-----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, HRL7eLQYCzLjm/lmNvLTqDKC6G3JEJY+tmWi/Jrky4W2LHSUbArrHfhKJZlziOHk 3FLaFxgzh4uRSbrOMXNUcg== 0001047469-99-013009.txt : 19990402 0001047469-99-013009.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-013009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99583178 BUSINESS ADDRESS: STREET 1: 3131 ELLIOTT AVENUE STREET 2: SUITE 500 CITY: SEATTLE STATE: WA ZIP: 98121 BUSINESS PHONE: 206-298-29 MAIL ADDRESS: STREET 1: MARKET PLACE ONE STREET 2: 2003 WESTERN AVE SUITE 660 CITY: SEATTLE STATE: WA ZIP: 98121-2162 10-K 1 10-K 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, 1998. 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, 1998 WASHINGTON 91-1605464 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3131 Elliott Avenue, Suite 500 Seattle, WA 98121 (Address of principal executive offices) (206) 298-2909 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 () 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 23, 1999 was $72,089,716. As of March 23, 1999, 10,487,050 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 1999 Annual Meeting of Stockholders to be held on May 19, 1999. EMERITUS CORPORATION Index Part I
PAGE NO. -------- Item 1. Description of Business................................................................................... 1 Item 2. Description of Property................................................................................... 13 Item 3. Legal Proceedings......................................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders....................................................... 18 Executive Officers of the Registrant...................................................................... 18 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 20 Item 6. Selected Financial Data.............................................................................. 21 Item 7. Management's Discussion and Analysis of Financial condition and Results of Operations................ 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................... 29 Item 8. Financial Statements and Supplementary Data.......................................................... 29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 29 Part III Item 10. Directors and Executive Officers of the Registrant.................................................... 30 Item 11. Executive Compensation................................................................................ 30 Item 12. Security Ownership of Certain Beneficial Owners and Management........................................ 30 Item 13. Certain Relationships and Related Transactions........................................................ 30 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................... 30
PART I ITEM 1. DESCRIPTION OF BUSINESS OVERVIEW AND BACKGROUND Emeritus Assisted Living - Emeritus Corporation ("Emeritus" or the "Company") is a nationally integrated assisted living organization focused on operating residential style communities. Emeritus is one of the largest and most experienced providers of assisted living communities. Assisted living communities provide a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services. The Company was founded in July 1993 to become a nationwide operator of assisted living communities. During the 16 years prior to 1987, Daniel R. 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. Mr. Baty left Hillhaven to pursue opportunities in the independent living market. In 1987, he became the chairman of the board and a 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. As of March 23, 1999 the Company held ownership, leasehold or management interests in 117 assisted living communities (the "Operating Communities") consisting of approximately 10,400 units with a capacity for 12,000 residents, located in 29 states. As of March 23, 1999, the Company leased 53 of its assisted living communities, owned 15 communities, managed or provided administrative services for 41 communities and had a partnership interest or joint venture in eight communities. Additionally, the Company holds a 31.3% minority interest in Alert Care Corporation ("Alert"), an Ontario, Canada based owner and operator of 21 assisted living communities consisting of approximately 1,200 units with a capacity for approximately 1,300 residents. See "Strategic Relationships --Alert Relationship". Of the 117 current Operating Communities, the Company has developed 48 and acquired 69 since its inception in 1993. Of the newly developed communities, 20 and 11 (six of which are managed) were opened during 1997 and 1998, respectively. As of March 23, 1999 the Company completed development on four additional communities and owned, had a leasehold interest in, management interest in or had acquired an option to purchase development sites for 17 new assisted living communities (the "Development Communities"). Of the Development Communities, 13 and four are scheduled to open during the remainder of 1999 and in 2000, respectively. The Development Communities contain capacity for 1,800 additional residents. After completion of the 1999 Development Communities and including Alert, the Company will have an interest in 151 communities with a total capacity for over 14,500 residents. Effective December 31, 1998, the Company completed a transaction whereby a related entity acquired 22 assisted living communities previously leased by the Company from Meditrust and three communities previously owned by the Company for a combined purchase price of approximately $168 million (the "Emeritrust transaction"). The Company is continuing to operate all 25 communities pursuant to a three year management agreement and will receive management fees equal to 5% of revenues, as well as an additional 2% of revenues contingent on such communities achieving positive cash flows. In addition, the Company has an option and a right of first refusal to purchase the 22 previously leased communities and the three previously owned communities, respectively, during the three year period at a purchase price equal to the original cost to the entity plus an amount calculated to provide the entity with a specified rate of return on its invested capital. The combined transaction will accomplish several strategic objectives for the Company including: (i) expected management fee income of $2.5 million in 1999 versus 1998 losses from operations from these communities of $11.0 million and (ii) an immediate improvement of approximately $800,000 in monthly cash flow from operations. Daniel R. Baty, the Company's Chairman and Chief Executive Officer, and William E. Colson, a director, have financial interests in the entity that is a party to this arrangement. THE ASSISTED LIVING INDUSTRY The Company believes the assisted living industry is steadily becoming a preferred alternative for meeting the growing needs of senior citizens who do not require the intensive medical attention provided by a skilled nursing facility, but cannot live independently due to physical and/or cognitive frailties. The assisted living industry is one of the fastest growing niche markets in the United States, projected to grow 150 percent by the year 2005, according to the U.S. Small Business Administration. The Company believes an assisted living environment is: - a residential setting that provides or coordinates personal services, 24-hour supervision and personalized assistance (scheduled and unscheduled), health-related services and activities in a professionally managed group environment; - designed to accommodate individual residents' changing needs and preferences; - intended to maximize resident's dignity, quality of life, autonomy, privacy, independence, choice and safety; - designed to minimize the need to move by providing a comprehensive range of assisