industry standards comparable to those prevailing in other similar facilities, and all applicable state or local rules, regulations, or ordinances. All maintenance and repair work undertaken by Manager shall be done in a workmanlike manner, leaving the Facility free of liens for labor and material to the extent funds are provided by owner'. Manager hereby grants to Owner the right to inspect and access to the Facility at all reasonable times; provided, however, that Owner shall have not duty to conduct any inspection. 3.7 LICENSES AND PERMITS. Manager shall apply for, and use its best efforts to obtain and maintain in the name and at the expense of the Owner, all licenses and permits required in connection with the management and operation of the Facility. Owner agrees to cooperate with Manager in applying for, obtaining and maintaining such licenses and permits. 3.8 INSURANCE. Manager shall apply for, obtain and maintain on behalf of Owner, and at Owner's expense, at all times during the term of this Agreement, the following insurance in such amounts and coverage as may be appropriate and mutually agreed upon by Owner and Manager or as may be required by any financing or lease arrangements of Owner, whichever is greater: (a) insurance on the Facility on a replacement cost basis (including the equipment, furnishings and other tangible personal property used in connection therewith) against loss and damage by fire and lightning with coverage extended by means of an extended coverage endorsement to a fire insurance policy so as to include loss or damage arising out of windstorm, and hail, provided such insurance is reasonably available, and sprinkler damage, if reasonably available; (b) insurance on the Facility against loss or damage, including business interruption insurance, for boilers and machinery, heating apparatus, pressure vessels, and pressure pipes installed in the Facility; (c) commercial primary and excess general liability, including automobile liability (as needed), products liability bonds, professional and other liability, and property damage insurance, 3 insuring Owner and Manager against loss or liability for damages or personal injury, death, or property damage arising or resulting from the management, maintenance, operation and/or use of the Facility; (d) such workers' compensation and other similar insurance as may be required by law or as may be required to insure Owner and Manager against loss or the payment of damages for such liabilities as may be imposed by law; (e) unemployment Compensation insurance through the appropriate state agencies; and fidelity and honesty insurance. (f) fidelity and honesty insurance. Forthwith after the effective date of this Agreement, Manager shall submit to Owner for its approval, which approval shall not be unreasonably withheld, a proposal setting forth the kinds and amounts of insurance which Manager intends to obtain, in connection with the operation of the Facility (including, without limitation, insurance of the kinds and in the respective amounts described in paragraphs [a] through [f] of this section) and Owner shall be deemed to have approved the proposal unless Owner has disapproved in writing within ten days of submission of the proposal by Manager. All insurance provided for under the foregoing provisions of this Section shall be effected by policies issued by insurance companies of good reputation, sound adequate financial responsibility, and properly licensed and qualified to do business in the State and which are acceptable to any Secured parties (hereinafter defined). All of the policies of insurance of the character described in Paragraphs (a) - (b) of this Section shall be carried in the names of Owner, Manager, the secured parties, if any, under any mortgage, deed of trust or security instrument from time to time outstanding affecting the Facility (the "Secured Parties"). Any losses payable under such policies of insurance shall be payable to Owner, Manager, and such Secured Parties as their respective interests may appear. Each of the policies of insurance referred to in paragraphs (c) - (f) of this Section shall insure Owner and Manager. Owner, Manager and their respective officers, partners, directors, shareholders, managers and employees shall, to the extent permissible, be named as additional insureds under all such policies. 3.9 GOVERNMENTAL REGULATION. (a) Manager shall perform its duties hereunder to insure that the facility and the management thereof by Manager complies in all material respects with all Federal, state and local laws, rules, orders, determination, regulations and ordinances affecting or issued in connection with the Facility, or the management thereof by Manager, including any laws and regulations applicable to the Facility, and with the prior written consent of Owner, Manager shall make arrangements for any alterations or repairs ordered or required thereby, if not included in the Operating Budget. (b) Manager shall immediately provide to Owner, as and when received by Managers, all notices, reports or correspondence from governmental agencies that assert deficiencies or charges against Facility or that otherwise relate to the suspension, revocation, or any other action adverse to any approval, authorization, certificate, determination, license or permit required or necessary to own or operate the Facility. Manager may appeal any action taken by any 4 governmental agency against the Facility; provided, however, that Owner shall adequately secure and protect Manager from loss, cost, damage or expense by bond or other means reasonably satisfactory to Manager in order to contest by proper legal proceedings the validity of any such statute, ordinance, law, regulation or order, provided that any such contest shall not result in the suspension of operations of the Facility and, provided, further, that Owner shall have not obligation to secure and protect Manager from any loss, cost, damage or expense that arise directly out of Manager's negligence, misconduct, or breath of any of its obligations under this Agreement. 3.10 TAXES. Manager shall give notice to Owner of all taxes, assessments, penalties, fines, and charges of every land imposed upon the Facility by any governmental authority within five days of receipt of notification other than in the normal course of business, including interest and penalties thereon, and shall cause such items to be paid when due if funds are available, except that Manager shall not cause such payment to be made if (i) same is in good faith being contested by the Owner at its sole expense and without cost to Manager, (ii) enforcement thereof is stayed, and (iii) Owner shall have given Manager written notice of such contest and authorized the nonpayment thereof not less than ten days prior to the date on which such tax assessment, penalty or charge: is due and payable. 3.11 Deposit and Disbursement of Funds. Upon the implementation of this Agreement, Owner shall initiate an operating reserve fund in a financial institution and available to Manager as Owner's agent hereunder in an amount to be agreed upon by the parties. Such reserve fund shall be used by manager to meet the financial payments noted below until sufficient revenues are generated by operation of the Facility to reasonably meet those financial obligations on a monthly basis. manager shall promptly deposit in a banking institution acceptable to Owner, which is a member of the FDIC, in accounts in Manager's name as agent for Owner, all Gross Revenues, as defined below, and moneys and Facility income arising from the operation of the Facility, or otherwise received by Manager for and on behalf of Owner ("Facility Funds"), which funds shall be Owner's funds. No amounts deposited with Facility Funds shall in any event be co- mingled with any other funds of Manager. Manager shall pay from the reserve amount and/or, once sufficient Facility Funds are generated and received to meet the monthly operating expenses of the Facility, manager shall pay from Facility Funds on behalf of and in the name of Owner, and in the following order of priority, and in each case, in such amounts and at such times as are required to be made in connection with: (a) all costs and expenses arising out of the ownership, maintenance, and operation of the Facility, including the reimbursable expenses of Manager hereunder pursuant to Exhibit A attached hereto ; (b) payment of Facility Debt Service; (c) Manager' s Base Management Fee provided for in Article 5, below (including any accrued and unpaid Base Management Fees for prior periods); and (d) the balance of the Facility Funds shall be disbursed to Owner within five days of receipt of such funds. It is expressly acknowledged that financial responsibility for payment of the costs and expenses noted above is that of the Owner. If the available Facility Funds previously deposited by Manager, or the reserve amounts previously placed in the Accounts by Owner are insufficient in any month to pay all of the amounts described in paragraphs (a) - (c), Owner shall promptly, upon the request of Manager, advance to Manager, or pay into those accounts described above, for use 5 by Manager on Owner' s behalf, any additional amounts necessary and sufficient to allow Manager to pay all amounts due hereunder. Manager shall not be required to advance any sums on Owner's behalf to meet any financial obligations of Owner pursuant to the management of Facility. Owner's failure to promptly advance funds, or to deposit any reserve amounts where required hereunder and where written demand has been made by Manager, shall be considered a breach by Owner of this Agreement. As used herein, "Facility Debt Service" means scheduled payments of the principal and interest with respect to: (i) the indebtedness identified on Exhibit B attached hereto, and (ii) any additional indebtedness incurred by Owner for the improvement, maintenance, or operation of the facility. "Facility Debt Service" does not include any amounts payable by reason of involuntary prepayments or the acceleration of such indebtedness for any reason. 3.12 STATEMENTS. Manager shall deliver or cause to be delivered to Owner statements as follows: (a) On or about the 30th day after the end of each calendar month (except for the final month of the fiscal year as noted in 3.12(b) below, a profit and loss statement and balance sheet statement (both prepared on an accrual basis) showing the results of the operation of the Facility for the preceding calendar month and the year to date, and having annexed thereto a computation of the management fee (as determined under Article 5 hereof for such preceding month and the year to date. (b) On or before 45 days after the close of each fiscal year during the term of this Agreement, Manager will also deliver or cause to be delivered to Owner a balance sheet and related statement of profit and loss showing the assets employed in the operation of the Facility and the liabilities incurred in connection therewith as of the end of the fiscal year, and the results of the operations of the Facility during the preceding 12 months then ended, and having annexed thereto (i) a copy of the Medicare and Medicaid cost report, if any, prepared by Manager with respect to the Facility for such twelve-month period, and (ii) a computation of the management fee for any such 12-month period and payments made according to Section 3.11. All costs and expenses incurred in connection with the preparation of any statements, schedules, computation, and other reports required under this Section 3.12(b) shall be borne by Owner. (c) Within 30 days of filing, copies of the 10-Q and 10-K of Manager filed with the United States Securities and Exchange Commission. (d) Within 45 days after the end of each quarter, each of the following certified by the chief financial officer of Manager to be true and correct: (i) unaudited financial statements of the Manger prepared in accordance with generally accepted accounting principles consistently applied, which statements shall include a balance sheet and statement of income and expenses for the quarter then ended; (ii) if requested by Owner, within 15 days of the end of each calendar month, an aged accounts receivable report of the Facility in sufficient detail to show amounts due 6 from each class of patient-mix (i.e., private, Medicare (if any), Medicaid (if any) and V.A.) by the account age classifications of 30 days, 60 days, 90 days, 120 days, and over 120 days; (iii) within 45 days after the end of each calendar quarter, the quarterly financial statement and census date for the Facility, properly completed and certified by Manager to be true and correct; (iv) within ten days of filing or receipt all cost reports required by any regulatory or licensing agency and any amendments thereto filed with respect to the Facility and all responses and statements of deficiencies (with plans of correction attached thereto, if required, within the period prescribed by law); (v) within ten days of receipt, copies of all licensure and certification survey reports and statements of deficiencies (with plans of correction attached thereto, if required, within the period prescribed by law; (vi) within ten days of receipt, a copy of the Medicaid rate calculation worksheet (or the equivalent thereof, if any, issued by the applicable Medicaid agency for the Facility; (vii) upon Owner's request, evidence of payment of any applicable provider bed taxes or similar taxes. 3.13 COMPLAINTS; INVESTIGATIONS; LEGAL ACTIONS. Manager shall receive, consider, and handle any complaints of residents, guests or users of any of the services of the Facility. Using reasonable judgment, Manager shall notify Owner of all material written complaints regarding the quality of resident care or operation of the Facility received by Manager. Manager shall comply with the procedures and policies for reporting of adverse resident occurrences at the Facility to the insurance company or to such other persons as Owner may designate. Manager shall promptly notify Owner of any pending, threatened or initiated investigation, by any governmental or administrative agency, regarding any aspect of operation of the Facility. Manager shall promptly notify Owner if it is served with process in any legal action regarding any aspect of its operation of the Facility Manager shall institute, in its own name or in the name of the Owner at the expense of the Owner, appropriate legal actions or proceedings to collect charges, rent, or other sums due the Facility or to lawfully oust or dispossess Residents or other persons in possession under (or lawfully cancel, modify or terminate) any lease, license, or concession agreement for the breach thereof or default thereunder by the Resident, licensee or concessionaire. Unless otherwise directed by Owner, Manger shall take, at Owner's expense, appropriate legal steps with respect to any alleged violation, or a adverse order, rule, or regulation affecting the Facility. Any counsel to be engaged under this or the next preceding paragraph of this Section shall be approved by owner, which approval shall not be unreasonably withheld. Manager shall promptly notify Owner of all such actions. 3.14 MANAGEMENT SERVICE. Manager shall use its best efforts to manage and operate the Facility with a maximum of efficiency in a manner to achieve optimal financial performance and productivity of personnel and in a quality manner for the residents of the Facility commensurate with standards for comparable facilities in the State, provided that this is done in a manner consistent with good business practices. 7 3.15 DATA PROCESSING. Manager shall, directly or through an affiliate or subcontractor (the cost of which shall, within the agreed Operating Budget, be borne by Owner), provide the data processing required to maintain the financial, payroll, and accounting records of the Facility. 3.16 INDEMNIFICATION. Manager shall at all times indemnify and hold harmless Owner, its agents, representatives, partners, joint venturers, officers, directors, and shareholders, from and against any and all claims, losses, liabilities, actions, proceedings, and expenses (including reasonable attorneys' fees and costs) arising out of Manager's management or operation of the Facility; provided that the foregoing indemnity will not include Owner's willful acts or negligence. The provisions of this Section 3.16 shall survive the termination or expiration of this Agreement. 3.17 BOOKS AND RECORDS. Manager, on behalf of Owner, shall supervise and direct the keeping of full and accurate books of account and such other records reflecting the results of operation of the Facility in accordance with sound business and accounting practices and as required by law. 3.18 OTHER DUTIES. Manager shall not take any action or inaction that would constitute a default under any note, loan agreement, mortgage, trust deed, lease or other agreement executed by Owner relating to the Facility. Owner shall deliver to Manager a copy of each such agreement prior to execution thereof. 3.19 SECURITY DEPOSITS. If required by state law, Manager shall collect and disburse resident security deposits in accordance with the applicable rental agreements and all other applicable state and federal laws and regulations. Such deposits, if any, shall be deposited in a separate FDIC insured trust account (maintained in compliance with applicable law) held in the name of Owner. The balance of such account shall at all times equal or exceed the liability therefor to all residents. 3.20 OPERATING BUDGET. Subject to the Plan of Operation, Manager shall, 60 days prior to the Commencement Date prepare a pro forma budget, and about January 1 of each year thereafter, prepare an operating budget for that year, based on the immediately prior year's operating experience (the "Operating Budget"). The Operating Budget shall include, but not be limited to estimated revenues and operating expenses for the ensuing year. If Owner objects to the Operating Budget submitted by Manager, Owner shall provide Manager with written notice of such objection, stating the reasons for such objections, within 30 days after receipt. If Manager disagrees with Owner's objections, Manager shall notify Owner of such disagreement within ten days after Manager's receipt of Owner's objections. If the parties cannot resolve any dispute within ten days thereafter, then the matter may be submitted to arbitration pursuant to Article 10 hereof and the parties shall use the Operating Budget for the previous period pending the resolution of such arbitration proceeding. At the same time as the Operating Budget is submitted to Owner, Manager shall submit, for Owner's approval, a narrative report of Manager's major management goals and intended actions for the succeeding fiscal year so as to enable Owner to evaluate Manager's intended conduct of the affairs of the Facility during that period. Once the budget is mutually agreed to by the parties, Manager shall use its best efforts to manage and operate the Facility within the budget. However, Manager is not guaranteeing that Facility shall make a profit at any time or that anticipated financial projections can be met under this Agreement. All expenses shall be charged to the proper budget account and no expense may be classified (or reclassified) for the purpose of avoiding an excess in the annual budgeted amount of any accounting category. The parties agree to confer from time to time with regard to the budget and to adjust the budget as is reasonably necessary for the operation of the Facility. Owner understands and agrees that there 8 may be emergencies that arise from time to time which might require immediate expenditures by Manager to assure the continuous operation of the Facility which are not in the budget. Owner may specify the format of the budget from time to time. Manager shall, in addition, provide to Owner a capital improvements budget (the "Capital Expenditures Budget") covering all anticipated capital improvements and expenditures. The Capital Expenditures Budget is subject to Owner's approval and the same procedures set forth above with respect to the Operating Budget. Notwithstanding anything contained herein to the contrary. Manager shall not incur any expense or capital expenditure in excess of $5,000 for any single item or $10,000 in any fiscal year above the approved budget without Owner's specific written authorization; provided however, Manager shall have the authority to incur such expenses and capital expenditures without Owner's prior approval if such expense or capital expenditure is immediately necessary for: (i) the health or safety of the residents of the Facility, or (ii) to comply with any applicable law, rule or regulation governing the operation of the Facility ("Emergency Expenditures"). Manager shall promptly provide Owner with written notice describing the cost and reason for any such Emergency Expenditure. Owner shall promptly review Manager's request for authorization of expenses and capital expenditures in excess of the aforesaid limits which are not Emergency Expenditures. 3.21 FEES AND CHARGES. Subject to approval of Owner, Manager shall establish, maintain, revise and administer the overall charge structure of the Facility, including, without limitation, monthly fees, rentals, and charges of any kind, charges for ancillary services, any and all items sold at the Facility and any other services provided at the Facility. Manager shall be responsible for the timely billing and collection from residents or third party payors of the amounts due and payable from residents for the services provided by the Facility. Manager shall be responsible for making timely and complete rate filings as required by law, and all posting or filing of notices, charges and fees required by law. 3.22 RESIDENT-MANAGEMENT RELATIONS. Manager will encourage and assist residents of the Facility in forming and maintaining representative organizations to promote their common interests and will maintain good- faith communication with such organizations so that problems affecting the Facility and its residents may be avoided or solved on the basis of mutual self interest. 3.23 CONSTRUCTION OF IMPROVEMENTS TO EXISTING FACILITY. Except as otherwise provided herein, Manager shall not make or cause to be made any alterations, additions, replacements or improvements on, in, about or to the Facility without the prior written consent of Owner. The entire cost of construction of any such new improvements to the existing facility and all expenses connected therewith, shall be borne and paid by Owner exclusively. Prior to the commencement of any such alterations, additions, replacements or improvements, Manager shall submit to and obtain Owner' s written approval of the plans and specifications thereof. Manager agrees that such plans and specifications shall require the contractor to post an adequate performance bonds. Manager agrees to make and construct all such repairs, improvements and installations in accordance with all laws, rules and regulations of applicable governing bodies and agencies, to diligently complete such construction once the same has commenced. All improvements constructed by Manager upon the Facility shall, upon termination of this Agreement, belong to Owner. Manager shall save and hold Owner harmless and the Facility harmless from any and all liability of any kind on account of such work or improvement while this Agreement remains in effect. Owner shall have the right at any time to post the Facility with such notices as may be required to protect Owner's interest in the Facility from mechanics' liens or other liens of a similar 9 nature. The failure to disapprove Manager's plans and specifications within 60 days after receipt thereof by Owner shall be automatically deemed disapproval thereof. 3.24 USE OF THE FACILITY'S PROPERTY. Manager shall not utilize any hazardous materials on the Facility's property except in accordance with applicable legal requirements and will not permit any contamination which may require remediation under applicable Hazardous Materials Law as defined herein). Manager shall not dispose of any hazardous materials or substance within the sewage system of the Facility's property, and that it shall handle all "red bag" wastes in accordance with applicable Hazardous Materials Laws. "Hazardous Materials Law" shall mean any law regulation, or ordinance relating to environmental conditions, medical waste or industrial hygiene, including the Resource Conservation Recovery Act of 1976 ("RCRA"), the Comprehensive Environmental Response Compensation Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the Hazardous Materials Transportation Act, the Federal Water Pollution Control Act, the Clean Air Act, the Clean Water Act, the Toxic Substance Control Act, the Safe Drinking Water Act, the Atomic Energy Act and all similar federal, state and local environmental statutes and ordinances, whether heretofore or hereafter enacted or effected and all regulations, orders, or decrees heretofore or hereafter promulgated thereunder. 3.25 ACCESS TO BOOKS, RECORDS AND DOCUMENTS. In the event the Facility participates in the Medicare/Medicaid programs, for purposes of Section 1861(v)(1)(I) of the Social Security Act as amended, and any written regulation thereto, if the value or cost of services rendered by Manager to Owner is $10,000 or more over a 12-month period, including without :imitation services rendered pursuant to this Agreement, Manager agrees as follows: (a) Until the expiration of four years after the furnishing of such services, Manager shall, upon written request, make available to the Secretary of the Department of Health and Human Services (the "Secretary"), the Secretary's duly authorized representative, the Comptroller General, or the Comptroller General's duly authorized representatives, such books, documents, and records as may be necessary to certify the nature and extent of costs of such services; and (b) If any such services are performed by way of subcontract with another organization and the value or cost of such subcontracted services is $ 10,000 or more over a 12-month period, such subcontract shall contain and Manager shall enforce a clause to the same effect as subsection (a) immediately above. The availability of Manager's books, documents and records shall be subject at all times to all applicable legal requirements, including without limitation such criteria and procedures for seeking and obtaining access as may be promulgated by the Secretary by regulation. ARTICLE 4 RIGHTS AND DUTIES OF OWNER During the term of this Agreement: 4.1 RIGHT OF INSPECTION. Owner (or its representative) shall have the right to enter upon any part of the Facility during regular business hours upon reasonable advance notice to Manager for the purpose of examining or inspecting same or examining or making copies or extracts of books and records of the Facility, but this shall be done with as little disruption to the business of the Facility as is practicable. However, the books and records of the Facility shall not 10 be removed from the Facility without the expressed written consent of Manager. Owner acknowledges that some books and records will be maintained at Manager's principal place of business, but that such books and records shall be available for inspection by Owner or its representative. The parties will agree in writing as to which books and records must be kept at the Facility. Owner shall direct all inquiries regarding operations, procedures, policies, employee relations, patient care, and all other matters concerning the Facility to the Manager's divisional director of operations or other officer of Manager as it may from time to time designate in a written notice to Owner. Notwithstanding the foregoing, Owner shall retain the right to contact the executive director regarding matters pertinent to the Facility. 4.2 COOPERATION WITH MANAGER. Subject to the provisions of Article 5 below, Owner shall cooperate with Manager in operating and supervising the Facility and shall reimburse Manager for all funds reasonably expended or costs and expenses reasonably incurred to which Manager is entitled to reimbursement pursuant to Exhibit A of this Agreement and all out of pocket expenses paid or incurred by Manager for the operation of the Facility, including reasonable and necessary traveling expenses of executives of Manager, and all reasonable costs and expenses of any business promotion or personnel training program of the Facility, as reflected in the Operating Budget. 4.3 CAPITAL IMPROVEMENTS. Subject to the capital Expenditures Budget, Owner shall provide Manager by depositing into the reserve account or Facility Funds such amount of funds as may be required from time to time to make all necessary capital improvements to the Facility, in order to maintain and continue standards of operation of the Facility as a retirement community and assisted living care center. If Manager in its professional judgment determines that additional capital improvement funds are required, Manager shall notify Owner thereof in writing for Owner's consent which shall not be unreasonably withheld. Upon such consent, Owner shall provide Manager with such increase in capital improvement funds, by depositing the funds in the reserve account or Facility Funds within 30 days thereafter. 4.4 INDEMNIFICATION. Owner shall at all times indemnify and hold harmless Manager, its agents, representatives, partners, joint venturers, officers,, directors, and shareholders, from and against any and all claims, losses, liabilities, actions, proceedings, and expenses (including reasonable attorneys' fees and costs) arising out of Owner' s operation of the Facility prior to the Commencement Date and Owner's ownership of the Facility, including the performance of its obligations with respect to any loans secured by a security interest in the Facility. Such claims, losses, liabilities, actions, proceedings and expenses are considered the responsibility of Owner absent documentation of responsibility for such claims by Manager. The provisions of this Section 4.4 shall survive the termination or expiration of this Agreement. ARTICLE 5 COMPENSATION AND DISTRIBUTIONS 5.1 Management Fees. As full compensation for all to the services to be rendered by Manager during the term of this Agreement (but not including reimbursement for costs or expenses incurred by manager on behalf of Owner of the Facility hereunder), Owner shall pay to Manager at its principal office, or at such other place as Manager may from time to time designate in writing, and at the times herein after specified, a management fee equal to five percent of Gross Revenues (as defined below) derived from the operation of the Facility on a monthly basis 11 determined on the accrual method of accounting. Such management fee (the "Base Management Fee") shall be payable from Facility Funds monthly upon delivery to Owner of the monthly financial statement referred to in Section 3.12 (each date being hereinafter referred to as a "Payment Date") and shall be calculated based upon the Facility's Gross Revenues during the preceding month as set forth in such financial statements. 5.2 GROSS REVENUES. For purposes of determining such management fees, "Gross Revenues" for any period shall be determined on the basis of all revenues and income of any kind derived, directly or indirectly, from the operation of the Facility during such period ( including rental or other payment from concessionaires, licensees, Residents, and other users of the Facility, but excluding therefrom all bequests, gifts, or similar donations) whether on a cash basis or on credit, as determined in accordance with generally accepted accounting principles consistently applied, excluding, however: (a) federal, state, and municipal excise, sales, and use taxes collected directly from residents as a part of the sales prices of any goods and services; (b) proceeds of any life insurance policies; (c) gains arising from the sale or other disposition of capital assets; (d) any reversal of any contingency or tax reserve; (e) interest earned on sinking funds, Social Security Accounts, bonds funds, etc. originally and specifically formed as a requirement of any bond issue utilized to finance the Facility; and any refunds, contractual adjustments, income set-offs or bad debt expense. The proceeds of business interruption insurance or proceeds received as a result of Medicare and Medicaid audits shall be included in Gross Revenues from the Facility. However, funds required to be repaid as a result of Medicare and Medicaid audits shall be deducted from Gross Revenues of the Facility. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF POWER Owner and members of Owner represent and warrant to Manager as follows: 6.1 ORGANIZATION AND STANDING OF OWNER. Owner is a limited liability company duly organized, validly existing and in good standing under the laws of the State of North Carolina and is qualified to do business in each other jurisdiction where such qualification is necessary, or shall be qualified within thirty (30) days hereof. Copies of the Articles of Organization and Operating Agreement of Owner, and all amendments thereof to date, have been, if requested, delivered to Manager and are complete and correct. The Owner has the power and authority to own the property and assets now owned by it and to conduct the business currently being conducted by it. 6.2 ABSENCE OF CONFLICTING AGREEMENTS. Neither the execution or delivery of this Agreement, including all Schedules and Exhibits hereto, or any of the other instruments and documents required or contemplated hereby and thereby ("Transaction Documents") by Owner, nor the performance by Owner of the transactions contemplated hereby and thereby, conflicts 12 with, or constitutes a breach of or a default or requires the consent of any third party under (i) the Articles of Organization or Operating Agreement of Owner, or (ii) to the best of its knowledge after due inquiry, any applicable law, rule judgment, order, writ, injunction, or decree of any court, currently in effect; or (iii) to the best of its knowledge after due inquiry, any applicable rule or regulation of any administrative agency or other governmental authority currently in effect; or (iv) any agreement, indenture, contract or instrument to which Owner is now a party or by which the assets of Owner are bound. 6.3 CONSENTS. Except as set forth in Schedule 6.3, no authorization, consent, approval, license, exemption by, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary in connection with the execution, delivery and performance of this Agreement by the Owner. 6.4 LEGAL PROCEEDINGS. Other than as set forth on Schedule 6.4, there are no claims, actions, suits or proceedings or arbitrations, either administrative or judicial, pending or, to the knowledge of Owner, overtly threatened against or affecting Owner, its affiliates or shareholders, or their ability to consummate the transactions contemplated herein, at law or in equity or otherwise, before or by any court or governmental agency or body, domestic or foreign, or before an arbitrator of any kind. 6.5 ABSENCE OF CERTAIN EVENTS. Except as set forth on Schedule 6.5, Owner has not: (a) sold, assigned or transferred any of its assets or properties, except in the ordinary course of business; (b) mortgaged, pledged or subjected to any lien, pledge, mortgage, security interest, conditional sales contract or other encumbrance of any nature whatsoever, the Facility's assets; (c) made or suffered any amendment or termination of any material contract, commitment, instrument or agreement other than in the ordinary course of business; (d) failed to pay or discharge when due any liabilities, the failure to pay or discharge which has caused or will cause any actual material damage or give rise to the risk of a material loss to Owner; (e) changed any of the accounting principles followed by them or the methods of applying such principles ; (f) entered into any material transaction other than in the ordinary course of business; or (g) received any notice of any adverse determination made by any licensing authority or reimbursement source which may reasonably be expected to have a material adverse effect on the revenues or operations of the Facility. Owner shall report to Manger, within five business days after receipt thereof, any written notices that Owner or the Facility is not in compliance in any material respect with any of the foregoing. 6.6 COMPLIANCE WITH LAWS. Except for notices of non-compliance as to which Owner has taken connective action acceptable to the applicable governmental agency, and as set forth in Schedule 6.6, Owner has not within the period of twelve months preceding the date of this 13 Agreement, received any written notice that it fails to comply in any material respect with any applicable federal, state, local, or other governmental agency having jurisdiction over Owner ("Governmental Requirements"). Owner shall report to Manager, within five business days after receipt thereof, any written notices that Owner is not in compliance in any material respect with any of the foregoing. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF MANAGER Manager represents and warrants to Owner as follows: 7.1 ORGANIZATION AND STANDING OF MANAGER. Manager is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Copies of the Articles of Incorporation and By-Laws of Manager, and all amendments thereof to date, have been, if requested, delivered to Owner and are complete and correct. Manager has the power and authority to own the property and assets now owned by it and to conduct the business currently being conducted by it. 7.2 ABSENCE OF CONFLICTING AGREEMENTS. Neither the execution or delivery of this Agreement, including all Schedules and Exhibits hereto, or any of the other instruments and documents required or contemplated hereby and thereby by Manager, nor the performance by Manager of the transactions contemplated hereby and thereby, conflicts with, or constitutes a breach of or a default or requires the consent of any third party under (i) the Articles of Incorporation or By-Laws of Manager, or (ii) to the best of its knowledge after due inquiry, any applicable law, rule, judgment, order, writ, injunction, or decree of any court, currently in effect; or (iii) to the best of its knowledge after due inquiry, any applicable rule or regulation of any administrative agency or other governmental authority currently in effect; or (iv) any agreement, indenture, contract or instrument to which Manager is now a party or by which the assets of Manager are bound. 7.3 CONSENTS. Except as set forth in Schedule 7.3, no authorization, consent, approval, license, exemption by, filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is or will be necessary in connection with the execution, delivery and performance of this Agreement by the Manager. 7.4 LEGAL PROCEEDINGS. Other than as set forth on Schedule 7.4, there are no claims, actions, suits or proceedings or arbitrations, either administrative or judicial, pending or, to the knowledge of Manager, overtly threatened against or affecting Manager, its affiliates or shareholders, which affect their ability to consummate the transactions contemplated herein, at law or in equity or otherwise, before or by any court or governmental agency or body, domestic or foreign, or before an arbitrator of any kind. 7.5 COMPLIANCE WITH LAWS. Except for notices of non-compliance as to which Manager has taken corrective action acceptable to the applicable governmental agency, and as set forth in Schedule 7.5, Manager has not within the period of 12 months preceding the date of this Agreement, received any written notice that it fails to cc: :ply in any material respect with any applicable federal, state, local or other governmental laws or ordinances, or any applicable order, rule or regulation of any Federal, state, local or other governmental agency having jurisdiction over Manger. Manager shall report to Owner, within five business days after receipt thereof, any written notices that Manager is not in compliance in any material respect with any of the 14 foregoing. ARTICLE 8 TERMINATION RIGHTS This Agreement may be terminated and, except as to liabilities or claims or either party hereto which have accrued prior to the effective date of termination, the obligations of the parties with respect to this Agreement may be terminated only upon the occurrence of any of the following events; 8.1 TERMINATION BY OWNER. If at any time or from time to time during the term of this Agreement any of the following events shall occur and not be remedied within the applicable period of time herein specified, namely: (a) Manager applies for or consents to the appointment of a receiver, trustee, or liquidator of Manager of all or a substantial part of its assets, files a voluntary petition in bankruptcy or is the subject of an involuntary bankruptcy proceeding, makes a general assignment with creditors or takes advantage of any insolvency law, or if an order, judgment or decree is entered by any court of competent jurisdiction, on the application of a creditor, adjudicating Manager as bankrupt or insolvent or approving a petition seeking reorganization of Manager or appointing a receiver, trustee, or liquidator of Manager or of all or a substantial part of its assets, and such order, judgment or decree continues unstayed and in effect for any period of 90 consecutive days; (b) Manager shall fail to keep, observe, or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed, or performed by Manager; or Manager's failure to substantially comply with the state and local regulations concerning the development and operating of similar facilities, and such material default or failure to substantially comply with state and local regulations shall continue unabated for a period of 60 days after written notice thereof by Owner to Manager; (c) The license or licenses required for the operation of the Facility are at any time suspended, terminated, or revoked beyond the applicable appeal period for any reason due to acts of commission or omission of Manager; or (d) The Facility or any portion thereof is damaged or destroyed by fire or other casualty and (i) Owner fails to undertake to repair, restore, rebuild, or replace any such damage or destruction within 60 days after such fire or other casualty, or fails to complete such work. diligently, and (ii) Owner fails to permit Manager to undertake to repair, restore, rebuild, or replace any such damage or destruction within 60 days after such fire or casualty; then in case of any such event and upon the expiration of the period of grace applicable thereto, except for an event under Sections 8.1(c) or 8.1(d) there being no grace period, this Agreement shall terminate at Owner's option and upon ten days written notice to Manager; provided, however, that if an event under Sections 8.1(c) or 8.1(d) occurs, this Agreement shall terminate immediately upon notice to Manager. 8.2 TERMINATION BY MANAGER. If at any time or from time to time during the term of this Agreement any of the following events shall occur and not be timely cured: 15 (a) Owner fails to keep, observe, or perform any material covenant, agreement, term or provision of this Agreement to be kept, observed, or performed by Owner, and such default continues for a period of 6o days after written notice thereof by Manager to, Owner; (b) The Facility or any portion thereof is damaged or destroyed by tire or other casualty and (i) Owner fails to undertake to repair, restore, rebuild, or replace any such damage or destruction within 60 days after such fire or other casualty, or fails to complete such work diligently, and (ii) Owner fails to permit Manager to undertake to repair, restore, rebuild, or replace any such damage or destruction within 60 days after such fire or casualty; (c) Owner applies for or consent: to the appointment of a receiver, trustee, or liquidator of Owner or of all or a substantial part of its assets, files a voluntary petition in bankruptcy or admits in writing its ability to pay its debts as they become due, makes a general assignment for the benefit of creditors, files a petition or any answer seeking reorganization or arrangements with creditors or to take advantage of any insolvency law, or if an order, judgment or decree is entered by a court of competent jurisdiction, on the application of a creditor, adjudicating Owner bankrupt or appointing a receiver, trustee, or liquidator of Owner or with respect to all or a substantial part of the assets of Owner, and such order, judgment or decree continues unstayed and in effect for any period of 90 consecutive days; (d) Any license, lease or sub-lease necessary for the operation of the Facility is suspended, terminated, or revoked and such suspension, termination, or revocation continues unstayed and in effect for a period of 60 consecutive days; or then in case of any such event and upon the expiration of the period of grace applicable thereto, this Agreement shall terminate at Manager's option and upon ten days written notice to Owner. 8.3 SURVIVING RIGHTS UPON TERMINATION. If either party exercises its option to terminate pursuant to this Article 8, each party shall forthwith, but in no event later than ten days after the termination date of this Agreement, account for and pay to the other all sums due and owing pursuant to the terms of this Agreement. All other rights and obligations of the parties under this Agreement shall terminate, except the obligations of the parties for damages caused by a breach of this Agreement, a duty of a party required under applicable law or regulation, or the indemnification provisions contained in this Agreement or as expressly stated herein. ARTICLE 9 CONDEMNATION If the whole of the Facility is taken or condemned in any eminent domain, condemnation, compulsory acquisition, or like proceeding, by a competent authority for any public or quasi-public use or purpose, or if a portion thereof is taken or condemned so as to make the balance of the Facility unsuitable for its primary intended use, then this Agreement shall terminate on the date on which the Owner is required to surrender possession of the Facility. Manager shall continue to supervise and direct the management of the Facility until such time as Owner is required to surrender possession of the Facility by reason of such taking or condemnation. If only a part of the Facility is taken or condemned and the taking or condemnation of 16 such part does not make the balance unsuitable for its primary intended use, this Agreement shall not terminate. In the event that the parties are unable, within a period of 30 days after controversy arising between them, to agree upon the apportionment of any award or are otherwise in dispute as to any matter arising under this Article, any such dispute shall be resolved by arbitration in accordance with the provisions of Article 11 below, and the costs thereof or incurred therein shall be borne or apportioned and paid as determined by said arbitration. ARTICLE 10 ARBITRATION If any controversy should arise between the parties relating to this Agreement, involving any matter, either party may serve upon the other a written notice stating that such party desires to have the controversy determined by a single arbitrator. If the parties cannot agree within 15 days from the service of such notice as to the selection of such arbitrator, an arbitrator shall be selected or designated by the American Arbitration Association upon written request of either party hereto. Arbitration of such controversy, disagreement, or dispute shall be conducted in accordance with the rules then in force of the American Arbitration Association, and the decision and award of the arbitrator so selected shall be binding upon owner and Manger. The arbitration will be held in the city and state where the Facility is located Notwithstanding the foregoing, if a dispute arises between the parties to this Agreement that also involves or is related to a third party or parties not bound to arbitration under this Agreement, then, unless both parties to this Agreement agree to proceed in arbitration, that dispute or any other related disputes shall not be subject to this arbitration provision. Both parties, however, shall make a good faith effort to resolve any controversy, which effort shall continue for a period of 30 days prior to any demand for arbitration. Unless otherwise specified in the decision of the arbitrators, the prevailing party shall be reimbursed by the non-prevailing party for any reasonable out-of-pocket expenses (including travel expenses and reasonable attorney's fees and expenses) incurred as a result of its participation in any such arbitration and the non-prevailing party will pay all other costs associated with such proceedings. If the issue to be arbitrated is Manager' s alleged breach of this Agreement, and as a result thereof Owner has the right to terminate this Agreement, Manager shall continue to manage the Facility hereunder pending the outcome of such arbitration, provided Manager posts bond of any money damages in dispute. ARTICLE 11 SUCCESSORS AND ASSIGNS 11.1 ASSIGNMENTS BY MANAGER. Manager, without the consent of Owner, shall have the right to assign this Agreement to a wholly or majority owned subsidiary, provided that Manager shall not hereby be released from its obligations hereunder and no event of default then exists under Section 8.1 hereof. Except as otherwise permitted herein, Manager shall have no right to assign this Agreement. 17 11.2 SALE, ASSIGNMENT, OR SUBLEASE BY OWNER. Any sale, sub-lease, or assignment by Owner with respect to the Facility, other than to Manager or one of its affiliates, shall be expressly subject to the terms and provisions of this Agreement and shall not relieve Owner of its liability or obligations hereunder. Owner shall cause any purchaser, assignee, or sublessee to deliver to Manager written acknowledgment of its agreement to perform hereunder including the payment of the management fee described herein. Upon such sale, lease, sublease or assignment by Owner to a third party other than CapBay IV, Ltd., or its successors, affiliates or permitted assigns, manager may terminate this Agreement upon ten (10) days written notice to Owner, its lessee, sublessee or assignee. ARTICLE 12 MISCELLANEOUS PROVISIONS 12.1 NOTICES. Any notice or other communication by either party to the other shall be in writing and shall be deemed to have been duly given upon the date delivered if delivered personally, or upon the date received if mailed postage prepaid, registered, or certified mail, addressed as follows: Owner: ALCO VII, L.L.C. 46 3rd Street N. W. Hickory, North Carolina 28601 Manager: EMERITUS CORPORATION 3131 Elliott Avenue Suite 500 Seattle, Washington 98121 or to such other address, and to the attention of such other person or officer as either party may designate in writing by notice, 12.2 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in the Agreement shall constitute or be construed to be or create a partnership or joint venture between Owner, its successors, or assigns on the one part and Manager, its successors, or assigns on the other part. 12.3 MODIFICATIONS AND CHANGES. This Agreement cannot be changed or modified except by written agreement of the parties. 12.4 UNDERSTANDING AND AGREEMENTS. This Agreement constitutes the entire understanding and agreement between the parties with respect to Manager's operation and management of the Facility, and supersede any and all understandings or agreements, whether written or oral, concerning any matters described herein. No subsequent agreements or understandings between the parties concerning any matter herein can after the terms of this Agreement except by written agreement of the parties. 12.5 HEADINGS. The article and paragraph headings contained herein are for convenience of reference only and are not intended to define, limit, or describe the scope of intent of any provision of this Agreement. 12.6 APPROVAL OR CONSENT. Whenever under any provisions of this Agreement, the approval or disapproval of either party is required, notice of such approval or disapproval shall 18 be promptly given and any requested approval shall not be unreasonably withheld. Whenever, under any provision of this Agreement, the approval or disapproval of Owner is required, such approval or disapproval may be given by the person or any one of the persons, as the case may be, designated in a notification signed by or on behalf of Owner. For all purposes under this Agreement, Manager may rely upon the latest such notification received by it, notwithstanding any knowledge to the contrary. 12.7 GOVERNING. This Agreement shall be deemed to have been made and shall be construed and interpreted in accordance with the laws of the State. 12.8 SEVERABILITY. If any provision of this Agreement is held to be unenforceable or invalid for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Agreement shall be deemed valid and enforceable to the fullest extent. 12.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 12.10 THIRD-PARTY RIGHTS. Nothing expressed or referred to in this Agreement will be construed to give any person other than the parties to this Agreement and the Lender any legal or equitable rights or remedy or claim under or with respect to this Agreement or any provision of this Agreement. The Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and the Lender and their successors and assigns. Lender is an intended third-party beneficiary of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement effective as of the day and year first above written. OWNER ALCO VII, L.L.C. a North Carolina limited liability company By: /s/ ------------------- - -------------------- Its: Manager MANAGER: EMERITUS CORPORATION, a Washington corporation By: /s/ Raymond R. Brandstrom ------------------ - ----------------------- Its: President 19 EX-10.76.1 17 EX 10.76.1 AGREEMENT THIS AGREEMENT is made and entered into, on this day of 1996, by and between EMERITUS CORPORATION, a Washington corporation with its principal place of business at 2003 Western Avenue, Suite 660, Seattle, WA 98121 ("Emeritus") and SANYO ELECTRIC CO., LTD., a Japanese corporation with its principal place of business at 5-5 Keihan-hondori 2-chome, Moriguchi-shi Osaka-fu, 570, Japan ("Sanyo"). RECITALS A. Emeritus is in the business of developing, owning and operating assisted living facilities, independent living facilities and nursing home (the "Senior Housing Business") throughout the United States. B. Sanyo and Emeritus are interested in jointly entering the development, construction and/or operation of the Senior Housing Business in Japan. C. In order to enable Sanyo and Emeritus to undertake a study for the Senior Housing Business in Japan, and in order to facilitate the development of such Senior Housing Business if both parties once reach at an agreement to start the Senior Housing Business in Japan, Emeritus has agreed to train a designee of Sanyo (the "Sanyo Employee") and to permit him/her to gain know-how and expertise concerning the Senior Housing Business. D. Emeritus and Sanyo are interested in documenting the terms and conditions of said training relationship and the rights which the Sanyo Employee and Sanyo will have to use the know-how and expertise gained by the Sanyo Employee. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. TRAINING OF SANYO EMPLOYEE. Emeritus does hereby agree to train the Sanyo Employee, in accordance with the "Training Program" which is attached hereto as Exhibit A, at no expense to Sanyo except as expressly provided herein. Such training shall commence on June 3,1996. Sanyo and Emeritus agree that it will be mutually beneficial to train the Sanyo Employee in all facets of American Senior Housing Business in America for preparation for the joint Senior Housing Venture. Emeritus will use its best efforts within the capabilities of Emeritus to train the Sanyo Employee to gain sufficient know how to operate the Joint Senior Housing Business in Japan. Sanyo Employee, during his/her training, shall be subject to the rules and regulations of Emeritus applicable to Sanyo Employee, provided, however, that Sanyo Employee shall in no event be considered to be an employee of Emeritus. Except as expressly provided herein, Sanyo Employee shall have no obligations to Emeritus. It is understood and agreed on by both parties that Sanyo Employee shall not be required to take any office or job position in Emeritus' organization nor to assume any responsibility or liability for his/her performance during the training. All of the salary and benefits of the Sanyo Employee shall be paid by Sanyo. In addition, Emeritus shall require the Sanyo Employee to be covered by an appropriate liability insurance policy covering Sanyo Employee with respect to any acts or omissions of the Sanyo Employee taken in the course of the training, provided, however, that Emeritus shall assist Sanyo in determining and procuring adequate insurance coverage, if so requested by Sanyo. All of the travel and living expenses of the Sanyo Employee while residing in the United States shall be paid by Sanyo. Emeritus further retains the right to request that Sanyo replace the Sanyo Employee if the parties hereto mutually agree that Sanyo Employee is not capable or otherwise suitable for the training. It is understood that upon the expiration or earlier termination of this Agreement, the Sanyo Employee shall terminate his/her training with Emeritus and shall return to Japan and be involved in the development and/or operation of the Senior Housing Business. 2. ACCESS TO KNOW-HOW. During the course of his/her training, Emeritus shall allow the Sanyo Employee to have access to such know-how concerning the Senior Housing Business as may be reasonably necessary for the Sanyo Employee's training. In conjunction therewith, the Sanyo Employee shall have the right to share any such know how with Sanyo, subject to the limitations set forth in Section 3 with respect to Sanyo's right and the right of the Sanyo Employee to use such know-how, provided, however, it is understood and agreed that Sanyo shall have the right to use such know-how for feasibility study for the Senior Housing Business and/or in furtherance of the development, construction and operation of the Senior Housing Business between the parties. Sanyo acknowledges and agrees that the Sanyo Employee shall not have the right to disclose such know-how to any person or entity other than Sanyo and other employees, officers, agents and directors of Emeritus, without prior written consent of Emeritus. 3. LIMITATION ON USE OF KNOW-HOW. Neither Sanyo nor the Sanyo Employee shall have the right to use any know-how of Emeritus gained by the Sanyo Employee during the course of his/her training with Emeritus for any purposes other than conducting a feasibility study for the Senior Housing Business and/or in furtherance of the . development, construction and operation of the Senior Housing Business for the parties business relationship. Any breach of this Section 3, which will materially harm Emeritus' right in such know-how, shall be grounds for immediate termination of this Agreement and shall entitle Emeritus to sue for injunctive relief, it being understood and agreed that is may suffer irreparable damages from the use of such know-how of Emeritus in violation of the terms hereof. For the purpose of Section 2 and this 3, Emeritus' know- how does not include 1) Information which is or becomes known public through no fault of Sanyo; or 2) Information already known to Sanyo before the disclosure; or 3) Information which is independently developed by Sanyo without making use of the confidential Information of Emeritus; or 4) Information learned by Sanyo from a third party entitled to disclose it; or 5) Information which has been approved for release or use by written authorization of Emeritus, or 6) Information which is disclosed pursuant to the requirement of any governmental agency, court order or any law or regulations requiring disclosure thereof, provided that Emeritus shall be provided with prior written notice of any such disclosure. 2 4. DISPUTE RESOLUTION. The parties shall use their best efforts to avoid any disputes by communicating freely and openly about issues and by adhering to the general principle that in a11 matters, each shall seek what is fair and equitable for both parties. In the event that any dispute shall occur, the parties agree to resolve the dispute according to the following steps: (a) A person designated by Sanyo and a person designated by Emeritus shall meet in an attempt to resolve the problem. In preparation for such meetings, each party will present to the other party at least five days prior to the meeting a position statement setting forth such party's analysis and proposed resolution of the problem. The parties will use their best efforts to resolve their differences. (b) If the parties are unable to resolve their differences, they may mutually agree to use non-binding mediation in Honolulu to resolve the issues. (c) If the parties are unable to agree on mediation, the issue(s) will be submitted to arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (the "Rules") by one or more arbitrators appointed in accordance with the rules. (d) The arbitration shall be held in and proceedings shall be conducted and reported in the English language. (e) If more than one arbitrator participates in the proceeding, the arbitrators shall decide any matter before them by majority vote in accordance with this Agreement. (f) The arbitrators shall proceed promptly and diligently and render their decision as soon as practicable. The decision of the arbitrators shall be in writing in English and presented in separate finding of fact and law. The award of the arbitrators shall be final and binding on the parties from which no appeal may be taken, and an order confirming the award or judgment upon the award may be entered in any court having jurisdiction. The award of the arbitrators may include pre-award interest and equitable relief to the extent the arbitrators deem appropriate. The award shall include interest from the date of the award until paid in full, at a rate to be fixed by the arbitrators. (g) Each party shall pay their own costs and expenses incurred by and in connection with the arbitration, except the costs and expenses of the arbitrator(s) shall be borne equally by each party. (h) Notwithstanding the initiation of an arbitration proceeding, each party shall continue to perform all duties and obligations under this Agreement, without prejudice. 5. SCOPE OF THE AGREEMENT. This Agreement in no way affects Sanyo ' s ability to utilize its own or lawfully acquired or licensed third party's information and/or know-how independent of the joint business cooperation for Senior Housing Business in Japan which is under negotiation by and between the parties hereto. 3 6. INDEMNITY. Each of Emeritus and Sanyo agrees to indemnify, defend and hold harmless the other from and against any and all costs, liabilities, damages and expenses, including, but not limited to, reasonable attorneys fees and costs which it may incur in the event of the breach of its obligations hereunder. 7. NOTICE. Any notice, request or other communication hereunder shall be sent in English by registered airmail, telex, telegram or facsimile (if followed immediately by a confirmation copy sent by air mail) and shall be addressed to the parties at the addresses set forth above c/o Mr. Frank Ruffo and Mr. Takeyama in the case of notices to Emeritus and c/o Mr. Tanaka and Mr. Matsumura in the case of notices to Sanyo. Each such notice, request or other communication shall be deemed to be received and effective when actually received or when delivery is refused by the other party hereto. 8. ENTIRETY. This Agreement reflects the entire understanding of the parties hereto with respect to the subject matter hereof and supersedes all prior negotiations, discussions or agreements; provided, however, that this Agreement shall not be deemed to supersede that Letter of Intent dated February 16,1996 which shall continue in full force and effect after the date hereof. This Agreement may not be amended or modified except by written instrument signed by the parties hereto. 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Washington. 10. SEVERABILITY. In the event any provision of this Agreement is deemed to be invalid or unenforceable, said determination shall not affect the enforceability or validity of the remaining terms hereof. 11. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. 12. TERM. This Agreement shall commence on June 3,1996 and shall continue subject to the parties' diligently progressing towards consummation of their joint venture agreement, until terminated by (i) mutual agreement of the parties, (ii) either party with or without cause on no less than sixty (60) days written notice to the other party or (iii) termination of Training Program. In the event of the termination of this Agreement, the obligations of Sanyo and the Sanyo Employee under Section 3 and the obligations of Sanyo and Emeritus under Section 6 shall survive such termination. 4 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth above. EMERITUS CORPORATION By: /s/ Frank A. Ruffo - ------------------------------------ Its: Vice President By: /s/ Y. Tanaka ----------------------- - -------------- Its: Managing Director 5 EX-10.76.2 18 EX 10.76.2 JOINT VENTURE AGREEMENT THIS JOINT VENTURE AGREEMENT is entered into on this 9th day of July, 1997, by and between Emeritus Corporation, a corporation organized under the laws of the State of Washington, U.S.A. ("Emeritus"), and Sanyo Electric Co., Ltd., a corporation organized under the laws of Japan ("Sanyo"). (Emeritus and Sanyo may from time to time be hereinafter referred to collectively as the "Parties" and individually as the "Party"). RECITALS A. Sanyo and Emeritus, either directly or through subsidiaries, desire to establish a joint venture in order to provide senior housing in the county of Japan, with an aim of establishing a leadership position in Japan in this market. B. This Agreement is designed to create such joint venture and to provide for its existence and operation. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Parties agree as follows: l. FORMATION, PURPOSES, AND DURATION L.1 FORMATION AND NAME 1.1.1 FORMATION The Parties hereby agree to form a joint venture (the "Company") in such business form as will meet their mutual tax and operational purposes. It is contemplated that the Company will be organized in the form of a Japanese Kabushiki Kaisha. To the extent permitted by Japanese law and practice, the articles of incorporation of the Company shall provide each Party the protections set forth herein. 1.1.2 NAME The name of the Company shall be "Sanyo Emeritus Corporation," expressed in the Japanese language. Following incorporation, the Parties shall cause the Company to file a registration for the trade names, trademarks, and/or service marks agreed upon between the Parties. Neither Party shall use the name of the other Party outside of the Company's business without such other Party's permission. In the event that either Party withdraws from the Company for any reason whatsoever, the other Party shall take all necessary steps to cause the Company to change its corporate name so as to exclude therefrom the name of the withdrawing Party or any name similar thereto. 1.2 EFFECTIVE DATE The date on which this Agreement shall be effective and binding ("Effective Date") shall be the date first above written. 1.3 PURPOSES AND SCOPE OF THE COMPANY 1.3.1 BUSINESS PURPOSE The Company shall be formed for the purpose, without limitation, of developing, owning, and operating senior housing and long-term care facilities in the country of Japan (which purpose shall hereinafter be referred to as the "Business Purpose"). 1.3.2 GENERAL AUTHORITY In order to carry out the Business Purpose of the Company set forth in Section 1.3. l, the Company may, to the extent permitted by the laws of Japan, acquire, own, lease and operate property, enter into contracts, hire personnel, and undertake and do all other lawful acts necessary for or incidental to the purposes set forth in Section 1.3.1. 1.4 SCOPE OF PARTY'S AUTHORITY Except as otherwise expressly and specifically provided for in this Agreement, neither of the Parties shall have any authority to bind or act for, or assume any obligation or responsibility on behalf of the other Party or the Company. This Agreement shall not be deemed to create a partnership between the Parties with respect to any activities other than the activities within the scope of the Business Purpose of the Company. 1.5 PRINCIPAL PLACE OF BUSINESS The initial principal place of business of the Company shall be located either at Sanyo's corporate headquarters in Osaka, Japan, or an alternate address suggested by Sanyo and mutually agreed to by the Parties. 1.6 TERM This Agreement shall commence as of Effective Date, and shall continue until terminated in accordance with Article 9 of this Agreement. The Parties contemplate that the Company will require some time before it can be determined whether the Company will succeed or not. Accordingly, except pursuant to the termination provisions of this Agreement, each Party hereby agrees not to withdraw from the Company or to dissolve, terminate, liquidate or petition a court for the dissolution, termination or liquidation of the Company, and neither of the Parties at any time shall have the right to petition or to take any action to subject the Company assets or any part thereof to the authority of any court of bankruptcy, insolvency, receivership or similar proceedings, until the Company shall have operated for at least five years. 2. OWNERSHIP; DUTIES OF THE PARTIES 2.1 OWNERSHIP OF THE COMPANY; DUTIES OF THE PARTIES The Parties shall have the following percentage interest in the Company (which respective percentage interest of each Party shall hereinafter be referred to as its "Holding Ratio"): Emeritus Sanyo ----------- ------- -- 50% 50% 2.2 DUTIES OF EMERITUS 2 Emeritus shall, at its own cost and expense, do the following: 2.2.1 CAPITAL Promptly after the Effective Date and upon a date mutually agreed to beforehand between the Parties, Emeritus shall contribute cash in the amount of 25 million yen. 2.2.2 EMERITUS KNOW-HOW Subject to the confidentiality provisions of this Agreement, and promptly after the Effective Date and from time to time during the term of this Agreement, Emeritus shall make available to the Company such technical assistance, advice and know-how owned by Emeritus necessary or desirable to develop, construct and operate senior housing and long-term care facilities (hereinafter referred to as the "Emeritus Know how"). Except as otherwise specifically provided herein, the Emeritus Know-how is to be used exclusively for the Parties' joint business in Japan and for no other purposes. Such know how will be provided in the English language. Any Japanese translation will be approved by Emeritus and be completed in the United States. 2.2.3 MANAGEMENT SERVICES Emeritus shall, from time to time during the term of this Agreement, provide the Company with management assistance and consulting services in the development and operation of the senior housing facilities. 2.3 DUTIES OF SANYO Sanyo shall, at its own cost and expense, do the following: 2.3.1 CAPITAL Promptly after the Effective Date and upon a date mutually agreed to beforehand between the Parties, Sanyo shall contribute cash in the. amount of 25 million yen. 2.3.2 SANYO KNOW-HOW Subject to the confidentiality provisions of this Agreement, and promptly after the Effective Date and from time to time during the term of this Agreement, Sanyo shall make available to the Company such technical assistance, advice and know-how owned by Sanyo necessary or desirable to establish, manage and operate the Company (hereinafter referred to as the "Sanyo Know-how"). Except as otherwise specifically provided herein, the Sanyo Know-how is to be used exclusively for the Parties' joint business in Japan and for no other purposes. 2.3.3 MANAGEMENT SERVICES Sanyo shall, from time to time during the term of this Agreement, provide management assistance and consulting services in the management and operation of the Company. 2.3.4 PROPERTY LOCATION Sanyo shall cooperate to find suitable locations for the Company, or to make certain real property locations available to the Company on a long-term ground lease basis upon mutually 3 agreed reasonable terms. It is contemplated that such ground leases will have a term of at least 30 years, with options to renew for additional periods. 2.4 PROJECT SELECTION The Parties shall discuss and agree on each project on a case by case basis pursuant to plans and specifications agreed to by the Parties and pursuant to the approved Budget and Business Plan (as defined in Section 3.2 hereof. 3. MANAGEMENT; FINANCING 3.1 MANAGEMENT OF THE COMPANY The Company shall be managed by a Board of Directors as set forth below. 3.1.1 BOARD OF DIRECTORS For purposes of exercising their management and control of the Company, each Party shall designate two persons to serve on the board of directors of the Company (hereinafter referred to as the "Board of Directors"). The initial directors appointed by Emeritus shall be Dan Baty and Frank Ruffo. The initial directors appointed by Sanyo shall be Yasusuke Tanaka and Kentaro Haga. When the phrase "Approved by the Board of Directors" is used in this Agreement, such phrase shall mean approval by the Board of Directors. Resolutions of the Board of Directors shall require the affirmative vote of a majority of the total number of directors in office. The Parties may also adopt written resolutions signed by all of the directors in lieu of meetings. In the event of any need for approval or other action by the Board of Directors, each Party shall use its best efforts to respond within twenty (20) days of the date such Party is notified of the need for such approval or action as provided in Section 10.2 hereof but in no event later than thirty (30) days after such notice. The Board of Directors shall meet either in person or by such technological means as video conference (to the extent permissible under the laws of Japan) at least quarterly. 'The place of the meetings shall be determined by the Parties. All reasonable expenses of the Parties incurred in attending such meetings shall be paid for by the Company. 3.1.2 PRESIDENT AND VICE PRESIDENT The President and Representative Director of the Company shall be designated from among the directors appointed by Sanyo. The initial President and Representative Director of the Company shall be Kentaro Haga. The Vice President and Representative Director of the Company shall be designated from among the Directors appointed by Emeritus. The initial Vice President and Representative Director of the Company shall be Frank Ruffo. The President and Vice President shall hereinafter be referred to as "Company Representatives." 3.1.3 STATUTORY AUDITORS The Company shall have two (2) statutory auditors, one designated by Sanyo and the other by Emeritus. Initial statutory auditors of the Company shall be Fumio Ohara and Ray 4 Brandstrom. 3.1.4 MAJOR DECISIONS No acts shall be taken, sum expended, decision made or obligation incurred by the Company with respect to a matter within the scope of any of the major decisions enumerated below (the "Major Decisions") unless and until the same has been Approved by the Board of Director's or expressly delegated by the Parties in writing (provided, however, that in the event that Japanese law requires t e approval of such Major Decision by the shareholders of the Company in a General Meeting. then such approval by the shareholders in a General Meeting shall also be required). The Major Decisions shall include the following: (a) Bidding on or entering into any contract not included in the Budget involving annual expenditures in excess of ten million yen; (b) Acquiring any equipment or other personal properly or selling or otherwise disposing of the same whose cost (in the case of acquisition) or book value (in the case of sale or disposition) is in excess of twenty million yen; (c) Entering into any insurance contract or varying or change any portion of the insurance program authorized by the Parties; (d) Entering into a lease or acquisition of real properly or interest therein; (e) Approving the Budget or the Business Plan; The making of any expenditure or incurring any obligation which when added to the other expenditures for the fiscal year of the Company substantially ("substantially" being defined as ten million yen or more) exceeds the Budget or any line item specified in the Budget; (g) Pledging or otherwise mortgaging any of the assets of the Company; (h) The adoption of any logos, trade names, service marks or trademarks for use by the Company; (i) Selecting or varying depreciation and accounting methods and making other decisions with respect to treatment of various transactions for income tax purposes or other financial purposes not otherwise specifically provided for herein, provided that such methods and decisions shall be consistent with other provisions of this Agreement; (j) Determining whether or not distributions should be made to the Parties; (k) Retention of counsel for the Company or institution of any legal action; (1) Making any other expenditure or incurring any obligation by or on behalf of the Company involving a sum in excess of ten million yen; (m) The content and timing of public announcements relative to the Company, except to the extent disclosures are required by applicable law or regulation either in the United States or Japan; 5 (n) Borrowing money in excess of ten million yen; (o) The hiring of any manager of a facility of the Company and his compensation; or (p) Any other decision or action which materially effects the Company or its assets or operations. 3.2 BUSINESS PLAN; BUDGETS The Board of Directors will cooperate in preparing or causing to be prepared a business plan for the Company which sets forth the anticipated plan for the business of the Company, together with financial projections therefor (the "Business Plan"). In order to accomplish the Business Plan, the Board shall discuss and decide upon a budget ("Budget") setting forth the estimated receipts and expenditures (capital, operating and other) of the Company for the period covered by the Budget. In the event up-front payments or deposits are received from customers, the Parties agree to allocate a certain amount of such up-front payments or deposits toward anticipated operating capital needs of the Company, including repayment of loans to the Company. The Board of Directors shall review and adjust the Budget on a semiannual basis. When Approved by the Board of Directors, the Company Representatives shall be authorized, without the need for further approval by the Board of Directors, to make expenditures and incur the obligations provided for in the Budget to such extent and in such manner as permitted by Japanese law. Travel and lodging expense not reflected in the Budget incurred by either Party for its own purposes, rather than on behalf of the Company, shall not be reimbursed by the Company but shall be borne by the Party in question. The Parties will confer relative to unanticipated expenses incurred by either Party on legitimate Company business with the intent that such expenses shall be reimbursed. 3.3 COMPENSATION AND REIMBURSEMENT OF PARTIES Full-time employees and Company Representatives shall, upon the completion of all necessary procedures, if any, in accordance with Japanese law, be compensated by the Company as provided in the Budget. Initially, it is contemplated that there will be only one full-time Company Representative who shall be the President of the Company. However, in the event that employees of either Party are needed for other than brief periods of time, the Parties contemplate that the Company will pay for such employee's time in such amounts as the Parties shall mutually agree, provided, however, that requisite approvals, if any, required by Japanese law, shall first be obtained. Except as may be expressly provided for herein or Approved by the Board of Directors, no payment will be made by the Company to any Party for the services of such Party or any member, shareholder, director or employee of such Party. Each of the Parties agrees that it shall not be entitled to reimbursement from the Company or from the other Party for any expenditures incurred by that Party in connection with this Agreement or the Company prior to the execution of this Agreement, except insofar as such reimbursement is agreed upon by the Parties separately hereto. Following the execution of this Agreement, Parties shall be reimbursed for such expenses as are included within the Budget or otherwise permitted by the provisions of this Agreement. 3.4 CONTRACTS WITH RELATED PARTIES The Company shall not contract with any individual or entity related to or affiliated with either Party unless such agreement or arrangement and the nature of the relationship or affiliation has been disclosed to the other Party, and that Party's consent obtained. 6 3.5 NONCOMPETITION 3.5.1 DURING TERM OF AGREEMENT In order to maximize the success of the Company, the Parties wish to avoid any inherent conflicts of interest by committing to channel through the Company a11 of their business of senior housing and long-term care facilities in Japan. Neither of the Parties shall undertake any business or undertakings which are directly or indirectly competitive in Japan with the Business Purpose of the Company set forth in Section 1.3.1. In the event that Sanyo desires to conduct any senior housing and long-term care operations outside of Japan, Sanyo agrees to give Emeritus first right of refusal to participate in such business on terms similar to those set forth in this Agreement or otherwise mutually agreed to by the Parties. The Parties are free to engage in other businesses not conflicting with the Business Purpose of this Company. 3.5.2 AFTER TERMINATION OF AGREEMENT If either Party is responsible for an Event of Default which results in either the termination or dissolution of the Company or the sale of such defaulting Party's Interest in the Company (as described in Section 7.2 hereof), the defaulting Party, either itself or through its affiliates, shall not engage in any business competitive with the Business Purpose of the Company in Japan for a period of seven years following the termination, dissolution, or sale, and the nondefaulting Party shall be released from this noncompetition obligation and is free to engage in any activity substantially similar to the Company's business within Japan. In the event the Parties jointly agree to terminate or dissolve the Company, the Parties are free to engage in businesses competitive with the Company. 3.5.3 PURCHASE OF A PARTY'S INTEREST If a Party's entire interest in the Company is purchased pursuant to Section 6.2 hereof and this Agreement terminates as a result thereof the Party whose interest was not purchased shall be released from this noncompetition obligation and is free to engage in any activity substantially similar to the Company's business in Japan. 'The non-competition obligation set forth in Section 3.5.2 shall bind the Party which sells its interest pursuant to Section 6.2. 3.5.4 SURVIVAL Except as otherwise specifically provided in this Section 3.5, the noncompetition obligation set forth in the second sentence of Section 3. 5.1 hereof shall survive the termination of this Agreement for a period of seven years. 3.6 SCOPE OF AUTHORITY; INDEMNIFICATION Neither of the Parties shall, without the consent of the other Party, take any action on behalf of or in the name of the Company, or enter into any commitment or obligation binding upon the Company, except otherwise specifically provided herein. Each Party shall indemnify and hold harmless the other Party and its affiliates, directors, and officers against any and all claims, demands, losses, damages, liabilities, lawsuits and other proceedings, judgments and awards, and costs and expenses (including but not limited to reasonable attorneys' fees), arising directly or indirectly, in whole or in part, of any breach of the foregoing provisions by such Party or its affiliates, officers, agents or employees. 7 3.7 FINANCING The Parties agree that any financing input or support for the Company that cannot be effected from the shareholders' capital contributions, reserved profits or financing obtained by the Company from financial and other institutions shall be arranged by the Parties. The Parties agree that each project shall be decided on a case by case basis, with the relative financing obligations being laid out in the Budget and Business Plan for each project. No project shall proceed until the Parties have reached agreement on the Budget for that particular project. 3.8 DIVIDEND POLICY It is agreed that, in principle, the Company shall, after making appropriate provision for the Company's obligations and setting aside the reserve contemplated for the Company's future capital investment, pay such dividends as determined by the Board of Directors in accordance with sound management policies and approved by the shareholders of the Company in a General Meeting. 4. ACCOUNTING AND OTHER RECORD KEEPING 4.1 FISCAL YEAR The fiscal year of the Company shall conclude on March 31 of each year. 4.2 ACCOUNTANTS TO THE COMPANY As a general rule, accounting services and preparation of financial statements for the Company shall be done by the Company. If necessary for U.S. accounting or public reporting purposes, Emeritus may require that the Company provide audited financial statements. The Japanese independent certified public accounting firm of Chuo Kaikei shall act as the independent certified public accountants to the Company if such service is required. 4.3 ACCOUNTING AND INTERNAL CONTROLS The Parties shall cause the management of the Company to conduct the business of the Company at all times in accordance with high standards of business ethics. The Company shall maintain separate books and accounts in accordance with generally accepted Japanese accounting principles consistently applied, and specifically, shall: (a) maintain full and accurate books and accounts which shall, in reasonable detail, accurately and fairly reflect a11 transactions of the Company; (b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that all (i) transactions are executed in accordance with general or specific authorizations and (ii) transactions are recorded as necessary to permit preparation of all tax returns and financial statements in conformity with generally accepted accounting principles, to ensure compliance with all relevant governmental regulations regarding such matters and to maintain accountability for assets; and (c) work cooperatively to structure transactions to limit, as far as reasonable commercial and business considerations permit, the generation of substantial costs to Emeritus in connection with its duty to consolidate the Company's financial statements with those of Emeritus under U.S. 8 reporting requirements. 4.4 FINANCIAL AND BUSINESS INFORMATION AND TAX RETURNS The Company Representatives of the Company shall: (a) make available to a11 members of the Board of Directors on a regular basis, and as reasonably requested, a11 such information and/or documents as may be required to permit the Board of Directors to make informed judgments with respect to the financial status of the Company and all other relevant matters of interest to it; (b) within 50 days after the end of each fiscal year, provide the Board of Directors with regular annual audited financial statements prepared by the Company's certified independent public accountants that shall include a statement of profit and losses and a balance sheet for the year then ended, and include such other appropriate financial information reasonably requested by the Parties; (c) cause to be prepared within a reasonable time after each September 30, unaudited interim financial statements reflecting profit and loss, changes in financial position and a balance sheet for such interim period; and (d) cause to be prepared and filed before delinquency all necessary tax returns and all other informational and financial reports and records required by any governmental entity. 4.5 BANK ACCOUNTS All funds of the Company shall be deposited in the Company's separate name in separate bank accounts and shall be withdrawn only upon the use of the seal of persons authorized by the Board of Directors or in accordance with the procedures set forth in the Business Plan. In all cases, the Company's accounts shall be maintained separately from the bank account of each Party. 4.6 LOCATION AND RIGHTS OF INSPECTION The Company's books and records of account shall be kept and maintained at all times at the principal place of business of the Company as designated by the Parties pursuant to Section 1.5 of this Agreement. Each Party and its authorized representative shall have the right to inspect, examine and copy the books, records, files, and other documents of the Company at all reasonable times. 5. CONFIDENTIALITY 5.1 SANYO CONFIDENTIALITY OBLIGATIONS Sanyo hereby acknowledges and agrees that, through the Parties' mutual participation in the joint venture, Emeritus has shared and will share with Sanyo certain Confidential Information (as such term is defined with respect to Emeritus in Section 5.5.1 hereof. Sanyo agrees not to disclose Confidential Information received directly or indirectly from Emeritus or to use such Confidential Information except for the purposes and within the restrictions set forth in this Agreement. Sanyo agrees that the Confidential Information provided by Emeritus hereby and through any related training agreements shall be used only in connection with this joint venture or other joint business between the Parties involving senior housing or long- 9 term care facilities, whether in Japan or anywhere else in the world (unless Emeritus shall be offered the first right of refusal as set forth in Section 3.5.1 above and shall have determined not to participate). This provision is designed to prevent Sanyo or third parties from using proprietary know-how or other Confidential Information obtained from Emeritus to the detriment of Emeritus or in competition with Emeritus' core business in the senior housing and long-term care industry, and shall not preclude Sanyo from using information obtained pursuant to this Agreement in other aspects of Sanyo's business. All information provided by Emeritus to Sanyo shall be deemed to be Confidential Information whether or not marked as such by Emeritus. Furthermore, Sanyo agrees not to: (a) disclose to any third party Confidential Information of Emeritus or of the Company; and (b) make any commercial use of such Confidential Information of Emeritus or of the Company except as is contemplated by the operations of the Company or except as is otherwise allowed by this Agreement or the agreements contemplated by this Agreement. 5.2 EMERITUS CONFIDENTIALITY OBLIGATIONS Emeritus hereby acknowledges and agrees that, through the Parties' mutual participation in the joint venture, Sanyo has shared and will share with Emeritus certain Confidential Information (as such term is defined with respect to Sanyo in Section 5.5.2 hereof. Emeritus agrees not to disclose Confidential Information received directly or indirectly from Sanyo or to use such Confidential Information except for the purposes and within the restrictions set forth in this Agreement. Emeritus agrees that the Confidential Information provided by Sanyo hereby shall be used only in connection with this joint venture or other joint business between the Parties involving senior housing or long-term care facilities, whether in Japan or anywhere else in the world. All information provided by Sanyo to Emeritus shall be deemed to be Confidential Information whether or not marked as such by Sanyo. Furthermore, Emeritus agrees not to: (a) disclose to any third party Confidential Information of Sanyo or of the Company; and (b) make any commercial use of such Confidential Information of Sanyo or of the Company except as is contemplated by the operations of the Company or except as is otherwise allowed by this Agreement or the agreements contemplated by this Agreement. 5.3 CERTAIN LIMITED DISCLOSURES Notwithstanding the provisions of Sections 5.1 and 5.2, however, nothing in this Agreement shall be deemed to prevent any Party from making such limited disclosures of Confidential Information of the other Party or of the Company to its affiliates, agents, governmental authorities, subcontractors, suppliers and purchasers as is reasonably necessary to carry out the purposes of the Company. 5.4 RESTRICTIONS Each Party agrees that: (a) it will make no more copies of Confidential Information of the other Party or of the Company other than as is reasonably necessary on a need to know basis for such first mentioned Party's internal use or for use by third parties to which disclosure is permitted pursuant to Section 5.3 but only for such uses as contemplated by Section 5.3; 10 (b) it may, if it chooses, cause all such copies to be marked confidential; (c) it shall instruct its officers, employees, and any third parties to whom such Confidential Information may be disclosed pursuant to Section 5.3 to keep such copies confidential; and (d) upon any dissolution and winding up of the Company, it shall return all such copies in its possession (as well as originals) to the other Party or to the Company, as the case may be, and shall cause a11 third parties (other than governmental authorities) to return such copies and originals to such other Party or the Company. 5.5 Definition of Confidential Information 5.5.1 Confidential Information of Emeritus For the purposes of this Article 5, "Confidential Information" of Emeritus shall include all Emeritus Know-how and a11 technology, methods of business operation, trade secrets and other proprietary confidential information of Emeritus, including without limitation technical, pricing, commercial, or other information or data of Emeritus (including of affiliates of Emeritus), except for the Excluded Information as defined in Section 5.5.3 below. 5.5.2 CONFIDENTIAL INFORMATION OF SANYO For the purposes of this Article 5, "Confidential Information" of Sanyo shall include all Sanyo Know-how and all technology, methods of business operation, trade secrets and other proprietary confidential information of Sanyo, including without limitation technical, commercial, or other information or data of Sanyo (including affiliates of Sanyo), except for the Excluded Information as defined in Section 5.5.3 below. 5.5.3 EXCLUDED INFORMATION Each Party agrees that such of the technical or other information or data as falls within any one or more of the following categories shall be excluded from the definition of Confidential Information with respect to it or to the Company, under Section 5.5.1 or 5.5.2, as the case may be: (a) Information which, at the time of disclosure to the other Party, is in the public domain or which subsequently becomes part of the public domain (except by wrongful act of such other Party); or (b) Information which was in the possession of the other Party prior to its receipt thereof; or (c) Information which was received by the other Party from a third party having no obligation of secrecy with respect thereto; or (d) Information which was independently developed by one Party without making use of the subject information; or (e) Information which has been approved for release or use by written authorization of the other Party; or 11 Information which was disclosed pursuant to the requirement of any governmental agency, court order or any law or regulations requiring disclosure thereof, provided that each party shall provide the other Party with prior written notice of any such disclosure. 5.6 SURVIVAL OF OBLIGATIONS The provisions of this Article 5 shall take effect as of the Effective Date and shall survive any dissolution or winding-up of the Company or sale or other disposition of a Party's entire interest in the Company and any termination of this Agreement and shall remain applicable to each Party for a period of seven years following such termination, dissolution, winding up, sale or other disposition, notwithstanding such Party's withdrawal from the Company. 6. SALE, TRANSFER, OR MORTGAGE OF INTEREST IN COMPANY 6.1 RESTRICTIONS ON SALE, TRANSFER OR MORTGAGE OF COMPANY INTEREST Except as provided in this Article 6 and except as may be otherwise agreed to by the Parties, no Party shall sell, assign, transfer, mortgage, charge or otherwise encumber any part or all of its Company interest. Any attempt to transfer in violation of this Article 6 shall be void. 6.2 RIGHT OF FIRST REFUSAL If either Party elects to sell, transfer or otherwise dispose of any or all of its interest in the Company after the elapse of five years of initial operation of the Company referred to in Section 1.6 hereof, it shall first offer in writing to sell or transfer the shares to the other Party upon the same terms and conditions as the bona fide proposed sale or transfer to a third party. In the event the other Party has not accepted such written offer and agreed to purchase the offered shares or interest within 30 days, the offering Party may sell or transfer such shares on the same terms and conditions as in the written offer to the third party. 6.3 SURVIVAL AND WAIVER Failure of a Party to exercise its rights under Section 6.1 or 6.2 shall not constitute a waiver thereof and a single exercise of such right shall not preclude any other or further exercise thereof. The express waiver by a Party of its rights under this Article 6 in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. 'The rights set forth in this Article 6 shall survive the termination of this Agreement. 7. DEFAULT 7.1 EVENT OF DEFAULT For purposes of this Agreement, the occurrence of either of the following is to be considered an event of default ("Event of Default"): (a) The failure by either Party to pay all or any portion of its capital requirements, which failure to pay remains uncured for a period of thirty (30) days after notice of nonpayment by the other Party, or (b) Any breach by a Party of any other material duty ("material" m a duty which is 12 fundamental and if violated, would conflict with the overall intent of this Agreement) imposed upon it under this Agreement if the defaulting Party has not commenced appropriate action to cure such breach within 30 days following the giving of notice of such breach by the other Party; or (c) The institution (a) against Emeritus of a proceeding under any section of the Federal Bankruptcy Code, or (b) against Sanyo under any provision of the bankruptcy laws of Japan, as now existing or hereafter amended which proceeding is not dismissed, stayed or discharged within a period of sixty (60) days after filing thereof or if stayed, which stay is thereafter lifted without a contemporaneous discharge or dismissal of such proceeding, or in the event that a receiver, trustee or like officer is appointed to take possession of any assets of the Party. 7.2 REMEDIES UPON DEFAULT Upon an Event of Default, the non-defaulting Party shall have the following rights and remedies: (a) If the Event of Default is described in Section 7.1 (a) or (c), either to (i) terminate and dissolve the Company pursuant to Section 9, or (ii) exercise any purchase right it may have pursuant to Section 7.3 ; or (b) If the Event of Default is described in Section 7.1(b), either to (i) terminate and dissolve the Company pursuant to Section 9, (ii) exercise any purchase right it may have pursuant to Section 7.3, or (iii) sue the defaulting Party for specific performance or damages. Notwithstanding anything to the contrary in this Agreement, if the non-defaulting Party has suffered any direct loss or damages, including attorneys' fees and other out-of pocket expenses, as a result of the Event of Default, in the event that the non-defaulting Party elects either to terminate and dissolve the Company pursuant to Article 9 or to exercise its purchase right pursuant to Section 7.3, the amount of any such damages shall be offset against and deducted from any liquidation or sales proceeds to which the defaulting Party otherwise would have been entitled. 7.3 PURCHASE OF DEFAULTING PARTY'S INTEREST IN THE COMPANY At the election of the non-defaulting Party, the non-defaulting Party may purchase the defaulting Party's entire interest in the Company for 90% of the then fair market value of the defaulting Party's interest. For purposes of this Section 7.3, if the Parties have not agreed in writing as to the fair market value of the defaulting Party's interest in the Company within 30 days after the non- defaulting Party has elected to purchase the defaulting Party's interest under this Section 7.3, the Parties agree they will request the Company's independent certified public accountant to select within fifteen business days a qualified appraiser who shall decide the fair market value of the defaulting Party's interest based on a going-concern value of the Company. All documents and Information requested by the appraiser shall be immediately provided, and the appraiser shall be requested to notify each Party as to the value of the defaulting Party's interest within 30 days of engagement. The market value as determined by the appraiser shall be final and binding upon both Parties. 8. DEADLOCKS 8.1 DEADLOCK PROCEDURES 13 In the event that the Board of Directors is unable to approve a new Business Plan for the Company or the Board of Directors is deadlocked, either Party may declare a deadlock by notice to the other. Such notice shall not be delivered until after the Board of Directors has had a discussion regarding the issue. Upon declaration of a deadlock, the matter shall be referred to a designated officer of Emeritus (initially Frank Ruffo) and a designated officer of Sanyo (initially Yasusuke Tanaka) (the "Responsible Officers") who shall meet personally within 45 days of receipt of notice of such deadlock. If the Responsible Officers are unable to resolve the deadlock issues within 30 days of their meeting, the provisions of Section 8.2 below shall be implemented. 8.2 RESOLUTION OF DEADLOCK If the Parties have not been able to resolve a deadlock in accordance with the provisions of Section 8.1 above, the following shall occur: (a) If both Parties desire to sell their interests in the Company, the Company shall be sold to a third party or liquidated and dissolved and each Party shall be entitled to its pro rata portion of the Company's assets in accordance with its Holding Ratio after provision has been made for all liabilities. (b) If either Party desires to purchase the other Party's interest in the Company, the Parties shall request the Company's independent certified public accountants to select within 15 business days a qualified appraiser who shall determine the fair market value of the other Party's interest in the Company. The market value as determined by the appraiser shall be taken into serious consideration by the Parties, who shall negotiate in good faith for a period of 30 days following such market value determination, to reach an agreement regarding the purchase and sale of the interest in the Company. If the Parties at the end of such 30 days still cannot agree, the Parties will meet within the next 30 days with the Company's independent certified public accountant, who will conduct an open auction between the Parties. The independent certified public accountant shall determine which Party offered the higher price for the other Party's half interest in the Company and such Party shall have the right to purchase the other Party's interest at that price. Unless otherwise agreed, the closing of such purchase shall take place at the registered office of the purchasing Party within 90 days after the auction. The purchase price shall be payable in cash, unless otherwise agreed by the selling Party. 9. DISSOLUTION 9.1 EVENTS OF DISSOLUTION The Company shall be dissolved only in the event that: (a) an Event of Default has occurred and the non- defaulting Party elects to dissolve and terminate the Company; (b) the Parties mutually agree to dissolve and terminate the Company; or (c) the Parties are deadlocked and the deadlock has not been resolved as provided in Article 8. 9.2 MANAGEMENT RIGHTS DURING DISSOLUTION During the period of dissolving the Company and winding up its affairs, the rights and 14 obligations of the Parties set forth herein with respect to the management of the Company shall continue. For purposes of winding up, the Parties, acting through their representatives, shall continue to act as such and shall make all decisions relating to the conduct of any business or operations in accordance with this Agreement, during the winding up period to the sale or other disposition of the Company assets. A Party who causes the dissolution of the Company because of its default shall not be entitled to participate in the management of the Company during the winding up period. 9.2.1 NONCASH ASSETS Every reasonable effort shall be made to dispose of the assets of the Company so that distribution may be made to the Parties in cash. In the case of any assets the Company might have at the time of dissolution in the form of intangible intellectual property, works in process, notes, or other noncash assets, the same shall be distributed in kind to the Parties in lieu of cash proportionate to their right to receive the assets of the Company on an equitable basis reflecting the net fair market value of the assets so distributed. 9.3 DISPOSITION OF DOCUMENTS AND RECORDS All documents and records of the Company, including, without limitation, all financial records, vouchers, canceled checks and bank statements, shall be delivered to a public storage facility in Japan agreed upon by the Parties upon termination of the Company. Unless otherwise approved by the Parties, such public storage facility shall retain such documents and records for a period of not less than ten (10) years and shall make such documents and records available during normal business hours to either Party at its request for inspection and copying at such Party's cost and expense. 10. GENERAL PROVISIONS 10.1 COMPLETE AGREEMENT; AMENDMENT This Agreement constitutes the entire agreement between the Parties and supersedes all agreements, representations, warranties, statements, promises and understandings, whether oral or written with respect to the subject matter hereof, and neither Party shall be bound by or charged with any oral or written agreements, representations, warranties, statements, promises or understandings not specifically set forth in this Agreement or exhibits made hereto. This Agreement may not be amended. altered or modified except by instrument in writing titled "Modification No. (number modifications consecutively) to Joint Venture Agreement" to be signed by both Parties. 10.2 NOTICES 10.2.1 ADDRESSES Notices under this Agreement shall be in writing and in English and shall be delivered by personal delivery or by certified or registered mail, postage prepaid, return receipt requested, or by facsimile (but in the event of facsimile notice, such notice shall not be effective unless the notifying Party also places such notice in the mail to the other Party) to the Parties at the addresses herein set forth and to the Company at its principal place of business. The addresses for notices are as follows: 15 If to Emeritus: Emeritus Corporation 3131 Elliott Avenue, Suite 500 Seattle, WA 98121, U.S.A. Tel: 206-298-2909 Fax: 206-301-4500 Attention: Frank Ruffo If to Sanyo: Sanyo Electric Co., Ltd. 5-5, Keihan-hondori 2-chome Moriguchi Osaka 570 Japan Tel: 06-994-4322 Fax: 06-991-6522 Attention: Yasusuke Tanaka, Managing Director By giving at least thirty (30) days' written notice thereof any Party may notify to the other Party of a change in address. 10.2.2 EFFECTIVE DATE FOR NOTICE All notices, demands, and requests shall be deemed effective upon delivery in the case of personal service, at the time of dispatch in the case of facsimile, or ten days after being deposited in the mail, in the case of mailing. 10.3 DISPUTE RESOLUTION 10.3.1 MEDIATION PROCEDURES The Parties shall use their best efforts to avoid any disputes by communicating freely and openly about issues and by adhering to the general principle that in all matters, each shall seek what is fair and equitable for both Parties. In the event that the Parties are unable to reach agreement about the Budget, the Business Plan, or any other material decision to be Approved by the Board of Directors under this Agreement, the Parties agree to follow the multi-tiered procedure set out below: (a) A representative selected by each Party who has authority to resolve the dispute on behalf of that Party shall meet in an attempt to resolve the problem. In preparation for such meetings, each Party will present to the other Party at least five days prior to the meeting a position statement setting forth such Party's analysis and proposed resolution of the problem. (b) If the representatives of the Parties are unable to resolve the problem, the Parties shall present the controversy for non-binding mediation at a neutral location, the Parties' first choice being Singapore. The mediator shall be legally trained, offered through a recognized international mediation/arbitration service in the city where the mediation occurs and in accordance with international mediation rules in effect at the place of mediation, and shall be mutually agreeable to the Parties. The expenses of the mediator shall be borne equally by the Parties. The mediation 16 session shall not exceed two days, unless an extension is agreed to by both Parties. If the mediator is unable to effect a written settlement agreement between the Parties during the mediation session, the mediation session shall be adjourned and reconvened at a later time agreed to by the Parties and the mediator (not to exceed twenty days), at which time the mediator shall read his recommendations for settlement to the Parties and thereafter provide in written form the mediator's recommendations for settlement of the case, including the mediator's analysis of the merits of the case. (c) In the event of a matter involving irreparable harm as would justify the granting of a preliminary injunction, nothing shall prevent the Parties from seeking relief in the courts of the other Party's Jurisdiction for resolution (i.e., Sanyo may commence an action for preliminary injunction in Seattle, Washington, or Emeritus may commence an action for preliminary injunction in Osaka, Japan); provided that during the pendency of such preliminary injunction, if granted, the Parties shall continue the mediation procedures set forth in this Section 10.3.1. (d) Except to the extent that the mediator's written opinion is presented to the court hearing the case, the results of any such mediation shall be kept confidential by the Parties. 10.3.2 LITIGATION In the event that any dispute cannot be settled by mediation as set forth in Section 10.3. l, or in matters involving a preliminary injunction as referred to in Section 10.3.1(c), all disputes, controversies, or differences which may arise between Emeritus, Sanyo or the Company out of or in relation to or in connection with this Agreement, or for the breach thereof either Party may seek relief in the courts of the other Party's Jurisdiction for resolution (i.e., Sanyo may commence an action for preliminary injunction in Seattle, Washington, or Emeritus may commence an action for preliminary injunction in Osaka, Japan). While the written opinion of the mediator shall not be binding upon the court, either Party may present that opinion for consideration by the court, and such opinion shall be given only so much weight as the court shall decide. Nothing shall prevent either Party from freely arguing for or against the reasonableness or viability of such written opinion. 10.3.3 GOVERNING LAW For purposes of a written mediation opinion, the mediator may use whatever general principles of law the mediator believes helpful in analyzing the case. In the event of litigation, the law of the jurisdiction where the lawsuit is brought shall be applied. 10.4 VALIDITY In the event that any provision of this Agreement shall be held to be invalid or unenforceable, the same shall not affect in any respect whatsoever the validity or enforceability of the remainder of this Agreement. 10.5 SURVIVAL OF RIGHTS Except as otherwise provided herein to the contrary, this Agreement shall be binding upon and inure to the benefit of the Parties signatory hereto and their respective heirs, executors, legal representative and permitted successors and assigns. 17 10.6 WAIVER No consent or waiver, express or implied, by a Party to or of any breach or default by any other Party and the performance by such other Party of its obligations hereunder shall be deemed or construed to be a consent or waiver to any other breach or default in the performance by such other Party of the same or any other obligations of such Parnr hereunder. 10.7 OPERABLE LANGUAGE The English version of this Agreement shall control. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year first written above. Emeritus Corporation By: /s/ /Frank A. Ruffo ------------------- -------- Name: Frank A. Ruffo Title: Vice President Sanyo Electric Co., Ltd. B y: /s/ Yasusuke Tanaka ------------------ ------------ Name: Yasusuke Tanaka Title: President of New Business Development Headquarters 18 EX-10.77.1 19 EX 10.77.1 NORTH PHOENIX; ARIZONA LEASEHOLD IMPROVEMENT AGREEMENT AMONG MEDITRUST ACQUISITION CORPORATION I AND EMERITUS PROPERTIES I, INC. LEASEHOLD IMPROVEMENT AGREEMENT THIS LEASEHOLD IMPROVEMENT AGREEMENT is made as of December 30, I 997, by and among EMERITUS PROPERTIES I, INC., a Washington corporation (the "Lessee"), and MEDITRUST ACQUISITION CORPORATION I, a Massachusetts corporation (the "Lessor"). l. BACKGROUND l.1 Lessee. Lessee is a corporation which is a wholly-owned Subsidiary of the Guarantor (as hereinafter defined). The Guarantor is a corporation the stock of which is publicly traded on the American Stock Exchange. 1.2 The Land and Existing Improvements. Lessor is the owner of a certain parcel of land located in the City of Phoenix, Maricopa County, Arizona and more particularly described on EXHIBIT A (the "Land"). 1.3 The Facility Lease. Lessor and Lessee have entered into that certain Facility Lease Agreement of even date herewith, relating to the Land (the "Facility Lease"), a Memorandum of which is to be recorded with the Maricopa County, Arizona real estate records. 1.4 Project. Lessee proposes to construct a 101-unit assisted living facility and other improvements, including, without limitation, accessory parking and landscaping on the Land (collectively, the "Improvements"). The Land and the Improvements are collectively referred to herein as the "Project." . 1.5 Lessor's Agreement to Fund the Project and Lessee's Agreement to Supervise the Project. Lessee and Lessor have agreed that the Project will be a benefit to the premises demised under the Facility Lease and to Lessee's and Lessor's respective interests therein. Lessor and Lessee have further agreed that, pursuant to, and in accordance with, the terms and conditions of this Agreement, Lessor shall fund an amount not to exceed Seven Million Seven Hundred Seventeen Thousand Five Hundred Thirty-Six and No Dollars ($7,7I7,536.00) of the cost of the Project (the "Project Funds"). Lessee has agreed to supervise and manage the construction of the Project and Lessor has agreed to advance the Project Funds to pay for the cost of the construction of the Project; all pursuant to the terms and conditions of this Agreement. 1.6 Plans; the Architect and Architect's Contract. The Improvements are to be constructed and equipped in accordance with the plans and specifications to be delivered as provided herein (collectively, the "Project Plans"), prepared by Architects Todd & Associates, Inc. (the "Architect") pursuant to the contract dated January 29, 1997, amended February 14,1997, by and between Emeritus Corporation and the Architect (the "Architect's Contract"). 1.7 Construction Contracts. All of the Improvements are to be constructed pursuant to a guaranteed maximum contract (the "Construction Contract") to be delivered as provided herein by and between Lessee and ADA Construction Company, Inc. dated October 15,1997 (the "General Contractor"). 1.8 Schedule of Work and Completion Date; Schedule of Draws. The work necessary to complete and fully equip the Project is to be (a) undertaken and completed in accordance with the schedule of work and schedule of values ("Schedules") to be delivered as provided herein; and (b) substantially completed by the first anniversary of the date. hereof (the "Completion Date") in accordance with the terms hereof. 1.9 Project Budget. Lessee has submitted, or shall submit in accordance with the terms hereof prior to the making of the first advance which includes amounts to be expended on the construction or equipping of the Improvements), to Lessor a line item budget (the "Project Budget"), for the design and construction of the Project, including (a) a breakdown of construction costs (itemized as to trade category, subdivision of the work to be performed and the names of each contractor), (b) a breakdown of all soft costs in connection with the construction of the Project, including, without limitation, costs for such items as real estate taxes, legal and accounting fees, survey costs, permits and inspection fees, insurance premiums, architect's and engineer's fees, marketing, management, leasing and advertising expenses, and all amounts due in connection with the Advance of Project Funds pursuant to this Agreement, (c) a projected draw schedule and (d) a projected progress schedule for the construction of the Project. 1.10 Use of Project Funds. The Project Funds are to be used, to the extent sufficient therefor, solely for the payment of Project costs set forth in the Project Budget. 1.11 Project Funds. Subject to all of the terms, conditions and provisions of this Agreement, and of the agreements and instruments referred to herein, Lessor agrees to advance the Project Funds and Lessee agrees to supervise and manage the construction of the Project and to pay the Rent (as hereinafter defined) due under the Facility Lease (as the same may from time to time be adjusted pursuant to the terms and conditions set forth therein); it being understood that Lessee shall be liable for the payment of Rent regarding such sums as shall have been advanced from time to time under this Agreement to Lessee. 1.12 Guaranties and Indemnities. As an inducement to Lessor to enter into this Agreement, advance the Project Funds and enter into the Facility Lease, the Guarantor has agreed to furnish certain guaranties as hereinafter described. 2. DEFINITIONS In this Agreement, except as otherwise expressly provided in the text of this Agreement 2 or unless the context otherwise requires, all capitalized terms shall have the meaning ascribed to them in EXHIBIT E. 3. INTENTIONALLY OMITTED 4. LEASE DOCUMENTS; COLLATERAL SECURITY 4.1 Lease Documents. The Project Funds shall be advanced, evidenced, administered and governed by all of the terms, conditions and provisions of each of the following: A. a Seventh Amended and Restated Agreement Regarding Related Transactions (Development) of even date by and among Lessee, Lessor, ESC I, L.P., and ESC G.P. I, Inc., as the same may be amended from time to time; B. this Agreement; C. the Facility Lease; D. a Collateral Assignment of Permits, Approvals, Licenses, and Contracts of even date granted by Lessee to Lessor (the "Permits Assignment"); E. a Security Agreement of even date by and between Lessee and Lessor (the "Security Agreement") and related UCC Financing Statements; F. a Completion Guaranty of even date executed by the Guarantor for the benefit of Lessor guarantying the completion of the Project and the satisfaction of the other Guarantied Obligations (the "Completion Guaranty");G. a Guaranty of Lease Obligations of even date executed by the Guarantor for the benefit of Lessor guarantying the payment and performance of the Lease Obligations (the "Guaranty of Lease Obligations"); H. an Environmental Indemnity Agreement of even date by and among Lessee, the Guarantor and Lessor (the "Environmental Indemnity Agreement"); I. a Deposit Pledge Agreement of even date by and between Lessee and Lessor (the "Deposit Pledge Agreement"); . J. a Group Two Negative Pledge Agreement (Development) dated April 15, 1996 by and among Lessee, Lessor and Guarantor (the "Negative Pledge Agreement"); K. an Assignment of Construction Contract granted by Lessee to Lessor and containing the consent of the General Contractor (the "Construction Assignment"); L. an Assignment of Architect's Contract of even date granted by Lessee to Lessor and containing the consent of the Architect (the "Architect's Assignment"); 3 M. an Affiliated Party Subordination Agreement of even date by and among Lessee, the Guarantor, various Affiliates of Lessee and Lessor (the "Affiliated Party Subordination Agreement"); and N. all other documents, instruments, or agreements now or hereafter evidencing or securing the obligations under this Agreement and the Facility Lease. Items (A) through (N) above, as the same from time to time may be hereinafter amended, modified or supplemented, are referred to herein as the "Lease Documents." 4.2 Lease Obligations. Lessee agrees to pay and perform all indebtedness, covenants, liabilities, obligations, agreements and undertakings (other than Lessor's obligations) under this Agreement and all of the other Lease Documents (collectively, the "Lease Obligations"). 4.3 Collateral Security. The Lease Obligations shall be secured by the following: A. a perfected first priority security interest in all Permits and Contracts pursuant to the Permits Assignment; B. a security interest in Tangible Personal Property, and certain other Collateral and a security interest in Receivables, all pursuant to the Security Agreement; C. the Completion Guaranty; D. the Guaranty of Lease Obligations; E. the Environmental Indemnity; F. a perfected first priority interest in the Cash Collateral pursuant to the Deposit Pledge Agreement; G. all other security interests in such other property for which provision is made in the Lease Documents or at law or in equity; and H. certain other Related Party Agreements. All of the property in which security interests are granted as described in items (A) through (H) above are referred to herein as the "Collateral." 5. REPRESENTATIONS AND WARRANTIES In order to induce Lessor to advance the Project Funds pursuant to the terms and conditions of this Agreement, Lessee represents and warrants to Lessor that: 5.1 Architect's Contract and Construction Contract. The Architect's Contract and the Construction Contract have been validly executed by, 4 and are binding upon Lessee and are in full force and effect in accordance with the terms thereof as of the date hereof. All of the parties to the Architect's Contract Construction Contract have faithfully performed all of their respective obligations thereunder to the extent accrued as of the date hereof, and none of the parties to the foregoing instruments has asserted any claim of default thereunder and Lessee has no reason to believe that such agreements have not been validly executed by and binding upon the other parties thereto; 5.2 Project Plans. The two (2) copies of the Project Plans delivered to Lessor by Lessee (a) are true and correct and satisfactory to Lessee and (b) have been filed with and approved by all appropriate Governmental Authorities. All necessary Permits relating to the Project Plans to be issued or granted by any applicable Governmental Authority having or claiming jurisdiction over the Leased Property which can be obtained in the ordinary course as of the date hereof have been obtained and all such Permits are in full force and effect, are not subject to any unexpired appeal periods or any appeals or challenges which have not been fully resolved in favor of Lessee, and do not contain any conditions or terms relating to the Leased Property which have not been fully satisfied or which will not be fully satisfied by the completion of the construction of the Project (in accordance with the Project Plans and the terms and provisions of this Agreement). Furthermore, the Project Plans are the plans and specifications which have been approved in writing by Lessor, any construction heretofore performed on the Project has been performed in accordance with the Project Plans and all future construction on the Project shall be performed in accordance with the Project Plans, as the same may be amended or modified from time in accordance with Section 6.3.2 hereof, and the terms and conditions of this Agreement. There are no structural defects in the Project of which Lessee has been advised or of which Lessee has notice or knowledge except as otherwise described in writing to Lessor or actually known by Lessor. Lessee has not received any notice claiming that, and Lessee has no knowledge that, the Project Plans violate any Legal Requirement; 5.3 Prior Construction Work. No Person has performed any construction work or furnished any services in connection with any construction carried on or to be carried on at the Leased Property who or which remains unpaid at the time of execution of this Agreement, except as indicated in the requisition submitted simultaneously herewith or otherwise expressly approved by Lessor and, if applicable, the Other Permitted Uses; 5.4 Suitability of Project Plans. The Project Plans provide for the construction and renovation of all buildings and related improvements necessary, both legally and practically, for the construction of the Project in accordance with the terms of this Agreement and, after the completion of the construction thereof, for the operation of the Project for its Primary Intended Use; 5.5 Compliance with Legal Requirements and Applicable Agreements. Upon the completion of construction of the Project, which shall be constructed in accordance with the Project Plans and the terms and provisions of this Agreement, the Project shall be in compliance with (a) all Legal Requirements; (b) all Permits and Contracts and (c) all applicable by-laws, codes, rules, regulations and restrictions of the Board of Fire Underwriters or other insurance underwriters or similar bodies. 5 5.6 Permits and Contracts. All Permits and Contracts required by or entered into with any Governmental Authority or quasi- governmental authority or agency for, or in connection with, the construction of the Project which can be obtained in the ordinary course as of the date hereof have been obtained or executed, as the case may be. All such Permits and Contracts are in full force and effect, are not subject to any unexpired appeal periods or any appeals or challenges which have not been conclusively resolved in favor of any member of the Leasing Group, and do not contain any conditions or terms which have not been fully satisfied or which will not be fully satisfied by the completion of the construction of the Project (if constructed in accordance with the Project Plans and the terms and provisions of this Agreement). There is no action pending, or, to the best knowledge and belief of Lessee, recommended by the applicable Governmental Authority having jurisdiction thereof, either to revoke, repeal, cancel, modify, withdraw or suspend any such Permit or Contract relating to the construction of the Project, or any other action of any other type which would have a material adverse effect on the Project. All other Permits and Contracts required for the completion of the construction of the Project and the operation of the Facility are described on SCHEDULE 5.6 annexed hereto and Lessee has no reason to believe such Permits and Contracts shall not be obtainable as and when needed. 5.7 First Advance. As of the date of the first advance of Project Funds to Lessee pursuant to this Agreement, the amount of the money expended by Lessee on account of the construction of the Project in accordance with the Project Plans and the items listed on Project Budget will not be less than the amount of such first advance. 5.8 Valid and Binding. Lessee is duly authorized to make and enter into all of the Lease Documents to which Lessee is a party and to carry out the transactions contemplated therein. All of the Lease Documents to which Lessee is a party have been duly executed and delivered by Lessee, and each is a legal, valid and binding obligation of Lessee, enforceable in accordance with its terms. 5.9 No Violation. The execution, delivery and performance of the Lease Documents and the consummation of the transactions thereby contemplated shall not result in any breach of, or constitute a default under, or result in the acceleration of, or constitute an event which, with the giving of notice or the passage of time, or both, would result in default or acceleration of any obligation of any member of the Leasing Group under any of the Permits or Contracts or any other contract, mortgage, lien, lease, agreement, instrument, franchise, arbitration award, judgment, decree, bank loan or credit agreement, trust indenture or other instrument to which any member of the Leasing Group is a party or by which any member of the Leasing Group may be bound or affected and do not violate or contravene any Legal Requirement. 5.10 Consents and Approvals. Except as already obtained or filed or as reasonably expected to be obtained in the ordinary course of business prior to or upon the Completion of the Project, as the case may be, no consent or approval or other authorization of, or exemption by, or declaration or filing with, any Person and no waiver of any right by any Person is required to authorize or permit, or is otherwise 6 required as a condition of the execution, delivery and performance of its obligations under the Lease Documents, the Construction Contract or the Architect's Agreement by any member of the Leasing Group or as a condition to the validity (assuming the due authorization, execution and delivery by Lessor of the Lease Documents to which it is a party) and the priority of any Liens granted to Lessor under the Lease Documents, except the fling of the Financing Statements. 5.11 Pending Actions, Notices and Reports. (a) There is no action or investigation pending or, to the best knowledge and belief of Lessee, threatened, anticipated or contemplated (nor, to the knowledge of Lessee, is there any reasonable basis therefor) against or affecting the Leased Property or any member of the Leasing Group (or any Affiliate thereof before any Governmental Authority, which could prevent or hinder the consummation of the transactions contemplated hereby or call into question the validity of any of the Lease Documents or any action taken or to be taken in connection with the transactions contemplated thereunder or which in any single case or in the aggregate might result in any material adverse change in the business, prospects, condition, affairs or operations of any member of the Leasing Group or the Leased Property (including, without limitation, any action to revoke, withdraw or suspend any Permit necessary or desirable for the construction of the Project for its Primary Intended Use. (b) No member of the Leasing Group has received any notice of any claim, requirement or demand of any Governmental Authority, to take action so as to make the Project or the Leased Property conform to or comply with any applicable Legal Requirement. 6. COVENANTS 6.1 Collection and Enforcement Costs. Upon demand, Lessee shall reimburse Lessor for all costs and expenses, including, without limitation, attorneys' fees and expenses and court costs, paid or reasonably incurred by Lessor in connection with the collection of any sum due hereunder, or in connection with the enforcement of any of Lessor's rights or any member of the Leasing Group's obligations under this Agreement or any of the other Lease Documents. Any amount due and payable to Lessor pursuant to the provisions of this Section shall be a demand obligation and, to the extent permitted by law, shall be added to the Lease Obligations and shall be secured by the Liens created by the Lease Documents as fully and effectively and with the same priority as every other obligation of Lessee secured thereby and, if not paid within ten ( 10) days after demand, shall thereafter, to the extent permitted by applicable law, bear interest at the Overdue Rate until the date of payment. The obligation of Lessee to pay all costs, charges and sums due hereunder or under any of the other Lease Documents shall continue in full force and effect and in no way shall be impaired, until the actual payment thereof to Lessor. In the event of(a) a sale, conveyance, transfer or other disposition of the Leased Property, (b) any further agreement given to secure the payment of the obligations set forth herein or (c) any agreement or stipulation extending the time or modifying the terms of payment set forth herein, Lessee shall nevertheless remain obligated to pay the indebtedness evidenced by this Agreement, as extended or modified by any such agreement or stipulation, unless Lessee is released and discharged from such obligation by a written agreement executed by Lessor. 6.2 Continuing Effect of Representations and Warranties. All representations and warranties contained in this Leasehold Improvement Agreement shall constitute continuing representations and warranties which shall remain true, correct and 7 complete throughout the Term. 6.3 Construction Covenants. 6.3.1 Commencement of Construction. If construction of the Project has not already begun, Lessee shall commence construction of the Project within thirty (3 0) days from the later of the date hereof or of issuance of a building permit for the Project. Lessee shall diligently and continuously cause the Project to be constructed and completed and made ready for occupancy and use in accordance with the Project Plans all in a manner satisfactory to Lessor on or before the Completion Date. Notwithstanding anything to the contrary contained herein, Lessee shall be and shall remain unconditionally liable to Lessor for (a) the complete construction of the Project in accordance with the Project Plans on or before the Completion Date and whether or not proceeds of the Project Funds remaining to be disbursed hereunder, if any, are sufficient to cover all costs of construction and (b) the complete performance of all other obligations, covenants, agreements and liabilities of Lessee hereunder. 6.3.2 Quality of Materials and Workmanship. The materials used in the Project shall be of the quality called for by the Project Plans, and the workmanship shall be in conformity with the Construction Contract and this Agreement, and both the quality of such materials and such workmanship shall be satisfactory to Lessor. Lessee shall not make any changes in, and shall not permit the General Contractor or the Architect to make any changes in, the quality of such materials, the Project Plans or the Project Budget, whether by change order or otherwise, without the prior written consent of Lessor, in each instance (which consent may be withheld in Lessor's reasonable discretion); provided, however, that such consent shall not be required for any individual change which has been approved by the Architect, which does not materially affect the structure or exterior of the Project, and the cost of which does not exceed TEN THOUSAND DOLLARS ($10,000) or which changes, in the aggregate, do not exceed ONE HUNDRED THOUSAND DOLLARS ($100,000) in. cost. Notwithstanding the foregoing, prior to making any change in Project Plans, copies of all change orders shall be submitted by Lessee to Lessor and Lessee shall also deliver to Lessor evidence satisfactory to Lessor, in its reasonable discretion, that all necessary Permits and/or Contracts required by any Governmental Authority in connection therewith have been obtained or entered into, as the case may be. 6.3.3 Project Budget. Upon the request of Lessor, Lessee shall furnish Lessor with revisions for the Project Budget to reflect (a) any changes approved by Lessor to the Project Budget, (b) the total cost of the construction of the Project completed through any specific date and (c) the remaining cost to complete the construction of the Project in accordance with the Project Plans and the terms and provisions of this Agreement. 6.3.4 Architect Certificates. Lessee agrees to cause the Architect to furnish such statements as to progress and certificates of completion as Lessor may reasonably require from time to time during such period as this Agreement may be in effect, all without expense to Lessor; provided, however, that to the 8 extent the delivery of such certificates will require a visit to the Project, Lessee shall have no obligation to deliver the same more frequently than with every other advance request hereunder. Lessee agrees to cause the Architect to make the Project Plans available to Lessor without expense to Lessor, and to agree that, in the event that Lessor shall take over the Project by reason of an occurrence of a Lease Default, Lessor shall be entitled to use said Project Plans without any additional compensation to the Architect above what is required (and was not previously paid) under the Architect's Contract. 6.3.5 Intentionally Deleted. 6.3.6 Lessor's Consultant. Lessee agrees to pay the costs and expenses reasonably incurred by Lessor to retain the Consultants to perform various services to Lessor in connection with the construction of the Project and the advances of Project Funds contemplated hereunder, including, without limitation, the following: A. to review and analyze the Project Plans and advise Lessor whether the same are satisfactory for the intended purposes thereof; B. to make periodic inspections of the Leased Property for the purpose of assuring that construction performed in connection with the Project prior to the date of such inspection has been completed in accordance with the Project Plans and this Agreement; C. to review Lessee's then current requisition to determine whether it is consistent with the obligations of Lessee under this Agreement, and to advise Lessor of the anticipated costs of, and the time for, the completion of the Project in accordance with the Project Plans, and the adequacy of reserves and contingencies related thereto; D. to review and analyze any proposed changes to the Project Plans and advise Lessor regarding the same; E. to review and analyze the Project Budget and advise Lessor as to the sufficiency thereof; and F. to review and analyze the Architect's Contract and the Construction Contract entered into by Lessee in connection with the construction of the Project and advise Lessor regarding the same. Except as otherwise expressly provided herein, Lessee agrees promptly to make such changes or corrections in the construction of the Project as may be required by Lessor, based on the recommendation of any of the Consultants, unless Lessee demonstrates to Lessor's satisfaction that such corrective work is inconsistent with the Project Plans. 6.3.7 Title To Materials and Security Interest Granted to Lessor. Except as otherwise expressly provided herein, Lessee shall not suffer the use in connection with any construction relating to the Project of any materials, fixtures or equipment 9 intended to become part of the Project which are purchased upon lease or conditional bill of sale or to which Lessee does not have absolute and unencumbered title. Lessee covenants to cause to be paid punctually all sums becoming due for labor, materials, fixtures or equipment used or purchased in connection with any such construction and, in recognition of the fact that it is intended that the Project Funds be used to pay for the costs of the construction of the Project on behalf of the Lessor, Lessee agrees that title to all materials, fixtures and equipment that are incorporated into the Project shall automatically pass to Lessor upon such incorporation without the need for the execution or delivery of any further instrument of conveyance. Notwithstanding the foregoing, in order to more fully secure Lessor with reference to all advances of Project Funds made hereunder, Lessee hereby conveys to Lessor a security interest in all of Lessee's right, title and interest in materials on the Leased Property which are not at any relevant time incorporated into the Project and materials, wherever located, intended for incorporation into the Project. Lessee agrees: A. that Lessor shall have all the rights, with reference to such security, as a secured party is entitled to hold with reference to any security interest under the UCC; B. that such security interest shall cover cash and non-cash proceeds of such materials; . C. that such materials will not be held for sale to others or disposed of by Lessee without the prior written consent of Lessor and, if at any time located on the Leased Property shall be suitably stored, secured and insured and furthermore, shall not be removed from the Leased Property; and D. that such security interest shall be prior to the rights of any other Person other than the Permitted Prior Security Interests. The undertakings of Lessee in this Section shall also be applicable to any personal property that is owned by Lessee and that is used (or to be used) in connection with the Project, whether or not the purchase thereof was financed by advances of Project Funds made by Lessor. Lessee agrees to execute such instruments as Lessor may from time to time request to perfect the security interest of Lessor in any and all rights under this Agreement and the other Lease Documents, and any and all property of Lessee which, under applicable provisions of this Agreement and/or any of the other Lease Documents, may or shall stand as security for advances of Project Funds under this Agreement and for the complete performance of the Lease Obligations. 6.3.8 Compliance With Legal Requirements And Applicable Agreements. Lessee, the Project Plans and the Leased Property and all uses thereof (including, without limitation, the construction of the Project) shall comply with (a) all Legal Requirements, (b) all Permits and Contracts, (c) all applicable by-laws, codes, rules, regulations and restrictions of the Board of Fire Underwriters or other insurance underwriters or similar body and (d) the Lease Documents, except to the extent any of the matters represented in clause (a) or (c) are being duly contested in accordance with the terms of the Facility Lease. 10 6.3.9 Liens. The Leased Property shall at all times be free from any attachment, encumbrance, lis pendens, mechanic's or materialmen's lien or notice arising from the furnishing of materials or labor and, with the exception of the Permitted Encumbrances, all other Liens of any kind except to the extent the same is being duly contested in accordance with the terms of the Facility Lease or the terms hereof. Lessee shall not permit the recording of any notice of contract or mechanic's or materialmen's lien relating to construction of the Project or otherwise affecting the Leased Property except to the extent the same is being duly contested in accordance with the terms of the Facility Lease or the terms hereof. Notwithstanding the foregoing provisions of this Section 6.3.09, the existence of an attachment or lis pendens for a period not in excess of thirty (30) days shall not be deemed to be a default hereunder provided that (a) there shall be no cessation of construction of the Project, (b) a Lease Default has not occurred and (c) Lessee shall proceed promptly to cause such attachment or lis pendens to be removed, but Lessor shall not be obliged to make any further advance under this Agreement while such attachment or lis pendens remains outstanding, unless a bond, satisfactory to Lessor, has been posted as security for such attachment or lis pendens. 6.3.10 Books And Records. Lessee shall cause to be kept and maintained, and shall permit Lessor and its representatives to inspect at all reasonable times, accurate books of accounts in which complete entries will be made in accordance with GAAP, if applicable, reflecting all financial transactions of Lessee relating to the Project (showing, without limitation, all materials ordered and received and all disbursements, accounts payable and accounts receivable in connection with the construction of the Project and the operation of the Leased Property). Such books and records must accurately reflect that all funds advanced hereunder for construction of the Project have been used solely for the payment of obligations and expenses properly incurred in accordance with the Project Budget. 6.3.11 Inspection Of Construction. Lessor and its representatives including, without limitation, the Consultants, shall, at all times as long as this Agreement remains in effect, have the right to enter the Leased Property, upon reasonable notice to Lessee and at reasonable times (except in the event of an emergency) for the purpose of inspecting the Project and the progress of the work and materials thereon, and if any such- inspection reveals that Lessee is not in compliance herewith (in its sole and absolute discretion), then Lessor shall not be obligated to make any further advances under this Agreement to Lessee. 6.3.12 Notice Of Delay. Lessee shall give to Lessor prompt written notice of any fire, explosion, accident, flood, storm, earthquake or other casualty or strike, lock out, act of God or interruption of the construction of the Project which is reasonably anticipated to interfere with the ability of Lessee to complete the Project by the Completion Date. 6.3.13 Bonds. Performance, payment and lien bonds, in form and substance and guaranteed by sureties satisfactory to Lessor (in its sole and absolute discretion), shall be furnished to Lessor in 11 connection with the Construction Contract in amounts at least equivalent to the amount of such contract, naming Lessor as a dual obligee and shall be furnished to Lessor prior to the commencement of any work pursuant to such contract. 6.3.14 Use of Project Funds. Lessee shall utilize all advances by Lessor pursuant to the terms of this Agreement only for those items for which requisitions are permitted under this Agreement or for reimbursement of expenditures already made for items for which requisitions are so permitted. Lessee agrees to hold all advances by Lessor hereunder as a trust fund for the purpose of payment of the costs and expenses permitted under this Agreement. 6.3.15 Occupancy of the Project. Lessee shall not permit any occupancy of the Project (other than such occupancy as is required in connection with the construction thereto) prior to (a) the substantial completion of that portion of the Project being occupied and (b) the issuance by the appropriate Governmental Authorities of a Certificate of Occupancy (or its equivalent) permitting the occupancy of the Project for its Primary Intended Use and, if applicable, the Other Permitted Uses. The Project shall not be deemed to have been completed unless and until constructed in accordance with this Agreement and a Certificate of Occupancy(or its equivalent) permitting the occupancy of the Project for its Primary Intended Use has been issued by the applicable Governmental Authorities. 7. CONSTRUCTION ADVANCES 7.1 Conditions Precedent to First Advance of Project Funds. Prior to the first advance of Project Funds contemplated by this Agreement, and as a condition of Lessee's right to receive any of the proceeds of the Project Funds, there shall have been furnished to Lessor: A. An owner's title insurance policy in form and substance satisfactory to Lessor, in its sole and absolute discretion, issued by a title insurance company or companies satisfactory to Lessor (the "Title Company") with such endorsements, reinsurance and/or co-insurance as Lessor may require, insuring Lessor's fee title to the Leased Property free from all Liens and without exception for (i) filed or unfiled mechanics' liens, (ii) survey matters, (iii) rights of parties in possession, (iv) environmental liens and (v) any other matters of any kind or nature whatsoever other than the Permitted Encumbrances (the "Title Policy"); B. Such evidence as Lessor may require that the use contemplated for the Project, and all of the improvements and construction contemplated by the Project Plans, comply with all applicable Legal Requirements, to the extent in force and applicable; C. Insurance policies and/or Certificates of Insurance required pursuant to the terms and provisions of the Facility Lease; D. Such evidence as Lessor may require to determine that the total cost of completion of the Project in all respects, including all related direct and indirect 12 costs as previously approved by Lessor, will not exceed the amount set forth in the Project Budget; E. Such evidence as Lessor may require that Lessee's representations and warranties contained herein and in all of the other Lease Documents are true and correct in every material respect; F. Such evidence as Lessor may require as to the satisfaction of such of the terms and conditions of this Agreement and of the other Lease Documents as may by their nature be satisfied prior to the making of such advance; G. Such evidence as Lessor may require that all outstanding Impositions which are due and payable as of the date of the First Advance pertaining to the Leased Property have been paid in full in accordance with the terms of the Facility Lease; H. A current instrument survey, satisfactory in form and content to Lessor, prepared in accordance with the requirements set forth in EXHIBIT G (the "Survey") and a certificate substantially in the form of EXHIBIT H (the "Surveyor's Certificate"), prepared and signed by a surveyor licensed to do business in the state where the Leased Property is located with his or her seal affixed thereto; I. True and correct copies of the Construction Contract and the Architect's Contract in effect with respect to the Project, as well as all receipted bills paid by Lessee to the General Contractor and the Architect for goods and/or services rendered with respect to the Project prior to the date hereof; J. A certificate from an engineer and/or architect, registered as such in the state where the Leased Property is located, substantially in the form attached hereto as EXHIBIT H, certifying as to the (i) compliance of the Leased Property with all applicable Legal Requirements, (ii) the availability and adequacy of access/egress to and from the Leased Property and (iii) the availability and adequacy of sewer, drainage, water, electric and other utility services to the lot line of the Leased Property; together with such other assurances concerning the design of the Project as Lessor may require; K. Lessor's receipt of opinions, in forms satisfactory to Lessor (in its sole and absolute discretion), from Lessee's counsel and the Guarantor's counsel, regarding (i) the due execution, authority and enforceability of the Lease Documents; (ii) the compliance of the Leased Property and the Project, in all material respects, with applicable zoning and other land-use Legal Requirements (except in such instances in which a satisfactory title insurance zoning endorsement has been issued); (iii) the valid issuance of the Certificate of Need, if applicable, and all other Permits required for the construction of the Project, the continuing effectiveness of said Certificate of Need, if applicable, and other Permits and Lessee's and Project's compliance therewith and (iv) such other matters as Lessor may reasonably request (collectively, the "Opinions"); L. Payment of the Leasehold Improvement Fee (subject, however, to the provisions of Section 3 hereof; 13 M. True and correct copies of all Permits and Contracts relating to the construction and operation of the Project (including, without limitation, an unconditional building permit or a building permit which is subject only to such conditions as will be fully satisfied by the completion of the construction of the Project in accordance with the Project Plans and this Agreement); N. Such evidence as Lessor may require that there has been no material adverse change in the financial condition and strength of Lessee and the Guarantor, and that the Leased Property shall have sustained no impairment, reduction, loss or damage which has not been fully restored and repaired, and that no Condemnation proceedings or other governmental action is or shall be pending against or with respect thereto; O. Such evidence as Lessor may require that the General Contractor and the Architect maintain adequate insurance, as determined in Lessor's reasonable discretion; P. True and correct copies of all payment, performance and completion bonds required pursuant to 6.3.13 hereof; Q. A fully executed Construction Assignment, in form and substance satisfactory to Lessor; and R. A fully executed and authorized Architect's Assignment, in form and substance satisfactory to Lessor. 7.2 Lessor's Right to Advance the Project Funds. Without at any time waiving any of Lessor's rights hereunder, Lessor shall have the right to make the first advance of a portion of the Project Funds hereunder without the satisfaction of each and every condition precedent to Lessor's obligation to make such advance, and Lessee agrees to accept such advance as Lessor may elect to make. The making of any advance hereunder shall not constitute an approval or acceptance by Lessor of any work on the Project theretofore completed. 7.3 Submission of Requests for Advances of the Project Funds. Advances under this Agreement shall be made not more than once each month and at least ten ( 10) days before the date upon which an advance is requested, Lessee shall give notice to Lessor, specifying the total advance which will be desired, accompanied by: A. Itemized requisitions for advances or, at Lessee's option, for reimbursements to Lessee for prepaid items, signed by Lessee, the Architect and the General Contractor on A.I.A. Forms G702, G702A or G703 or such other form(s) as Lessor may reasonably require (together with copies of invoices or receipted bills relating to items covered by such requisitions when so requested by Lessor). All such requisitions shall include an indemnification of Lessor by the Architect, the General Contractor and Lessee, jointly and severally, to the extent such indemnification is available from the General Contractor and the Architect upon Lessee's best efforts to obtain such indemnification, against any and all claims of any subcontractors, laborers and suppliers; 14 B. A certificate executed by Lessee substantially in the form attached hereto as EXHIBIT I; C. A certificate executed by the General Contractor substantially in the form attached hereto as EXHIBIT J; D. With respect to every other Advance requested, a certificate executed by the Architect substantially in the form attached hereto as EXHIBIT K. E. At Lessor's request, certificates executed by the Consultants in such form as Lessor may reasonably require; F. To the event the Advance is not clearly subject to effective coverage, an endorsement of the Title Policy issued by the Title Company, satisfactory in form and substance to Lessor, redating the Title Policy to the date that the then current advance will be made, increasing the coverage afforded by the Title Policy so that the same shall constitute insurance in an amount at least equal to the sum of the amount of the insurance then existing under the Title Policy plus the amount of the then current advance of Project Funds to be disbursed to Lessee under this Agreement and subject to no additional exceptions other than the Permitted Encumbrances; G. If and when reasonably requested by Lessor, satisfactory assurance that the construction of the Project has been performed in accordance with the requirements of the Construction Contract, the Project Plans, this Agreement and all of the other Lease Documents and has been inspected and found satisfactory by the parties hereto; H. If and when reasonably requested by Lessor, an updated Surveyor's Certificate substantially in the form attached hereto as EXHIBIT G and/or updated Engineer's/Architect's Certificate substantially in the form attached hereto as EXHIBIT H; I. If and when requested by Lessor, updated Opinions from Lessee's counsel and the Guarantor's counsel (in form and substance satisfactory to Lessor in its sole and absolute discretion); J. If and when requested by Lessor, satisfactory evidence that the funds remaining unadvanced under this Agreement are sufficient for the payment of all related direct and indirect costs for the completion of the Project in accordance with the terms and provisions hereof. If the evidence furnished shall not be satisfactory to Lessor, in its sole and absolute discretion, it shall be a condition to the making of any further advance hereunder that Lessee will provide Lessor with such financial guaranties (whether in the form of a bond, cash deposit, letter of credit or otherwise) as are acceptable to Lessor, in its sole and absolute discretion, to assure the completion of the construction of the Project in accordance with the Project Plans and the terms and conditions of this Agreement. In the event that Lessor requires a cash deposit from Lessee, Lessee shall deposit with Lessor such funds, to be held in an interest bearing account with the interest accruing thereon to the benefit of Lessee, which, together with such unadvanced funds of the Loan, shall be sufficient to pay all of the aforesaid costs. All funds so 15 deposited with Lessor along with the proceeds thereof, shall be disbursed prior to any further advance hereunder and upon completion of the Project any remaining funds so deposited or any unadvanced portion of the Project Funds, shall be remitted to Lessee; K. A certification of work completed by the General Contractor, together with a statement of the payment due therefor; L. Partial lien waivers from the General Contractor for all work theretofore performed, and from all other contractors and all subcontractors and suppliers for all work, the cost of which in each instance exceeds ONE THOUSAND DOLLARS ($ 1,000.00), which was the subject of a requisition in the immediately preceding month; M. If and when reasonably requested, Lessee shall deliver to Lessor an updated Survey of the Leased Property, acceptable to Lessor (in its reasonable discretion); N. Evidence satisfactory to Lessor (in its reasonable discretion) that all materials and other property furnished by any contractors, subcontractors, materialmen or other Persons, the cost of which will be paid with the proceeds of the advance to be made by Lessor, are free and clear of all Liens, except (a) encumbrances, if any, (securing indebtedness due to Persons whose names, addresses and amounts due to them are identified to Lessor) that shall be discharged upon the disbursement of the funds then being requested, (b) the Liens created by the Lease Documents and (c) the Permitted Encumbrances; O. Such evidence as Lessor may require that there has been no material adverse change in the financial condition and strength of Lessee and the Guarantor, and that the Leased Property shall have sustained no impairment, reduction, loss or damage which has not been fully restored and repaired and that no condemnation is or shall be pending against or with respect thereto; and P. Prior to the first advance which includes amounts to be expended on the construction or equipping of the Improvements, Lessee shall, to the extent not previously delivered to Lessor, submit to Lessor true and correct copies of (i) the Project Budget, (ii) the Project Plans, (iii) the Schedules and (iv) the Construction Contract, each of which shall be in form and content satisfactory to Lessor (in its sole and absolute discretion); Lessee hereby designates Tom Mullins as Lessee's construction representative with authority to approve requisitions and to execute certificates to be delivered pursuant to Section 13.3B on behalf of Lessee. 7.4 Advances by Wire Transfer. All advances hereunder shall be made by wire transfer of funds into a bank account maintained by either Lessee or an authorized agent of Lessee. 7.5 Conditions Precedent to All Advances. 16 A. Advances hereunder shall be made solely for the payment of the costs and expenses incurred by Lessee directly in connection with the construction of the Project, consistent with the Project Budget, which are required to be paid out-of pocket to all other Persons or to reimburse Lessee for out- of pocket costs incurred by it pursuant to the Project Budget. No funds advanced by Lessor shall be utilized for any purpose other than as specified herein and none of the Project Funds shall be paid over to any officer, stockholder or employee of any member of the Leasing Group or to any of the Persons collectively constituting any member of the Leasing Group or those holding a beneficial interest in any member of the Leasing Group, or any employee thereof, except to the extent funds are used to pay compensation to an employee for and with respect to activity of such employee in construction of the Project. B. The amount of each requisition shall represent (i) the cost of the work completed on the Project as of the date of such requisition, which has not been paid for under prior requisitions, (ii) the cost of all equipment, fixtures and furnishings included within the Project Budget approved by Lessor, which has not been paid for under prior requisitions, but not incorporated into any contract and which have been delivered to the Leased Property for incorporation into the Project; provided that, in Lessor's judgment, such materials are suitably stored, secured and insured and that Lessee can furnish Lessor with evidence satisfactory to Lessor of Lessee's unencumbered title thereto and (iii) approved soft costs, which have not been paid for under prior requisitions. C. All requisitions for the first fifty percent (50%) of the Project Funds shall be subject to a ten percent (10%) retainage for the completion of the Project, and no retainage shall be required with respect to all requisitions thereafter. It is understood that such retainage is intended to provide a contingency fund to assure that the construction of the Project shall be fully completed in accordance with the Project Plans and the terms and provisions of this Agreement. All amounts so withheld shall be disbursed after (i) construction of the Project has been fully completed in accordance with the Project Plans and the terms and provisions of this Agreement, (ii) all of the items set forth in Section 7.6 hereof have been delivered to Lessor and (iii) the expiration of the period during which liens may be perfected with respect to any work performed or labor or materials supplied in connection with the construction of the Project or the receipt of such evidence as may be required to assure Lessor that no claim may thereafter arise with respect to any work performed or labor or materials supplied in connection with the construction of the Project. D. At the time of each advance, no event which constitutes, or which, with notice or lapse of time, or both, would constitute, a Lease Default shall have occurred and be continuing. E. Without at any time waiving any of Lessor's rights under this Agreement, Lessor shall always have the right to make an advance hereunder without satisfaction of each and every condition upon Lessor's obligation to make an advance under this Agreement, and Lessee agrees to accept any advance which Lessor may elect to make under this Agreement. Notwithstanding the foregoing, Lessor shall have the right, notwithstanding a waiver relative to the first advance or any subsequent advance hereunder, to refuse to make any and all subsequent advances under this Agreement until each and every condition set forth in this 17 Section has been satisfied. The making of any advance hereunder shall not constitute an approval or acceptance by Lessor of any work on the Project theretofore completed. F. If, while this Agreement is in effect, a claim is made that the Project does not comply with any Legal Requirement or an action is instituted before any Governmental Authority with jurisdiction over the Leased Property or Lessee in which a claim is made as to whether the Project does so comply, Lessor shall have the right to defer any advance of Project Funds which Lessor would otherwise be obligated to make until such time as any such claim is finally disposed of favorably to the position of Lessee, without any obligation on the part of Lessor to make a determination of, or judgment on, the merits of any such claim. For the purposes of the foregoing sentence, the term "claim" shall mean an assertion by any Governmental Authority or Person as to which, in each case, Lessor has made a good faith determination that the assertion may properly be made by the party asserting the same, that the assertion, on its face, is not without foundation and that the interests of Lessor require that the assertion be treated as presenting a bona fide risk of liability or adverse effect on the Project. If any such proceeding is not favorably resolved within thirty (30) days after the commencement thereof, Lessor shall also have the right, at its option, to treat the commencement of such action as a Lease Default, for which Lessor shall have all rights herein specified for a Lease Default. As aforesaid, Lessor shall have no obligation to make a determination with reference to the merits of any such claim. No waiver of the foregoing right shall be implied from any forbearance by Lessor in making such election or any continuation by Lessor in making advances under this Agreement. In all events, Lessee agrees to notify Lessor forthwith upon learning of the assertion of any such claim or the commencement of any such proceedings. G. It is contemplated that all advances of the Project Funds made by Lessor to Lessee will be pursuant to this Agreement. H. No inspections or any approvals of the Project during or after construction shall constitute a warranty or representation by Lessor or any of the Consultants as to the technical sufficiency, adequacy or safety of any structure or any of its component parts, including, without limitation, any fixtures, equipment or furnishings, or as to the subsoil conditions or any other physical condition or feature pertaining to the Leased Property. All acts, including any failure to act, relating to the Leased Property by any agent, representative or designee of Lessor (including, without limitation, the Consultants) are performed solely for the benefit of Lessor to assure the payment and performance of the Obligations and are not for the benefit of Lessee or the benefit of any other Person. 7.6 Completion of the Project. Upon the completion of the construction of the Project in accordance with the Project Plans and the terms and provisions of this Agreement, Lessee shall provide Lessor with (A) true, correct and complete copies of (i) a final unconditional Certificate of Occupancy (or its 18 equivalent) issued by the appropriate governmental authorities, permitting the occupancy and use of the Project for its Primary Intended Use and (ii) all Permits issued by the appropriate Governmental Authorities which are necessary in order to operate the Project as a fully-licensed assisted living facility, (B) a certification from the Architect or the Consultants stating that the Project was completed in accordance with the Project Plans, (C) an updated Survey of the Leased Property, acceptable to Lessor (in its sole and absolute discretion), (D) updated Opinions and (E) such other items relating to the operation and/or construction of the Project as may be reasonably requested by Lessor. 8. LESSOR'S RIGHT TO MAKE PAYMENTS AND TAKE OTHER ACTION Lessor may, after ten ( 10) Business Days' prior notice to Lessee of its intention so to do (except in an emergency when such shorter notice shall be given as is reasonable under the circumstances), unless Lessee demonstrates the same has already been paid, pay any sums due or claimed to be due for labor or materials furnished in connection with the ownership, construction, development, maintenance, management, repair, use or operation of the Leased Property, and any other sums which in the reasonable opinion of Lessor, or its attorneys, it is expedient to pay, and may take such other and further action which in the reasonable opinion of Lessor is reasonably necessary in order to secure (A) the completion of the Project in accordance with the Project Plans and the terms and conditions of this Agreement, (B) the protection and priority of the security interests granted to Lessor pursuant to the Lease Documents and (C) the performance of all obligations under the Lease Documents. Lessor, in its sole and absolute discretion, may charge any such payments against any advance that may otherwise be due hereunder to Lessee or may otherwise collect such amounts from Lessee, and Lessee agrees to repay to Lessor all such amounts, which may exceed the line item amount therefor in the Project Budget. Any amount which is not so charged against advances due hereunder and all costs and expenses reasonably incurred by Lessor in connection therewith (including, without limitation, attorneys' fees and expenses and court costs) shall be a demand obligation of Lessee and, to the extent permitted by applicable law, shall be added to the Lease Obligations and secured by the Liens created by the Lease Documents, as fully and effectively and with the same priority as every other obligation of Lessee thereunder and, if not paid within ten ( 10) days after demand, shall thereafter, to the extent permitted under applicable law, bear interest at the Overdue Rate until the date of payment. If Lessee fails to observe or cause to be observed any of the provisions of this Agreement and such failure continues beyond any applicable notice or cure period provided for under this Agreement, Lessor or a lawfully appointed receiver of the Leased Property, at their respective options, from time to time may perform, or cause to be performed, any and all repairs and such other work as they deem necessary to bring the Leased Property into compliance with the provisions of this Agreement may enter upon the Leased Property for any of the foregoing purposes, and Lessee hereby waives any claim against Lessor or such receiver arising out of such entry or out of any other act carried out pursuant to this Section. All amounts so expended or incurred by Lessor and by such receiver and all costs and expenses reasonably incurred in connection therewith (including, without limitation, attorneys' fees and expenses and court costs), shall be a demand obligation of Lessee to Lessor or such receiver, and, to the extent permitted by law, shall be added to the Obligations and shall be secured by the Liens created by the Lease Documents as fully and effectively and with the same priority as every other obligation of Lessee secured thereunder and, if not paid within ten ( 10) days after demand, shall thereafter, to the extent permitted by applicable law, bear interest at the Overdue Rate until the date of payment. 9. INSURANCE; CASUALTY; TAKING 9.1 General Insurance Requirements. 19 Lessee shall at its sole cost and expense keep the Leased Property and the business operations conducted thereon insured as required under the Facility Lease. 9.2 Fire or Other Casualty or Condemnation. In the event of any damage or destruction to the Leased Property by reason of fire or other hazard or casualty (a "Casualty") or a taking by power of eminent domain or conveyance in lieu thereof of all or any portion of the Leased Property (a "Condemnation"), Lessee shall give immediate written notice thereof to Lessor and comply with the provisions of the Facility Lease governing Casualties and Condemnations. 10. EVENTS OF DEFAULT Each of the following shall constitute an "Event of Default" hereunder and shall entitle Lessor to exercise its remedies hereunder and under any of the other Lease Documents: A. any failure of Lessee to pay any amount due hereunder or under any of the other Lease Documents within ten (10) days following the date when such payment was due; B. any failure in the observance or performance of any other covenant, term, condition or warranty provided in this Agreement or any of the other Lease Documents, other than the payment of any monetary obligation and other than as specified in subsections (C) through (F) below (referred to herein as a "Failure to Perform"), continuing for thirty (30) days after the giving of notice by Lessor to Lessee specifying the nature of the Failure to Perform; except as to matters not susceptible to cure within thirty (30) days, provided that with respect to such matters, (i) Lessee commences the cure thereof within thirty (30) days after the giving of such notice by Lessor to Lessee, (ii) Lessee continuously prosecutes such cure to completion, (iii) such cure is completed within one hundred twenty ( 120) days after the giving of such notice by Lessor to Lessee and (iv) such Failure to Perform does not impair Lessor's rights with respect to the Leased Property or otherwise impair the Collateral or Lessor's security interest therein; C. the occurrence of any default or breach of condition continuing beyond the expiration of the applicable notice and grace periods, if any, under any of the other Lease Documents; D. if any representation, warranty or statement contained herein or in any of the other Lease Documents proves to be untrue in any material respect as of the date when made or at any time during the Term if such representation or warranty is a continuing representation or warranty pursuant to Section 6.2; E. except as a result of any Casualty or a partial or complete Condemnation, if a suspension of any work in connection with the construction of the Project occurs for a period in excess often (10) Business Days, irrespective of the cause thereof, provided that Lessee shall not be deemed to be in default under this Subsection if such suspension is for circumstances not reasonably within its control, but only if Lessor, in its sole and absolute discretion, shall determine 20 that such suspension shall not create any risk that the construction of the Project will not be completed (in accordance with the Project Plans and the terms and conditions of this Agreement) on or before the Completion Date; and F. if construction of the Project shall not be completed in accordance with the Project Plans and this Agreement (including, without limitation, satisfaction of the conditions set forth in Section 7.6) on or before the Completion Date. 11. REMEDIES IN EVENT OF DEFAULT Upon the occurrence of an Event of Default, at the option of Lessor, which may be exercised at any time after an Event of Default shall have occurred, Lessor shall have all rights and remedies available to it, at law or in equity, including, without limitation, all of the rights and remedies under the Facility Lease and the other Lease Documents. Subject to the requirements of applicable law, all materials at that time on or near the Leased Property which are the property of Lessee and which are to be used in connection with the completion of the Project shall be subject to the Liens created by the Lease Documents. In addition to, and without limitation of, the foregoing, Lessor is authorized to charge all money expended for completion of the Project against sums hereunder which have not already been advanced (even if the aggregate amount of such sums expended and all amounts previously advanced hereunder exceed the amount of the Project Funds which Lessor has agreed to advance hereunder); and Lessee agrees to pay to Lessor Rent under the Facility Lease (calculated, in part, thereunder based upon all sums advanced hereunder, including, without limitation, all sums expended in good faith by Lessor in connection with the completion of the Project), and, in addition thereto, Lessee agrees to pay to Lessor (as Rent under the Facility Lease), for services in connection with said completion of the Project, such additional sums as shall compensate Lessor for the time and effort Lessor and its employees shall have expended in connection therewith. Lessor is authorized, but not obligated in any event, to do all such things in connection with the construction of the Project as Lessor, in its sole and absolute discretion, may deem advisable, including, without limitation, the right to make any payments with respect to any obligation of Lessee to Lessor or to any other Person in connection with the completion of construction of the Project and to make additions and changes in the Project Plans, to employ contractors, subcontractors and agents and to take any and all such action, either in Lessor's own name or in the name of Lessee, and Lessee hereby grants Lessor an irrevocable power of attorney to act in its name in connection with the foregoing. This power of attorney, being coupled with an interest, shall be irrevocable until all of the Obligations are fully paid and performed and shall not be affected by any disability or incapacity which Lessee may suffer and shall survive the same. The power of attorney conferred on Lessor by the provisions of this Section 11 is provided solely to protect the interests of Lessor and shall not impose any duty on Lessor to exercise any such power and neither Lessor nor such attorney-in-fact shall be liable for any act, omission, error in judgment or mistake of law, except as the same may result from its gross negligence or wilful misconduct. In the event that Lessor takes possession of the Leased Property and assumes control of the Project as aforesaid, it shall not be obligated to continue the construction of the Project and/or the operation of the Project for any period of time longer than Lessor shall see fit (in its sole and absolute discretion), and Lessor may thereafter, at any time, abandon its efforts and refuse to make further payments for the account of Lessee, whether or not the Project has been completed. In addition, at Lessor's option and without demand, notice or protest, the occurrence of any Event of Default shall also constitute a default under any one or more of the Related Party Agreements. 21 12. GENERAL The provisions set forth in Articles 22, 23 and Sections 2.2,16.8 through 16.10, 24.2. through 24.6, and 24.8 through 24.12 of the Facility Lease are hereby incorporated by reference, mutatis, mutandis, and shall be applicable to this Agreement as if set forth in full herein. This Agreement and the other Lease Documents set forth the entire agreement of the parties with respect to the subject matter and shall supersede in all respects (a) the Letter of Intent with respect to the Project, and (b) the letter dated April 11,1997, as amended, from Hutchins, Wheeler & Dittmar to Randi S. Nathanson relating to the Land (including, without limitation, the indemnities therein). 13. LEASE PROVISIONS PARAMOUNT In the event of a conflict between the provisions hereof and the provisions of the Facility Lease, the provisions of the Facility Lease are paramount. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 22 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. ATTEST: LESSEE: EMERITUS PROPERTIES I, INC., a Washington corporation /s/ Jennifer A. Valenta By: /s/ Kelly J. Price - ---------------------------------- - ------------------------------------- Name: Jennifer Valenta Name: Kelly J. Price Title: Vice President of Finance ATTEST: LESSOR: MEDITRUST ACQUISITION CORPORATION a Massachusetts Corporation /s/ Amelia C. Gentry By: /s/ Michael S. Benjamin, - --------------------------------- ---- - ----------------------------------------- Name: Amelia C. Gentry Name: Michael S. Benjamin, ESQ. Title: Senior Vice President 23 EX-10.78.1 20 EX 10.78.1 THE FOLLOWING DOCUMENTS ARE SUBSTANTIALLY THE SAMEFOR THE TEXAS COMMUNITIES. MANAGEMENT AND CONSULTING AGREEMENT Assisted Living Facility THIS AGREEMENT is by and between XL MANAGEMENT COMPANY L.L.C., an Oregon limited liability company, ("XL") and ESC I, L.P., a Washington limited partnership ("Owner"). XL is engaged in the management and operation of assisted living care facilities, and through its officers and agents is experienced in such management and operation. Owner operates a 87 bed assisted living care facility located at 1808 W. Loop 250 N, Midland, Texas known as Saddleridge Lodge ("the Facility") and desires to avail itself of the services of XL in management and operation of the Facility. As parties hereto, XL and Owner agree: 1. MANAGEMENT AND CONSULTING RESPONSIBILITIES OF XL: XL shall provide the following management, consulting and advisory services as an independent contractor to Owner in connection with the Facility, upon the terms and conditions as set forth in the agreement: (a) ADMINISTRATOR: XL shall recruit, evaluate and select the Administrator, who shall be responsible for the functional operation of the Facility and execution on a day-to-day basis of policies established by XL and Owner in accordance with this agreement. (b) PERSONNEL: XL shall establish all necessary and desirable personnel policies, wage structures and staff schedules for employment of personnel at the Facility. Staffing shall be maintained in compliance with applicable state regulations. All personnel shall be employees of the Owner. It is the intention of both Owner and XL to control costs of operation by staffing at the level necessary to maintain quality service without waste. However, Owner understands and agrees that, during the initial fill-up period and during times of unusual conditions of competition or other economic pressures, additional costs may be incurred for staff and promotion in order to achieve and maintain essential occupancy levels. (c) OPERATIONAL POLICIES: XL shall develop all operational policies and procedures necessary to insure establishment and maintenance of the standards of resident care/services and licensure appropriate for the nature of the Facility. (d) FORMS: XL shall develop and adopt all invoices and other such forms necessary and desirable for effective, efficient and professional operation of the Facility. Such forms and invoices shall be sold to the Facility at a cost not to exceed that charged to other facilities managed by XL and in no event at a cost which exceeds a comparable retail price for such forms and invoices in the market. (e) CHARGES: Subject to the approval of Owner, XL shall establish the schedules of recommended charges for services, including any and all special charges to the residents of the Facility. XL shall periodically review and adjust any and all such charges as necessary. XL shall not make material adjustments to rates without Owner consent. (f) INFORMATION: XL shall develop all initial and continuing informational material, mass media releases and other such publicity. XL shall also be responsible for matters related to customer relations. (g) EQUIPMENT AND IMPROVEMENTS: XL shall advise Owner as to equipment and improvements to the Facility which are needed to maintain certification and accreditation, to maintain or upgrade quality, or which are necessary to replace obsolete or run-down equipment. Owner consent shall be required for any capital improvement or equipment purchase greater that $52,500.00. 1 (h) BOOKKEEPING AND ACCOUNTING: XL shall provide bookkeeping and accounting procedures necessary for the preparation of proper financial records. Bookkeeping and accounting procedures and systems shall be according to generally accepted accounting principles which shall not distort income or loss. Owner shall be responsible for preparing all federal and state income tax returns due from operation of the Facility. (i) REPORTS: XL shall prepare and provide to the Owner profit and loss statements with balance sheets and any census data or other reasonable information which may, from time to time, be specifically requested by Owner. Cost for these reports will be included in the management fee to be paid to XL Management Company L.L.C., except for services required of outside vendors which will be in addition to management fees. (j) BUDGETS: XL shall prepare and shall submit to Owner, for Owner's review and approval, an annual budget for the Facility for each calendar year during the Term setting forth the estimated receipts and expenditures (capital, operating and other) for the Facility on a monthly and an annual basis (the "Operating Budget") and attempt to submit the Operating Budget to Owner for approval prior to the commencement of the period covered thereby. XL shall implement the Operating Budget when it is approved by Owner (the "Approved Operating Budget"), and XL shall use its reasonable efforts not to incur expenses in connection with the maintenance and operation of the Facility in excess of the amounts allocated to the various classifications of expenses in the Approved Operating Budget without Owner's prior consent. 2. OPERATING RESPONSIBILITIES AND BANK ACCOUNT: (a) OPERATING COSTS: Owner shall be responsible for and shall pay all operating costs, wages, salaries, expenses and fees incident to the operation of the Facility, including all authorized costs incurred by XL on behalf of Owner, when due. (b) BANK ACCOUNT: XL shall establish and maintain a bank account with regard to the operations of the Facility, under which XL shall be authorized to withdraw funds, execute checks, and make disbursements. All funds received in the operation of the Facility shall be deposited in this bank account, and Owner shall maintain in such account adequate funds to permit the prompt payment when due of the salaries of the Administrator and all other employees, taxes, insurance premiums, accounts payable incurred in the operation of the Facility, and all other expenses related to the operation of the Facility. XL shall disburse to Owner, upon request, any surplus funds in such bank account which in XL's opinion are not necessary for operation of the Facility. Such bank account shall be established in the bank or branch of such banks as shall be designated by XL. Notwithstanding the foregoing, no single expenditure exceeding Five Thousand Dollars ($55,000.00) shall be made by XL without the consent of Owner for other than normal operating costs. Owner shall be a signatory on the Facility account. (c) GENERAL XL AUTHORITY AND RESPONSIBILITY: XL shall supervise the Administrator and all other personnel in the execution of policies established in Paragraph 1 of this agreement, and shall (i) prepare the payroll and prepare and file all payroll tax returns and reports, /ii) prepare and sign checks, (iii) pay all accounts payable as they become due, so long as sufficient funds are available in the bank account, (iv) prepare and file such cost reports as required to establish reimbursement rates for all federal programs, and (v) arrange for the purchase and installation of any new equipment in accordance with Paragraph 1 of this agreement. It is specifically agreed that XL has sole power and authority for the preparation, filing and payment of all payrolls and payroll taxes of every nature, which duty may not be delegated to Owner. XL shall have authority as agent of Owner to perform all the foregoing tasks, and Owner shall not interfere with the management and operation of the Facility except in accordance with this agreement. 2 3. LIABILITY AND INDEMNIFICATION: Except for XL's own negligent acts or omissions, gross mismanagement, breach of terms of this Agreement or deliberate acts detrimental to Owner's interest, XL does not assume any liabilities associated with or incident to the operation of the Facility, but all such liabilities shall be assumed by Owner as principal. XL acts as an independent contractor with regard to some services and as agent or Owner with regard to other services as described in this agreement, and does not act in any other capacities for Owner and does not act as principal in the operation of the Facility. XL does not guarantee that operation of the Facility will be profitable. Owner shall indemnify and hold XL harmless against any loss, claim or damage which XL may suffer or sustain by reason of failure by Owner to pay any and all operating expenses as they become due, assume any and all liabilities incident to operation of the Facility, maintain sufficient funds in the bank account, failure to maintain required insurance, or any other cost, expense, loss or claim suffered by XL for which it is not responsible according to the terms of this agreement. 4. INSURANCE: Owner shall obtain on behalf of Owner all necessary and proper hazard insurance covering the premises occupied by the Facility, the furniture, fixtures and equipment situated thereon, and all necessary and proper liability insurance for the protection of Owner, XL, and the Administrator, employees and volunteers of the Facility and XL shall be named an additional insured with respect to liability. Such insurance shall be an expense of operation. The Facility shall utilize the risk management and insurance forms of Owner. 5. PAYMENT: As consideration for the services rendered by XL in accordance with this agreement, Owner shall pay to XL a fee equal to 6% of the gross revenues, determined on an accrual basis. (a) If the services of XL commence or terminate other than on the first day of the month, the fee shall be pro-rated proportionate to the number of days for which services are actually rendered. (b) Owner shall pay the fee to XL on a monthly basis, and such fee may be disbursed by XL to itself out of the account provided for above in Paragraph 2 /b). 6. BONUS FEE. XL shall be paid a bonus fee one year from the date of this Agreement based on the following schedule. If the Facility occupancy is between 75% and 89% at that date, XL shall be paid a $25,000 bonus fee. If the Facility occupancy is greater than or equal to 90% at that date, XL shall be paid a $50,000 bonus fee. 7. TERMINATION. (a) In the event that Owner fails to maintain funds in the bank account sufficient to continue the operation of the Facility, materially interferes in the management and operation of the Facility to be performed by XL under this agreement, or in any other way materially violates or materially breaches this agreement or any covenant thereof XL may at its option, in addition and without prejudice to any other remedy it may have, terminate this agreement upon 30 days notice to Owner. If Owner operates the Facility under a lease, XL shall give written notice of any default hereunder to the Facility lessor and shall allow the Facility lessor to cure such default. If Owner cures the breach to XL's satisfaction during said period, the Agreement shall be reinstated on the original terms and conditions. 3 (b) In the event of a final decree against the Owner under any bankruptcy, insolvency, or reorganization law, or the appointment of any receiver for Owner, or any assignment for the benefit of creditors of the Owner, XL may, at its option, in addition and without prejudice to any other remedy it may have, forthwith terminate this agreement without further obligation. Owner reserves the right to terminate the services of XL in the event that XL fails to manage the Facility with due diligence and pursuant to the standards of similar facilities. Owner shall also retain the right to terminate with XL in the event that Owner determines it would be in Owner's interest to sell the Facility to a third-party purchaser or Owner's license to operate the Facility is suspended or revoked or the licensing agency threatens to take such action. In the event of termination of XL by Owner for these reasons, Owner agrees to give XL not less than sixty (60) days' notice prior to the effective date of termination. In the event that Owner terminates with XL for cause, as hereinabove stated with the exception of selling the Facility, and in the event that a controversy develops between the parties pertaining to whether or not Owner is justified in so terminating XL, then, and in such event, such controversy shall be submitted to arbitration. Each of the parties shall be required to choose one arbitrator, and the two arbitrators shall then choose a third arbitrator to determine whether or not Owner may justifiably terminate its contract with XL for cause as stated herein. The parties agree to be bound by the decision of their arbitrators, and the arbitration proceeding must be carried out within thirty (30) days of the notice from Owner to XL of its wish to terminate XL's management contract. 8. TERM: The term of this agreement shall commence on the date hereof and, unless earlier terminated in accordance with the provisions hereof, shall continue for a period of 30 months to and including the 20th day of July, 2000. 9. PROPRIETARY MATERIALS: Various forms, operating procedures and controls employed by XL in the performance of the agreement are proprietary in nature and shall remain the property of XL and shall at no time be utilized, distributed, copied or otherwise used or employed by the Owner except with the consent of XL or in accordance with the terms and objectives of this agreement. 10. ASSIGNMENT: This agreement may not be assigned by XL or the Owner to any party or parties without the written consent of the other, except that XL may assign the same to any corporation which controls it directly or indirectly, or which is controlled by it directly or indirectly. 11. ATTORNEY'S FEES: In the event either party brings an action to enforce this agreement, the prevailing party in such action shall be entitled to receive costs and reasonable attorney's fees incurred by it in such amount as a court may deem reasonable, whether at trial or appellate court level. 12. NOTICES: All notices, demands and other communications which may be or are required to be given hereunder or with respect hereto shall be in writing directed to the respective parties as follows, or to such other address as either party may, from time to time, designate by notice: 4 XL Owner Attn: Bruce D. Thorn Attn: Michelle Bickford XL Management Company LLC ESC I, L.P. 2250 McGilchrist St. SE c/o Emeritus Corporation P.O. Box 14111 3131 Elliott Avenue, Suite 500 Salem, OR 97309-5026 Seattle, WA 98121 13. ENTIRE AGREEMENT: This agreement constitutes the entire agreement between the parties and supersedes and cancels any and all other agreements between the parties relating to the subject hereof. Executed effective the 1st day of February, 1998. XL Owner XL Management Company L.L.C., ESC I, L.P., an Oregon limited liability company a Washington limited partnership By: /s/ Norman L. Brenden By: ESC G.P.I., INC., ------------------------------ A Washington corporation Norman L. Brenden Manager By: /s/ Michelle A. Bickford - ------------------------------------- Michelle A. Bickford Vice President New Business Development 5 EX-10.79.1 21 EX 10.79.1 THIS NOTE AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1993 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPTION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE FOR SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION. $5,000,000 Dated as of January 7,1998 CONVERTIBLE PROMISSORY NOTE For value received, Aurora Bay Investments, L.L.C., a Washington limited liability company, having an office at 5720 LBJ Freeway, Suite 450, Dallas, Texas 75240-6339 ("Maker"), hereby promises to pay to the order of Emeritus Corporation, a Washington corporation ("Payee"), at 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121, or such other place designated in writing by Payee in lawful money of the United State of America, Five Million Dollars ($5,000,000) or such lesser amount as may be advanced by Payee to Maker from time to time under that certain Credit Agreement dated as of January 7, 1998, by and between Maker and Payee (the "Credit Agreement"), together with interest thereon from the date of such advances until paid as hereinafter stated. 1. INTEREST ACCRUAL AND PAYMENT. Interest shall accrue on the aggregate outstanding principal balance of this Convertible Promissory Note (the "Note"), commencing on the date hereof, at nine percent (9.0"%) per annum, and shall be payable quarterly in arrears on the first day of each calendar quarter (January 1, April l, July l, and October 1), commencing on April 1,1998. Interest on this Note shall be calculated on the basis of the actual number of days elapsed in any period in which interest is payable. Whenever any payment under this Note is due on a Saturday, Sunday or any other day on which banks in the State of Washington are required to be closed, such payment shall be made on the next succeeding day on which banks in the State of Washington are not required or permitted by law to be closed. 2. PRINCIPAL PAYMENT: MATURITY. Unless sooner paid, all interest and principal payable hereunder, and all other amounts due under this Note, shall be due and payable by Maker on January 7, 2003 (the "Maturity Date"). 3. VOLUNTARY PREPAYMENT. Maker shall not lie entitled to prepay, in part or in whole, the outstanding principal balance of this Note at any time prior to its Maturity Date without the prior consent of Payee, which consent may be withheld by Payee in its sole and absolute discretion. 4. PLACE OF PAYMENT. All amounts due hereunder shall be payable to Payee at the address of Payee or at such other place as Payee may designate in writing to Maker at Maker's address set forth above. 5. CONVERSION RIGHTS. As long as there is not an uncured material default by Payee under the Credit Agreement, Payee shall have a one-time right, exercisable at any time prior to the Maturity Date, to convert effective five (5) days after the giving of such notice (the "Conversion Date"), all (but not less than all) of the principal amount of this Note outstanding as at the Conversion Date into a membership interest in Maker entitling Payee to receive cash distributions made by Maker and to be allocated profits, gains, losses, deductions, credits, or any items thereof, allocated by Maker to its Members, as such rights are stipulated in the Maker's Operating Agreement dated as of January 6,1998, which is attached hereto as Exhibit A-1 (the "Operating Agreement"). The conversion right described herein shall lapse if not exercised on or prior to the Maturity Date. Payee shall effect a conversion by surrendering this Note to Maker, together with a written notice of Payee's intent to exercise its conversion rights (the "Holder Conversion Notice"). Each Holder Conversion Notice, once given, shall be irrevocable. 6. PROCEDURES FOR IMPLEMENTING CONVERSIONS. The following procedures shall apply to the voluntary conversion of this Note pursuant to Section 5. (a) If upon the Conversion Date, Payee has not advanced to Maker all funds that might be drawn upon by Maker under the Credit Agreement to fund its acquisition, development, construction and initial carrying cost of projects, Payee will be obligated to contribute to Maker, as additional capital contributions, funds at such times, and in such E amounts, that such funds would have been made available to Maker pursuant to the terms of the Credit Agreement. The funding of such capital contributions will be subject to the conditions set forth in the Credit Agreement, as though the Credit Agreement had. been incorporated into Maker's Operating Agreement in its entirety and Payee shall not be obligated to make such capital contributions unless and until all conditions precedent to the funding of such amounts under the Credit Agreement have been satisfied in full. Any funds contributed by Payee to Maker, pursuant to the obligations set forth in the paragraph, shall be credited to Payee's capital account in Maker. (b) If Payee exercises the conversion right described in Section 5, then, effective as of the Conversion Date, this Note shall be canceled and terminated, and Maker shall thereafter have no further obligations, and Payee shall thereafter have no further rights, under this Note. (c) The Conversion Notice shall be given by facsimile and by mail, postage prepaid, addressed to Maker at the facsimile telephone number and address of the principal place of business of Maker. (d) The membership interests issuable upon conversion of this Note will be, when as and if issued, "restricted securities" under the Securities Act and will bear a legend to that effect. The membership interests may not be sold or transferred and must be held indefinitely unless an redemption from registration is available. Maker is not obligated to register the membership interests or to comply with any exemption under the Securities Act or to supply or file any information which would facilitate the resale thereof. 7. LATE CHARGES. In the event that any payment due hereunder or under the Credit Agreement shall not be made when due a late charge of five cents ($.05) for each dollar ($ 1.00) so overdue may be charged by Payee for the purpose of defraying the expense incident to handling such delinquent payment (the "Late Charge Fee"). Such Late Charge Fee represents the reasonable estimate of Payee and Maker of a fair average compensation for the loss that will be sustained by Payee due to the failure of Maker to make timely payments. Such Late Charge Fee shall be paid without . prejudice to the right of Payee to collect any other amounts provided to be paid or to declare an Event of Default under this Note or the Credit Agreement. If an Event of Default (as hereunder defined) occurs, then the interest rate applicable in calculating any defaulted payments from the due date of the defaulted payments shall be the default rate stipulated in Section 8 until paid in full and the Late Charge Fee shall apply to any such payments. 8. DEFAULTS. At the option of Payee, all principal and interest shall immediately become due and payable on any of the following events: (a) Maker fails to make any payment as provided for in this Note, or in the Credit Agreement, and such failure to make payment continues for five (5) calendar days after Maker's receipt of written notice from Payee that such payment is due; (b) Maker makes a general assignment for the benefit of creditors; a receiver is appointed for the assets of Maker upon request by any person(s) other than Maker, or Maker makes a formal request for appointment of a receiver; or any proceeding is brought by Maker in any court or under supervision of any court-appointed officer under any federal or state bankruptcy reorganization, rearrangement, insolvency or debt readjustment law, or if any such proceedings are instituted against Maker and he fails to obtain dismissal of such proceeding within ninety (90) days after the same has been instituted; 2 (c) Maker fails to cure any material breach (other than nonpayment of a monetary obligation) of any agreement of Maker contained in this Note or in the Credit Agreement after Maker has been sent 30 calendar days' written notice of such breach (other than nonpayment of a monetary obligation) from Payee; (d) Any breach by Maker of any material representation or warranty contained in the Credit Agreement or any other instrument or agreement delivered by Maker to Payee in connection therewith; or (e) The cessation of Maker's business operations, or the insolvency of Maker an admission in writing of its inability to pay debts as they mature. In the event of such Default, the rate of interest due under this Note will. increase to a rate per annum equal to the lesser of (x) 16% per annum and (y) the maximum rate allowed by law and will continue until such Default has been cured or waived. 9. ATTORNEYS' FEES AND COSTS AND CONSULTANT/EXPERT WITNESS EXPENSES. Maker shall pay Payee a11 its direct or indirect reasonable attorneys' fees and costs and the reasonable expense of expert witness and consultants engaged directly or indirectly by Payee to advise Payee and to take whatever steps Payee deems reasonably necessary to collect this Note, including, without limitation, commencement of any action or proceeding to enforce this Note against Maker. Without limiting the generality of the foregoing, Maker understands and agrees to pay the reasonable attorneys' fees and costs and reasonable expenses for expert witnesses and consultants (a) engaged by Payee in connection with this Note, (b) incurred by Payee directly or indirectly in any insolvency proceeding or in any contested matter or adversity proceeding that is part of bankruptcy, and (c) incurred by Payee in advance of any action or proceeding relating to this Note or for the appeal of certiorari proceeding subsequent to an action or proceeding on this Note. 10. NO WAIVER. Maker hereby waives diligence, presentment, protest, any demand for payment, notice of protest, dishonor and nonpayment of this Note. Maker hereby agrees to pay all sums which are payable by it hereunder without set-off or offset. . 1l. CUMULATIVE RIGHTS. The rights and remedies of Payee provided in this Note shall be cumulative and concurrent and may be pursued singly, successively, or together against Maker for the payment hereof in the sole discretion on Payee. The failure to exercise any such right or remedy shall in no event be construed as a waiver of release of said rights and remedies or the rights to exercise them at any later time. 12. MODIFICATION. This Note may not be amended, modified, or changed, nor shall any waiver of any provision be effective, except only by an instrument in writing signed by the person against whom enforcement of such waiver, amendment, change, modification or discharge is sought. 13. JURISDICTION AND VENUE. Maker agrees that the state and federal (as Payee may in its sole discretion elect) courts in the State of Washington situated in King County, Washington, will have non- exclusive jurisdiction and venue over any action or proceeding relating to this Note. Maker submits to such courts and their jurisdiction and agrees that venue in King County, Washington is proper over any such action or proceeding. 14. USURY. It is the intent of Payee and Maker in the execution of this Note and all other instruments now or hereafter securing this Note to contract in strict compliance with applicable usury law. In furtherance thereof Payee and Maker stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Interest Rate permitted under applicable law (the "Maximum Rate") (the parties hereby acknowledging and confirming that applicable law is to mean the laws of the State of Washington or the laws of the United States, whichever laws allow the greater rate of interest (as noted below) but, if for whatever reason, notwithstanding the parties' joint determination of the applicable law, which determination the parties intend to be conclusive, a court were to 3 determine that the applicable law was the laws of the State of Texas, and if such law provides for a ceiling upon interest rates under Tex. Rev. Civ. Stat. Ann. art. 5069-1.04, as amended, or any successor laws or regulations, such ceiling shall be the indicated maximum interest rate); neither Maker nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the Maximum Rate that may be lawfully charged under applicable law, and the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. Payee, including each holder of this Note, expressly disavows any intention to enlarge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason or if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the Loan exceeds the amount of interest that would have accrued at the Maximum Rate, Payee or other holder of this Note shall, at its option, either refund to Maker the amount of such excess or credit the amount of such excess against the principal amount and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. In the event that Payee or any other holder of this Note shall contract for, charge or receive any amounts and/or any other thing of value which are determined to constitute interest which would increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable law, all such sums determined to constitute interest in excess of the amount of Interest at the lawful rate shall, upon such determination, at the option of Payee or other holder of this Note, be either immediately returned to Maker or credited against the principal amount in which event any and all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Note, Maker acknowledges that it believes the loan evidenced by this Note, and all arrangements in connection. therewith, to be non- usurious and agrees that if, at any time, Maker should have reason to believe that the loan is in fact usurious, it will give the Payee or other holder of this Note notice of such condition and Maker agrees that Payee or other holder shall have ninety (90) days in which to make appropriate refund or other adjustment in order to correct such condition if in fact such exists. 'The term applicable law as used in this Note shall mean the laws of the State of Washington or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. 15. MISCELLANEOUS. Every provision of this Note is intended to be severable and in the event any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall be interpreted so as to make the remaining terms and provisions binding and enforceable to the fullest extent possible. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. In this Note, the singular shall include the plural and the masculine shall include the feminine and neuter gender, and vice versa, if the context so requires. The headings at the beginning of each numbered paragraph of this Note are intended solely for convenience of reference and are not to be deemed or construed to be a part of this Note. Nothing contained in this Note or elsewhere shall be deemed or construed as creating a partnership or joint venture between Payee and Maker or between Payee and any other person, or cause the holder hereof to be responsible in any way for the debts or obligations of Maker. This Note shall be governed by and construed in accordance with the laws of the State of Washington (without giving effect to its choice of law principles). "ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW." 4 IN WITTINESS WHEREOF, Maker has executed this Note on the 7th day of January, 1998. AURORA BAY INVESTMENTS, L.L.C., a Washington limited liability company By: /s/ Craig W. Spaulding - ---------------------------------------- Craig W. Spaulding, Manager By: /s/ Jerry Erwin - -------------------------------------------- Jerry Erwin, Manager 5 EX-10.79.2 22 EX 10.79.2 NOTICE AND AGREEMENT EMERITUS CORPORATION LOAN TO AURORA BAY INVESTMENTS, L.L.C. Reference is made to the following documents (the "Loan Documents"), all dated to be effective as of the date hereof and executed in connection with a loan of up to $5 million from Emeritus Corporation ("Lender") to Aurora Bay Investments, L.L.C. ("Borrower"): 1. Convertible Promissory Note in the principal amount of $5 million executed by Borrower in favor of Lender. 2. Credit Agreement between Lender and Borrower. 3. Guaranty in favor of Lender executed by Thilo Best, Erwin Investors I, L.L.C., and Craig W. Spaulding. 4. Guarantor Pledge and Security Agreements in favor of Lender executed by Thilo Best, Erwin Investors I, L.L.C., and Craig W. Spaulding. 5. Financing Statements. Borrower, Lender and Guarantors take notice of and agree to the following: 1. PURSUANT TO SUBSECTION 26.02(b) OF THE TEXAS BUSINESS AND COMMERCE CODE, A LOAN AGREEMENT IN WHICH THE AMOUNT INVOLVED THEREIN EXCEEDS $50,000 IN VALUE IS NOT ENFORCEABLE UNLESS THE AGREEMENT IS IN WRITING AND SIGNED BY THE PARTY TO BE BOUND OR BY THAT PARTY'S AUTHORIZED REPRESENTATIVE. 2. PURSUANT TO SUBSECTION 26.02(c) OF THE TEXAS BUSINESS AND COMMERCE CODE, THE RIGHTS AND OBLIGATIONS OF THE PARTIES TO THE LOAN DOCUMENTS SHALL BE DETERMINED SOLELY FROM THE LOAN DOCUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN THE PARTIES ARE SUPERSEDED BY AND MERGED INTO THE LOAN DOCUMENTS. 3. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES THERETO. THERE ARE NO WRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 4. NOTHING IN THIS NOTICE AND AGREEMENT IS, HOWEVER, TO BE CONSTRUED TO MAKE ANY OF THE LOAN DOCUMENTS GOVERNED BY AND SUBJECT TO TEXAS LAW, BUT EACH OF SUCH LOAN DOCUMENTS IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF WASHINGTON, WITHOUT REGARD TO THE CHOICE OF LAW RULES THEREOF. IN WITNESS WHEREOF, this Notice and Agreement is executed by the undersigned parties as of January __, 1998. BORROWER: AURORA BAY INVESTMENTS, L.L.C., a Washington limited liability company By: /s/ Craig W. Spaulding ------------------ ------------------- Craig W. Spaulding By: /s/ Jerry Erwin ----------------- -------------------- Jerry Erwin, Manager LENDER: EMERITUS CORPORATION, a Washington corporation By: /s/ Michelle A. Bickford ----------------- ------------------- Its: V.P. New Business Development 2 EX-10.79.3 23 EX 10.79.3 CREDIT AGREEMENT Between EMERITUS CORPORATION and AURORA BAY INVESTMENTS, L.L.C. Dated as of January 7,1998 CREDIT AGREEMENT THIS CREDIT AGREEMENT is made and entered into as of the 7th day of January, 1998, by and between Emeritus Corporation, a Washington corporation ("Emeritus"), and Aurora Bay Investments, L.L.C., a Washington limited liability company ("Borrower"). RECITALS A. Borrower is a recently formed company organized to own, develop, operate and acquire Alzheimer's special care facilities to provide room, board, and personal care services primarily to elderly persons afflicted with Alzheimer's disease. B. Emeritus is in the business of owning, developing, and operating senior housing facilities throughout the United States and is willing to make available to Borrower certain funds to permit Borrower's acquisition, development, and construction of such facilities, provided that such loans are convertible, at Emeritus' option, into an equity interest in Borrower. C. Subject to the terms and conditions of this Agreement, Emeritus is prepared to advance funds to Borrower, and Borrower is prepared to borrow funds from Emeritus. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and conditions set herein, the parties agree as follows: l. DEFINITIONS As used herein, the following terms have the meanings set forth below: "Affiliate" means a Person that now or hereafter, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Borrower. A Person shall be deemed to control a corporation, limited liability company, limited partnership or partnership if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management of such corporation, limited liability company, limited partnership or partnership, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" means this Credit Agreement, including all modifications and amendments thereto. "Applicable Law" means all applicable provisions and requirements of all (a)constitutions, statutes, ordinances, rules, regulations, standards, orders, and directives of any Governmental Bodies, (b) Governmental Approvals, and (c) orders, decisions, decrees, judgments, injunctions, and writs of all courts and arbitrators, whether such Applicable Laws presently exist, or are modified, promulgated, or implemented after the date hereof. "Best" means Thilo Best, one of the members of Borrower. "Borrower" means Aurora Bay Investments, L.L.C., a Washington limited liability company. "Borrower Project Subordinated Debt" means with respect to each of the Projects, the amount of subordinated debt advanced by Borrower to the Wholly Owned Subsidiary which owns, or will own, such Project. 2 "Borrowing Notice" has the meaning set forth in Section 2.10. "Business Day" means any day except a Saturday, Sunday, or other day on which national banks in the state of Washington are authorized or required by law to close. "Collateral" means all the property, real or personal, tangible or intangible, now owned or hereafter acquired, in which Emeritus has been or is to be granted a security interest by Borrower or any other Person, to secure the Indebtedness of Borrower to Emeritus. "Commitment Period" has the meaning set forth in Section 2.1. "Construction/Permanent Loan" means, with respect to each of the Projects, the construction and permanent financing, to be obtained by Borrower, to fund the acquisition, development and construction of such Project, to cover anticipated operational expenses, including debt service payments, until the Project's operations can be conducted on a break even basis, the terms of which financing must be approved by Emeritus as required by Section 2.7. "Convertible Promissory Note" is the Convertible Promissory Note attached hereto as Exhibit A to be executed by Borrower, representing Borrower's obligation to repay the Loan to Emeritus. "Default" means any condition or event that constitutes an Event of Default or with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Emeritus Corporation" means Emeritus Corporation, a Washington corporation, which has agreed to advance certain funds to Borrower pursuant to the terms of this Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Erwin" means Jerry Erwin. "Erwin LLC" means Erwin Investors I, L.L.C., a Washington limited liability company, controlled by Jerry Erwin, which company is one of the three members of Borrower. "Event of Default" has the meaning set forth Section 7.1. "Funding" means any disbursement of the proceeds of the Loan. "Governmental Approval" means any authorization, consent, approval , certificate of compliance, license, permit, or exemption from, contract with, registration or filing with, or report or notice to, any Governmental Body required or permitted by Applicable Law. "Governmental Body" means the government of the United States, any state or any foreign country, or any governmental or regulatory official, body, department, bureau, subdivision, agency, commission, court, arbitrator, or authority, or any instrumentality thereof whether federal, state, or local. "Guarantor" means each of Best, Erwin LLC and Spaulding, who will execute and deliver to Emeritus the Guaranty pursuant to Section 3.1(b) of this Agreement. 3 "Guarantor Pledge and Security Agreement" means the Pledge and Security Agreement, in the form attached hereto as Exhibit C, to be executed by each of the Guarantors granting in favor of Emeritus a first priority and. exclusive security interest in such Guarantor's membership interest in Borrower. "Guaranty" means, with respect to each of the Guarantors, the non-recourse guaranty to be executed by such Guarantor in favor of Emeritus, in the form attached hereto as Exhibit B, including all renewals, replacements, and amendments thereto. "Hazardous Materials" means oil or petrochemical products, PCBs, asbestos, urea formaldehyde, flammable explosives, radioactive materials, Hazardous wastes, toxic substances, or related materials, including, but not limited to, substances defined as or included in the definition of "Hazardous substances, " "Hazardous wastes", "Hazardous materials," or "toxic substances" under any Hazardous Materials Laws. "Hazardous Materials Claims" means (a)enforcement, cleanup, removal, or other regulatory actions instituted, completed, or threatened by any Governmental Body pursuant to any applicable Hazardous Materials Laws and (b) claims made or threatened by any third party against Borrower or any Wholly Owned Subsidiary or its property relating to damage, contribution, cost recovery, compensation, loss, or injury resulting from Hazardous Materials. "Hazardous Materials Laws" means all Applicable Laws pertaining to Hazardous Materials. "Indebtedness" means all items that in accordance with generally accepted accounting principles would be included in determining total liabilities as shown on the liabilities side of the balance sheet as of the date that "Indebtedness" is to be determined, and in any event, includes liabilities secured by any mortgage, deed of trust, pledge, lien, or security interest on property owned or acquired, whether or not such a liability has been assumed, and the ties, endorsements (other than for collection in the ordinary course of business), and other contingent obligations with regard to the obligations of other Persons. "Loan Documents" means this Agreement, the Convertible Promissory Note , the Guaranties, the Guarantor Pledge and Security Agreements, the Project Promissory Notes, the Project Pledge and Security Agreements, and the Financing Statements related to such Pledge and Security Agreements, together with all other agreements, instruments, and documents arising out of or relating to this Agreement or the Loan, and includes all renewals, replacements, and amendments thereof. "Loan" means the loan to be made to Borrower pursuant to this Agreement, as well as all renewals, replacements, and modifications thereof. "Minimum Tax Distribution" means, with respect to Borrower's members, an amount sufficient to permit the Members to pay their federal and state income taxes for a given taxable year on the aggregate taxable income, as adjusted by the proviso of this paragraph, allocated to such members for such tax year pursuant to the Operating Agreement, assuming for this purpose that such members are subject to the highest U.S. federal statutory marginal ordinary income tax rate then applicable for individuals; provided, however, if such members have been allocated in prior tax years losses, such losses shall first be offset against income for such tax year (to determine a net taxable income), until all such losses have been offset against income in such tax year or prior tax years, and the amount of such taxable income, less the offsetting losses, if any, 4 shall be regarded as the amount of taxable income of such members for such tax year. "Operating Agreement" means that certain Operating Agreement of Aurora Bay Investments, L.L.C., dated as of January 6, 1998, a copy of which is attached hereto as Exhibit F. "Permitted Encumbrances" means, with respect to each of the Projects, (a) liens for taxes not yet due or liens for taxes being contested in good faith by appropriate proceedings for which adequate reserves determined in accordance with general accepted accounting principles have been established; (b)liens securing payment of the Senior Debt on such Project, (c)zoning and other governmental restrictions, (d) matters common to any general area or subdivision in which the Project is located, (e) liens in respect of the Project imposed by law arising in the ordinary course of business such as materialmen's mechanics', warehousemen's, supplier's or vendor's and other like liens provided that such liens secure only amounts not yet due and payable or if overdue are being contested in good faith by appropriate actions or proceedings and adequate reserves have been established; (f) easements, rights-or-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not impairing, in any material respect, the use of such Project for its intended purposes or interfering, in any material respect, with the use of such Project for its intended purposes. "Person" means any individual, partnership, joint venture, firm, corporation, association, limited liability company, limited liability partnership, trust, or other enterprise or any Governmental Body. "Plan" means an employee pension benefit plan that is covered by ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code of 1986, as amended, and is either (a) maintained by Borrower or any Affiliate for employees of Borrower or any Affiliate or (b) maintained pursuant to a collective bargaining agreement or any other agreement under which more than one employer makes contributions and to which Borrower or any Affiliate is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "Project" means each senior housing facility to be acquired, developed and constructed by Borrower through a Wholly Owned Subsidiary, for which Borrower intends to borrow funds under this Agreement. "Project Development Budget" means, with respect to each of the Projects, the initial construction/development budget, including any updates thereto, prepared by Borrower and delivered to Emeritus for review and approval, showing all anticipated costs and expenses for acquiring, developing and constructing the Project, and covering its carrying costs until anticipated break even and showing the sources of all funds to be obtained by Borrower to fund such expenditures including the amount of the Construction/Permanent Loan, the Borrower Project Subordinated Debt, the amounts to be borrowed by Borrower under this Agreement to fund such Project. "Project Operating Budget" means, with respect to each of the Projects, the annual operating budget for such Project, including any updates thereto, prepared by Borrower and delivered to Emeritus for review and approval, showing all anticipated revenues and all anticipated costs and expenses for the Project, including amounts to be set aside for capital expenditures and reserves, for such 12-month period. 5 "Project Loan" means, with respect to each of the Projects, the loan or loans made by Borrower to the Wholly Owned Subsidiary owning such Project, funded out of the proceeds borrowed by Borrower under this Agreement to fund such Project or funded from Borrower's income or other available funds. "Project Promissory Note" means, with respect to each of the Project Loans , the Project Promissory Note, in the form attached hereto as Exhibit D, to be executed by each Wholly Owned Subsidiary evidencing such subsidiary's obligation to repay to Borrower the Project Loan, which Project Promissory Note is to be pledged and assigned to Emeritus pursuant to the Project Pledge and Security Agreement. "Project Pledge and Security Agreement" means, with respect to each of the Project Loans, the Project Pledge and Security Agreement, in the form attached hereto as Exhibit E, to be executed by Borrower granting to Emeritus a first priority and exclusive security interest in the Project Promissory Note and the Borrower's equity interest in such Wholly Owned Subsidiary. "Senior Debt" means, with respect to each of the Projects, all Indebtedness due and payable on the Construction/Permanent Loan for such Project, or any refinancing thereof obtained by Borrower or its applicable Wholly Owned Subsidiary, provided that the proceeds of such refinancing are used exclusively to repay the existing secured indebtedness and, if applicable, the costs associated with such refinancing. "Spaulding" means Craig W. Spaulding, one of the members of Borrower. "Wholly Owned Subsidiary" means the special purpose entity, which may be in the form of a limited liability company or limited partnership, organized by Borrower for the sole and exclusive purpose of acquiring, developing, constructing, operating, holding and investing in a Project, all of whose equity securities are owned and held by Borrower, either directly or indirectly through another wholly owned entity; provided, however, that in the event Borrower establishes another entity to serve as a member or general partner of such Wholly Owned Subsidiary, which entity will hold an interest of not more than l%, another Person may be admitted to such a special purpose entity and retain a l% interest therein (thereby entitling such Person to a .0001 interest in the Wholly Owned Subsidiary), but otherwise such entity will be wholly owned by Borrower. In the event such Wholly Owned Subsidiary is organized as a limited partnership, Borrower shall establish a wholly owned limited liability company (subject to the l% interest in such entity that may be held by another Person) to serve as such entity's general partner, holding a l% interest therein, and will hold the balance of such entity's equity (99% interest) as a limited partner. In addition, if such Wholly Owned Subsidiary is organized as a limited liability company in a jurisdiction requiring two members to so conduct business, Borrower will establish a wholly owned entity (subject to the l% interest in such entity that may be held by another Person) to serve as one of its members, holding a l% interest therein, and will hold the balance of such equity interest (99% interest) directly as a member. 2. LINE OF CREDIT 2.1 Loan Commitment Subject to and upon the terms and conditions set forth herein and in reliance upon the representations, warranties, and covenants of Borrower contained herein or made pursuant hereto, Emeritus will make Fundings to Borrower from time to time during the period from the date hereof through and including December 31, 2000 ("Commitment Period"), but the aggregate 6 amount of such Fundings shall not exceed $5 million. This is not a revolving credit facility, and any payments by Borrower of the outstanding principal balance of the Loan shall not increase the amount that Borrower may borrow from Emeritus under this Agreement. 2.2 Loan Payment Terms All amounts funded by Emeritus shall bear interest at nine percent (9%) per annum, compounded annually. Interest payments on the Loan shall be made quarterly, on January 1, April I, July 1, and October 1 of each year, commencing with the first interest payment on April 1, 1998. The outstanding principal, balance of the Loan is due and payable in full on the fifth anniversary from the date of the first Funding to Borrower under the Loan. The Loan may not be prepaid, in whole or in part, prior to its maturity without Emeritus' consent. The terms of the Loan are set forth in full in the Convertible Promissory Note, attached hereto as Exhibit A, and, in the event of any inconsistency between the terms of this Agreement, and those detailed in the Convertible Promissory Note, the terms of the Convertible Promissory Note shall control. 2.3 Collateral Securing Payment of Convertible Promissory Note Payment of the Convertible Promissory Note shall be secured or supported by each of the following, until the Indebtedness represented thereby has been paid in full or until Emeritus has exercised its option to convert the Loan into an equity interest in Borrower as permitted by Section 2.4 and the terms of the Convertible Promissory Note: (a) Each of the Guarantors shall execute and deliver to Emeritus the Guaranty, a non-recourse guaranty of the Convertible Promissory Note, and shall execute and deliver the Guarantor Pledge and Security Agreement granting to the Emeritus a first priority and exclusive security interest in such Guarantor's membership interest in Borrower. (b) Whenever any advances under the Loan are first used to fund any Project Loan, Borrower shall execute and deliver to Emeritus the Project Pledge and Security Agreement granting Emeritus a first priority and exclusive security interest in the Project Promissory Note and in Borrower's entire equity interest, direct and indirect, in the Wholly Owned Subsidiary owning such Project. 2.4 Emeritus' Conversion Rights Emeritus shall have the right to convert the Loan into an equity interest in Borrower subject to, and upon the terms and conditions set forth in, the Convertible Promissory Note. 2.5 Use of Proceeds Emeritus shall advance funds under the Loan to Borrower solely for the purpose of allowing Borrower to (i) make Project Loans to its Wholly Owned Subsidiaries, (ii) make interest payments on the Convertible Promissory Note, to the extent that such payments cannot be funded out of the cash flow from the Wholly Owned Subsidiaries, (iii) cover the legal expenses incurred by Borrower, both for its counsel and Emeritus' counsel, filing fees, and other start up and organizational costs incurred in assisting with the formation of Borrower and its Wholly Owned Subsidiaries and the documentation required in connection with this Agreement and the Project Loans; and (iv) reimburse South Bay Partners, Inc., an Affiliate of Spaulding, for out-of pocket expenses payable to unaffiliated third parties incurred by such entity in connection with the acquisition, construction and development of the Projects, and the formation of Borrower and each 7 of the Wholly Owned Subsidiaries. Borrower shall use funds obtained under this Agreement solely for such purposes. Borrower is required to carry out its development program so as to permit development of a minimum of seven Projects within three years of the date of this Agreement using the $5 million credit facility provided by Emeritus under this Agreement, conventionally available Construction/Permanent Loans, and such additional Borrower Project Subordinated Debt as may be necessary, all as required by Section 2.6. 2.6 Project Development and Capital Requirements (a) Borrower has represented to Emeritus that this credit facility will permit Borrower to acquire and develop seven Projects within three years of the date of first Funding under this Agreement. Borrower covenants and agrees to take any and all action necessary to acquire, develop and construct such seven Projects within that time frame. Such actions shall include but not be limited to the following with respect to each such Project: (i) selecting an appropriate site for development in a market area approved by and acceptable to Emeritus; (ii) negotiating the terms of purchase and sale agreements with the owner of the Project site; (iii) preparing plans and specifications for the Project; (iv) securing all necessary Governmental Approvals for Project development; (v) engaging architects, contractors, surveyors, title companies, land use consultants, legal counsel, and others to assist with the acquisition, development and constructions; (vi) obtaining the Construction/Permanent Loan for the Project; (vii) monitoring and overseeing the performance of third party vendors; (viii) preparing and updating, as necessary, the Project Development Budget; (ix) engaging South Bay Partners, Inc., to provide development services for each of the Projects to be developed by a Wholly Owned Subsidiary; and (ix) engaging Jerry Erwin Associates, Inc. or another qualified property management company, to be responsible for the lease up and daily operations of the Project. (c) Borrower covenants and agrees to make funds available to complete each of the seven Projects required by this Agreement to the extent that such funds cannot be financed with the amounts available under the Construction/Permanent Loan and the advances made by Emeritus under this Agreement with respect to such Project. Such funds are herein referred to as the 8 Borrower Project Subordinated Debt. Prior to borrowing funds under this Agreement to fund a Project, Borrower shall deliver to Emeritus for its review and approval, a detailed Project Development Budget, showing the estimated acquisition, development, construction and lease-up expenses, and demonstrating that the funds available for such purposes, including the amount of the Construction/Permanent Loan and the amount requested from Emeritus under this Agreement, are sufficient to cover a11 such expenses and thereby demonstrating the economic feasibility of the Project. Emeritus shall have no obligation to fund any Project Loan until it has satisfied itself based upon the submitted Project Development Budget, that there are adequate funds available for its acquisition, construction and development, and initial lease up, and that the Project is economically feasible. Should Emeritus determine that additional funds are needed to make the Project economically feasible, if Borrower wishes to proceed with such Project, Borrower shall advance such additional funds as are necessary, concurrent with initial Funding of the Project Loan through this Agreement, which advances shall be treated as Borrower Project Subordinated Debt, in order to ensure that the Project is economically feasible. Moreover, to the extent that the Project has cost overruns, slower than anticipated lease-up or other events causing its actual expenses to exceed budgeted amounts, and to the extent that additional advances are not made available by Emeritus pursuant to the terms of Section 2.7, Borrower shall make available to the Wholly Owned Subsidiary such additional funds as may be necessary to complete the acquisition, development and construction of the Project, to allow the Project to achieve break even, to cover any other operating deficits, and to cover any capital improvements and replacements necessary to allow the Project to operate in the ordinary course of business. Such additional funds shall be available when needed by the Project, and advanced promptly so there is no delay or disruption in the Project's development, lease-up and operations, and such amounts, if advanced by one or more of Borrower's managers or Affiliates thereof, shall be regarded as loans from the person(s) making the funds available to the Wholly Owned Subsidiary. Any such loan, if made, shall bear interest at the lesser of nine percent (9"%) per annum or the lender's cost of funds, shall be an unsecured obligation of the Wholly Owned Subsidiary, and shall be subordinated, in all respects, to the prior payment of the Project Promissory Note from the Wholly Owned Subsidiary to Borrower and payment of the Convertible Promissory Note from Borrower to Emeritus; provided, however, that there is no Event of Default hereunder and that the Project's cash flow permits the Wholly Owned Subsidiary to pay out of cash flow the current portion of all principal and interest payments due on Senior Debt, the Project Promissory Note, and any other Indebtedness, and to cover other expenses of the Wholly Owned Subsidiary as they become due and payable, all such payments to be made so there is no default under this Agreement or any of such other obligations, the Wholly Owned Subsidiary may apply the excess cash flow, if any, toward payment of the outstanding principal balance plus accrued but unpaid interest on any loan from one or more of the Borrower's managers or Affiliates thereof, on such basis as Borrower deems appropriate. Moreover, the other terms of such loan shall not be more favorable than those included in the loan from Borrower to the Wholly Owned Subsidiary. Such loan, if advanced, shall be evidenced by an unsecured promissory note, the form and substance of which must be acceptable to Emeritus. (d) Borrower shall promptly give Emeritus written notice of any event expected to cause such Project to require funding above and beyond the amount initially budgeted for such Project in the Project Development Budget. Upon receipt of such written notice, Emeritus shall, as required by Section 2.8, determine whether it is willing to advance any additional funds under this Agreement to fund such Project expenses. 2.7 Construction/Permanent Loans Borrower shall obtain a Construction/Permanent loan for each of the Projects. It is anticipated that such financing will be obtained from a conventional mortgage lender. Moreover, it is anticipated that the Construction/Permanent Loan will bear interest at a market rate, require 9 payments of interest only during the construction phase, but provide for the outstanding principal to be amortized over a period of twenty to twenty-five years once. debt amortization commences, and be secured by a first priority lien on the real and personal property of the Wholly Owned Subsidiary. Borrower shall use its best efforts to obtain financing for as long a period as is reasonably practicable, taking into account the market conditions, the cost of the financing, lenders' willingness to make long-term financing available for construction projects and other similar factors, with the expectation that such financing will, if at a11 possible, have a term of not less than five years after completion of the Project's construction and with the understanding that Emeritus expects to have long-term financing available for the Projects before permitting draws against the Loan to fund Project Loans. It is expected that the mortgage lender will also require a construction budget and may condition the loan upon the establishment of construction contingency reserves and a lease-up reserve. The lender of the Construction/Permanent Loan must be advised as to Emeritus' right to convert the Loan into an equity interest in Borrower, and as to Emeritus' security rights under this Agreement, and consent to Emeritus' possession of such rights and acknowledge that the exercise thereof does not, and will not, constitute an event of default under the Construction/Permanent Loan. Borrower will be responsible for negotiating the terms and conditions of the loan commitment letter for the Construction/Permanent Loan, and such financing shall be presented to Emeritus for its review and approval, which approval shall not be unreasonably withheld. Erwin and Spaulding each agrees to personally guarantee, if required by the lender, the payment of the Construction/Permanent Loan. 2.8 Project Loans in Excess of $750,000 Emeritus is not obligated to permit draws against the Loan to fund a Project, if and to the extent that the aggregate amount of the draws for such Project would exceed $750,000. Any draws against the Loan used to cover interest due on Project Promissory Notes or to cover acquisition, development, construction, operational expenses, or start-up or organizational expenses of the related Wholly Owned Subsidiaries, shall be allocated to such Projects in determining the maximum amount advanced for the benefit of such Projects. If for whatever reason, Borrower needs additional funds under the Loan for such Project, Borrower may make a request in writing for such funds, and Emeritus may permit additional Funding for such Project if it has been demonstrated, to Emeritus' satisfaction, that making such additional funds available will not jeopardize the development of any other Project or reduce the likelihood of Borrower's ability to complete the seven Projects required by Section 2.6. Should Emeritus decline to make such additional funds available for such Project, Borrower shall make loans available to the Wholly Owned Subsidiary to permit its completion and to cover lease- up expenses and other operational expenses as required by Section 2.6. 2.9 Engagement of Affiliates Emeritus hereby acknowledges that each of the Wholly Owned Subsidiaries intends to (i) engage South Bay Partners, Inc., a Texas corporation wholly owned by Spaulding to assist with the development of its Project pursuant to a Development Services Agreement in the form attached hereto as Exhibit I; and (ii) engage Jerry Erwin Associates, Inc., a Washington corporation controlled by Erwin, to manage the Project, pursuant to the Property Management Agreement, in the form attached hereto as Exhibit J. No payments beyond those authorized by these Agreements shall be payable to such parties for rendering the services required thereby. A condition to Emeritus' obligation to make any Fundings under this Agreement is that each such developer and manager pledges to Emeritus its rights under the applicable Project Management Agreement and Development Services Agreement concurrent with the initial Funding of the Project Loan for that Project. The Development Services Agreement and Property 10 Management Agreement each reserves to Borrower and its Wholly Owned Subsidiary the right to suspend the payment of any further amounts due, and to terminate such agreement without penalty, upon the occurrence of a Default or an Event of Default under this Agreement. Emeritus may cause such right of suspension or termination to be exercised, if it so wished, upon the occurrence of Default or an Event of Default and shall exercise such right, by giving written notice thereof to Borrower, the Wholly Owned Subsidiary, and the developer and property manager, as the case may be. Such suspension or termination shall be effective immediately upon receipt of such written notice from Emeritus and no further action shall be required of any other party in order to cause such action to be effective. 2.10 Funding Requisitions Each request for the Funding of a Project loan must be initiated by the Borrower by submitting to Emeritus a written notice (the "Borrower "Notice"). Such Borrower Notice must be signed by the manager of Borrower and must (i) certify that all conditions to Funding of the Project Loan, whether such Funding is an initial Funding or subsequent Funding, have been satisfied; (ii) be accompanied by the items required by Section 3.2 as to the initial Funding of the Project Loan or by the items required by Section 3.3. as to the subsequent funding of the Project Loan, to the extent that such items have not previously been delivered to Emeritus; (iii) state the amount requested and specify in reasonable detail the uses of the funds requested; (iv) confirm the maximum loan amount available for such Project, as required by Section 3.2(i); (v) certify that the amount requested, together with any prior advances for such Project Loan, will not exceed the maximum loan amount authorized for the Project; and (vi) confirm that the funds requested will be used exclusively for the purposes permitted under Section 2.5. A Borrower Notice with respect to each Project shall not be submitted to Emeritus for Funding more frequently than once per calendar month; provided, however, that, under unusual circumstances, Borrower may, upon reasonable notice to Emeritus, submit requests for Funding of a Project Loan twice in each calendar month. Subject to confirming compliance with the applicable funding requirements under Section 3, Emeritus shall advance the funds requested in Borrower Notice no later than three days after receipt of such Borrower Notice. It is the intent of Borrower and Emeritus that funds will not be drawn upon by Borrower to fund Project Loans until such funds are needed. Accordingly, Borrower shall not submit Borrower Notices with respect to any of the Projects unless it reasonable expects that the funds requested will be expended by Borrower or the Wholly Owned Subsidiary for permissible expenses within 45 days of the Funding of such amounts by Emeritus or that the receipt of such funds is expressly required by the lender of the Construction/Permanent Loan. Fundings of the Loan shall be by wire transfer of immediately good funds to such account as may be designated by Borrower. 3. CONDITIONS PRECEDENT FOR FUNDINGS UNDER THE LOAN 3.1 Conditions Precedent for Initial Funding Emeritus shall not be required to make the initial Funding under the Loan unless or until the following conditions have been fulfilled to the satisfaction of Emeritus: (a) Borrower shall have executed and delivered to Emeritus this Agreement and the Convertible Promissory Note. (b) Each of the Guarantors shall have executed and delivered to Emeritus the Guaranty and the Guarantor Pledge and Security Agreement. 11 (c) Each of the Guarantors shall have executed and delivered to Emeritus such financing statements and other documents deemed necessary by Emeritus to protect the security interest granted to Emeritus by such Guarantor. (d) No Default or Event of Default hereunder shall exist, and after having given effect to the requested Funding; no Default or Event of Default shall exist. (e) All representations and warranties of Borrower contained herein or otherwise made in writing in connection herewith shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the initial Funding. (f) All company proceedings of Borrower shall be satisfactory in form and substance to Emeritus, and Emeritus shall have received all information and copies of all documents, including records of all company proceedings, that Emeritus has requested in connection therewith, such documents where appropriate to be certified by proper company authorities or Governmental Bodies. Borrower shall provide Emeritus with. the following documents prior to or upon the execution of this Agreement: (i) Copies of Borrower's Certificate of Formation and Operating Agreement, together with all amendments thereto, certified by Borrower to be true and complete; (ii) A certificate of authority or good standing for Borrower in its state of organization and in the state of its principal place of business, dated within 30 days of the date of the execution of this Agreement; and (iii) A certified resolution of Borrower's members and incumbency certificate of Borrower. (g) Emeritus shall have received such evidence deemed necessary by Emeritus that Emeritus' security interests in the Collateral constitute first priority and exclusive security interests. (h) With respect to each of the Projects to be financed with such initial Funding under the Loan, the conditions set forth in Section 3.2 for the initial funding of such Project have been fulfilled to the satisfaction of Emeritus. 3.2 Conditions Precedent to Initial Funding for Each Project The obligation of Emeritus to make any Funding (including the initial Funding) under the Loan, the proceeds of which are to be used for the initial financing of a Project, is subject to the fulfillment to the satisfaction of Emeritus of the following conditions as to such Project: (a) Borrower has organized, or caused to be organized, a Wholly Owned Subsidiary, which may either be a limited partnership or a limited liability company, to acquire, develop, construct, operate and hold the Project. (b) Borrower shall provide Emeritus with the following. documents, which must be in form and substance satisfactory to Emeritus, prior to the initial Funding of the Project: (i) Copies of the Wholly Owned Subsidiary's certificate of limited partnership 12 and limited partnership agreement, or certificate of formation and operating agreement (as the case may be), together with all amendments thereto, certified by Borrower to be true and complete; (f) Emeritus shall have received insurance certificates in form satisfactory to Emeritus to the effect set forth in Section 4.6. (g) Borrower shall deliver, or cause to be delivered, the plans and specifications for the Project, evidencing that the Project to be delivered is substantially equivalent, in all material respects, to the "prototype" facility historically developed by Spaulding and Erwin and to the extent that Borrower intends to depart, in any material respects, from the "prototype" facility, Borrower shall expressly identify for Emeritus' attentions such departures, giving reasons therefor, and such variations in the plans and specifications are subject to the approval of Emeritus, which approval may be granted or withheld in its sole discretion. . (h) The Project is located in the market area approved by Borrower and Emeritus. Attached hereto as Exhibit G is a list of pre-approved market areas mutually acceptable to Borrower and Emeritus. If the Project is not within one of these market areas, no Funding for such Project will be permitted unless and until such market area has been approved by Emeritus. (i) The maximum amount to be borrowed by Borrower for any one Project under this Agreement must be established, to Borrower's and Emeritus' satisfaction, prior to the first draw request under this Loan for such Project, and such amount may not be subsequently increased without Emeritus' consent. All amounts advanced to a Wholly Owned Subsidiary to cover its acquisition, development and construction expenses, to fund interest on amounts borrowed by such Wholly Owned Subsidiary, and to cover its organizational and start- up expenses, shall be treated as loans from the Borrower to such Wholly Owned Subsidiary and reflected in a Project Promissory Note. The maximum amount advanced by the Borrower to a Wholly Owned Subsidiary may not exceed $750,000 per Project. (j) The Wholly Owned Subsidiary shall execute and deliver to Borrower the Project Promissory Note, and Borrower shall endorse the Project Promissory Note in favor of Emeritus, and deliver to Emeritus the endorsed. Project Promissory Note and shall execute and deliver to Emeritus the Project Pledge and Security Agreement. (k) Borrower shall have executed and delivered to Emeritus such financing statements and other documents deemed necessary by Emeritus to protect the security interests granted to Emeritus by Borrower. (l) Borrower shall prepare and deliver to Emeritus the Borrower Notice containing the information required by Section 2.10 and advising Emeritus of the amount of such Funding to be applied toward the Project. (m) All amounts advanced by Emeritus for the Project Loan shall immediately be deposited into an account, in the name and for the benefit of the Wholly Owned Subsidiary, and such funds. shall thereafter not be returned to Borrower or any of its Affiliates, or used for any other purpose other than paying the expenses of the Wholly Owned Subsidiary as itemized in the Project Development Budget. (n) Borrower shall prepare and deliver to Emeritus for its review and approval a Project Development Budget demonstrating that the amount of the Project Loan, the 13 Construction/Permanent Loan and the Borrower Project Subordinated Debt, if any, are sufficient to cover the projected acquisition, development, construction cost, and operational costs, until such time as the Project is expected to reach break even and that the Project is economically feasible. (o) If and to the extent that the Project Development Budget requires Borrower to make available Borrower Project Subordinated Debt to fund the Project, Borrower shall advance such funds to the Wholly Owned Subsidiary prior to the initial funding of the Project Loan. (p) No Default or Event of Default hereunder shall exist, and after giving effect to the requested Funding, no Default or Event of Default shall exist. (q) All representations and warranties of Borrower contained herein or otherwise made in writing in connection herewith shall be true and correct in all material respects with the same effect as though such representations and warranties had been on and as of the date of such Funding. (r) Emeritus shall have received from counsel for Borrower an opinion addressed to Emeritus, dated as of the date of the Funding, substantially in the form and substance attached hereto as Exhibit H, with such modifications thereto as are reasonably necessary for the Project. 3.3 Conditions Precedent for Subsequent Fundings of the Project Loans Emeritus shall not be required to make any subsequent Funding under the Loan to permit any subsequent Funding of a Project loan unless and until the following conditions have been fulfilled to the satisfaction of Emeritus: (a) All Fundings to be used by Borrower to fund the Project Loan shall not exceed a maximum of $750,000, without the prior written consent of Emeritus, which consent may be granted or withheld in its sole and absolute discretion. (b) All Fundings to be used by Borrower to finance the Project Loan shall not exceed the maximum amount for such Project Loan established by Borrower, and disclosed to Emeritus, at or prior to the time of the initial Funding of the Project Loan. (c) If additional funds are needed to finance a Project, beyond the Maximum Project Loan Amount, Borrower may request that additional advances be made to fund the Project Loan, and Emeritus may make such additional advances after Borrower's demonstration, to Emeritus' satisfaction, that the additional advances toward the Project Loan would not jeopardy any other Project's acquisition and development or Borrower's objective of acquiring, constructing and developing, and bringing to break even the seven Projects required by the terms of this Agreement. If Emeritus does not approve such further advances, additional funds for such Project Loan shall be furnished by Borrower as required by Section 2.8. (d) On or prior to the Funding, Borrower shall deliver to Emeritus a title update confirming that, as of such date, the Project is not subject to any liens, encumbrances or adverse claims other than the Permitted Encumbrances. (e) No Default or Event of Default hereunder shall exist, and after giving effect to the requested Funding, no Default or Event of Default shall exist. 14 (f) All representations and warranties of Borrower contained herein or otherwise made in writing in connection herewith shall be true and correct in all material respects with the same effect as though such representations and warranties had been on and as of the date of such Funding. 3.4 Review of Funding Request Materials Borrower shall use all reasonable efforts to assemble the materials to be submitted to Emeritus under either Section 3.2 or 3.3 so that only one or two packages are submitted for Emeritus' review. The initial package submitted to Emeritus for Funding under Section 3.2 will include a summary of the proposed Project, together with the Project Development Budget. In addition, to the extent feasible, Borrower will assemble an overall due diligence package, comparable to the information to be provided to the prospective lender of the Construction/Permanent Loan including as many of the items set forth in this Section 3.2 as are reasonably possible, in order to facilitate Emeritus' efficient review of the Project and the related Project documentation. Emeritus shall have a period of ten business days following the receipt of information from Borrower to advise Borrower whether the items so submitted are approved or disapproved. If, for whatever reason, Borrower requires an expedited review of such materials, Borrower shall so advise Emeritus, providing an explanation of the reasons therefor. Requests for expedited review are to be made only under extraordinary circumstances, the parties acknowledging that expedited review requests are not intended to become the standard course of dealing between the parties. Emeritus shall use reasonable efforts to respond to such expedited requests, but the parties acknowledge and agree that Emeritus is not obligated to waive its right to have a full ten business days after the receipt of such items for their review and approval, even when these items are accompanied by expedited review requests. 4. AFFIRMATIVE COVENANTS Borrower hereby covenants and agrees that so long as this Agreement is in effect, and until the Loan, together with interest thereon, and all other obligations incurred hereunder is paid or satisfied in full, Borrower shall: 4.1 Financial Data Keep its books of account, and cause the books of account of each of its Wholly Owned Subsidiaries to be kept, in accordance with generally accepted accounting principles, consistently applied, and furnish to Emeritus: (a) As soon as practicable and in any event within 45 days after the close of each month, a written report, certified by Borrower's manager describing the status of each of the Projects, the remaining funds allocated for the acquisition and development of such Project, and the anticipated uses of such funds to ensure the completion of construction and lease-up, in accordance with the applicable Project Development Budget. (b) As soon as practicable and in any event within 25 days after the close of each month, the following unaudited financial statements of Borrower and each of the Wholly Owned Subsidiaries for each such month, all in reasonable detail, in comparative form to historical and budgeted financial statements, and certified by Borrower to be true and correct: balance sheet, statement of income, and statement of cash flows. (c) As soon as practicable and in any event within 90 days after the close of each fiscal 15 year of Borrower, the following financial statements of Borrower, and each of the Wholly Owned Subsidiaries, setting forth the corresponding figures for the previous fiscal year in comparative form where appropriate, all in reasonable detail and reviewed (without any qualification or exception deemed material by Emeritus) by Borrower's current independent certified public accountant or such other independent certified public accountants selected by Borrower and satisfactory to Emeritus: balance sheet, statement of income, and statement of cash flows. Borrower shall provide Emeritus with a copy of its independent certified public accountants' review letter or other similar report or correspondence to Borrower. (d) As soon as practicable and in any event within 45 days after the close of each fiscal quarter of Borrower, certificates signed by Borrower, stating that during such period no Default or Event of Default existed or, if any such Default or Event of Default existed, specifying the nature thereof, the period of existence thereof, and what action Borrower proposes to take or has taken with respect thereto. (e) Promptly upon the occurrence of any Default or Event of Default, a certificate signed by Borrower, specifying the nature thereof, the period of existence thereof, and what action Borrower proposes to take or has taken with respect thereto. (f) Upon request by Emeritus, copies of all reports relative to the operations of Borrower and its Affiliates filed with any Governmental Body. (g) As soon as practicable and in any event no later than December 1 prior to each fiscal year, a Project Operating Budget for each of the Projects then owned by a Wholly Owned Subsidiary, in a format satisfactory to Emeritus, projecting a11 anticipated capital expenditures, revenues, and expenses for the following fiscal year. (h) With reasonable promptness, such other information regarding the business, operations, and financial condition of Borrower and Wholly Owned Subsidiaries as Emeritus may from time to time reasonably request. 4.2 Licenses and Permits Maintain, and cause each of the its Wholly Owned Subsidiaries to maintain, all Governmental Approvals and all related or other material agreements necessary for Borrower and the Wholly Owned Subsidiaries to operate their businesses, as they now exists or as they may be modified or expanded. Borrower and the Wholly Owned Subsidiaries will at all times comply with a11 Applicable Laws relating to the operations, facilities, or activities of Borrower and the Wholly Owned Subsidiaries. 4.3 Maintenance of Properties Keep Borrower's and Wholly Owned Subsidiaries' properties in good repair and in good working order and condition, in a manner consistent with past practices and comparable to industry standards; from time to time make all appropriate and proper repairs, renewals, replacements, additions, and improvements thereto; and keep all equipment that may now or in the future be subject to compliance with any Applicable Laws in full compliance with such Applicable Laws. 4.4 Payment of Charges 16 Duly pay and discharge all (a) taxes, assessments, levies, and any other charges of Governmental Bodies imposed on or against Borrower, the Wholly Owned Subsidiaries, or their property or assets, or upon any property leased by Borrower or the Wholly Owned Subsidiaries, prior to the date on which penalties attached thereto, unless and to the extent only that such taxes, assessments, levies, and any other charges of Governmental Bodies, after written notice thereof having been given to Emeritus, are being contested in good faith and by appropriate proceedings, (b) claims allowed by Applicable laws, whether for labor, materials, rentals, or anything else, that could, if unpaid, become a lien or charge upon Borrower's or Wholly Owned Subsidiaries' property or assets or the outstanding capital stock of Borrower or adversely affect the facilities or operations of Borrower or the Wholly Owned Subsidiaries (unless and to the extent only that the validity thereof is being contested in good faith and by appropriate proceedings after written notice thereof has been given to Emeritus); (c) trade bills in accordance with the terms thereof or generally prevailing industry standards; and (d) the Secured Debt and all other Indebtedness heretofore or hereafter incurred or assumed by Borrower or Wholly Owned Subsidiaries. In the event any charge is being contested by Borrower as allowed above, Borrower shall establish adequate reserves against possible liability therefor. 4.5 Comply with the Requirements of the Construction/ Permanent Loans Comply in all respects with the requirements of the loan agreements, deeds of trust, mortgages, pledge agreements, financing statements, and any and all other documents, instruments or agreements as may be executed by Borrower or its Wholly Owned Subsidiaries in connection with the Construction/Permanent Loans obtained for the Projects, together with any refinancing thereof. 4.6 Insurance (a) Obtain and maintain insurance upon Borrower's and Wholly Owned Subsidiaries' properties and business insuring against such risks as Emeritus shall reasonably determine from time to time. Borrower shall cause each insurance policy issued in connection therewith to provide and shall cause the insurer issuing such policy to certify to Emeritus that (i) if such insurance is proposed to be canceled or materially changed for any reason whatsoever, such insurer will promptly notify Emeritus, and such cancellation or change shall not be effective as to Emeritus for 30 days after receipt by Emeritus of such notice, unless the effect of the change is to extend or increase coverage under the policy; and (ii) Emeritus will have the right at its election to remedy any default in the payment of premiums within 30 days of notice from the insurer of the default. (b) From time to time upon request by Emeritus, promptly furnish or cause to be furnished to Emeritus evidence, in form and substance satisfactory to Emeritus, of the maintenance of all insurance, indemnities, or bonds required by this Section 4.6 or by any license, lease, or other agreement to be maintained, including, but not limited to, such originals or copies as Emeritus may request of policies, certificates of insurance, riders, assignments, and endorsements relating to the insurance and proof of premium payments. 4.7 Maintenance of Records Keep at all times books of account and other records in which full, true, and correct entries will be made of all dealings or transactions in relation to the business and affairs of Borrower and the Wholly Owned Subsidiaries. 4.8 Inspection 17 Allow any representative of Emeritus to visit and inspect any of the properties of Borrower and the Wholly Owned Subsidiaries, to examine the books of account and other records and files of Borrower and the Wholly Owned Subsidiaries, to make copies thereof and to discuss the affairs, business; finances, and accounts of Borrower and the Wholly Owned Subsidiaries with their officers, employees, and accountants, all at such reasonable times and as often as Emeritus may desire. This right of inspection shall specifically include Emeritus' collateral and financial examinations. 4.9 Hazardous Substances (a) Borrower hereby covenants and agrees that so long as any Indebtedness of Borrower to Emeritus is outstanding: (i) Neither Borrower nor the Wholly Owned Subsidiaries will permit its property or any portion thereof to be a site for the storage, use, generation, manufacture, disposal or transportation of Hazardous Materials in violation of Hazardous Materials Laws; (ii) Neither Borrower nor the Wholly Owned Subsidiaries will permit any Hazardous Materials to be disposed of off its property other than in properly licensed disposal sites; (iii) Borrower and the Wholly Owned Subsidiaries, at their cost and expense, will keep and maintain their property and each portion thereof in compliance with and shall not cause or permit its properly or any portion thereof to be in violation of any Hazardous Materials Laws; and (iv) Borrower will immediately advise Emeritus in writing of any Hazardous Material Claim.. (b) Borrower agrees to indemnify Emeritus and hold Emeritus harmless from and against any and all claims, demands, damages, losses, liens, liabilities, penalties, fines, lawsuits, and other proceedings and costs and expenses (including attorneys' fees), arising directly or indirectly from or out of or in any way connected with (i) the accuracy of the representations contained in Section 6.15 hereof; (ii) any activities on its property during Borrower's or any Wholly Owned Subsidiary's ownership, possession, or control of its property that directly or indirectly results in its property or any other property becoming contaminated with Hazardous Materials; (iii) the discovery of Hazardous Materials the property of Borrower or any of its Wholly Owned Subsidiaries; (iv)the cleanup of Hazardous Materials from the property of Borrower or any of its Wholly Owned Subsidiaries; and (v) the discovery of Hazardous Materials or the cleanup of Hazardous Materials from adjacent or other property that has become contaminated as a result of any activity on the property of Borrower or any of its Wholly Owned Subsidiaries. As between Borrower and Emeritus, Borrower acknowledges that it will be solely responsible for all costs and expenses relating to the cleanup of Hazardous Materials from the properly of Borrower or any of its Wholly Owned Subsidiaries or from any other properties that become contaminated with Hazardous Materials as a result of activities on or the contamination of such properly. (c) The representations, warranties, and covenants of Borrower set forth in this Section 4.9 and Section 6. IS (including, but not limited to, the indemnity provided for in Section 4.9(b)) 18 shall survive the closing and repayment of the Loan to Emeritus; and, to the extent permitted by Applicable Laws and Hazardous Materials Laws, shall survive the transfer of the property of Borrower or any of its Wholly Owned Subsidiaries by foreclosure proceedings (whether judicial or nonjudicial), deed in lieu of foreclosure, or otherwise. Borrower acknowledges and agrees that its covenants and obligations hereunder are separate and distinct from its obligations under the Loan and the Loan Documents. 4.10 Existence Maintain and preserve the existence under the laws of the state of its organization, and qualification to do business in each foreign jurisdiction in which such qualification is necessary, of Borrower and each of the Wholly Owned Subsidiaries. 4.11 Notice of Disputes and Other Matters Promptly give written notice to Emeritus of: (a) Any citation, order to show cause, or other legal process or order that could have a material adverse effect on Borrower or any Wholly Owned Subsidiary, directing Borrower to become a party to or to appear at any proceeding or hearing by or before any Governmental Body that has granted to Borrower or any Wholly Owned Subsidiary any Governmental Approval, and include with such notice a copy of any such citation, order to show cause, or other legal process or order; (b) Any (i)refusal, denial, threatened denial, or failure by any Governmental Body to grant, issue, renew, or extend any material Governmental Approval; (ii) proposed or actual revocation, termination, or modification (whether favorable or adverse) of any Governmental Approval by any Governmental Body; (iii) dispute or other action with regard to any Governmental Approval by any Governmental Body; (iv) notice from any Governmental Body of the imposition of any material fines or penalties or forfeitures; or (v) threats or notice with respect to any of the foregoing or with respect to any proceeding or hearing that might result in any of the foregoing; (c) Any dispute concerning or any threatened non renewal or modification of any material lease for real or personal property to which Borrower or any Wholly Owned Subsidiary is a party; or (d) Any actions, proceedings, or claims of which Borrower may have notice that may. be commenced or asserted against Borrower or any Wholly Owned Subsidiary in which the amount involved is $25,000 or more and is not fully covered by insurance or which, if not solely a claim for monetary damages, could, if adversely determined, have a material adverse effect on Borrower or any Wholly Owned Subsidiary. 4.12 Maintenance of Liens At all times maintain the liens and security interests provided under or pursuant to this Agreement as valid and perfected first liens and security interests on the property and assets intended to be covered thereby. Except as contemplated under Section 5.5, Borrower shall take all action requested by Emeritus necessary to assure that Emeritus has valid and exclusive liens and security interests in all Collateral. 19 5. NEGATIVE COVENANTS Borrower covenants and agrees that until the Loan, together with interest thereon, and all other obligations incurred hereunder are paid or satisfied in full, neither Borrower nor any of its Wholly Owned Subsidiaries shall, without the prior written consent of Emeritus: 5.1 Dividends and Distributions Prior to Emeritus' conversion of the Loan into an equity in t e r e s t i n B o r r o w e r , declare or pay any cash distributions or dividends or return any capital to any of Borrower's members; authority or make any distribution, payment, or delivery of property or cash to any of Borrowers members; redeem, retire, purchase, or otherwise acquire, directly or indirectly, for consideration, any shares or other interests of Borrower now or hereafter outstanding; or set aside any funds for any of the foregoing purposes; provided, however, that notwithstanding anything in this Section 5.1 to the contrary, Borrower may make distributions to its Members on an annual basis in an amount equal to the Minimum Tax Distributions. Any pre-conversion cash accumulations held by Borrower shall be used by Borrower to acquire, develop and construct new Projects. 5.2 Transactions With Affiliates Except for the Project Loans and as provided in Section 2.9, and except as to any Borrower loans that may be made to a Wholly Owned Subsidiary pursuant to Section 2.6, enter into any transaction, other than an arm's-length transaction, in which an Affiliate of Borrower shall have any interest; or make any payment or agree to make any payment to any such Affiliate; or transfer or agree to transfer ownership or possession of any of its business or assets, tangible or intangible, real, personal, or mixed, to any Affiliate. 5.3 Other Indebtedness Create, incur, assume, or suffer to exist, contingently or otherwise, any Indebtedness except (a) Senior Debts; (b) Indebtedness represented by the Loan; (c) accounts and other current payables arising from the ordinary course of business; and (d) Indebtedness created as a result of Borrower loans pursuant to Section 2.6. 5.4 Leases and Leasebacks Enter into any agreement to rent or lease any material real or personal property or enter into any arrangement with any bank, insurance company, or other lender or investor providing for the leasing of any real or personal property or equipment (a) that at the time has been or is sold or transferred by Borrower to such lender or investor or (b) that has been or is being acquired from another Person by such lender or investor or on which one or more buildings have been or are to be constructed by such lender or investor, for the purpose of leasing such property to Borrower. Borrower may, however, enter into such leases in the ordinary course of business. 5.5 Liens Contract, create, incur, assume, or suffer to exist any mortgage, pledge, lien, or other charge or encumbrance of any kind (including, but not limited to, the charge upon property purchased under conditional sales or other title retention agreements) upon or grant any interest in any of the property of Borrower or the Wholly Owned Subsidiary or assets whether now owned or 20 hereafter acquired, except (a)liens granted pursuant to this Agreement; (b) liens granted to secure payment of the Senior Debt on the Project; and (c) any other Permitted Encumbrances. 5.6 Advances and Loans Subsequent to the date of this Agreement, lend money, make credit available (other than in the ordinary course of business to customers), or lend property or the use thereof to any Person; purchase or repurchase the stock or Indebtedness or all or a substantial part of the assets or properties of any Person; guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly or by any instrument having the effect of assuring any Person's payment, performance, or capability) the Indebtedness, performance, obligations, stock, or dividends of any Person; but Borrower or the Wholly Owned Subsidiary may endorse negotiable instruments for deposit or collection in the ordinary course of business. Notwithstanding the foregoing, Borrower may make the Project Loans as contemplated and permitted by Section 20.6. 5.7 Investments Except as otherwise contemplated by this Agreement, invest in (by capital contribution or otherwise), acquire, purchase, or make any commitment to purchase the obligations, stock, or equity of any Person, except (a) direct obligations of the government of the United States of America or any agency or instrumentality thereof, (b) interest-bearing certificates of deposit or repurchase agreements issued by any commercial banking institution satisfactory to Emeritus, and (c) stock or obligations issued in settlement of claims of Borrower or the Wholly Owned Subsidiary against others by reason of bankruptcy or a composition or readjustment of debt or reorganization of any debtor of Borrower or the Wholly Owned Subsidiary. 5.8 Acquisitions Either directly or through an Affiliate, acquire, purchase, or make any commitment to acquire or purchase a controlling interest in the stock or other equity interest of any Person or all or a substantial portion of the assets of any Person unless (a) such Person will be a Wholly Owned Subsidiary, or (b) Borrower receives Emeritus' prior written consent. 5.9 Consolidation, Merger, and Sale of Assets Wind up, liquidate, or dissolve Borrower's or the Wholly Owned Subsidiary's affairs or enter into any transaction of merger or consolidation with any Person; convey, sell, lease, or otherwise dispose of (or agree to do any of the foregoing at any time) any of its material licenses, contracts, or permits, sell all or a substantial part of its property or assets or sell any part of its property or assets necessary or desirable for the conduct of its business as now generally conducted or as proposed to be conducted; sell any of its notes receivable, installment or conditional sales agreements, or accounts receivable: purchase, lease, or otherwise acquire all or a substantial part of the property or assets of any other Person (except as contemplated by this Agreement). 5.10 Type of Business Enter into any business which is substantially different from or not connected with the business in which Borrower or the Wholly Owned Subsidiary is presently engaged or make any substantial change in the nature of its business or operations, or the Wholly Owned Subsidiary. 21 5.11 Change of Chief Executive Office or Name Change (a) the chief executive office of Borrower, or any Wholly Owned Subsidiary, (b) Borrower's, or any Wholly Owned Subsidiary's name, or (c) the location of any of the Collateral, except in the ordinary course of business; or adopt or use any trade name without (x) prior written notice to Emeritus, and (y) the execution, delivery, and filing (and payment of filing fees and taxes) of all such documents as may be necessary or advisable in the opinion of Emeritus to continue to perfect and protect the liens and security interests in the Collateral. 5.12 Change in Documents Amend, supplement, terminate, or otherwise modify in any way Borrower's or any Wholly Owned Subsidiary's certificates of formation, articles of incorporation, operating agreements, bylaws, or organizational documents, contracts, or other documents delivered to Emeritus hereunder or executed in connection herewith. 5.13 Control Enter into any agreement (other than employment agreements) with any Person that confers upon such Person the right or authority to control or direct a major portion of the business or assets of Borrower or the Wholly Owned Subsidiary. 5.14 Pension Plan Establish, create, fund or otherwise assume responsibility as. to any Plan for Borrower or the Wholly Owned Subsidiary; or permit any other event or circumstance to occur that results or could result in liability to the Pension Benefit Guaranties Corporation or a violation of ERISA. 5.15 Transfers of Interest Permit, consent to, or otherwise authorize any of its equity holders to transfer an interest in such Person, except to the extent permitted by the terms of the Operating Agreement, or issue or authorize such Person to issue any additional equity securities. 6. REPRESENTATIONS AND WARRANTIES In order to induce Emeritus to enter into this Agreement and to make the Loan as herein provided, Borrower hereby makes the following representations, covenants, and warranties, a11 of which shall survive the execution and delivery of this Agreement and shall not be affected or waived by any inspection or examination made by or on behalf of Emeritus: 6.1 Corporate Status Borrower and each Wholly Owned Subsidiary is an entity organized and validly existing under the laws of the state of its organization. Borrower and each Wholly Owned Subsidiary has the power and authority to own its property and assets and to transact the business in which it is engaged or presently proposes to engage. Borrower and each Wholly Owned Subsidiary is qualified to do business in all states except where the failure to be qualified could not have a material adverse effect on Borrower. 22 6.2 Power and Authority Borrower and each Wholly Owned Subsidiary has the power to execute, deliver, and carry out the terms and provisions of this Agreement and each of the Loan Documents and has taken all necessary action to authorize the execution, delivery, and performance of this Agreement and the other Loan Documents, the borrowings hereunder, and the making and delivery of the Convertible Promissory Note and all Loan Documents delivered hereunder. This Agreement constitutes and the Convertible Promissory Note and other Loan Documents and instruments issued or to be issued hereunder, when executed and delivered pursuant hereto, constitute or will constitute the authorized, valid, and legally binding obligations of Borrower and each Wholly Owned Subsidiary (as the case may be) enforceable in accordance with their respective terms. 6.3 No Violation of Agreements Neither Borrower nor any Wholly Owned Subsidiary is in default under any material provision of any agreement to which it is a party or in violation of any Applicable Laws. The execution and delivery of this Agreement, the Convertible Promissory Note, the other Loan Documents, and the instruments incidental hereto; the consummation of the transactions herein or therein contemplated; and compliance with the terms and provisions hereof or thereof (a) will not violate any material Applicable Law and (b) will. not conflict or be inconsistent with; result in any breach of any of the material terms, covenants, conditions, or provisions of; constitute a default under; or result in the creation or imposition of (or the obligation to impose) any lien, charge, or encumbrance upon any of the property or assets of Borrower or any Wholly Owned Subsidiary pursuant to the terms of any material Governmental Approval, mortgage, deed of trust, lease, agreement, or other instrument to which Borrower is a party, by which Borrower or any Wholly Owned Subsidiary may be bound, or to which Borrower or any Wholly Owned Subsidiary may be subject, and (c) will not violate any of the provisions of the certificate of formation, operating agreement or other organizational documents of Borrower or any Wholly Owned Subsidiary. No Governmental Approval is necessary (i) for the execution of this Agreement, or the making of the Convertible Promissory Note, or (ii)for the consummation by Borrower and Wholly Owned Subsidiaries of the transactions contemplated by this Agreement, including, but not limited to, the grant of the security interests to Emeritus. 6.4 Recording and Enforceability Neither the certificates of formation, operating agreements, certificates of limited partnership, limited partnership agreement, or other applicable organizational documents of Borrower or any Wholly Owned Subsidiary, nor other agreements require recording, filing, registration, notice, or other similar action in order to insure the legality, validity, binding effect, or enforceability against all Persons of this Agreement, the Convertible Promissory Note, or other Loan Documents executed or to be executed hereunder, other than filings or recordings that may be required under the Uniform Commercial Code or in connection with the perfection of the security interests of Emeritus in patents, trademarks, and similar types of Collateral. 6.5 Litigation There are no actions, suits, or proceedings pending or, to the Borrower's knowledge, threatened against or affecting Borrower or any Wholly Owned Subsidiary before any Governmental Body that could have a material adverse effect on Borrower or any Wholly Owned Subsidiary or the Collateral. Neither Borrower nor any Wholly Owned Subsidiary is in default 23 under any material provision of any Applicable Law or Governmental Approval of any Governmental Body which could have a material adverse effect on Borrower or any Wholly Owned Subsidiary or on the Collateral. 6.6 Good Title to Properties Borrower and each Wholly Owned Subsidiary has good and indefeasible title to, or a valid leasehold interest in, its property and assets, subject to no liens, mortgages, pledges, encumbrances, or charges of any kind, except any of the Permitted Encumbrances. 6.7 Licenses and Permits All Governmental Approvals with respect to the business of Borrower and Wholly Owned Subsidiaries were to Borrower's knowledge duly and validly issued by the respective Governmental Bodies, are in full force and effect, and are to Borrower's knowledge valid and enforceable in accordance with their terms. With regard to such Governmental Approvals, no fact or circumstance exists that constitutes or, with the passage of time or the giving of notice or both, would constitute a material default under any thereof or permit the grantor thereof to cancel or terminate the rights thereunder, except upon the expiration of the full term thereof. Borrower and Wholly Owned Subsidiaries presently holds all material Governmental Approvals as are necessary or advisable in connection with the conduct of its business as now conducted and as presently proposed to be conducted. 6.8 No Burdensome Agreements Neither Borrower nor any Wholly Owned Subsidiary is a party to any agreement or instrument or subject to any restrictions that now have or, as far as can be foreseen, could have a material adverse effect on Borrower or any Wholly Owned Subsidiary. 6.9 Properties in Good Condition All the material properties of Borrower and Wholly Owned Subsidiaries are, and all material properties to be added in connection with any contemplated expansion will be in good repair and good working order and condition in a manner consistent with past practices of Borrower and Wholly Owned Subsidiaries, and comparable to industry standards and are and will be in compliance with all Applicable Laws. 6.10 Taxes Borrower and Wholly Owned Subsidiaries have duly filed all tax returns and reports required by Applicable law to be filed; and all taxes, assessments, levies, fees, and other charges of Governmental Bodies upon Borrower and Wholly Owned Subsidiaries or upon their assets that are due and payable have been paid (except as otherwise permitted in this Agreement). 6. 1I License Fees Borrower and Wholly Owned Subsidiaries have paid all fees and charges that have become due for any Governmental Approval for their business or has made adequate provisions for any such fees and charges that have accrued. 6.12 Trademarks, Patents, Etc. 24 Borrower and Wholly Owned Subsidiaries possess all necessary trademarks, trade names, service marks, copyrights, patents, patent rights, and licenses to conduct their businesses as now and as proposed to be conducted, without conflict with the rights or claimed rights of others. 6.13 Disclosure To the best of Borrower's knowledge, the exhibits hereto, the financial information and statements referred to in Section 4.l, hereof, any certificate, statement, report or other document furnished to Emeritus by Borrower or any other Person in connection herewith or in connection with any transaction contemplated hereby, and this Agreement, do not contain any untrue statements of material fact or omit to state any material fact necessary in order to make the statements contained therein or herein not misleading. 6.14 Regulations U and X Borrower does not own and no part of the proceeds hereof will be used to purchase or carry any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any margin stock. Borrower is not engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying any margin stock. If requested by Emeritus, Borrower will furnish to Emeritus a statement in conformity with the requirements of Federal Reserve Form U-1 referred to in said Regulation. No part of the proceeds of the Loan will be used for any purpose that violates or is inconsistent with the provisions of Regulation X of said Board of Governors. 6.15 Condition of Property Except as otherwise disclosed to Emeritus, Borrower hereby represents and warrants to Emeritus that as of the date hereof and continuing hereafter, Borrower's and Wholly Owned Subsidiaries' property (both owned and leased) and each portion thereof (a) are not and to the best knowledge of Borrower after due investigation have not been a site for the use, generation, manufacture, storage, disposal, or transportation of any Hazardous Material; (b) are presently in compliance with all Hazardous Materials Laws; and (c) are not being used and to the best knowledge of Borrower after due investigation have not been used in any manner that has resulted in or will result in Hazardous Materials being spilled or disposed of on any adjacent or other property. 7. EVENTS OF DEFAULT; REMEDIES 7.1 Events of Default "Event of Default," wherever used herein, means any one of the following events (whatever the reason for the Event of Default, whether it shall relate to one or more of the parties hereto, and whether it shall be voluntary or involuntary or be pursuant to or affected by operation of Applicable Law): (a) If Borrower fails to pay the principal of or any installment of interest on the Convertible Promissory Note, when and as the same becomes due and payable, whether at scheduled maturity, by acceleration, or otherwise; or (b) If any Indebtedness of Borrower or any Wholly Owned Subsidiary for money 25 borrowed or credit extended becomes or is declared due and payable (after any applicable grace period) prior to the stated maturity thereof or is not paid as and when it becomes due and payable, or if any event occurs which constitutes an event of default under any instrument, agreement, or evidence of Indebtedness relating to any such obligation of Borrower or any Wholly Owned Subsidiary; or (c) If Borrower or any Wholly Owned Subsidiary fails to pay or perform (after any applicable grace period) any obligation or Indebtedness to others in excess of $25,000 (other than as set forth in Section 7.1(b) hereof), whether now or hereafter incurred; or (d) If any representation or warranty (i)made by Borrower in this Agreement or (ii) made by Borrower, Wholly Owned Subsidiary, or any other Person in any document, certificate, or statement furnished pursuant to this Agreement or in connection herewith, is false or misleading in any material respect; or (e) If Borrower fails to (i) observe or perform any term, covenant, or agreement to be performed or observed pursuant to Sections 4 and 5 hereof; or (ii) observe or perform (not otherwise specified in this Section 7) any term, covenant, or agreement to be performed or observed pursuant to the provisions of this Agreement, the other Loan Documents, or any other agreement incidental hereto; or . (iii) perform any of its obligations under any of the Loan Documents not otherwise specified in this Section 7, or if the validity of any of such documents has been disaffirmed by or on behalf of any of the parties thereto other than Emeritus; and, in each such case, such breach or failure has not been cured within thirty (30) days of Emeritus' giving Borrower written notice thereof or if such breach or failure is not susceptible to cure within thirty (30) days but could be cured, to commence to cure within such thirty (30) day period and thereafter diligently proceed to complete such cure, which cure must under all circumstances be completed with ninety (90) days of Emeritus' giving the Borrower written notice thereof; or If custody or control of any substantial part of the property of Borrower or any Wholly Owned Subsidiary is assumed by any Governmental Body or if any Governmental Body takes any final action, the effect of which would be to have a material adverse effect on Borrower; or (g) If Borrower or any Wholly Owned Subsidiary suspends or discontinues its business, or if Borrower or Wholly Owned Subsidiary makes an assignment for the benefit of creditors or a composition with creditors, is unable or admits in writing its inability to pay its debts as they mature, files a petition in bankruptcy, becomes insolvent (howsoever such insolvency may be evidenced), is adjudicated insolvent or bankrupt, petitions or applies to any tribunal for the appointment of any receiver; liquidator, or trustee of or for it or any substantial part of its property or assets, commences any proceeding relating to it under any Applicable Law of any jurisdiction whether now or hereafter in effect relating to bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution, or liquidation; or if there is commenced against Borrower or any Wholly Owned Subsidiary any such proceeding that remains undismissed for a period of 60 days or more, or an order, judgment, or decree approving the petition in any such proceeding is entered; or if Borrower or any Wholly Owned Subsidiary by any act or failure to act indicates its consent to, approval of, or acquiescence in, any such proceeding or any appointment of any receiver, liquidator, or trustee of or for it or for any substantial part of its property or assets, suffers any such appointment to continue undischarged or unstayed for a period of 60 days or more, or takes any corporate action for the purpose of effecting any of the foregoing; or if any court of competent jurisdiction assumes jurisdiction with respect to any such proceeding, or if a 26 receiver or a trustee or other officer or representative of a court or of creditors, or if any Governmental Body, under color of legal authority, takes and holds possession of any substantial part of the property or assets of Borrower or any Wholly Owned Subsidiary; or (j) If there is any refusal or failure by any Governmental Body to issue, renew, or extend any lease or Governmental Approval with respect to the operation of the business of Borrower or any Wholly Owned Subsidiary, or any denial, forfeiture or revocation by any Governmental Body of any Governmental Approval that could have a material adverse effect on Borrower; or (k) If any of the events described in Section 4.10 occur or are threatened and, in Emeritus' reasonable judgment, such event jeopardizes or could reasonably be expected to jeopardize repayment of the Convertible Promissory Note; or (1) If Borrower or Borrower's managers or Affiliates thereof fail to make available to Borrower the funds necessary to satisfy on a timely basis Borrower's obligations under Section 2.6. 7.2 Acceleration; Remedies Upon the occurrence of any Event of Default or at any time thereafter, if any Event of Default is then continuing, Emeritus may, by written notice to Borrower, declare the entire unpaid principal balance or any portion of the principal balance of the Convertible Promissory Note and interest accrued thereon to be immediately due and payable by the maker thereof; and such principal and interest shall thereupon become and be immediately due and payable, without presentation, demand, protest, notice of protest, or other notice of dishonor of any kind, all of which are hereby expressly waived by Borrower. Emeritus may proceed to protect and enforce its rights hereunder or realize on any or all security granted pursuant hereto in any manner or order it deems expedient without regard to any equitable principles of marshaling or otherwise. All rights and remedies given by this Agreement, the Convertible Promissory Note, and the other Loan Documents are cumulative and not exclusive of any thereof or of any other rights or remedies available to Emeritus; no course of dealing between Borrower and Emeritus or any delay or omission in exercising any right or remedy shall operate as a waiver of any right or remedy; and every right and remedy may be exercised from time to time and as often as deemed appropriate by Emeritus. 8. MISCELLANEOUS 8.1 Notices All notices, requests, consents, demands, approvals, and other communications hereunder shall be deemed to have been duly given, made, or served if made in writing and delivered personally, sent via facsimile, or mailed by first-class certified or registered mail, postage prepaid, to the respective parties to this Agreement as follows: (a) If to Borrower: Aurora Bay Investments, L.L.C. 5720 LBJ Freeway, Suite 450, Lock Box 16 Dallas, Texas 75240-6339 Attention: Craig W. Spaulding Facsimile No.: (972) 458-2233 27 (b) If to Emeritus: Emeritus Corporation 313 I Elliott Avenue, Suite 500 Seattle, Washington 98121 Attention: Ray Brandstrom Facsimile No. : (206) 301-4500 Any notice sent via facsimile shall be confirmed by a copy, sent on the same day, via first-class certified or registered mail, postage prepaid. Any notice or other communication, if addressed and sent, mailed or delivered as provided above, shall be deemed given or received three days after the date of mailing as indicated on the certified or registered mail receipt, or on the date of delivery or transmission if hand delivered or sent by facsimile transmission. The designation of the persons to be so notified or the address of such persons for the purposes of such notice may be changed from time to time by similar notice in writing, except that any communication with respect to a change of address shall be deemed to be given or made when received by the party to whom such communication was sent. 8.2 Payment of Expenses Whether or not the transactions hereby contemplated are consummated, Borrower shall pay on demand all costs and expenses of Emeritus incurred in connection with the preparation, negotiation, execution, and delivery of the Loan Documents, as well as any amendments, modifications, consents, or waivers relating thereto, including, without limitation, reasonable attorneys' fees, appraisal fees, title insurance fees, and recording fees. In addition, if there shall occur any Default or Event of Default, Emeritus shall be entitled to recover any costs and expenses incurred in connection with the preservation of rights under, and enforcement of, the Loan Documents, whether or not any lawsuit or arbitration proceeding is commenced, in all such cases, including, without limitation, reasonable attorneys' fees and costs (including the allocated fees of internal counsel). Costs and expenses as referred to above, shall include, without limitation, a reasonable hourly rate for collection personnel, whether employed in- house or otherwise, overhead costs as reasonably allocated to the collection effort, and all other expenses actually incurred. Reasonable attorneys' fees shall include, without limitation, attorneys' fees and costs incurred in connection with any bankruptcy case or other insolvency proceeding commenced by or against Borrower or any Person granting a security interest in any item of Collateral, including all fees incurred in connection with (a) moving from relief from the automatic. stay, to convert or dismiss the case or proceeding, or to appoint a trustee or examiner, or (b) proposing or opposing confirmation of a plan of reorganization or liquidation, in any case without regard to the identity of the prevailing party. 8.3 Fees and Commissions Borrower agrees to indemnify Emeritus and hold it harmless with regard to any commissions, fees, judgments, or expenses of any nature and kind that Emeritus may become liable to pay by reason of any claims by or on behalf of brokers, finders, or agents in connection with any act or failure to act by Borrower or any litigation or similar proceeding arising from such claims. Borrower states that it is aware of no valid basis for any such claims. 8.4 No Waiver No failure or delay on the part of Emeritus or the holder of any of the Convertible 28 Promissory Note in exercising any right, power, or privilege hereunder and no course of dealing between Borrower and Emeritus or the holder of any of the Convertible Promissory Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any right, power, or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies that Emeritus or any subsequent holder of any of the Convertible Promissory Note would otherwise have. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances or shall constitute a waiver of the right of Emeritus to any other or further action in any circumstances without notice or demand. 8.5 Entire Agreement and Amendments This Agreement and the exhibits to this Agreement represent the entire agreement between the parties hereto with respect to the Loans and the transactions contemplated hereunder and, except as expressly provided herein, shall not be affected by reference to any other documents. This Agreement, or any provision hereof, may not be changed, waived, discharged, or terminated orally, but only by an instrument in writing, signed by the party against whom enforcement of the change, waiver, discharge, or termination is sought. 8.6 Benefit of Agreement This Agreement is binding upon and inures to the benefit of Borrower and Emeritus and their successors and assigns and all subsequent holders of any of the Convertible Promissory Note or any portion thereof. Borrower expressly acknowledges that Emeritus is not prohibited or restricted from assigning rights or participations hereunder or any portion thereof to another Person. In addition, Borrower may delegate its responsibilities and assign it rights hereunder to Daniel R. Baty or to an Affiliate thereof. Borrower, however, is precluded from assigning any of its respective rights or delegating any of its obligations hereunder or under any of the other agreements between Borrower and Emeritus without the prior written consent of Emeritus. 8.7 Severability If any provision of this Agreement or any of the Loan Documents is held invalid under any Applicable Laws, such invalidity shall not affect any other provision of this Agreement that can be given an effect without the invalid provision, and, to this end, the provisions hereof are severable. 8.8 Descriptive Headings The descriptive headings of the several sections of this Agreement are inserted for convenience only and do not affect the meaning or construction of any of the provisions hereof. 8.9 Governing Law This Agreement and the rights and obligations of the parties hereunder and under the other Loan Documents shall be construed in accordance with and shall be governed by the laws of the state of Washington without regard to the choice of law rules thereof. 8.10 Consent to Jurisdiction, Service, and Venue 29 For the purpose of enforcing payment of the Convertible Promissory Note, and the performance of Borrower's obligations under this Agreement, the other Loan Documents, or otherwise in connection herewith, Borrower hereby consents to the jurisdiction and venue of the courts of the state of Washington or of any federal court located in such state, including, but not limited to, the Superior Court of Washington for King County and the United States District Court for the Western District of Washington. Borrower hereby waives the right to contest the jurisdiction and venue of courts located in King County, Washington, on the ground of inconvenience or otherwise and waives any right to bring any action or proceeding against Emeritus in any court outside King County, Washington. The provisions of this section do not limit or otherwise affect the right of Emeritus to institute and conduct action in any other appropriate manner, jurisdiction, or court. 8.11 Counterparts This Agreement and each of the Loan Documents may be executed in one or more counterparts, each of which shall constitute an original agreement, but all of which together shall constitute one and the same instrument. 8.12 Statutory Notice ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. 30 IN WITNESS WHEREOF, Borrower and Emeritus, have caused this Agreement to be duly executed by the respective, duly authorized signatories as of the date first above written. BORROWER: AURORA BAY INVESTMENTS, L.L.C., a Washington limited liability company By: /s/ Craig W. Spaulding ----------------------- - ------------------- Craig W. Spaulding, Manager By: /s/ Jerry Erwin ----------------------- - ------------------ Jerry Erwin, Manager EMERITUS: EMERITUS CORPORATION, a Washington corporation By: /s/ Michelle A. Bickford ---------------------- - -------------------- Its: V.P. New Business Development 31 EX-10.79.4 24 EX 10.79.4 PROJECT PROMISSORY NOTE (Lubbock Group, Ltd.) $535,000 Dated as of January 7, 1998 For value received, Lubbock Group, Ltd., a Texas limited partnership, having an office at 5720 LBJ Freeway, Suite 450, Dallas, Texas 75240-6339 ("Maker"), hereby promises to pay to the order of Aurora Bay Investments, L.L.C., a Washington limited liability company ("Payee"), at 5720 LBJ Freeway, Suite 450, Dallas, Texas 75240-6339, or such other place designated in writing by Payee in lawful money of the United State of America, such amounts as may be advanced by Payee to Maker from time to time to fund Maker's business pursuant to that certain lending arrangement by and between Maker and Payee (the "Credit Agreement"), together with interest thereon from the date of such advances until paid as hereinafter stated. 1. INTEREST ACCRUAL AND PAYMENT. Interest shall accrue on the aggregate outstanding principal balance of this Project Promissory Note (the "Note") commencing on the date hereof, at nine percent (9.0%) per annum, and shall be . payable quarterly in arrears on the first day of each calendar quarter (January 1, April 1, July 1, and October 1), commencing on April 1, 1998. Interest on this Note shall be calculated on the basis of the actual number of days elapsed in any period in which interest is payable. Whenever any payment under this Note is due on a Saturday, Sunday or any other day on which banks in the State of Washington are required to be closed, such payment shall be made on the next succeeding day on which banks in the State of Washington are not required or permitted by law to be closed. 2, PRINCIPAL PAYMENT MATURITY. Unless sooner paid, all interest and principal payable hereunder, and all other amounts due under this Note, shall be due and payable by Maker on January 7, 2003 (the "Maturity Date"). 3. VOLUNTARY PREPAYMENT. Maker shall not be entitled to prepay, in part or in whole, the outstanding principal balance of this Note at any time prior to its Maturity Date without the prior consent of Payee, which consent may be withheld by Payee in its sole and absolute discretion. 4. PLACE OF PAYMENT. All amounts due hereunder shall be payable to Payee at the address of Payee or at such other place as Payee may designate in writing to Maker at Maker's address set forth above. 5. LATE CHARGES. In the event that any payment due hereunder or under the Credit Agreement shall not be made when due a late charge of five cents ($.05) for each dollar ($1.00) so overdue may be charged by Payee for the purpose of defraying the expense incident to handling such delinquent payment (the "Late Charge Fee"). Such Late Charge Fee represents the reasonable estimate of Payee and Maker of a fair average compensation for the loss that will be sustained by Payee due to the failure of Maker to make timely payments. Such Late Charge Fee shall be paid without prejudice to the right of Payee to collect any other amounts provided to be paid or to declare an Event of Default under this Note or the Credit Agreement. If an Event of Default (as hereunder defined) occurs, then the interest rate applicable in calculating any defaulted. payments from the due date of the defaulted payments shall be the default rate stipulated in Section 6 until paid in full and the Late Charge Fee shall apply to any such payments. 6. DEFAULTS. At the option of Payee, all principal and interest shall immediately become due and payable on any of the following events: (a) Maker fails to make any payment as provided for in this Note or the Credit Agreement, and such failure to make payment continues for five (5) calendar days after Maker's receipt of written notice from Payee that such payment is due; (b). Maker makes a general assignment for the benefit of creditors; a receiver is appointed for the assets of Maker upon request by any person(s) other than Maker, or -Maker makes a formal request for appointment of a receiver; or any proceeding is brought by Maker in any court or under supervision of any court- appointed officer under any federal or state bankruptcy reorganization, rearrangement, insolvency or debt readjustment law, or if any such proceedings are instituted against Maker and he fails to obtain dismissal of such proceeding within ninety (90) days after the same has been instituted; (c) Maker fails to cure any material breach (other than nonpayment of a monetary obligation) of any agreement of Maker contained in this Note or in the Credit Agreement after Maker has been sent 30 calendar days' written notice of such breach (other than nonpayment of a monetary obligation) from Payee; (d) Any breach by Maker of any material representation or warranty contained in the Credit Agreement or any other instrument or agreement delivered by Maker to Payee in connection therewith; or (e) The cessation of Maker's business operations, or the insolvency of Maker, an admission in writing of its inability to pay debts as they mature. In the event of such Default, the rate of interest due under this Note will increase to a rate per annum equal to the lesser of (x) 16% per annum and (y) the maximum rate allowed by law and will continue until such Default has been cured or waived. 7. ATTORNEYS' FEES AND COSTS AND CONSULTANT/EXPERT WITNESS EXPENSES. Maker shall pay Payee all its direct or indirect reasonable attorneys' fees and costs and the reasonable expense of expert witness and consultants engaged directly or indirectly by Payee to advise Payee and to take whatever steps Payee. deems reasonably necessary to collect this Note, including, without limitation, commencement of any action or proceeding to enforce this Note against Maker. Without limiting the generality of the foregoing, Maker understands and agrees to pay the reasonable attorneys' fees and costs and reasonable expenses for expert witnesses and consultants (a) engaged by Payee in connection with this Note, (b) incurred by Payee directly or indirectly in any insolvency proceeding or in any contested matter or adversary proceeding that is part of bankruptcy, and (c) incurred by Payee in advance of any action or proceeding relating to this Note or for the appeal of certiorari proceeding subsequent to an action or proceeding on this Note. 8. NO WAIVER. Maker hereby waives diligence, presentment, protest, any demand for payment, notice of protest, dishonor and nonpayment of this Note. Maker hereby agrees to pay all sums which are payable by it hereunder without set-off or offset. 2 9. CUMULATIVE RIGHTS. The rights and-remedies of Payee provided in this Note shall be cumulative and concurrent and may be pursued singly, successively, or together against Maker for the payment hereof in the sole discretion on Payee. The failure to exercise any such right or remedy shall in no event be construed as a waiver . of release of said rights and remedies or the rights to exercise them at any later time. 10. MODIFICATION. This Note may not be amended, modified, or changed, nor shall any waiver of any provision be effective, except only by an instrument in writing signed by the person against whom enforcement of such waiver, amendment, change, modification or discharge is sought. 1l. JURISDICTION AND VENUE. Maker agrees that the state and federal (as Payee may in its sole discretion elect) courts in the State of Washington situated in King County, Washington, will have non-exclusive jurisdiction and venue over any action or proceeding relating to this Note. Maker submits to such courts and their jurisdiction and agrees that venue in King County, Washington is proper over any such action or proceeding. 12. USURY. It is the intent of Payee and Maker in the execution of this Note and all other instruments now or hereafter securing this Note to contract in strict compliance with applicable usury law. In furtherance thereof, Payee and Maker stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the Maximum Interest Rate permitted under applicable law (the "Maximum Rate") (the parties hereby acknowledging and confirming that applicable law is to mean the laws of the State of Washington or the laws of the United States, whichever laws allow the greater rate of interest (as noted below) but, if for whatever reason, notwithstanding the parties' joint determination of the applicable law, which determination the parties intend to be conclusive, a court were to determine that the applicable law was the laws of the State of Texas, and if such law provides for a ceiling upon interest rates under Tex. Rev. Civ. Stat. Ann. art. 5069-1.04, as amended, or any successor laws or regulations, such ceiling shall be the indicated maximum interest rate); neither Maker nor any guarantors, endorsers or other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the Maximum Rate that may be lawfully charged under applicable law, and the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. Payee, including each holder of this Note, expressly disavows any intention to enlarge or collect excessive unearned interest or finance charges in the event the maturity of this Note is accelerated. If the maturity of this Note shall be accelerated for any reason or if the principal of this Note is paid prior to the end of the term of this Note, and as a result thereof the interest received for the actual period of existence of the Loan exceeds the amount of interest that would have accrued at the Maximum Rate, Payee or other holder of this Note shall, at its option, either refund to Maker the amount of such excess or credit the amount of such excess against the principal amount and thereby shall render inapplicable any and all penalties of any kind provided by applicable law as a result of such excess interest. In the event that Payee or any other holder of this Note shall contract for, charge or receive any amounts and/or any 'other thing of value which are determined to constitute interest which would increase the effective interest rate on this Note to a rate in excess of that permitted to be charged by applicable law, all such sums determined to constitute interest in excess of the amount of Interest at the lawful rate shall, upon such determination, at the option of Payee or other holder of this Note, be either immediately returned to Maker or credited against the principal amount in which event any and all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Note, Maker acknowledges that it believes the loan evidenced by this Note, and all arrangements in connection therewith, to be non-usurious and agrees that if, at any time, Maker should have reason to believe that the loan is in fact usurious, it will give the Payee or other holder of this Note 3 notice of such condition and Maker agrees that Payee or other holder shall have ninety (90) days in which to make appropriate refund or other adjustment in order to correct such condition if in fact such exists. The term "applicable law" as used in this Note shall mean the laws of the State of Washington or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. 13. MISCELLANEOUS. Every provision of this Note is intended to be severable and in the event any term or provision hereof is declared by a court of competent jurisdiction to be illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall be interpreted so as to make the remaining terms and provisions binding and enforceable to the fullest extent possible. This Note may not be changed, modified or terminated orally, but only by an agreement in writing signed by the party to be charged. In this Note, the singular shall include the plural and the masculine shall include the feminine and neuter gender, and vice versa, if the context so requires. The headings at the beginning of each numbered paragraph of this Note are intended solely for convenience of reference and are not to be deemed or construed to be a part of this Note. Nothing contained in this Note or elsewhere shall be deemed or construed as creating a partnership or joint venture between Payee and Maker or between Payee and any other person, or cause the holder hereof to be responsible in any way for the debts or obligations of Maker. This Note shall be governed by and construed in accordance with the laws of the State of Washington (without giving effect to its choice of law principles). "ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.". 4 IN WITNESS WHEREOF, Maker has executed this Note on the 7th day of January, 1998. Lubbock Group, Ltd., a Texas limited partnership By Aurora Bay I, L.L.C., a Washington limited liability company, Its General Partner By: /s/ Craig W. Spaulding ------------------ - ----------------- Its: Craig W. Spaulding, Manager 5 ENDORSEMENT OF PROJECT PROMISSORY NOTE Pay to the order of Emeritus Corporation AURORA BAY INVESTMENTS, L.L.C., a Washington limited liability company, By: /s/ Craig W. Spaulding ------------------ - ----------------- Craig W. Spaulding, Manager By: /s/ Jerry Erwin - ------------------------------------- Jerry Erwin, Manager 6 EX-10.79.5 25 EX 10.79.5 PROJECT PLEDGE AND SECURITY AGREEMENT (Pledge of General and Limited Partnership Interests-- Lubbock Group, Ltd.) This Pledge and Security Agreement (this "Agreement") is made as of January 7, 1998 by Aurora Bay. Investments, L.L.C., a Washington limited liability company ("Aurora Bay"), Aurora Bay I, L.L.C., a Washington limited liability company ("General Partner") (each individually a "Pledgor" and collectively "Pledgors"), each having an office at 5720 LBJ Freeway, Suite 450, Dallas, Texas 75240-6339, for the benefit of Emeritus Corporation, a Washington corporation ("Pledgee"), having an office at 3131 Elliott Avenue, Suite 500, Seattle, WA 98121. RECITALS A. Contemporaneously with the execution hereof, Aurora Bay has entered into a Credit Agreement dated as of January 7, 1998 between Aurora Bay and Emeritus (the "Credit Agreement"), establishing a $5 million credit facility in favor of Aurora Bay, and in connection therewith executed and delivered to Emeritus a Convertible Promissory Note (the "Note"). B. . Aurora Bay has used, or expects to use, a portion of the proceeds borrowed under the Credit Agreement to make loans to Lubbock Group, Ltd., a Texas limited partnership ("Subco") and such loan will be evidenced by a Project Promissory Note from Subco to Aurora Bay. C. Each of the Pledgors is a partner, directly or indirectly, in Subco and will financially benefit from the loans represented by the Project Promissory Note and Pledgee's extension of credit under the Credit Agreement to permit Aurora Bay's advancing funds to Subco. D. Subco is governed by and will operate pursuant to the terms of that certain Amended and Restated Limited Partnership Agreement dated as of January 6, 1998, by and among the Pledgors.(the "Partnership Agreement"). E. In order to induce Pledgee to extend credit to Aurora Bay, each of the Pledgors desire to assign, pledge, and grant a security to Pledgee in the Collateral described herein. AGREEMENT NOW, THEREFORE, in consideration of the recitals, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. COLLATERAL "Collateral" shall mean: (a) All of Pledgor's right, title and interest in Subco, including without limitation its general and/or limited partnership interest in Subco, and all of Pledgor's units representing any right, title, and interest in Subco ("Units"), together with any additional Units or interest arising out of the interest pledged hereunder by way of dividend, split- up, reorganization, recapitalization or other similar proceedings, whether now owned or hereafter acquired; (b) Pledgor's right to receive distributions, allocations and payments under the Partnership Agreement, as such Partnership Agreement may be modified from time to time; (c) All indebtedness of Subco to Pledgor of any kind or description; (d) With respect to Aurora Bay, the Project Promissory Note from Subco to Aurora Bay; and (e) All substitutions, replacements, products and proceeds, whether cash proceeds or noncash proceeds, and products of any and all of the foregoing. If any redemption, reclassification, readjustment or other exchange is proposed or made with respect to the Collateral, Pledgee may, but need not, accept the property so exchanged in lieu of the Collateral described herein, and Pledgor agrees to deliver and hypothecate for the benefit of Pledgee any securities, cash, personalty or other property received in exchange for the Collateral, on such reasonable terms and conditions which will not impair Pledgee's security. Such substituted collateral shall be held by Pledgee under the terms of this Agreement in the same manner as the original Collateral pledged hereunder. 2. PLEDGE Pledgor hereby assigns, pledges and grants a security interest to Pledgee, to and in the Collateral to secure the payment and performance of all obligations of Aurora Bay to Pledgee, whether - presently existing or hereafter arising, direct and indirect, and with interest thereon, under the Note and the Credit Agreement made by Aurora Bay in favor of Pledgee and all further costs and expenses provided for in this Agreement (collectively the "Obligations"). When more than one person is liable on any of the Obligations, Pledgor shall be jointly and severally liable with such person or persons. Pledgor agrees and acknowledges that Pledgor may cause a notation to be made in the record books of Aurora Bay to the effect that the Collateral is subject to this Agreement, and Pledgee may cause a copy of this Agreement to be attached to the record books of Subco at all times while this Agreement remains in effect. 3. MANNER OF PERFECTING SECURITY Concurrently with the execution of this Agreement, Pledgor shall deliver signed UCC-1 Financing Statements for filing in the States of Washington and Texas to reflect the Pledgee's interest in the Collateral. In addition, Aurora Bay as the Pledgor shall endorse in blank the Project Promissory Note and shall deliver such note to the possession of Pledgee. Pledgor agrees that it owns the Collateral in constructive trust for the Pledgee so long as the Pledgor's obligations hereunder remain outstanding, and agrees to provide the Pledgee advance notice of any change of address. 4. RIGHTS OF PARTIES WHEN NO DEFAULT Unless an Event of Default (as hereinafter defined) shall have occurred and be continuing, the Pledgor shall be entitled to vote the Collateral and to give consents, waivers and ratifications with respect thereto and the Pledgor shall be entitled to receive any payments with respect to any indebtedness of Subco to Pledgor to the extent that such payments are permitted under such circumstances under the Credit Agreement. In order to permit the Pledgor to exercise such voting and/or consensual powers, the Pledgee shall, if necessary, upon the written request of the Pledgor from time to time, execute and deliver to the Pledgor appropriate proxies. In addition, prior to the occurrence of an Event of Default, Pledgor may (i) receive, use, and dispose of any distributions, allocations, and payments it receives in the operation of its business but subject to any limitations with respect to distributions to Pledgor's members contained in the Credit Agreement and (ii) use the proceeds of all payments made upon any indebtedness of Subco to Pledgor to satisfy and make payments upon the Note and to make 2 additional Project Loans as defined in the Credit Agreement. Upon the occurrence of an Event of Default, Pledgee shall receive (i) all cash or other dividends or distributions paid or made with respect to the Collateral, (ii) any and all sums paid with respect to any of the Collateral, and (iii) all amounts payable and/or distributable on the liquidation, whether voluntary or involuntary, of Subco (collectively, "Distributions"), and shall hold the same, together with any other amount to which the Pledgee is entitled in an interest bearing cash collateral account ' as additional collateral subject to the terms of this Agreement. 5. PLEDGEE'S ADDITIONAL RIGHTS DURING DEFAULT If an Event of Default shall have occurred and shall be continuing, i.e. not have been remedied or waived), in addition to any other rights granted hereunder, the Pledgee shall be entitled to exercise any, all or any combination of the following rights: (a) Vote the Collateral and to give consents, waivers and ratifications with respect thereto and otherwise act with respect thereto as though the Pledgee were the outright owner thereof (the Pledgor hereby irrevocably constituting and appointing the Pledgee its proxy and attorney-in-fact with full power and substitution so to do, such appointing being a power coupled with an interest), although the Pledgee shall not have any duty to exercise any such rights, privileges, options or powers or to sell or to otherwise realize upon any of the Collateral, as hereinafter authorized, or to preserve the same, and the Pledgee shall not be responsible for any failure to do so or delay in so doing; (b) Receive all Distributions; (c) Exercise any and all rights of collection, conversion or exchange, and any and all other rights, privileges, options or power of the Pledgor pertaining or relating to the Collateral (the Pledgor hereby irrevocably constituting and appointing the Pledgee his proxy and attorney-in-fact with full power of substitution so to do), although the Pledgee shall not have any duty to exercise any such rights, privileges, options or powers or to sell or to otherwise realize upon any of the Collateral, as hereinafter authorized, or to preserve the same, and the Pledgee shall not be responsible for any failure to do so or delay in so doing; (d) Apply any or all amounts held in any cash collateral account to payment of the Obligations; (e) Sell, assign and deliver the whole or, from time to time, any part of the Collateral at any broker's board or at any private sale or at public auction, with demand or notice or advertisement of the time or place of sale or adjournment thereof or otherwise, for cash, for credit or for other property, for immediate or future delivery, and for such price or prices and on such terms as determined in an arms length sale with an unrelated third party or pursuant to a price determined under the most current agreement between the partners of Subco, and the Pledgee may bid for and purchase the whole or any part of the Collateral so sold. Any such notice shall state the time, place and method fixed for such sale and, in case of sale at a broker's board, shall state the board at which such sale is to be made and the day on which Collateral, or that portion thereof so being sold, will first be offered for sale at such board. The Pledgee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. For the purposes hereof, (i) a private sale shall, in 3 the case of the Collateral, include, a sale after solicitation of a number of persons reasonably approximating the maximum number which, in the sole opinion of the Pledgee, shall not require registration of the Collateral so being offered for sale pursuant to the Securities Act of 1933, as amended, or compliance with any applicable state securities law commonly known as a "Blue Sky Law," and (ii) an agreement to sell all or any part of the Collateral shall be treated as a sale thereof, and the Pledgee shall be free to call out such sale pursuant to such agreement and the Pledgor shall not be entitled to the return of any Collateral subject thereto, notwithstanding the fact that after the Pledgee shall have entered into such an agreement all Events of Default may have been remedied or the Obligations may have been paid in full; (f) Either personally or by means of a court appointed receiver, take possession of all or any part of the Collateral and exclude therefrom the Pledgor and all others claiming under the Pledgor, and thereafter exercise all rights and powers of the Pledgor with respect to the Collateral or any part thereof. If the Pledgee demands or attempts to take possession of any of the Collateral in the exercise of any rights under this Agreement, the Pledgor promises and agrees to promptly turn over and deliver complete possession thereof to the Pledgee; and (g) Exercise any remedies of a secured party under the Uniform Commercial Code of the States of Washington and/or Texas, or any other applicable law, and exercise any remedies available to the Pledgee under any other agreement among the parties. 6. CERTAIN SECURITIES LAW RESTRICTIONS In view of the possible position of the Pledgor as an "affiliate" or "control person" of Subco, or because of other present or future circumstances, a question may arise under the Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being hereinafter called the "Federal Securities Laws") with respect to any disposition of the Collateral permitted hereunder. The Pledgor understands that compliance with the Federal Securities Laws may very strictly limit the course of conduct of the Pledgee if the Pledgee were to attempt to dispose of all or any part of the Collateral and may also limit the extent to which or the manner in which any subsequent transferee of the Collateral may dispose of the same. Similarly, because of the position of the Pledgor with respect to the Subco or because of other circumstances, there may be other legal restrictions or limitations affecting the Pledgee in any attempts to dispose of all or any part of the Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. The Pledgor agrees that any such private sale conducted in a manner which complies with such Federal Securities Laws and Blue Sky or state securities laws shall be commercially reasonable (within the meaning of Section 9-504(3) of the Uniform Commercial Code), and the Pledgor hereby waives any claims against the Pledgee arising by reason of the fact that the price at which the Collateral may have been sold at such a private. sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Pledgee accepts the first offer received and does not offer the Collateral to more than one possible purchaser. Without limiting the generality of the foregoing, these provisions would apply if, for example, the Pledgee placed all or any part of the Collateral privately with a purchaser or purchasers. 7. REDELIVERY OF COLLATERAL UPON FULL SATISFACTION Upon full and complete payment and performance of the Obligations, the Pledgor shall, except as otherwise provided herein, be entitled to the return, at its expense, of such of the Collateral as has not theretofore been sold pursuant to the provisions of this Agreement, together with any moneys at the time held by the Pledgee in any collateral account pursuant to this 4 Agreement, and all rights of Pledgee hereunder shall terminate; and Pledgee shall execute and file terminations of any financing statements covering any part of the Collateral. 8. REALIZATION OF COLLATERAL (a) The Pledgee shall apply the proceeds of any sale of the whole or any part of the Collateral, together with any other moneys at the time held by the Pledgee under the provisions of this Agreement after deducting all reasonable costs and expenses of collection, sale and delivery (including, without limitation, counsel fees and expenses) incurred by the Pledgee in connection with such sale, to the payment of the Obligations, the application as between the Obligations to be such as the Pledgee may in its sole discretion determine. (b) To the full extent that the Pledgor may lawfully so agrees, the Pledgor will not at any time plead, claim or take the benefit of any appraisement or valuation, law now or hereafter in force in order to prevent or delay the enforcement of this Agreement or the absolute sale of any portion or all. of the Collateral, or the possession thereof by any purchaser at any sale, and the Pledgor, for itself and all who may claim under the Pledgor, as far as the Pledgor now or hereafter lawfully may, hereby waives the benefit of all such laws. The Pledgor, for itself and all who may claim under the Pledgor, as far as the Pledgor now or hereafter lawfully may, also waives all right to have all or any portion of the Collateral marshalled upon any foreclosure hereof and agrees that any court having jurisdiction over this Agreement may order the sale of all or any portion of the Collateral as an entirety. Any sale of, or the grant of options to purchase, or any other realization upon, all or any portion of the Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the Pledgor in and to the Collateral so sold, optioned or realized upon, and shall be a perpetual bar both in law and in equity against the Pledgor and against any and all persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under the Pledgor. No delay on the pair of the Pledgee in exercising any power of sale, lien, option or other right hereunder, and no notice or demand which may be given to or made upon the Pledgor with respect to any power of sale, lien, option or other right hereunder shall constitute a waiver thereof, or limit or impair the right of the Pledgee to take any action or to exercise any power of sale, lien, option or any other right under this Agreement, or otherwise, nor shall any single or partial exercise thereof or the exercise of any power, lien, option or other right under this Agreement or otherwise all without notice or demand nor shall any of the same prejudice its rights against the Pledgor in any respect. Each and every remedy given the Pledgee shall, to the extent permitted by law, be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or by statute. (c) The Pledgee may bid for or purchase, free from any right of redemption on the part of the Pledgor (all said rights being also hereby waived and released), any part of or all the Collateral offered for sale and may make payment on account thereof by using any claim then due and payable to the to the Pledgee from the Pledgor as a credit against the purchase price, and the Pledgee may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability therefor. 9. EVENTS OF DEFAULT Time is of the essence in this Agreement. Subject to the right of cure set forth below in this Section 9, any of the following events shall constitute a default of this. Security Agreement ("Event of Default"). 5 (a) Any misrepresentation, breach, default or failure to perform under any of the covenants, representations or warranties of this Agreement by Pledgor, or any failure to pay any of the Obligations or any guaranty of any such Obligations, by Pledgor, Subco, or any guarantor, or the breach any other agreement relating to any of the Obligations or pursuant to which any of the Obligations arose; (b) Any failure to pay when due the full amount of any payment of principal, interest, taxes, insurance premiums or other charges which are or may be secured hereby; (c) The Collateral or any portion thereof being seized or levied upon under any legal or governmental process; (d) Pledgor becoming insolvent or the subject of a petition in bankruptcy, either voluntary or involuntary, or any other proceeding under the Federal Bankruptcy Code; or Pledgor making an assignment for the benefit of creditors; or . Pledgor being named in or the Collateral being subjected to a suit for the appointment of a receiver; (e) Entry of any judgment against Pledgor; (f) The Collateral or proceeds thereof for any reason whatsoever, becoming uncollectible in part or in their entirety; (g) Subco admits an additional Partner without the prior written consent of Pledgee; (h) The Pledgor terminates or amends the Partnership Agreement without the prior written consent of Pledgee; (i) Any Unit, or any right, title or interest, in Subco, whether or not evidenced by certificates, is issued, granted, sold, assigned, transferred, or otherwise conveyed to any party other than the Pledgee; (j) Subco is dissolved; or (k) An event shall have occurred that upon notice or lapse of time or both would constitute an Event of Default. Notwithstanding the foregoing, in the event of any nonmonetary default described above, such default shall not become an Event of Default until Pledgee has given Pledgor written notice of such default and Pledgor shall have failed to cure the default within thirty (30) days after notice. Upon the happening of any of the foregoing Events of Default the Obligations shall, at the option of the Pledgee, become immediately due and payable in their entirety without presentment, demand, protest or other notice of any kind, all of which are waived by the Pledgor, and the Pledgee may at any time thereafter proceed with the collection thereof and the realization upon all security which it may hold, including all rights hereunder or otherwise existing at law. 10. COVENANTS, REPRESENTATIONS, AND WARRANTIES OF PLEDGOR (a) Pledgor represents and warrants that: 6 (i) There are no restrictions upon the Pledgor's right to transfer or encumber the Collateral in favor of Pledgee, and the Pledgor has the right to transfer such Collateral free and clear of any lien, claim or encumbrances and of any right of first refusal to purchase or option to purchase or any similar such right, and without obtaining the consent of any other person, including any other partner of Subco, Subco, or any other individual or entity. (ii) The Collateral of Pledgors collectively represents not less than ONE-HUNDRED PERCENT (100%) of the presently issued and outstanding interests in Subco. (iii) There are no other interests in Subco other than the Collateral, and Subco has no other Partners other than Pledgors. (b) Pledgor covenants that it shall deliver copies of any proposed amendments to the Partnership Agreement to Pledgee. (c) Pledgor covenants that. it shall not, without the prior written consent of Pledgee, which consent may not be unreasonably withheld (i) sell, encumber or in any manner dispose of its interest in the Collateral or any of the Collateral; (ii) permit Subco to issue any additional interests; (iii) permit Subco to dissolve, reorganize, recapitalize, liquidate or merge or consolidate with any other person, firm, limited liability company or corporation. 11. GENERAL PROVISIONS (a) All notices hereunder shall be in writing and shall be effectively given when delivered personally on the date of delivery, or if mailed, two days after deposit in the United States mail, first class, postage prepaid, certified or registered, addressed as follows: If to Pledgee: Emeritus Corporation 3131 Elliott Avenue Suite 500 Seattle, WA 98121 With a copy to: George Beal, Esq. Perkins Coie 1201 Third Avenue, 40th Floor Seattle, WA 98101- 3099 If to Aurora Bay: Aurora Bay Investments, L.L.C. 5720 LBJ Freeway Suite 450 Dallas, Texas 75240-6339 If to General Partner: Aurora Bay I, L.L.C. 5720 LBJ Freeway Suite 450 Dallas, Texas 75240-6339 with a copy to: Sam S. Stollenwerck, Esq. Stollenwerck, Moore & Silverberg, P.C. 5949 Sherry Lane, Suite 1025 Dallas, Texas 75225 or such other addresses as either party may from time to time specify in writing to the other. (b) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. (c) Pledgor hereby appoints Pledgee as its attorney in fact to execute and file, on its behalf, any financing statements, continuation statements or other documentation required to perfect or continue the security interest created hereby. (d) This Agreement and the rights and obligations of the parties hereto shall be construed and interpreted in accordance with the laws of the State of Washington. (e) All agreements, covenants, conditions and provisions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. (f) This Agreement may be modified or rescinded only by a writing expressly relating to this Agreement and signed by all of the Pledgors and the Pledgee. (The balance of the page left intentionally blank.) 8 DATED this 7th day of January , 1998. AURORA BAY: Aurora Bay Investments, L.L.C. a Washington limited liability company By: /s/ Craig W. Spaulding - --------------------------------------- Its: Manager GENERAL PARTNERS: Aurora Bay I, L.L.C., a Washington limited liability company By: /s/ Craig W. Spaulding ------------------ - --------------------- Its: Manager EMERITUS CORPORATION, a Washington corporation By: /s/ Michelle A. Bickford ------------------ - ------------------- Its: V.P. New Business Development 9 EX-10.79.6 26 EX 10.79.6 GUARANTOR PLEDGE AND SECURITY AGREEMENT (Pledge of Limited Liability Company Interests) This Pledge and Security Agreement (this "Agreement") is made as of January 7, 1998 by Thilo Best ("Best"), Erwin Investors I, L.L.C., a Washington limited liability company ("Erwin"), and Craig Spaulding ("Spaulding") (each individually a "Pledgor" and collectively "Pledgors"), for the benefit of Emeritus Corporation, a Washington corporation ("Pledgee"), having an office at 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121. RECITALS A. Contemporaneously with the execution hereof, Aurora Bay Investments, L.L.C., a Washington limited liability company ("Aurora Bay"), has entered into a Credit Agreement dated as of January 7, 1998 between Aurora Bay and Pledgee (the "Credit Agreement"), establishing a $5 million credit facility in favor of Aurora Bay, and in connection therewith executed and delivered to Pledgee a Convertible Promissory Note (the "Note"). B. Each of the Pledgors is a member of Aurora Bay and will financially benefit from Pledgee' extension of credit to Aurora Bay. C. Aurora Bay is organized under, and will be governed by, its Operating Agreement dated as of January 6,1998 (the "LLC Agreement"). C. Each of the Pledgors has executed and delivered to Pledgee an nonrecourse guarantee in favor of Pledgee and is willing to pledge such Pledgor's equity interest in Aurora Bay to secure repayment of all amounts due and payable to Pledgee under the Note and the Credit Agreement. D. In order to induce Pledgee to extend credit to Aurora Bay, Erwin, Spaulding and Best desire to assign, pledge, and grant a security to Pledgee in the Collateral described herein. AGREEMENT NOW, THEREFORE, in consideration of the recitals, covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. COLLATERAL "Collateral" shall mean: (a) All of each Pledgor's right, title and interest i n A u r o r a B a y , including without limitation his membership interests in Aurora Bay, and all of Pledgor's units representing any right, title, and interest in Aurora Bay ("Units"), together with any additional Units or interest arising out of the interest pledged hereunder by way of dividend, split-up, reorganization, recapitalization or other similar proceedings, whether now owned or hereafter acquired; (b) Pledgor's right to receive distributions, allocations and payments under the LLC Agreement, as such LLC Agreement may be modified from time to time; (c) All indebtedness of Aurora Bay to Pledgor of any kind or description; and (d) All substitutions, replacements, products and proceeds, whether cash proceeds or noncash proceeds, and products of any and all of the foregoing. If any redemption, reclassification, readjustment or other exchange is proposed or made with respect to the Collateral, Pledgee may, but need not, accept the property so exchanged in lieu of the Collateral, described herein, and Pledgor agrees to deliver and hypothecate for the benefit of Pledgee any securities, cash, personalty or other property received in exchange for the Collateral, on such reasonable terms and conditions which will not impair Pledgee's security. Such substituted collateral shall be held by Pledgee under the terms of this Agreement in the same manner as the original Collateral pledged hereunder. 2. PLEDGE Pledgor hereby assigns, pledges and grants a security interest to Pledgee, to and in the Collateral to secure the payment and performance of all obligations of Aurora Bay to Pledgee, whether presently existing or hereafter arising, direct and indirect, and with interest thereon, under the Note and the Credit Agreement made by Aurora Bay in favor of Pledgee and all further costs and expenses provided for in this Agreement (collectively the "Obligations"). When more than one person is liable on any of the Obligations, Pledgor shall be jointly and severally liable with such person or persons. Pledgor agrees and acknowledges that Pledgor may cause a notation to be made in the record books of Aurora Bay to the effect that the Collateral is subject to this Agreement, and Pledgee may cause a copy of this Agreement to be attached to the record books of Aurora Bay at all times while this Agreement remains in effect. 3. MANNER OF PERFECTING SECURITY Concurrently with the execution of this Agreement, Pledgor shall deliver signed UCC-1 Financing Statements for filing in the States of Washington and Texas to reflect the Pledge's interest in the Collateral. Pledgor agrees that it owns the Collateral in constructive trust for the Pledgee so long as the Pledgor's obligations hereunder remain outstanding, and agrees to provide the Pledgee advance notice of any change of address. 4. RIGHTS OF PARTIES WHEN NO DEFAULT Unless an Event of Default (as hereinafter defined) shall have occurred and be continuing, the Pledgor shall be entitled to vote the Collateral and to give consents, waivers and ratifications with respect thereto. In order to permit the Pledgor to exercise such voting and/or consensual powers, the Pledgee shall, if necessary, upon the written request of the Pledgor from time to time, execute and deliver to the Pledgor appropriate proxies. Prior to the occurrence of an Event of Default (as hereinafter defined), Pledgor may use the proceeds of all payments made, as permitted by the terms of the Credit Agreement, upon the indebtedness of Aurora Bay to Pledgor in such manner as Pledgor shall determine in Pledgor's absolute discretion. Upon the occurrence of an Event of Default, Pledgee shall receive (i) all cash or other dividends or distributions paid or made with respect to the Collateral, (ii) any and all sums paid with respect to any of the Collateral, and (iii) all amounts payable and/or distributable on the liquidation, whether voluntary or involuntary, of Aurora Bay (collectively, "Distributions"), and shall hold the same, together with any other amount to which the Pledgee is entitled in an interest bearing cash collateral account as additional collateral subject to the terms of this Agreement. 2 5. PLEDGEE'S ADDITIONAL RIGHTS DURING DEFAULT If an Event of Default shall have occurred and shall be continuing, i.e. not have been remedied or waived), in addition to any other rights granted hereunder, the Pledgee shall be entitled to exercise any, all or any combination of the following rights: (a) Vote the Collateral and to give consents, waivers and ratifications with respect thereto and otherwise act with respect thereto as though the Pledgee were the outright owner thereof (the Pledgor hereby irrevocably constituting and appointing the Pledgee its proxy and attorney-in-fact with full power and substitution so to do, such appointing being a power coupled with an interest), although the Pledgee shall not have any duty to exercise any such rights, privileges, options or powers or to sell or to otherwise realize upon any of the Collateral, as hereinafter authorized, or to preserve the same, and the Pledgee shall not be responsible for any failure to do so or delay in so doing; (b) Receive all Distributions; (c) Exercise any and all rights of collection, conversion or exchange, and any and all other rights, privileges, options or power of the Pledgor pertaining or relating to the Collateral (the Pledgor hereby irrevocably constituting and appointing the Pledgee his proxy and attorney-in-fact with full power of substitution so to do), although the Pledgee shall not have any duty to exercise any such rights, privileges, options or powers or to sell or to otherwise realize upon any of the Collateral, as hereinafter authorized, or to preserve the same, and the Pledgee shall not be responsible for any failure to do so or delay in so doing; (d) Apply any or all amounts held in any cash collateral account to payment of the Obligations; (e) Sell, assign and deliver the whole or, from time to time, any part .. of the Collateral at any broker's board or at any private sale or at public auction, with demand or notice or advertisement of the time or place of sale or adjournment thereof or otherwise, for cash, for credit or for other property, for immediate or future delivery, and for such price or prices and on such terms as determined in an arms length sale with an unrelated third party or pursuant to a price determined under the most current agreement between the Members of Aurora Bay, and the Pledgee may bid for and purchase the whole or any part of the Collateral so sold. Any such notice shall state the time, place and method fixed for such sale and, in case of sale at a broker's board, shall state the board at which such sale is to be made and the day on which Collateral, or that portion thereof so being sold, will first be offered for sale at such board. The Pledgee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. For the purposes hereof, (i) a private sale shall, in the case of the Collateral, include, a sale after solicitation of a number of persons reasonably approximating the maximum number which, in the sole opinion of the Pledgee, shall not require registration of the Collateral so being offered for sale pursuant to the Securities Act of 1933, as amended, or compliance with any applicable state securities law commonly known as a "Blue Sky Law," and (ii) an agreement to sell all or any part of the Collateral shall be treated as a sale thereof, and the Pledgee shall be free to carry out such sale pursuant to such agreement and the Pledgor shall not be entitled to the return of any Collateral subject thereto, notwithstanding the fact that after the Pledgee shall have entered into such an agreement all Events of Default may have been remedied or the Obligations may have been paid in full; 3 (f) Either personally or by means of a court appointed receiver, take possession of all or any part of the Collateral and exclude therefrom the Pledgor and all others claiming under the Pledgor, and thereafter exercise all rights and powers of the Pledgor with respect to the Collateral or any part thereof. If the Pledgee demands or attempts to take possession of any of the Collateral in the exercise of any rights under this Agreement, the Pledgor promises and agrees to promptly turn over and deliver complete possession thereof to the Pledgee; and (g) Exercise any remedies of a secured party under the Uniform Commercial Code of the States of Washington and/or Texas, or any other applicable law, and exercise any remedies available to the Pledgee under any other agreement among the parties. 6. CERTAIN SECURITIES LAW RESTRICTIONS In view of the possible position of the Pledgor as an "affiliate" or "control person" of Aurora Bay, or because of other present or future circumstances, a question may arise under the Securities Act of 1933, as amended, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being hereinafter called the "Federal Securities Laws") with respect to any disposition of the Collateral permitted hereunder. The Pledgor understands that compliance with the Federal Securities Laws may very strictly limit the course of conduct of the Pledgee if the Pledgee were to attempt to dispose of all or any part of the Collateral and may also limit the extent to . which or the manner in which any subsequent transferee of the Collateral may dispose of the same. Similarly, because of the position of the Pledgor with respect to the Aurora Bay or because of other circumstances, there may be other legal restrictions or limitations affecting the Pledgee in any attempts to dispose of all or any part of the Collateral under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. The Pledgor agrees that any such private sale conducted in a manner which complies with such Federal Securities Laws and Blue Sky or state securities laws shall be commercially reasonable (within the meaning of Section 9-504(3) of the Uniform Commercial Code), and the Pledgor hereby waives any claims against the Pledgee arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Pledgee accepts the first offer received and does not offer the Collateral to more than one possible purchaser. Without limiting the generality of the foregoing, these provisions would apply if, for example, the Pledgee placed all or any part of the Collateral privately with a purchaser or purchasers. 7. REDELIVERY OF COLLATERAL UPON FULL SATISFACTION .Upon full and complete payment and performance of the Obligations, the Pledgor shall, except as otherwise provided herein, be entitled to the return, at its expense, of such of the Collateral as has not theretofore been sold pursuant to the provisions of this Agreement, together with any moneys at the time held by the Pledgee in any collateral account pursuant to this Agreement, and all rights of Pledgee hereunder shall terminate; and Pledgee shall execute and file terminations of any financing statements covering any part-of the Collateral. 8. REALIZATION OF COLLATERAL (a) The Pledgee shall apply the proceeds of any sale of the whole or any part of the Collateral, together with any other moneys at the time held. by the Pledgee under the provisions of this Agreement after deducting all reasonable costs and expenses of collection, sale and delivery (including, without limitation, counsel fees and expenses) incurred by the Pledgee in connection with such sale, to the payment of the Obligations, the application as between the Obligations to be such as .. the Pledgee may in its sole discretion determine. 4 (b) To the full extent that the Pledgor may lawfully so agrees, the Pledgor will not at any time plead, claim or take- the benefit of any appraisement or valuation, law now or hereafter in force in order to prevent or delay the enforcement of this Agreement or the absolute sale of any portion or all of the Collateral, or the possession thereof by any purchaser at any sale, and the Pledgor, for itself and all who may claim under the Pledgor, as far as the Pledgor now or hereafter lawfully may, hereby waives the benefit of all such laws. The Pledgor, for itself and all who may claim under the Pledgor, as far as the Pledgor now or hereafter lawfully may, also waives all right to have all or any portion of the Collateral marshalled upon any foreclosure hereof and agrees that any court having jurisdiction over this Agreement may order the sale of all or any portion of the Collateral as an entirety. Any sale of, or the grant of options to purchase, or any other realization upon, all or any portion of the Collateral shall operate to divest all right, title, interest, claim and demand, either at law or in equity, of the Pledgor in and to the Collateral so sold, optioned or realized upon, and shall be a perpetual bar both in law and in equity against the Pledgor and against any and all persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through and under the Pledgor. No delay on the part of the Pledgee in exercising any power of sale, lien, option or other right hereunder, and no notice or demand which may be given to or made upon the Pledgor with respect to any power of sale, lien, option or other right hereunder shall constitute a waiver thereof, or limit or impair the right of the Pledgee to take any action or to exercise any power of sale, lien, option or any other right under this Agreement, or otherwise, nor shall any single or partial exercise thereof, or the exercise of any power, lien, option or other right under this Agreement or otherwise all without notice or demand nor shall any of the same prejudice its rights against the Pledgor in any respect. Each and every remedy given the Pledgee shall, to the extent permitted by law, be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity or by statute. (c) The Pledgee may bid for or purchase, free from any right of redemption on the part of the Pledgor (all said rights being also hereby waived and released), any part of or all the Collateral offered for sale and may make payment on account thereof by using any claim then due and payable to the to the Pledgee from the Pledgor as a credit against the purchase price, and the Pledgee may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability therefor. 9. EVENTS OF DEFAULT Time is of the essence in this Agreement. Subject to the right of cure set forth below in this Section 9, any of the following events shall constitute a default of this Security Agreement ("Event of Default"). (a) Any misrepresentation, breath, default or failure to perform under any of the covenants, representations or warranties of this Agreement by Pledgor, or any failure to pay any of the Obligations or any guaranty of any such Obligations by Pledgor, Aurora Bay, or any guarantor, or the breach of any other agreement relating to any of the Obligations or pursuant to which any of the Obligations arose; (b) Any failure to pay when due the full amount of any payment of principal, interest, taxes, insurance premiums or other charges which are or may be secured hereby; (c) The Collateral or any portion thereof being seized or levied upon under any legal or governmental process; 5 (d) Pledgor becoming insolvent or the subject of a petition in bankruptcy, either voluntary or involuntary, or any other proceeding under the Federal Bankruptcy Code; or Pledgor making an assignment for the benefit of creditors; or Pledgor being named in or the Collateral being subjected to a suit for the appointment of a receiver; (e) Entry of any judgment against Pledgor; (f) The Collateral or proceeds thereof, for any reason whatsoever, becoming uncollectible in part or in their entirety; (g) Aurora Bay admits an additional Member without. the prior written consent of Pledgee; (h) The Pledgor terminates or amends the LLC Agreement without the prior written consent of Pledgee; (i) Any Unit, or any right, title or interest, in Aurora Bay, whether or not evidenced by certificates, is issued, granted, sold, assigned, transferred, or otherwise conveyed to any party other than the Pledgee; (j) Aurora Bay is dissolved; or (k) An event shall have occurred that upon notice or lapse of time or both would constitute an Event of Default. Notwithstanding the foregoing, in the event of any nonmonetary default described above, such default shall not become an Event of Default until Pledgee has given Pledgor written notice of such default and Pledgor shall have failed to cure the default within thirty (30) days after notice. Upon the happening of any of the foregoing Events of Default the Obligations shall, at the option of the Pledgee, become immediately due and payable in their , entirety without presentment, demand, protest or other notice of any kind, all of which are waived by the Pledgor, and the Pledgee may at -any time thereafter proceed with the collection thereof and the realization upon all security which it may hold, including all rights hereunder or otherwise existing at law. 10. COVENANTS, REPRESENTATIONS, AND WARRANTIES OF PLEDGOR (a) Pledgor represents and warrants that: (i)There are no restrictions upon Pledgor's right to transfer or encumber the Collateral in favor of Pledgee, and Pledgor has the right to transfer such Collateral to Pledgee free and clear of any lien, claim or encumbrances and of any right of first refusal to purchase or option to purchase or any similar such right, and without obtaining the consent of any other person, including any other Member of Aurora Bay, Aurora Bay, or any other individual or entity. (ii) The Collateral of Pledgors collectively represents not less than ONE-HUNDRED PERCENT (100"%) of the presently issued and outstanding interests in Aurora Bay. (iii) There are no other interests in Aurora Bay other than the Collateral, and Aurora Bay has no other Members other than the 6 Pledgors. (b) Pledgor covenants that it shall deliver copies of any proposed amendments to the LLC Agreement to Pledgee. (c) Pledgor covenants that it shall not, without the prior written consent of Pledgee, which consent may not be unreasonably withheld (i) sell, encumber or in any manner dispose of its interest in the Collateral or any of the Collateral; (ii) permit Aurora Bay to issue any additional interests; (iii) permit Aurora Bay to dissolve, reorganize, recapitalize, liquidate or merge or consolidate with any other person, firm, limited liability company or corporation; (iv) permit Aurora Bay to amend its certificate of formation or its LLC Agreement; (v) permit Aurora Bay to declare or pay any dividends on, or purchase, redeem or retire, or make any other distribution on account of or with respect to, any interest in Aurora Bay; except Aurora Bay may make annual distributions to each Member to defray its tax liabilities on allocable taxable income for the prior year as permitted by the Credit Agreement. 11. GENERAL PROVISIONS (a) All notices hereunder shall be in writing and shall be effectively given when delivered personally on the date of delivery, or if mailed, two days after deposit in the United States mail, first class, postage prepaid, certified or registered, addressed as follows: If to Pledgee: Emeritus Corporation 3131 Elliott Avenue Suite 500 Seattle, WA 98121 With a copy to: George Beal, Esq. Perkins Coie 1201 Third Avenue, 40th Floor Seattle, WA 98101-3099 If to Pledgors: Thilo Best 18254 Westminster Drive Lake Oswego, OR 97034 Erwin Investors I, L.L.C. 9817 N.E. 54th Vancouver, Washington 98662 7 Craig W. Spaulding 5720 LBJ Freeway Suite 450 Dallas, Texas 75240 with a copy to: Sam S. Stollenwerck, Esq. Stollenwerck, Moore & Silverberg, P.C. 5949 Sherry Lane, Suite 1025 Dallas, Texas 75225 or such other addresses as either party may from time to time specify in writing to the other. (b) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. (c) The Pledgor hereby appoints the Pledgee. as its attorney in fact to execute and file, on its behalf, any financing statements, continuation statements or other documentation required to perfect or continue the security interest created hereby. (d) This Agreement and the rights and obligations of the parties hereto shall be construed and interpreted in accordance with the laws of the State of Washington. (e) All agreements, covenants, conditions and provisions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto. (f) This Agreement may be modified or rescinded only by a writing expressly relating to this Agreement and signed by all of the Pledgors and the Pledgee. DATED this 7th day of January, 1998. Erwin Investors I, L.L.C., a Washington Limited liability company By: /s/ Jerry Erwin ---------------------- - ----------------- Jerry Erwin, Manager /s/ Craig W. Spaulding - ---------------------------------------- Craig W. Spaulding /s/ Thilo Best ---------- - ------------------------------ 8 EX-10.79.7 27 EX 10.79.7 GUARANTY This Guaranty is made as of the 7th day of January, 1998, by Thilo Best, Erwin Investors I, L.L.C., a Washington limited liability company, and Craig Spaulding (each individually a "Guarantor," and collectively "Guarantors"), to and for the benefit of Emeritus Corporation, a Washington corporation, and its successors, participants, and assigns ("Emeritus"). RECITALS: A. Contemporaneously with the execution hereof, Aurora Bay Investments, L.L.C., a Washington limited liability company ("Aurora Bay"), has entered into a Credit Agreement dated as of January 7,1998 between Aurora Bay and Emeritus (the "Credit Agreement"), establishing a $5 million credit facility in favor of Aurora Bay, and in connection therewith executed and delivered to Emeritus a Convertible Promissory Note (the "Note"). B. Each of the Guarantors is a member of Aurora Bay and will financially benefit from Emeritus' extension of credit to Aurora Bay. C. Each of the Guarantors is willing to execute this nonrecourse guaranty in favor of Emeritus and to pledge such Guarantor's equity interest in Aurora Bay to secure repayment of all amounts due and payable to Emeritus under the Note and the Credit Agreement. NOW, THEREFORE, in order to induce Emeritus to extend credit to Aurora Bay, Guarantor agrees as follows: ARTICLE I. GUARANTY Guarantor jointly, severally, unconditionally, absolutely, and irrevocably guarantees all past, present, and future indebtedness of Aurora Bay to Emeritus, including but not limited to (a) the due and punctual payment of the principal and interest of the Note and all money due or that may become due thereunder, whether according to the present terms of the Note or at any earlier or accelerated date or dates as provided therein, pursuant to any extension of time, or pursuant to any amendment, modification, or replacement of the Note hereafter made or granted and (b) the due and punctual payment of all money due or that may become due under the Credit Agreement, whether according to the present terms of the Credit Agreement or at any earlier or accelerated date or dates as provided therein, pursuant to any extension of time, or pursuant to an amendment, modification, or replacement of the Credit Agreement hereafter made or granted (collectively, "Obligations"). Guarantor acknowledges and agrees that Guarantor's liability hereunder is cumulative with the liability of Guarantor under all other unterminated guaranties of Guarantor. ARTICLE II. WAIVERS BY GUARANTOR AND RIGHTS OF EMERITUS Guarantor intends that it shall remain unconditionally liable for payment of. all the Obligations regardless of any act or omission which might otherwise operate as a legal or equitable defense to discharge Aurora Bay, Guarantor, or any other guarantor in whole or part. Therefore, Guarantor hereby waives any defense Guarantor may have to the enforceability of its obligations hereunder by virtue of any of the following and Emeritus may do any of the following things as many times as Emeritus wishes, without Guarantor's permission and without notifying Guarantor, and this will not affect Guarantor's promise to pay Emeritus the amount of the Obligations: (a) Emeritus does not have to notify Guarantor of Emeritus' acceptance of this Guaranty; (b) Emeritus does not have to notify Guarantor when Emeritus, extends credit to Aurora Bay, or pays the obligations of Aurora Bay; (c) Emeritus does not have to notify Guarantor of (i) Aurora Bay's failure to pay Aurora Bay's obligations when due or (ii) Aurora Bay's failure to perform any other obligation under the Note or the Credit Agreement; (d) Emeritus may extend, renew, accelerate, or otherwise change the time for payment of any of Aurora Bay's obligations to Emeritus, (e) Emeritus may make any other changes in the terms of the Note or the Credit Agreement; (f) Emeritus may release Aurora Bay, any other guarantor, or anyone else against whom Emeritus may have the right to collect amounts that may become due under the Note or the Credit Agreement; (g) Emeritus may apply collateral and direct the order or manner of sale thereof as Emeritus in its discretion may determine; (h) Emeritus may apply any money or collateral received from or on behalf of the Aurora Bay to the repayment of any indebtedness due to Emeritus in any order Emeritus determines; (i) Emeritus may release, surrender; substitute, take additional, or exchange, any collateral Emeritus now holds or may later acquire as security for Aurora Bay's indebtedness to Emeritus or Guarantor's obligations hereunder; (j) Emeritus may forbear from pursuing Aurora Bay or from foreclosing or otherwise realizing upon any security interest, letter of credit, or other (k) Emeritus may impair any and all collateral given, now or thereafter, to secure Aurora Bay's performance of its Obligations (collectively, the "Collateral") or Guarantor's obligations hereunder by its acts or omissions, including but not limited to failing to perfect a security interest in any Collateral; (l) Guarantor hereby waives any defense arising out of the absence, impairment, or loss of (i) any or all rights of recourse, reimbursement, contribution, or subrogation or (ii) any other right or remedy of Guarantor against Aurora Bay or any other party or Collateral to collect amounts that Guarantor is obligated to pay under this Guaranty;. (m) Guarantor hereby waives any defense arising (i) by reason of any invalidity, ineffectiveness, or unenforceability of all or any portion of the Note or the 2 Credit Agreement or (ii) on the basis of any other defense available to Aurora Bay (other than full payment in cash); (n) Guarantor waives diligence, demand for performance, notice of nonperformance, presentment, protest, notice of dishonor, and indulgences and notices of every other kind;. (o) Guarantor agrees that Emeritus may in its sole discretion proceed against all or any portion of the Collateral by way of either judicial or nonjudicial foreclosure. ARTICLE III. EMERITUS' RIGHT NOT TO PROCEED AGAINST AURORA BAY, OTHER GUARANTORS OR COLLATERAL If an Event of Default occurs under the Note or the Credit Agreement, Emeritus may enforce this guaranty against Guarantor (a)without attempting to collect or without exhausting Emeritus' efforts to collect from Aurora Bay, any other guarantor, or anyone else who is liable for the Obligations or (b) without attempting to enforce Emeritus' rights in any Collateral. Without limiting the foregoing, Emeritus may sue on the Note or the Credit Agreement or may take any other action authorized by law. In each case, Emeritus shall have the right to exercise its remedies in whatever order it elects and may join Guarantor in any suit on the Note or the Credit Agreement or can proceed against Guarantor in a separate proceeding. In case of suit, sale, or foreclosure, only the net proceeds therefrom, after deducting all charges and expenses of any kind and nature whatsoever, shall be applied to the reduction of the amount due on the Note or the Credit Agreement, and Emeritus shall not be required to institute or prosecute proceedings to recover any deficiency as a condition of payment under or enforcement of this Guaranty. At any sale of the Collateral, Emeritus may at its discretion purchase all or any part of the Collateral and may apply against the amount bid therefor all or any portion of the balance due it pursuant to the terms of the Note or the Credit Agreement. Guarantor hereby waives the right to object to the amount that may be bid by Emeritus at such foreclosure sale. ARTICLE IV. BANKRUPTCY AND ASSIGNMENT OF RIGHTS Guarantor agrees that its obligation to make payment under the terms of this Guaranty shall not be impaired, modified, changed, released, or limited in any manner by any impairment, modification, change, release, defense, or limitation of the liability of Aurora Bay or of a receiver, trustee, debtor-in-possession, or estate under any bankruptcy or receivership proceeding. If any payment made by Aurora Bay is reclaimed in a bankruptcy or receivership proceeding, Guarantor shall pay to Emeritus the dollar amount of the amount reclaimed. Guarantor further assigns to Emeritus all rights Guarantor may have in any proceeding under the U. S. Bankruptcy Code or any receivership or insolvency proceeding until all Indebtedness of Aurora Bay to Emeritus has been paid in full. This assignment includes all rights of Guarantor to be paid by Aurora Bay even if those rights have nothing to do with this Guaranty. This assignment does not prevent Emeritus from enforcing Guarantor's obligations under this Guaranty in any way. ARTICLE V. GUARANTOR'S DUTY TO KEEP INFORMED OF AURORA BAY'S AND THE OTHER GUARANTOR'S FINANCIAL CONDITION 3 Guarantor is now adequately informed of Aurora Bay's financial condition, and Guarantor agrees to keep so informed. Emeritus need not provide Guarantor with any present or future information concerning the financial condition of Aurora Bay or any other guarantor, and changes in Aurora Bay's or Guarantor's financial condition shall not affect Guarantor's obligations under this Guaranty. Guarantor has not relied on financial information furnished by Emeritus, nor will Guarantor do so in the future. ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF GUARANTOR Guarantor represents and warrants to Emeritus as follows: (a) The execution, delivery, and performance by Guarantor of this Guaranty do not and will not (i) conflict with or contravene any law, rule, regulation, judgment, order, or decree of any government, governmental instrumentality, or court having jurisdiction over Guarantor or Guarantor's activities or properties, (ii) conflict with, or result in any default under, any agreement or instrument of any kind to which Guarantor is a party or by which Guarantor or any of Guarantor's properties may be bound or affected, or (iii) require the consent, approval, order, or authorization of, or registration with, or the giving of notice to any United States or other governmental authority or any person or entity; (b) This Guaranty constitutes a legal, valid, and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms; (c) There is no action, litigation, or other proceeding pending or to Guarantor's knowledge threatened against Guarantor before any court; arbitrator, or administrative agency that may have a material adverse effect on the assets or the business or financial condition of Guarantor or that would prevent, hinder, or jeopardize the performance by Guarantor of Guarantor's obligations under this Guaranty; (d) Guarantor is fully familiar with all the covenants, terms, and conditions of the Note or the Credit Agreement; and (e) Guarantor is not party to any contract, agreement, indenture, or instrument or subject to any restriction individually or in the aggregate would have a material adverse effect on guarantor's financial condition or business or that would in any way jeopardize the ability of Guarantor to perform under this Guaranty. ARTICLE VII. SUBORDINATION OF INDEBTEDNESS OF AURORA BAY TO GUARANTOR Any Indebtedness of Aurora Bay now or hereafter held by Guarantor is hereby subordinated to the indebtedness of Aurora Bay to Emeritus, and such indebtedness of Aurora Bay to Guarantor, if Emeritus so requests and if there exists an event of default under this Guaranty and/or under the Credit Agreement, shall be collected, enforced, and received by Guarantor as trustee for Emeritus and be paid over to Emeritus on account of the indebtedness of Aurora Bay to Emeritus, but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. 4 ARTICLE VIII. WAIVER OF RIGHT OF SUBROGATION Guarantor agrees that Guarantor shall not have, and hereby expressly waives, any claim, right, or remedy that Guarantor may now have or hereafter acquire against. Aurora Bay including, without limitation, any claim, remedy; or right of subrogation, reimbursement, exoneration, indemnification, or participation in any claim, right, or remedy that Emeritus has or may hereafter have against Aurora Bay or any Collateral that Emeritus now has or hereafter acquires, whether or not such claim, right,. or remedy arises in equity, under contract, by statute, under common law, or otherwise. Guarantor hereby acknowledges and agrees that this waiver is intended to benefit Aurora Bay and Emeritus and shall not limit or otherwise affect Guarantor's liability under this Guaranty. Notwithstanding the foregoing, Guarantor shall not be obliged to waive such rights of subrogation, as long as they are in all respects subordinate to any and a11 rights Emeritus may have or acquire against Aurora Bay, and no payments may be made by Aurora Bay to Guarantor with respect to such subrogation rights, until any and a11 amounts owed by Aurora Bay to Emeritus have been paid in full. ARTICLE IX. PAYMENT OF OBLIGATIONS; EFFECT OF BANKRUPTCY This Guaranty shall terminate upon payment in full of the Obligations and termination of Emeritus' commitment to make advances of credit and to lend funds to Aurora Bay; but this Guaranty shall be automatically reinstated if. any payment is reclaimed in a bankruptcy or receivership proceeding, until Guarantor pays Emeritus the amount reclaimed or the amount is otherwise paid to Emeritus and is not subject to further reclamation. ARTICLE X. EVENTS OF DEFAULT; REMEDIES 10.1 EVENTS OF DEFAULT "Event of Default," whenever used herein, means any one of the following events (whatever the reason for the Event of Default, whether it shall relate to one or more of the parties hereto, and whether it shall be voluntary or involuntary or be pursuant to or effected by operation of Applicable Law): (a) If there shall occur an Event of Default under the Note or the Credit Agreement; or (b) If Guarantor fails to observe or perform any term, covenant, or agreement to be performed or observed pursuant to this Guaranty. 10.2 REMEDIES (a) Upon the occurrence of any Event of Default hereunder, the Obligations shall then or at any time thereafter, at the option of Emeritus become immediately due and payable without notice or demand, and Emeritus shall have an immediate right to pursue the remedies provided herein. (b) If an Event of Default occurs hereunder, Emeritus shall have all remedies provided by law. Guarantor hereby waives any notice of the occurrence of any Event of Default hereunder. ARTICLE XI. GENERAL PROVISIONS 5 11.1 BENEFITS OF AGREEMENT Guarantor agrees that (a) this Guaranty shall inure to the benefit of and may be enforced by Emeritus and any subsequent holder of any of the Note or the Credit Agreement and (b) this Guaranty shall be binding upon and enforceable against Guarantor and its successors and assigns. 11.2 NO ASSIGNMENT Guarantor agrees that no assignment of Guarantor's obligations under this Guaranty may be made to any person or entity without the prior written consent of Emeritus. 11.3 RULES OF CONSTRUCTION Unless some other meaning and intent is apparent from the context, the plural shall include the singular and vice versa, and masculine, feminine, and neuter words shall be used interchangeably. 11.4 GOVERNING LAW This Guaranty shall be construed according to the laws of the state of Washington, without giving effect to its principles of conflicts of law. 11.5 ENTIRE AGREEMENT; MERGER This Agreement constitutes the entire understanding between Emeritus and Guarantor with respect to the subject matter hereof; no course of prior dealing between the parties, no usage of trade, and no parole or extrinsic evidence of any nature shall be used to supplement or modify any terms; and there are no conditions to the full effectiveness of this Guaranty. All prior, and contemporaneous negotiations, understandings, and agreements between Guarantor and Emeritus with respect to the subject matter hereof are merged in this Guaranty. 11.6 INVALID PROVISIONS If any provision of this Guaranty is invalid, illegal, or unenforceable, such provision shall be considered severed from the rest of this Guaranty and the remaining provisions shall continue in full force and effect as if the invalid provision had not been included. This Guaranty may be changed, modified, or supplemented only through a writing signed by Guarantor and Emeritus. 11.7 ATTORNEYS' FEES AND COLLECTION EXPENSES If there shall occur any Default or Event of Default, Emeritus shall be entitled to recover from Guarantor, upon demand, any costs and expenses incurred in connection with the preservation of rights under, and enforcement of, this Guaranty and the Note or the Credit Agreement whether or not any lawsuit or arbitration proceeding is commenced, in all such cases including, without limitation, reasonable attorneys' fees and costs (including the allocated fees of internal counsel). Costs and expenses as referred to above shall include, without limitation, a reasonable hourly rate for collection personnel, 6 whether employed in-house or otherwise, overhead costs as reasonably allocated to the collection effort, and all other expenses actually. incurred. Reasonable attorneys' fees and costs shall include, without limitation, attorneys' fees and costs incurred in connection with any bankruptcy case or other insolvency proceeding commenced by or against Aurora Bay or any person granting a security interest in any item of Collateral, including all fees incurred in connection with (a) moving for relief from the automatic stay, to convert or dismiss the case or proceeding, or to appoint a trustee or examiner or (b)proposing or opposing confirmation of a plan of reorganization or liquidation, in any case without regard to the identity of the prevailing party. 11.8 CONSENT TO JURISDICTION AND VENUE Guarantor hereby (a) irrevocably submits to the jurisdiction of any state or federal court sitting in Seattle, King County, Washington, in any action or proceeding brought to enforce, or otherwise arising out of or relating to, this Guaranty; (6) irrevocably waives to the fullest extent permitted by law any objection that Guarantor may now or hereafter have to the laying of venue in any such action or proceeding in any such forum; and (c) further irrevocably waives any claim that any such forum is an inconvenient forum. Guarantor agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or in any other manner provided by law. Nothing herein shall impair the right of Emeritus to bring any action or proceeding against Guarantor in any court of any other jurisdiction. 11.9 COUNTERPARTS This Guaranty can be executed in counterpart originals. This Guaranty shall be binding on each person who signs a counterpart of this Guaranty even if everyone listed in the Guaranty does not agree to the Guaranty. 11.10 LIMITATIONS ON SCOPE OF GUARANTY Anything contained herein to the contrary notwithstanding, any claim based on or in respect of any liability of Guarantor under this Guaranty shall be "nonrecourse' and enforced only against the collateral pledged by such Guarantor to secure the payment and performance of the Obligations and Emeritus shall not seek to procure payment out of any other assets, properties or funds of Guarantor (or any legal representative, heir, estate, successor or assign thereof, nor to seek judgment for any sums which are or may be due hereunder, as well as any claim or judgment for any deficiency remaining after exercising its rights against the Collateral pledged by Guarantor. THE UNDERSIGNED CLEARLY UNDERSTANDS THAT EMERITUS DOES NOT HAVE TO PURSUE AURORA BAY OR PURSUE ANY OTHER REMEDIES BEFORE DEMANDING PAYMENT FROM GUARANTOR. GUARANTOR FURTHER UNDERSTANDS THAT IT WILL HAVE TO PAY AMOUNTS THEN DUE EVEN IF AURORA BAY OR ANY OF THE OTHER [The balance of the page intentionally left blank.] 7 GUARANTORS DO NOT MAKE THE PAYMENTS OR ARE RELIEVED OF THE OBLIGATION TO MAKE PAYMENTS. Erwin Investors I, L.L.C., a Washington limited liability company By: /s/ Jerry Erwin ---------------------- ------------------ Jerry Erwin, Manager /s/ Craig W. Spaulding ------------------------- --------------- Craig W. Spaulding /s/ Thilo Best ------------------------- -------------- Thilo Best 8 EX-10.79.8 28 EX 10.79.8 THE LIMITED LIABILITY COMPANY INTERESTS CREATED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; AS AMENDED, OR UNDER THE STATE BLUE SKY STATUTES IN THE VARIOUS STATES WHERE THE INTEREST(S) MAY BE OFFERED, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAME ACT OR THE APPLICABLE STATE BLUE SKY STATUTES OR SATISFACTORY ASSURANCE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION THE SALE OR TRANSFER OF ANY INTEREST(S) IN THE COMPANY MUST BE MADE IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT. IN VIEW OF THESE RESTRICTIONS, THE PURCHASER OF ANY INTEREST(S) IN THE COMPANY MUST BE PREPARED TO BEAR THE ECONOMIC RISK OF THE INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. OPERATING AGREEMENT OF AURORA BAY I, L.L.C. January 6,1998 This Operating Agreement (the "Agreement") is made and entered into as of the 6th day of January, 1998, by AURORA BAY INVESTMENTS, L.L.C., a Washington limited liability company, and ERWIN INVESTORS. I, LLC., a Washington limited liability company, as We initial members ("Members"). The Members agree to operate the Company (hereinafter defined) as a limited liability company under the laws of the state of Washington, as follows: The parties hereto agree as follows: 1. Definitions. The following terms used in the Agreement shall have the meanings specified below: 1.1 "Act" means the Washington limited Liability Company Act, as amended from time to time. 1.2 "Additional Member" means a Member who has been admitted to all rights of membership pursuant to Section 14.5 below. 1.3 "Adjusted Contribution Amount" with respect to each Member means the Capital Contributions pursuant to Sections 7.1 and 7.4 below. 1.4 "Affiliate" means, with respect to the second person (as defined in this paragraph) (i) any person (the "first person") who directly or indirectly controls a second person, or owns or controls 10% or more of the outstanding securities of the second person; (ii) any officer, director, partner, or member of the immediate family of the second person; and (iii) if the second person is an officer, director, or partner, any company for which the second person acts in that capacity. Control includes the terms "controlled by"-and "under common control with" and means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise. 1.5 "Agreement" means this Operating Agreement of the Au r o r a B a y 1 , L.L.C., as it may be amended from time to time. 1.6 "Assignee" means a person who has acquired a Member's interest in whole or part and has not become a Substitute Member. 1.7 "Capital Account" means the account maintained for each Member in accordance with Section 7S. In the case of a transfer of an interest, the transferee shall succeed to the Capital Account of the transferor or, in the case of a partial transfer, a proportionate share thereof. 1.8 "Capital Contribution" means the total amount of money and the fair market value of a11 property contributed to the Company by each Member pursuant to the terms of the Agreement. Capital Contribution shall also include any amounts paid directly by a Member to any creditor of the Company in respect of any guarantee or similar obligation undertaken by such Member in connection with the Company's operations. Any reference to the Capital Contribution of a Member shall include the Capital Contribution made by a predecessor holder of the interest of such Member. 1.9 "Cash Available for Distribution" means all cash receipts of the Company, excluding cash available upon liquidation of the Company, in excess of amounts reasonably required for payment of operating expenses, repayment of current liabilities, repayment of such amounts of Company indebtedness as the Managers shall determine necessary or advisable, and the establishment of and additions to such cash reserves as the Managers shall deem necessary or advisable, including, but not limited to, reserves for capital expenditures, replacements, contingent or unforeseen liabilities, or other obligations of the Company. 1.10 "Code" means the United States Internal Revenue Code of 1986, as amended. References to specific Code Sections or Treasury Regulations shall be deemed to refer to such Code Sections or Treasury Regulations as they may be amended from time to time or to any successor Code Sections or Treasury Regulations if the Code Section or Treasury Regulation referred to is repealed. 1.11 "Company" means the Aurora Bay 1, L.L.C. governed by the Agreement. 1.12 "Company Property" means all the real and personal property owned by the Company. 1.13 "Credit Agreement" means that certain Credit Agreement dated as of January 7,1998, by and between the Company and Emeritus Corporation. 1.14 "Deemed Capital Account" means a Member's Capital Account as calculated from time to time, adjusted by (i) adding thereto the sum of (A) the amount of such Member's Mandatory Obligation, if any, and (B) each Member's share of Minimum Gain (determined after any decreases therein for such year) and (ii) subtracting therefrom (A) allocations of losses and deductions which are reasonably expected to be made as of the end of the taxable year to the Members pursuant to Code Section 704(e)(2), Code Section 706(d) and Treasury Regulation Section 1.751-1(b)(2)(ii), and (B) distributions which at the end of the taxable year are reasonably expected to be made to the Member to the extent that said distributions exceed offsetting increases to the Member's Capital Account (including allocations of the Qualified Income Offset pursuant to Section 8.5 but excluding allocations of Minimum Gain Chargeback pursuant to Section 8.4) that are reasonably expected to occur during (or prior to) the taxable years in which such distributions are reasonably expected to be made. 1.15 "Emeritus" means Emeritus Corporation, a Washington corporation. 2 1.16 "Emeritus Corporation Loan" means a loan from Emeritus Corporation to the Company, to be made to the Company pursuant to the Credit Agreement, in an amount up to $5,000,000.00, with an option in favor of Emeritus Corporation to convert the loan to a Company Interest with a Percentage Interest of forty-eight percent (48%). 1.17 "Interest" or "Company Interest" means the ownership interest of a Member in the Company at any particular time, including the right of such Member to any and all benefits to which such Member may be entitled as provided in the Agreement and in the Act, together with the obligations of such Member to comply with all the terms and provisions of the Agreement and the Act. 1.18 "Mandatory Obligation" means the sum of (i) the amount of a Member's re contribution obligation (including the amount of any Capital Account deficit such Member is obligated to restore upon liquidation) provided that such contribution must be made in all events within ninety (90) days of liquidation of the Member's interest as determined under Treasury Regulation Section 1.704-1(b)(2)(ii)(g) and (ii) the additional amount, if any, such Member would be obligated to contribute as of year end to retire recourse indebtedness of the Company if the Company were to liquidate as of such date and dispose of all of its assets at book value. 1.19 "Manager(s)" means those Member(s) and other persons who are appointed in accordance with this Agreement to exercise the authority of Manager under this Agreement and the Act. If at any time a Member who is a Manager ceases to be a Member for any reason, that Member shall simultaneously cease to be a Manager. At all times there shall be at least one Manager who is a Member. The Managers of the Company as of the date of this Agreement are Craig W. Spaulding and Jerry Erwin. . 120 "Member(s)" means those persons and/or entities that execute a counterpart of this Agreement and those persons and/or entities that are hereafter admitted as members under Section 14.4 below. 121 "Minimum Gain" means the amount determined by computing, with respect to each nonrecourse liability of the Company, the amount of gain, if any, that would be realized by the Company if it disposed of the Company Property subject to such nonrecourse liability in full satisfaction thereof in a taxable transaction and then by aggregating the amounts so determined. Such gain shall be determined in accordance with Treasury Regulation Section 1.704-2(d). Each Member's share of Minimum Gain at the end of a taxable year of the Company shall be determined in accordance with Treasury Regulation Section 1.704- 2(g)(1). 1.22 "Net Income" or "Net Loss" means taxable income or loss (including items requiring separate computation under Section 702 of the Code) of the Company as determined using the method of accounting chosen by the Managers and used by the Company for federal income tax purposes, adjusted in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(g), for any property with differing tax and book values, to take into account depreciation, depletion, amortization, and gain or loss as computed for book purposes. 1.23 "Partnership" means Lubbock Group, Ltd., a Texas limited partnership, for which the Company will serve as its sole general partner. 3 1.24 "Percentage Interest" means the percent interest of each Member as set forth on Appendix A. 1.25 "Project" means the senior housing facility owned and developed by the Company. 1.26 "Project Loan" means the loan to be made by Aurora B a y I n v e s t m e n t s , L.L.C. to the Partnership from proceeds of the Emeritus Corporation Loan, as contemplated by the Credit Agreement, and from its available cash, which loan is to be evidenced by the terms of the "Project Promissory Note", a copy of which is attached hereto as Exhibit "A". 1.27 "Senior Debt" means the construction and short-term permanent financing arranged by the Company to construct and develop a Project as described in Section 7.7 hereof including Take-out Commitments. 1.28 "Subsidiary Loan" means a loan made by Aurora Bay Investments, I, L.L.C. to the Partnership from proceeds of loans made to Aurora Bay Investments, LLC. by its Managers. 129 "Substitute Member" means an Assignee who has been admitted to all of the rights of membership pursuant to Section 14.4 below. 2. Formation. The Members hereby agree to operate the Company under the terms and conditions set forth herein. Except as otherwise provided herein, the rights and liabilities of the Members shall be governed by the Act. 2.1 Defects as to Formalities. A failure to observe any formalities or requirements of this Agreement, the certificate of formation for the Company, or the Act shall not be grounds for imposing personal liability on the Members for liabilities of the Company. 2.2 No Partnership Intended for Nontax Purposes. The Members have formed the Company under the Act and expressly do not intend hereby to form a partnership under either the Washington Uniform Partnership Act or the Washington Uniform I Limited Partnership Act or a corporation under the Washington Business Corporation Act. The Members do not intend to be partners one to another or partners as to any third party. The Members hereto agree and acknowledge that the Company is to be treated as a partnership for federal income tax purposes. 2.3 Rights of Creditors and Third Parties. This Agreement is entered into among the Company and the Members for the exclusive benefit of the Company, its Members, their successors, and assigns. The Agreement is expressly not intended for the benefit of a creditor of the Company or any other person. Except, and only to the extent provided by applicable statute, no such creditor or third party shall have all rights under the Agreement or any agreement between the Company and any Member with respect to any Contribution or otherwise. 2.4 Title to Property. All Company Properly shall be owned by the Company as an entity, and no Member shall have any ownership interest in such Company Properly in the Member's individual name or right. Each Member's interest in the Company shall be 4 personal property for all purposes. Except as otherwise provided in this Agreement, the Company shall hold all Company Property in the name of the Company and not in the name or names of any Member or Members. 2.5 Payments of Individual Obligations. The Company's credit and assets shall be used solely for the benefit of the Company, and no asset of the Company shall be transferred or encumbered for, or in payment of any individual obligation of any Member unless otherwise provided for herein. 3. Name. The name of the Company shall be AURORA BAY I, L.L.C. The Managers may from time to time change the name of the Company or adopt such trade or fictitious names as they may determine to be appropriate. 4. Office; Agent for Service of Process. The principal office of the Company shall be at 520 Pike Street, Seattle, Washington 98101. The Company may maintain such other offices at such other places as the Managers may determine to be appropriate. The agent for service of process for the Company shall be CT Corporation System at the above address. 5. Purposes. The primary purpose and general character of the business of the Company is to serve as the general partner of Lubbock Group, Ltd., a Texas limited partnership, specially formed to acquire, develop, construct, operate, hold, and invest in certain real property located in Lubbock, Texas, and to engage in any lawful act or activity for which a limited liability company may be organized under the laws of the State of Washington, incident, necessary, advisable, or desirable to carry out the purpose of the Company. 6. Term. The term of the Company commenced upon the filing of the Articles of Organization for the Company in the office of the Washington Secretary of State and shall continue until January l, 2027, unless sooner dissolved, wound up, and terminated in accordance with the provisions of this Agreement and the Act. 7. Percentage Interest and Capital Contributions. 7.1 Initial Capital Contributions; Percentage Interests . The Members made initial Capital Contributions to the Company in the amounts set forth on Appendix A for the Percentage Interests in the Company as shown on Appendix A. 7.2 No Interest on Capital. No Member shall be entitled to receive interest on such Member's Capital Contributions or such Member's Capital Account. 7.3 No Withdrawal of Capital. Except as otherwise provided in this Agreement, no Member shall have the right to withdraw or demand a return of any or all of such Member's Capital Contribution. It is the intent of the Members that no distribution (or any part of any distribution) made to any Member pursuant to Section 10 hereof shall be deemed a return or withdrawal of Capital Contributions, even if such distribution represents (in full or in part) a distribution of revenue offset by depreciation or any other noncash item accounted for as an expense, loss, or deduction from, or offset to, the Company's income and that no Member shall be obligated to pay any such amount to or for the account of the Company or any creditor of the Company. However, if any court of competent jurisdiction holds that, notwithstanding the provisions of this Agreement, any Member is obligated to make any such payment, such obligation shall be the obligation of such Member and not of any other Member, including Managers. 5 7.4 Additional Capital. Except as otherwise provided for herein or mutually agreed upon by the Members, no Member shall be obligated to make an additional capital contribution to the Company. 7.5 Capital Accounts. The Company shall establish and maintain a Capital Account for each Member in accordance with Treasury Regulations issued under Section 704. The initial Capital Account balance for each Member shall be the amount of initial Capital Contributions made by each Member under Section 7.1 above. The Capital Account of each Member shall be increased to reflect (i) such Member's cash contributions, (ii) the fair market value of property contributed by such Member (net of liabilities securing such contributed property that the Company is considered to assume or take subject to Code Section 752), (iii) such Member's share of Net Income (including all gain as calculated pursuant to Section 1001 of the Code) of the Company and (iv) such Member's share of income and gain exempt from tax. The Capital Account of each Member shall be reduced to reflect (a) the amount of money and the fair market value of property distributed to such Member (net of liabilities securing such distributed property that the Member is considered to assume or take subject to under Section 752), (b) such Member's share of noncapitalized expenditures not deductible by the Company in computing its taxable income as determined under Code Section 705(a)(2)(B), (c) such Member's share of Net Loss of the Company and (d) such Member's share of amounts paid or incurred to organize the Company or to promote the sale of Company Interests to the extent that an election under Code Section 709(b) has not properly been made for such amounts. The Managers shall determine the fair market value of all property which is distributed in kind, and the Capital Accounts of the Members shall be adjusted as though the property had been sold for its fair market value and the gain or loss attributable to such sale allocated among the Members in accordance with Section 8, as applicable. In the event of a contribution of property with a fair market value which is not equal to its adjusted basis (as determined for federal income tax purposes), a revaluation of the Members' Capital Amounts upon the admission of new members to the Company, or in other appropriate situations as permitted by Treasury Regulations issued under Code Section 704, the Company shall separately maintain "tax" Capital Accounts solely for purposes of taking into account the variation between the adjusted tax basis and book value of Company Property in tax allocations to the Members consistent with the principles of Code Section 704(c) in accordance with the rules prescribed in Treasury Regulations promulgated under Code Section 704. 7.6 Default. In the event any Member shall fail to contribute any cash or property when due hereunder, such Member shall remain liable therefor to the Company, which may institute proceedings in any court of competent jurisdiction in connection with which such Member shall pay the costs of such collection, including reasonable attorneys' fees. Any compromise or settlement with a Member failing to contribute cash or properly due hereunder may be approved by a majority by Percentage Interest of the other Members. 7.7 Financing. The Company shall manage Senior Debt financing for the development and lease-up of its Project in accordance with its development budget. 8. Allocations. 8.1 Allocation of Net Income and Net Loss. Except as otherwise provided in this Section 8, Net Income and Net Loss for each fiscal year shall be allocated to the Members in proportion to each Member's Percentage Interest. 6 8.2 Special Allocation. Notwithstanding Section 8.1, depreciation, depletion, amortization, and gain or loss for tax purposes with respect to contributed property or with respect to property which has been revalued under Code Section 7.5(b) shall be allocated consistent with the principal of Section 704(c) and the regulations thereunder and Treasury Regulation Section 1.704-1(b)(4)(i). 8.3 Limitation on Net Loss Allocations. Notwithstanding anything contained in this Section 8, no Member shall be allocated Net Loss to the extent such allocation would cause a negative balance in such Member's Deemed Capital Account as of the end of the taxable year to which such allocation relates. 8.4 Minimum Gain Chargeback If there is a net decrease in Minimum Gain during a taxable year of the Company, then notwithstanding any other provision of this Section 8 or Section 16.3, each Member must be allocated items of income and gain for such year and succeeding taxable years to the extent necessary (the "Minimum Gain Chargeback"), in proportion to, and to the extent of an amount required under Treasury Regulation Section 1.704- 2(f). 85 Qualified Income Offset. If at the end of any taxable year and after operation of Section 8.4, any Member shall have a negative balance in such Members Deemed Capital Account, then notwithstanding anything contained in this Section 8, there shall be reallocated to each Member with a negative balance in such Member's Deemed Capital Account (determined after the allocation of income, gain, or loss under this Section 8 for such year), each item of Company gross income (unreduced by any deductions) and gain in proportion to such negative balances until the Deemed Capital Account for each such Member is increased to zero. 8.6 Curative Allocations. The allocations set forth in Sections 83, 8.4, and 8S (the "Regulatory Allocations") are intended to comply with certain requirements of the Treasury Regulations issued pursuant to Code Section 704(b). It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss, or deduction pursuant to this Section 8.6. Therefore, notwithstanding any other provision of this Section 8 (other than the Regulatory Allocations), the Managers shall make such offsetting special allocations of Company income, gain, loss, or deduction in whatever manner they determine appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Sections 8.1 and 8.2. . 8.7 Modification of Company Allocations. It is the intent of the Members that each Member's distributive share of income, gain, loss, deduction, or credit (or items thereof) shall be determined and allocated in accordance with this Section 8 to the fullest extent permitted by Section 704(b) of the Code. In order to preserve and protect the determinations and allocations provided for in this Section 8, the Managers shall be, and hereby are, authorized and directed to allocate income gain, loss, deduction, or credit (or items thereof) arising in any year differently from the manner otherwise provided for in this Section 8 if, and to the extent that, allocation of income, gain, loss, deduction, or credit (or items thereof) arising in any year different from the manner otherwise provided for in this Section 8 if, and to the extent that, allocation of income, gain, loss, deduction, or credit (or items thereof) in the manner provided for in this 7 Section 8 would cause the determination and allocation of each Member's distributive share of income, gain, loss, deduction, or credit (or items thereof) not to be permitted by Section 704(b) of the Code and Treasury Regulations promulgated thereunder. Any allocation made pursuant to this Section 8.7 shall be made only after the Managers have secured an opinion of counsel that such modification is the minimum modification required to comply with Code Section 704(b) and shall be deemed to be a complete substitute for any allocation otherwise provided for in this Section 8, and no amendment of this Agreement or approval of any Member shall be required. The Members shall be given notice of the modification within thirty (30) days of the effective date thereof such notice to include the text of the modification and a statement of the circumstances requiring the modification to be made. 8.8 Deficit Capital Accounts at Liquidation. It is understood and agreed that one purpose of the provisions of this Section 8 is to insure that none of the Members has a deficit Capital Account balance after liquidation and to insure that all allocations under this Section 8 will be respected by the Internal Revenue Service. The Members and the Company neither intend nor expect that any Member will have a deficit Capital Account balance after liquidation; and, notwithstanding any thing to the contrary in this Agreement, the provisions of this Agreement shall be construed and interpreted to give effect to such intention. However, if following a liquidation of a Member's interest as determined under Treasury Regulation Section 1.704- 1(b)92)(ii)(g), a Member has a deficit balance in such Member's Capital Account after the allocation of Net Income pursuant to this Section 8 and Section 16.3 and all other adjustments have been made to such Member's Capital Account for Company operations and liquidation, no Member shall have any obligation to restore such deficit balance. 9. Company Expenses. In addition to the costs to be reimbursed to the Managers pursuant to the provisions of Section 11.8 hereof but subject to the limitations set forth therein, the Company shall pay, and the Managers shall be reimbursed for, all costs and expenses of the Company, which may include, but are not limited to: (a) All organizational expenses incurred in the formation of the Company and the selling of interests in the Company; (b) All costs of personnel employed by the Company; (c) All costs reasonably related to the conduct of the Company's day-to-day business affairs, including, but without limitation, the cost of supplies, utilities, taxes, licenses, fees, and services contracted from third parties; (d) All costs of borrowed money, taxes, and assessments on Company Property and other taxes applicable to the Company; (e) Legal, audit, accounting, brokerage, and other fees; (f) Printing and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration, and recording of documents evidencing ownership of an interest in the Company or in connection with the business of the Company; (g) Fees and expenses paid to contractors, mortgage bankers, brokers 8 and services, leasing agents, consultants, onsite managers, real estate brokers, insurance brokers, and other agents, including affiliates of the Managers; (h) Expenses in connection with the acquisition, preparation, design, planning, construction, development, disposition, replacement, alteration, repair, remodeling, refurbishment, leasing, financing, and refinancing and operation of Company Property (including the costs and expenses of legal and accounting fees, insurance premiums, real estate brokerage, leasing commissions, and maintenance of such property); (i) The cost of insurance obtained in connection with the business of the Company; (j) Expenses of revising, amending, converting, modifying, or terminating the Company; (k) Expenses in connection with distributions made by the Company to, and communications and bookkeeping and clerical work necessary in maintaining relations with, Members; (1) Expenses in connection with preparing and making reports required to be furnished to Members for investment, tax reporting, or other purposes that the Managers deem appropriate; (m) Costs incurred in connection with any litigation, including any examinations or audits by regulatory agencies; and (n) Costs of preparation and dissemination of informational material and documentation relating to potential sale, refinancing, or other disposition of Company properties. 10. Distributions of Cash Available for Distribution. At such times and in such amounts as the Managers in their discretion determine appropriate, and subject to a11 restrictions concerning distribution contained in any agreement with a third party, Cash Available for Distribution shall be distributed in the following order of priority: (a) First, among the Members in proportion to their Adjusted Contribution Amounts until such balances are reduced to zero; and (b) Thereafter, among the Members in proportion to their Percentage Interests. As long as there are any amounts due and owing to Emeritus under the Emeritus Corporation Loan, or Emeritus is a member of Aurora Bay Investments, L.L.C., the Managers shall cause the Company to make quarterly distributions of Cash Available for Distribution, no later than 45 days after the end of each calendar quarter. In computing Cash Available for Distribution, the Managers may set aside reasonable amounts as reserves for capital expenditures, replacements, contingent or unforeseen liability, or other obligations of the Company, but the amounts of such reserves shall be reassessed at the end of each quarter to determine whether such balances are adequate in amount, should be increased or decreased, and if decreased the excess reserves will be available for distribution to the Members. Moreover, Cash 9 Available for Distribution may not be used by the Company to make investments in new Projects without the prior consent of Emeritus. It is the intent of the Parties to make periodic distributions of Cash Available for Distribution if and when such excess cash is available and not to hold such funds to build up reserves beyond reasonable amounts or to make investments in new Projects. 11. Powers, Rights, and Obligations of Managers. 11.1 General Authority and Powers of Managers. Except as provided in Section 11.7 and elsewhere in the Agreement, the Managers shall have the exclusive right and power to manage, operate, and control the Company and to do all things and make all decisions necessary or appropriate to carry on the business and affairs of the Company. All decisions required to be made by the Managers shall require the approval of all Managers, except as the Managers shall otherwise agree. In the event the Managers shall be unable to agree upon any matter described in this Section 11.1, then the Managers shall provide written notice of the proposed action to all Members, and the decision of Members holding a majority of the Percentage Interests in the Company shall be binding upon the Managers. The authority of the Managers shall include, but shall not be limited to, the following: (a) To spend the capital and revenues of the Company; (b) To manage, sell, develop, improve, operate, and dispose of any Company properties and assets, including to act on behalf of the Company with respect to any partnership or joint venture in which the Company participates; (c) To employ persons, firms, and/or corporations for the operation and management of the Company's business and for the operation and development of the properties and assets of the Company, including, but not limited to, sales agents, management agents, architects, engineers, contractors, attorneys, and accountants; (d) To acquire, lease, and sell personal and/or real property, hire and fire employees, and to do all other acts necessary, appropriate, or helpful for the operation of the Company business; (e) To execute, acknowledge, and deliver any and all instruments to effectuate any of the foregoing powers and any other powers granted the Managers under the laws of the state of Washington or other provisions of this Agreement; (f) To enter into and to execute agreements for employment or services, as well as any other agreements and all other instruments the Managers deem necessary or appropriate to operate the Company's business and to operate and dispose of Company properties and assets or to effectively and properly perform its duties or exercise its powers hereunder; (g) To borrow money on a secured or unsecured basis from individuals, banks, and other lending institutions to finance its Subsidiaries in the construction of a Project or refinance Company assets, to meet other Company obligations, provide Company working capital and for any other Company purpose, and to execute promissory notes, mortgages, deeds of trust, and 10 assignments of Company's property and assets, and such other security instruments as a lender of funds may require, to secure repayment of such borrowings; provided, that no individual, entity, bank, or other lending institution to which the Managers apply for a loan shall be required to inquire as to the purpose for which such loan is sought, and as between the Company and such individual, entity, bank, or other lending institution, it shall be conclusively presumed that the proceeds of such loan are to be, and will be, used for purposes authorized under the terms of this Agreement; (h) To enter into such agreements and contracts and to give such receipts, releases, and discharges, with respect to the business of the Company, as the Managers deem advisable or appropriate; (i) To purchase, at the expense of the Company, such liability and other insurance as the Managers, in their sole discretion, deem advisable to protect the Company's assets and business; however, the Managers - shall not be liable to the Company or the other Members for failure to purchase any insurance; and (j) To sue and be sued, complain, defend, settle, and/or compromise with respect to any claim in favor of or against the Company, in the name and on behalf of the Company. (k) To lend money to the Company to pay Company operating costs, including, without limitation, all start-up costs, upon such terms and conditions as the Managers shall reasonably determine. 11.2 Time Devoted to company; Other Ventures. The Managers shall devote so much of their time to the business of the Company as in their judgment the conduct of the Company's business reasonably requires. The Managers may engage in business ventures and activities of any nature and description independently or with others, whether or not in competition with the business of the Company, and shall have no obligation to disclose business opportunities available to it, and neither the Company nor any of the other Members shall have any rights in and to such independent ventures and activities or the income or profits derived therefrom by reason of its acquisition of interests in the Company. This Section 11.2 is intended to modify any provisions or obligations of the Act to the contrary, and each Manager and the Company hereby waives and releases any claims they may have under the Act with respect to any such activities or ventures of the Managers or other Members. 11.3 Liability of Managers to Members and to the Company. In carrying out its duties and exercising the powers hereunder, the Managers shall exercise reasonable skill, care, and business judgment. The Managers shall not be liable to the Company or other Members for any act or omission performed or omitted by it in good faith pursuant to the authority granted to it by this Agreement as a Manager or Tax Matters Partner (as defined in the Code) unless such act or omission constitutes negligence or willful misconduct by such Manager. 11.4 Indemnification. The Company shall indemnify and hold harmless the Managers from any loss or damage, including attorneys' fees actually and reasonably incurred by it, by reason of any act or omission performed or omitted by it on behalf of the Company or in furtherance of the Company's interests or as Tax Matters Partner; 11 however, such indemnification or agreement to hold harmless shall be recoverable only out of the assets of the Company and not from the Members. 11.5 Fiduciary Responsibility. The Managers shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Company, and all such funds and assets shall be used in accordance with the terms of this Agreement. 11.6 Contract with the Manager. (a) Without limitation upon the other powers set forth herein, the Managers are expressly authorized for, in the name and on behalf of the Company to: (i) Cause the Company Members for expenses incurred accordance with Section 11.8; to reimburse the Managers and on behalf of the Company in (ii) Permit the Partnership to borrow monies from the Managers in connection with the development, construction, and operations of the Projects as contemplated and permitted by the Credit Agreement; (iii) Permit the Partnership to engage South Bay Partners, Inc., an Affiliate of Craig W. Spaulding, to provide certain development services to the Partnership to develop the Project pursuant to the terms and conditions of a Development Services Agreement, the form and substance of which is set forth in Exhibit "B" attached hereto; (iv) Permit the Partnership to engage Jerry Erwin Associates, Inc., an Affiliate of Jerry Erwin, to manage the Project pursuant to the terms and conditions or a Property Management Agreement, the form and substance of which is set forth in Exhibit "C" attached hereto. (b) The Company may not enter into, nor may the Managers permit the Partnership to enter into, any other agreement, contract, or arrangement with a Manager, Member, or aa Affiliate thereof or provide for an amendment for any of the pre-authorized transactions, pursuant to which such person may profit or benefit, unless and until each of the following conditions is satisfied: (i) Such agreement, contract, or arrangement or amendment is embodied in a written contract that described the goods to be provided, the services to be rendered or the property to be sold, transferred, assigned, or conveyed, and all compensation, payments, remuneration, or other consideration to be paid; (ii) Such agreement, contract, or arrangement is promptly disclosed and its terms summarized in the reports to the Members and to Emeritus; (iii) Such agreement, contract, or arrangement is approved 12 or ratified by a majority vote of the Member (excluding for this purpose the Interests held by the interested Member) and by Emeritus; and (iv) Once approved, such agreement, contract, or arrangement may not be amended, modified, or supplemented without the prior approval of a majority of the Members (excluding for this purpose the Interests held by the interested Member) and by Emeritus. (c) The foregoing provisions are specifically included herein for the benefit of the Company and all the Members to enable the Company to operate efficiently and expeditiously, consistent with the standard set forth, and the Members hereby waive and release any claims they may have under the Act for any contracts of agreements entered into by the Managers which are consistent with the provisions of this Section 11.6. 11.7 Restrictions on Authority of Managers The Company will not take any of the acts enumerated below or cause or permit the Partnership to take similar acts, unless proposed by the Managers and approved by Emeritus or unless requested by Emeritus and approved by Emeritus and Members holding a majority of the outstanding Interests, with or without the concurrence of the Managers: (i) The sale, exchange, or other disposition of entity assets having a fair market value of $50,000.00 or more; (ii) The sale, exchange, or other disposition of any real estate assets; (iii) The incurrence of any indebtedness by the entity, whether secured or unsecured, recourse or nonrecourse, in an amount of $100,000.00 or more (standing authorization may be given for certain accounts receivable financing or a permanent line of credit for the benefit of the entity);(iv) Any decision to expand or broaden the scope of the entity's business beyond that specifically authorized in the entity's organizational documents; (v) Any expenditures for capital improvements or assets in excess of $50,000.00; (vi) The approval of an annual budget for the entity, with the Managers being authorized to expend funds consistent with the annual budget as long as such expenditures do not exceed 5% of the budgeted amounts; (vii) Decisions regarding any claims made by or against the entity, including, but not limited to, decisions regarding the prosecution, settlement, or other disposition of such claims; 13 (viii) The response to any governmental investigation, inquiry, action, or the like affecting the business and affairs of the entity; (ix) Entering into a joint venture, partnership, limited partnership, or other business arrangement with any third party to conduct the entity's business; (x) The admission of any new Member to the entity (except to the extent that such admission is expressly authorized under this Agreement); (xi) Any encumbrance, mortgage, pledge, or granting of a security interest or lien in any real or personal property owned or to be owned by the entity, except to the extent such security interest or lien is granted to secure entity financing permitted by the terms of the Credit Agreement; (xii) The execution of any guaranty by the entity of another's obligations; (xiii) The dissolution and winding up of the Company; (xiv) Approval of the withdrawal of a Manager; (xv) Appointment of a new Manager; (xvi) Continuation of the Company in accordance with Section 16.1(d); . (xvii) The acquisition of any real property; (xviii) Developing a Project other than an Alzheimer's facility; (xix) The engagement of the Manager or any Affiliate thereof to enter into a transaction with, or to provide goods, materials, or services to the entity (except to the extent that such transaction is expressly permitted by the terms of this Agreement or the written contracts contemplated hereby); and (xx) The issuance of any equity securities by the Company or the Partnership. 11.8 Reimbursement and Compensation. Except as otherwise provided herein, the Managers will be entitled to be reimbursed for direct payment of all reasonable and necessary business expenses incurred in the administration of the Company. Notwithstanding anything in this Agreement to the contrary, the Company shall not pay nor reimburse either of the Managers for: (a) any compensation, salary or salary- related expenses, or other remuneration, however designated, paid to, or incurred by Craig W. Spaulding, Jerry Erwin, or Thilo Best, in rendering any services to and on behalf of the 14 Company under this Agreement. (b) the Manager's overhead, such as rent or depreciation, utilities, and capital expenditures, or any other indirect costs incurred by the Manager in maintaining its corporate offices; (c) any services rendered by the Manager or its Affiliates pursuant to a separate agreement between such persons and the Company, providing separately for payment for such services; or (d) any compensation, salary or salary- related expenses, or other remuneration, however designated, paid to, or incurred by, the employees of the Manager or any Affiliate thereof in rendering services to or on behalf of the Company (exclusive of services covered by subparagraph (c) above, which are to be handled as provided for therein) or any goods, services, or products not purchased for the exclusive use of the Company, except to the extent that such arrangements are disclosed to Emeritus in advance and approved by it. 12. Status of Members. 12.1 No Participation in Management. Except as specifically provided in Section 11.7 above, no Member shall take part in the conduct or control of the Company's business or the management of the Company or have any right or authority to act for or on the behalf of or otherwise bind, the Company (except a Member who may also be a Manager and then only in such Member's capacity as a Manager within the scope of such Member's authority hereunder). 12.2 Limitation of Liability. No Member shall have, solely by virtue of such Member's status as a Member in the Company, any personal liability whatever, whether to the Company, to any Members, or to the creditors of the Company, for the debts or obligations of the Company or any of its losses beyond the amount committed by such Member to the capital of the Company, except as otherwise required by the Act. 12.3 Death or Incapacity of Non-Manager Member. The death, incompetence, withdrawal, expulsion, bankruptcy, or dissolution of a Member, or the occurrence of any other event which terminates the continued membership of a Member in the Company, shall not cause a dissolution of the Company. Upon the occurrence of such event, the rights of such Member to share in the Net Income and Net Loss of the Company, to receive distributions from the Company, and to assign an interest in the Company pursuant to Section 14.3 below shall, on the happening of such an event, devolve upon such Member's executor, administrator, guardian, conservator, or other legal representative or successor as the case may be, subject to the terms and conditions of this Agreement, and the Company shall continue as a limited liability company. However, in any such event, such legal representative or successor, or any assignee of such legal representative or successor, shall be admitted to the Company as a Member only in accordance with and pursuant to all of the terms and conditions of Section 14.4 hereof 12.4 Recourse of Members. Each Member shall look solely to the assets of the Company for all distributions with respect to the Company and such Member's Capital 15 Contribution thereto and share of Net Income and Net Loss thereof and shall have no recourse therefor, upon dissolution or otherwise, against any Manager or any other Member. 12.5 No Right to Proper r. No Member, regardless of the nature of such Member's contributions to the capital of the Company, shall have any right to demand or receive any distribution from the Company in any form other than cash, upon dissolution or otherwise. 13. Books and Records, Accounting, Reports and Statements, and Tax Matters. 13.1 Books and Records. The Managers shall, at the expense of the Company, keep and maintain, or cause to be kept and maintained, the books and records of the Company on the same method of accounting as utilized for federal income tax purposes. 132 Annual Accounting Period. All books and records of the Company shall be kept on the basis of an annual accounting period ending December 31 of each year, except for the final accounting period which shall end on the date of termination of the Company. All references herein to the "fiscal year of the Company" are to the annual accounting period described in the preceding sentence, whether the same shall consist of twelve months or less. 133 Managers' Reports to Members. The Managers shall send, at Company expense, to each Member the following: (a) Within seventy-five (75) days after the end of each fiscal year of the Company, such information as shall be necessary for the preparation by such Member of such Member's federal income tax return which shall include a computation of the distributions to such Member and the allocation to such Member of profits or losses as the case may be; and (b) Within forty-five (45) days after the end of each fiscal quarter of the Company, a quarterly report, which shall include: (i) A balance sheet; (ii) A statement of income and expenses; (iii) A statement of changes in Member's capital; and (iv) A statement of the balances in the Capital Accounts of the Members. 13.4 Right to Examine Records. Members shall be entitled, upon written request directed to the Company, to review and copy at such Members' expense the records of the Company at all reasonable times and at the location where such records are kept by the Company. 13.5 Tax Matters Partner. Should there be any controversy with the Internal Revenue Service or any other taxing authority involving the Company, the Managers 16 may expend such funds as they deem necessary and advisable in the interest of the Company to resolve such controversy satisfactorily, including, without being limited thereto, attorneys' and accounting fees. Aurora Bay Investments, L.L.C. is hereby designated as the 'Tax Matters Partner" as referred to in Section 6231(a)(7)(A) of the Code and is specially authorized to exercise all of the rights and powers now or hereafter granted to the Tax Matters Partner under the Code. Any cost incurred in the audit by any governmental authority of the income tax returns of a Member (as opposed to the company) shall not be a Company expense. The Managers agree to consult with and keep the Members advised with respect to (i) any income tax audit of a Company income tax return, and (ii) any elections made by the Company for federal, state, or local income tax purposes. 13.6 Tax Returns. The Managers shall, at Company expense, cause the Company to prepare and file a United States Partnership Return of Income and all other tax returns required to be filed by the Company for each fiscal year of the Company. 13.7 Tax Elections. The Managers shall be permitted in its discretion to determine whether the Company should make an election pursuant to Section 754 of the Code to adjust the basis of the assets of the Company. Each of the Members shall, upon request, supply any information necessary to properly give effect to any such election. In addition, the Manager, in its sole discretion, shall be authorized to cause the Company to make and revoke any other elections for federal income tax purposes as they deem appropriate, necessary, or advisable. 14. Transfers of Company Interests; Withdrawal and Admission of Members 14.1 General Provision. No Member may voluntarily or involuntarily, directly or indirectly, sell, transfer, assign, pledge, or otherwise dispose of or mortgage, pledge, hypothecate, or otherwise encumber, or permit or suffer any encumbrance of all or any part of such Member's interest in the Company, except as provided in this Section 14. Any other purported sale, transfer, assignment, pledge, or encumbrance shall be null and void and of no force or effect whatsoever. Notwithstanding anything in this agreement to the contrary, each of the Members is authorized to grant to Emeritus a first priority and exclusive security interest in such Members Interest in the Company to secure the Company's performance under the Credit Agreement and related documents. 14.2 Withdrawal of Member. A Member shall have no power to withdraw voluntarily from the Company, except that a Member may withdraw upon written approval of a majority of the non- withdrawing Members voting by Percentage Interests, which approval shall include the terms for redemption by the Company of the Interest of such Member. 14.3 Transfer by Members. (a) Subject to any restrictions on transferability required by law or contained elsewhere in this Agreement, a Member may transfer such Member's entire interest in the Company upon satisfaction of the following conditions: (i) The transfer shall be approved in writing by the 17 Members and Emeritus, which approvals may be granted or denied in their sole discretion. (ii) The transferor and transferee shall have executed and acknowledged such reasonable and customary instruments as the Members may deem necessary or desirable to effect such transfer; and (iii) The transfer does not violate any applicable law or governmental rule or regulation, including, without limitation, any federal or state securities laws. (b) At the time of a transfer of any Member's interest, whether or not such transfer is made in accordance with this Section 14.3, all the rights possessed as a Member in connection with the transferred interest, which rights otherwise would be held either by the transferor or the transferee, shall terminate against the Company unless the transferee is admitted to the Company as a Substitute Member pursuant to the provisions of Section 14.4 hereof; provided, however, that if the transfer is made in accordance with this Section 143, such transferee shall be entitled to receive distributions to which his transferor would otherwise be entitled from and after the effective date of such transfer, which date shall be specified by the Managers and shall be no later than the last day of the calendar month following the first calendar month during which the Managers have received notice of the transfer and all conditions precedent to such transfer provided for in this Agreement have been satisfied. 'The Company and the Managers shall be entitled to treat the transferor as the recognized owner of such interests until such effective date and shall incur no liability for distributions made in good faith to the transferor prior to the effective date. (c) Notwithstanding any other provision of this Agreement, a Member may not transfer such Member's interest in any case if such a transfer, when aggregated with all other transfers within a twelve (12)-month period, would cause the termination of the Company as a partnership for federal income tax purposes pursuant to Section 708 of the Code, unless such transfer has been previously approved by the Manager. 14.4 Admission of Transferees as Members (a) No transferee of a Member shall be admitted as a Member unless a11 of the following conditions have been satisfied: . (i) The transfer complies with Section 14.3; (ii) The prospective transferee has executed an instrument, in form and substance satisfactory to the Manager, accepting and agreeing to be bound by all the terms and conditions of this Agreement, including the power of attorney set forth in Section 17 hereof and has paid all expenses of the Company in effecting the transfer; (iii) All requirements of the Act regarding the admission of a 18 transferee Member have been complied with by the transferee, the transferring Member, and the Company; and (iv) Such transfer is effective in compliance with all applicable state and federal securities laws. (b) In the event of a transfer complying with all the requirements of Section 14.3 hereof. and the transferee being admitted as a Member pursuant to this Section 14.4, the Manager, for itself and for each Member pursuant to the Power of Attorney granted by each Member, shall execute an amendment to this Agreement and file any necessary amendments to the articles of organization for the Company. Unless named in this Agreement, as amended from time to time, no person shall be considered a Member. 14.5 Admission of Additional Members. Additional Members of the Company may be admitted if a proposed additional Member desires to purchase an Interest from the Company, such purchase may be made and the admission of the additional Member shall become effective only if approved by unanimous vote of the existing Members and Emeritus and compliance with the provisions of this Section 14.5 and 14.4(a)(ii), (iii), and (iv) hereof. Notwithstanding anything in this Agreement to the contrary, Emeritus will be admitted, without requiring additional consents or approvals of the Members or the Managers or the taking of any other action, as substitute or additional Member, should it exercise its rights to acquire the Interest of a Member pursuant to the pledge given to Emeritus to secure performance under the Credit Agreement. There are no additional conditions to Emeritus' admission to the Company under those circumstances. The Company will, however, cause an amendment to this Agreement to be promptly prepared to evidence Emeritus' decision to acquire such equity interest in the Company. Emeritus' rights as a new Member are, however, not contingent upon the Company's preparing such an amendment; 15. Resignation and Admission of Manager. 15.1 Resignation of Manager. A Manager shall not be entitled to resign as Manager. Moreover, if a Manager resigns in contradiction to this prohibition, such resigning Manager shall be liable to the Company for any and all damages, liabilities, costs, and expenses incurred by the Company or the other Members as a result of such resignation. 15.2 Death or Incompetency of Manager. A Manager shall cease to be a Manager upon the death, incompetency, bankruptcy, or dissolution of such Manager. 15.3 Removal of a Manager. A Manager that is a Member may be removed as a Manager upon the unanimous written approval of the remaining Members. A Manager that is not a Member may be removed as a Manager upon the unanimous written approval of Members, provided any Member which is owned in whole or in part by the Manager sought to be removed shall not be entitled to vote on such Manager's removal, and the unanimous written approval of the remaining Members shall be necessary and sufficient to remove such Manager. Removal of a Manager who is a Member of the Company, pursuant to this Section 15.3, shall not affect such Manager's interest as a Member of the Company, if any. 19 15.4 Appointment of a New or Replacement Manager. A new or replacement Manager may be appointed with the written approval of Members holding a majority of the Percentage Interests of the Company and by Emeritus, provided, however, that at all times there must be at least one Manager in the Company. 15.5 Automatic Removal of a Manager. In the event Craig W. Spaulding ceases to be a Member of Aurora Bay Investments, L.L.C. for any reason, he shall simultaneously cease to be a Manager. In the event Erwin Investors I, L.L.C. ceases to be a Member of Aurora Bay Investments, L.L.C. for any reason, Jerry Erwin shall simultaneously cease to be a Manager. 16. Dissolution, Winding Up, and Termination 16.1 Events Causing Dissolution. The Company shall be dissolved and its affairs shall be wound up upon the happening of the first to occur of any of the following events: (aj Expiration of the term of the Company stated in Section 6 hereof; (b) Entry of a decree of administrative or judicial dissolution pursuant to the Act; (c) The sale or other disposition of all or substantially all of the assets of the Company; (d) The death, incompetence, withdrawal, expulsion, resignation, removal, bankruptcy, or dissolution of the last remaining Manager of the Company, unless (i) within 120 days of such occurrence, Members owning at least a majority of Percentage Interests in the Company, consent to the appointment of a new Manager(s) in accordance with Section 15.4, in which case the business of the Company shall be carried on by the newly appointed Manager(s); (e) The unanimous written approval of the Members to dissolve. 16.2 Winding Up. (a) Upon dissolution of the Company for any reason, the Managers shall commence to wind up the affairs of the Company and to liquidate its assets. In the event the Company has terminated because the Company lacks a Manager, then the remaining Members shall appoint a new Manager solely for the purpose of winding up the affairs of the Company. The Managers shall have the full right and unlimited discretion to determine the time, manner, and terms of any sale or sales of Company Property pursuant to such liquidation. Pending such sales., the Managers shall have the right to continue to operate or otherwise deal with the assets of the Company. A reasonable time shall be allowed for the orderly winding up of the business of the Company and the liquidation of its assets and the discharge of its liabilities to creditors so as to enable the Managers to minimal the normal losses attendant upon a liquidation, having due regard to the activity and condition of the relevant markets for the Company properties and general financial and economic conditions. . 20 (b) The Managers shall cause the proceeds from the sale and liquidation of the Company's property to be applied and distributed in the following order: (i) First to the payment and discharge of all of the Company's debt and liabilities to creditors, including payments of any Project Loans and Subsidiary Loans and other loans from Members and their affiliates, and all expenses of liquidation; (ii) Second, after giving effect to all the allocations required to be made under this Agreement, to Members in proportion to their Capital Account balances; and (iii) Thereafter, the balance, if any, to the Members in proportion to their Percentage Interests. (c) It is intended and anticipated that the amount of case distributed upon a termination or dissolution of the Company should equal the sum of the Members' Capital Accounts after adjustments of such balance in accordance with Sections 7 and 8 hereof. 16.3 Certificate of Cancellation; Report; Termination. Upon the dissolution and completion of winding up of the Company, the Managers shall execute and file a certificate of cancellation for the Company. Within a reasonable time following the completion of the liquidation of the Company's assets, the Managers shall prepare and furnish to each Member, at the expense of the Company, a statement which shall set for the assets and liabilities of the Company as of the date of complete liquidation and the amount of each Member's distribution pursuant to Section 162 hereof Upon completion of the liquidation and distribution of all Company funds, the Company shall terminate, and the Managers shall have the authority to execute and file all documents required to effectuate the termination of the Company. 17. Special and Limited Powers of Attorney (a) The Managers shall at all times during the existence of the Company have a special and limited power of attorney as the authority to act in the name and on the behalf of each Member to make, execute, swear to, verify, acknowledge, and file the following documents and any other .documents deemed by the Managers to be necessary for the business of the Company; (b) This Agreement, any separate certificate of formation, fictitious business name statements, as well as any amendments to the foregoing which under the laws of any state are required to be fled or which the Managers deem it advisable to file; (c) Any other instrument or document which may be required to be filed by the Company under the laws of any state or by any governmental agency or which the Managers deem advisable to file; and (d) The special and limited power of attorney granted to the Manager hereby: 21 (i) Is a special and limited power of attorney coupled with an interest, is irrevocable, shall survive the dissolution or incompetency of the granting Members and is limited to those matters herein set forth; (ii) May be exercised by the Managers(or by any authorized officer of the Manager, if not a natural person) for each Member by referencing the list of Members on Appendix A and executing any instrument with a single signature acting as attorney-in-fact for all of them; (iii) Shall survive a transfer by a Member of such Member's interest in the Company pursuant to Section 14.3 hereof for the sole purpose of enabling the Managers to execute, acknowledge, and file any instrument or document necessary or appropriate to admit a transferee as a Member; and (iv) Notwithstanding the foregoing, in the event that a Manager ceases to be a Manager in the Company, the power of attorney granted by this Section 17 to such Manager shall terminate immediately; but any such termination shall not affect the validity of any documents executed prior to such termination or any other actions previously taken pursuant to this power of attorney or in reliance upon its validity, all of which shall continue to be valid and binding upon the Members in accordance with their terms. 18. Amendments. Except as otherwise provided by law, this Agreement may be amended in any respect by the unanimous written approval of the Members and Emeritus. 19. Miscellaneous. 19.1 Notices. Any notices or communications required or permitted to be delivered hereunder must be in writing and shall be deemed to be delivered (i) upon receipt if delivered personally or (ii) upon deposit in the United States Mail, certified, return receipt requested, postage prepaid, addressed to the Members, as the case may be, or (iii) upon receipt of a facsimile transmission, at the following addresses and/or facsimile numbers: Aurora Bay I, L.L.C. Attention: Craig W. Spaulding 5720 LBJ Freeway Suite 450, Lock Box 16 Dallas, Texas 75240 Phone: 972-458-0025 Fax #: 972-458-2233 Aurora Bay Investments, L.L.C. Attention: Craig w. Spaulding 5720 LBJ Freeway Suite 450, Lock Box 16 Dallas, Texas 75240 22 Phone: 972-458-0025 Fax #: 972-458-2233 Erwin Investors I, L.L.C. Attention: Jerry Erwin 9817 N.E. 54th Street Vancouver, Washington 98662 Phone: 360-254-9442 Fax #: 360-254-1770 Mr. Craig W. Spaulding 5720 LBJ Freeway Suite 450, Lock Box 16 Dallas, Texas 75240 Phone: 972-458-0025 Fax #: 972-458-2233 Mr. Jerry Erwin 9817 N.E. 54th Street Vancouver, Washington 98662 Phone: 360-254-9442 Fax #: 360-254-1770 19.2 Entire Agreement. This Agreement constitutes the entire agreement among the parties and supersedes any prior agreement or understandings among them, oral or written, all of which are hereby cancelled. This Agreement may not be modified or amended other than pursuant to Section 18 hereof. 19.3 Captions: Pronouns. The paragraph and section titles or captions contained in this Agreement are inserted only as a matter of convenience of reference. Such titles and captions in no way define, limit, extend, or describe the scope of this Agreement nor the intent of any provision hereof All pronouns and any variation thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the identify of the person or persons may require. 19.4 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and that same agreement. Delivery of any executed counterpart of a signature page to this Agreement by facsimile shall be effective as delivery of an executed original counterpart of this Agreement. 19.5 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Washington. 19.6 Expiration of Emeritus' Rights. The rights granted to Emeritus will expire and be of no further force and effect if the following conditions is satisfied: (i) Emeritus does not exercise its right to convert the Emeritus Corporation Loan into an equity interest in the Company prior to the expiration of such right under the Convertible Promissory Note, and (ii) the Managers discharge, and each of the Members discharges, in full any and all obligations it owes to Emeritus under the Credit Agreement, the Convertible Promissory Note, and any and all other documents executed in connection 23 therewith. IN WITTINESS WHEREOF the parties have executed this Agreement as of the date first hereinabove written. MEMBERS: Aurora Bay Investments, L.L.C., a Washington limited liability company By: /s/ Craig W. Spaulding ------------------ ------------------- Craig W. Spaulding, Manager By: /s/ Jerry Erwin ----------------- ------------------ Jerry Erwin, Manager ERWIN INVESTORS I, L.L.C., a Washington limited liability company By: /s/ Jerry Erwin ----------------- --------------- Jerry Erwin, Manager 24 EX-10.79.9 29 EX 10.79.9 DEVELOPMENT SERVICES AGREEMENT (Lubbock, Texas) This Development Services Agreement (Lubbock, Texas) ("Agreement") is made and entered into as of the 9th day of January, 1998, by and between LUBBOCK GROUP, LTD., a Texas limited partnership (hereinafter referred to as "Owner") and SOUTH BAY PARTNERS, INC., a Texas corporation ("South Bay"). A. Owner has an interest in acquiring real property in or around the City of Lubbock, Texas (hereinafter referred to as the "Property"), to construct thereon an Alzheimer's special care facility ("ALZ") to provide room, board, and personal care services primary to the elderly afflicted with Alzheimer's disease; B. Owner wishes to employ the services of South Bay for the furnishing of services to and for the benefit of Owner in connection with the development of the Property; and C. The parties hereto desire to enter into this Agreement to evidence the respective rights and obligations of the parties with respect to the acquisition and development of the Property by the Owner. NOW, THEREFORE, for and in consideration of the premises, the mutual covenants and agreements contained herein and Ten and No/100 Dollars ($10.00) and other good and valuable consideration received by each of the parties hereto, Owner and South Bay hereby agree as follows: 1. COMMENCEMENT DATE AND TERM. This Agreement shall become effective on the date hereof and shall continue until the ALZ has been constructed upon the Property, and the Owner accepts the completion of the final "punch list" required to be performed by the general contractor employed to construct the ALZ subject to the right of Owner to terminate this Agreement as provided herein. 2. APPOINTMENT AND ACCEPTANCE. Owner hereby appoints South Bay to act as an agent for Owner with respect to the services to be rendered hereunder, and South Bay hereby accepts such appointment subject to the terms and conditions herein set forth. 3. ADMINISTRATIVE AND MANAGEMENT SERVICES. South Bay shall provide for Owner all services with respect to the Property as set forth herein and such additional duties and responsibilities as are reasonable within the general scope of such services and responsibilities. South Bays services shall be performed on behalf of Owner and shall consist of the duties -set forth below. Subject to the provisions of paragraph 4 hereof South Bay is authorized to and shall perform the following: (a) Negotiate in the name of and on behalf of Owner, and submit to Owner for its approval and execution, (i) an agreement for the acquisition of the Property and (ii) a construction contract with a general contractor to construct and place an ALZ into operation upon the Property. (b) Negotiate in the name of and on behalf of, Owner an agreement with an Architect acceptable to Owner, to provide all architectural services in connection with the design, planning, and construction of the ALZ upon the Property, which agreement shall also include services to be performed by other professional consultants engaged and supervised by the Architect, to-wit: (1) civil engineering, (2) structural engineering, (3) food service design, (4) mechanical, electrical, and plumbing engineering, (5) geotechnical services, (6) environmental testing, and such other consultants as South Bay and/or the Architect shall deem necessary or required, and Owner shall approve, in connection with the design, planning, and construction of the ALZ on the Property. Owner agrees to pay to Architect, monthly as invoiced by South Bay, for a11 fees and costs charged and approved by Owner for the services to be performed by the Architect and the other consultants engaged by the Architect, which amounts shall not be credited to and applied toward the Fee, as that term is hereinafter defined. Site plans, design drawings, and construction drawings and specifications prepared by or under the supervision of the Architect shall be subject to Owner's written approval. Owner shall look solely to the Architect for the content of the services performed by the Architect and the consultants engaged and/or supervised by the Architect. (c) Assist Owner in the preparation of a budget for the acquisition and development of the Property for the period from the date of this Agreement to the date of issuance of a certificate of occupancy by the applicable authority of the municipality in which the Property is situated and periodically (not less often than monthly) update the budget. (d) Provide review of construction in progress to assure conformance with site plan and construction drawings and specifications and adherence to budget and construction schedules. (e) Preparation and compilation of the general draw, including review of each draw request from the general contractor and other parties that contracted directly with Owner to perform services and/or supply materials to the project and give Owner its comments with respect to each such draw request. (f) Advise Owner concerning all insurance respecting the project, including the type and amount of insurance coverage. (g) Advise Owner concerning, and assist Owner in obtaining, all licenses and permits required to construct an ALZ upon the Property and place the same into operation. (h) Provide Owner with a monthly written report of the status of the project in such detail as Owner may reasonably request. (i) Provide Owner with other reasonable services in connection with the acquisition of the Property and construction of an ALZ thereon as may be mutually agreed to by Owner and South Bay. (j) Negotiate and execute in the name of Owner, for and on behalf of Owner, agreements for geotechnical services and environmental testing with firms (hereinafter referred to as "Engineering Firms") acceptable to South Bay and approved by Owner, to provide those services in connection with the development of an ALZ upon the Properly. Owner agrees to pay to said Engineering Firms, monthly as invoiced by South Bay, all fees and costs charged and approved by Owner for the services to be performed by the Engineering Firms, which amounts shall not be credited to and applied toward the Fee, as that term is hereinafter defined. Owner shall look solely to the Engineering Firms for the content of services performed by them. 4. LIMITATIONS AND RESTRICTIONS. Notwithstanding any other provision of this Agreement to the contrary, South Bay shall not bind or attempt to bind Owner or incur any obligation on behalf of Owner. South Bay makes no representation or warranty to Owner respecting the total cost to acquire the Property or the cost to construct and place into operation an ALZ upon the Property. 2 5. SOUTH BAYS FEE. In consideration for the services to be rendered by South Bay hereunder, Owner hereby agrees to pay South Bay a fee (the "Fee") in the amount of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00), payable as follows: on the date the agreement to acquire the Property between Owner and the owner of the Property is closed, Owner shall pay South Bay the sum of $37,500.00; on the date of completion of the improvements, Owner shall pay South Bay the sum of $37,495.00; and, the sum of $10,715.00 each month commencing on the fifteenth day of the first month after commencement of construction and a like amount due on the fifteenth day of each succeeding month until the total Fee has been paid. Any unpaid balance of the Fee remaining unpaid on the date a certificate of occupancy ("CO") is issued by the municipality in which the Property is situated shall be paid within thirty (30) days following the date of the CO. Owner shall reimburse South Bay for all travel expenses and costs incurred by South Bay in the performance of its duties hereunder, monthly upon receipt of an invoice from South Bay for such costs and expenses. South Bay shall not be responsible for payment of any of Owner's acquisition, development, or operating costs, including, without limitation, those costs incurred or paid by South Bay by reason of the agreements entered into and negotiated by South Bay for the benefit of Owner. 6. DEFAULT BY OWNER. (a) In the event of default by Owner hereunder, South Bay shall give Owner written notice of default and an opportunity to cure such default as follows: (i) With respect to a monetary default, Owner shall have fifteen (15) days to cure; and (ii) With respect to a nonmonetary default, Owner shall have thirty (30) days to cure; provided, however, in the event any nonmonetary default cannot reasonably be cured within the thirty (30) day period, Owner shall not be deemed in default hereunder if Owner commences to cure said nonmonetary default within said thirty (30) day period and, thereafter, diligently causes such default to be cured. (b) The cure period shall commence upon delivery of written notice of default but not later than three (3) days after such written notice is deposited in the United States mail, certified mail, return receipt requested, or upon actual receipt by the intended recipient if hand delivered. (c) In the event the default is not timely cured, South Bay may: (i) Terminate this Agreement and/or bring suit for damages as South Bays sole and exclusive remedies hereunder. 7. DEFAULT BY SOUTH BAY. (a) In the event of default by South Bay hereunder, Owner shall give South Bay written notice of default and an opportunity to cure such default as follows: (i) With respect to a monetary default, South Bay shall have fifteen (15) days to cure; and (ii) With respect to a nonmonetary default, South Bay shall have thirty 3 (30) days to cure; provided, however, in the event any nonmonetary default cannot reasonably be cured within the thirty (30) day period, South Bay shall not be deemed in default hereunder if South Bay commences to cure said nonmonetary default within said thirty (30) day period and, thereafter, diligently causes such default to be cured. (b) The cure period shall commence upon delivery of written notice of default but not later than three (3) days after such written notice is deposited in the United States mail, certified mail, return receipt requested, or upon actual receipt by the intended recipient if hand delivered. (c) In the event the default is not timely cured, Owner may: (i) Terminate this Agreement and/or enforce specific performance of this Agreement as Owner's sole and exclusive remedies hereunder. 8. TERMINATION RIGHTS. Notwithstanding anything in agreement to the contrary, if there is an event of default under that certain Credit Agreement dated as of January 7th, 1998, between Aurora Bay Investments, L.L.C. ("Aurora Bay") and Emeritus Corporation ("Emeritus"), Emeritus may, but has no obligation to, terminate this Agreement by giving written notice of such termination directly to Owner and South Bay. Such notice shall be effective upon its delivery to Owner and South Bay. Should Emeritus exercise its termination rights hereunder, Emeritus may thereafter designate a new party to provide similar development services to Owner, upon such terms and conditions as Emeritus may stipulate. This paragraph may not be amended by Owner and South Bay without Emeritus' prior written consent, as long as any amounts are due and owing from Aurora Bay to Emeritus under the Credit Agreement or any of the Loan Documents as that term is defined in the Credit Agreement. Upon termination hereof Owner or Emeritus shall pay to South Bay all amounts then due hereunder, prorated for any partial monthly fee due under paragraph 5 hereof. 9. INDEMNITY. (a) Owner hereby indemnifies, defends, and holds South Bay, its partners, shareholders, directors, officers, agents, and employees harmless of and from all loss, liability, costs, attorney fees, and expenses incurred, paid or suffered by South Bay and claims asserted against South Bay, its partners, shareholders, directors, officers, agents, and employees in connection with the acquisition of the Property and the construction of improvements thereon and/or claims arising out of the performance of South Bay's obligations and duties hereunder (except where arising out of the negligence or willful misconduct of South Bay or any of its employees, its partners, shareholders, directors, officers, agents, or employees). (b) South Bay hereby indemnifies, defends, and holds Owner, its shareholders, directors, officers, agents, and employees harmless of and from all loss, liability, costs, attorney fees, and expenses incurred, paid, or suffered by Owner and claims asserted against Owner, its shareholders, directors, agents, and employees arising out of the negligence or willful misconduct of South Bay or any of its employees or agents in the performance of South Bays obligations and duties hereunder (except where arising out of the negligence or willful misconduct of Owner or any of its employees, its shareholders, directors, agents, or employees). 10. ARBITRATION. 4 (a) Owner and South Bay agree to settle any and all disputes by binding arbitration as provided in this Section 9. In the event of any such unresolved dispute, arbitration may be instituted by either party hereto by giving written notice to the other party of its intention to arbitrate the matter(s) specified in the notice. If Owner and South Bay cannot agree (within fifteen (15) days from the service of such notice upon the other) as to the selection of such arbitrator, the arbitrator shall be designated in accordance with the Rules of the American Arbitration Association. Arbitration shall be conducted in accordance with the rules and procedures of the American Arbitration Association. The decision rendered in any arbitration proceeding hereunder shall be binding on Owner and South Bay and may be entered in any court having jurisdiction thereof. In determining any matter before them, arbitrators shall apply the provisions of this Agreement without varying therefrom in any respect. The arbitrators shall not have the power to add to, modify, or change any portion of this Agreement. (b) Owner and South Bay shall pay the fees and expenses of its own counsel and witnesses. All other fees and expenses of arbitration shall be shared equally by Owner and South Bay unless the arbitrators conclude that one party has not acted in good faith, in which event they may assign fees and expenses. 11. MISCELLANEOUS. (a) All notices required or permitted hereunder shall be given in writing by actual delivery or by facsimile transmission, with a concurrent copy sent by certified U. S. mail, postage prepaid to Owner, by addressing the same to: Lubbock Group, Ltd. Attention: Jerry Erwin 9817 N. E. 54th Street Vancouver, WA 98662 Fax # 360-254-1770 to South Bay, by addressing the same to: South Bay Partners, Inc. Attention: Mr. Craig W. Spaulding 5720 LBJ Freeway Suite 450, Lock Box 16 Dallas, Texas 75240-6339 Fax # 214-458-2233 or to such other address or to such other person as may be designated by notice given from time to time during the Term hereof by one party to the other. Any notice hereunder shall be deemed given upon delivery or not later than three (3) business days after depositing with the U. S. Postal Service in the manner described above. (b) If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to the persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby; and, each term and provision of this Agreement shall be valid and be 5 enforced to the fullest extent permitted by law. (c) This Agreement contains the entire agreement between the parties hereto with respect to the matters herein contained, and any agreement hereafter made shall be ineffective to effect any change or modification, in whole or in part, unless such agreement is in writing and signed by the party against whom enforcement of the change or modification is sought. (d) Neither Owner nor South Bay may assign all or part of this Agreement without the prior written approval of the party. This Agreement shall be binding upon and inure to the benefit of Owner and South Bay, as well as to their respective successors and assigns, where permitted hereby. (e) In the event of a default hereunder, if the nondefaulting party employs an attorney to enforce its rights hereunder, the defaulting party shall be liable for all reasonable attorneys' fees, court costs, and other collection expense incurred by the nondefaulting party regardless of whether a lawsuit is filed. (f) Time is of the essence of this Agreement. (g) THIS AGREEMENT HAS BEEN MADE AND EXECUTED IN, AND SHALL BE GOVERNED BY THE LAWS OF, THE STATE OF TEXAS. (h) Nothing contained herein shall be deemed to create a joint venture, partnership, or similar relationship between the parties. (i) South Bay is acting hereunder as the agent for Owner. (j) This Agreement may be executed in any number of counterparts, each of which shall constitute one and the same agreement. 6 EXECUTED as of the date first above written. OWNER: LUBBOCK GROUP, LTD., a Texas limited partnership By: Aurora Bay I, L.L.C., a Washington limited liability company, General Partner By: Aurora Bay Investments, L.L.C., Member By: /s/ Jerry Erwin - ---------------------------------- Jerry Erwin, a Manager SOUTH BAY PARTNERS, INC., a Texas corporation By: /s/ Craig W. Spaulding - ------------------------------------------------ Craig W. Spaulding, President 7 EX-21.1 30 EX 21.1 SUBSIDIARIES OF EMERITUS CORPORATION Acorn Service Corporation, Washington corporation ALAI, L.L.C., Arizona corporation EMAC Corp., Delaware corporation EmeriCare, Inc., Washington corporation EmeriCare of Arizona, Inc., Washington corporation EmeriCare of Washington, Inc., Washington corporation Emeritus Canada Ltd., Toronto, Ontario Emeritus Employee Leasing, Inc., Washington corporation Emeritus Home Health, Inc., Washington corporation Emeritus Properties I, Inc., Washington corporation, Emeritus Properties II, Inc., Washington corporation Emeritus Properties III, Inc., Washington corporation Emeritus Properties IV, Inc., Washington corporation Emeritus Properties V, Inc., Washington corporation Emeritus Properties VI, Inc., Washington corporation Emeritus Properties of Illinois, Inc., Washington corporation Emeritus Real Estate L.L.C., Delaware limited liability company Emeritus Real Estate II, L.L.C., Delaware limited liability company Emeritus Real Estate IV, L.L.C., Delaware limited liability company ESC G.P. I, Inc., Washington corporation ESC G.P. II, Inc., Washington corporation ESC I, L.P., Washington limited partnership ESC II, L.P., Washington limited partnership ESC III, L.P., Washington limited partnership Cooper George Partners LTD. Partnership, Washington limited partnership Fairfield Retirement Center L.L.C., Delaware limited liability company Grand Terrace L.L.C., Delaware limited liability company Heritage Hills Retirement, Inc., North Carolina corporation Painted Post Partnership, Pennsylvania general partnership TDC/Emeritus Paso Robles Associates, Washington partnership EX-23.1 31 EX 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Emeritus Corporation We consent to incorporation by reference in the registration statements (No. 333-05965) on Form S-8 and (No. 333-20805) on Form S-3 of Emeritus Corporation of our report dated February 27, 1998, except for note 10 as to which the date is March 13, 1998, relating to the consolidated balance sheets of Emeritus Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders equity (deficit), and cash flows and the related schedule for each of the years in the three year period ended December 31, 1997, which reports appears in the December 31, 1997, annual report on Form 10-K of Emeritus Corporation. /s/ KPMG Peat Marwick, LLP Seattle, Washington March 27, 1998 EX-27.1 32
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES F-4 AND F-5 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 17,537 17,235 2,539 (348) 369 50,793 153,532 (7,701) 228,573 38,719 162,097 25,000 0 1 1,206 228,573 0 117,772 0 139,323 (610) 0 8,427 (28,636) 0 (28,636) 0 0 0 (28,636) (2.60) (2.60)
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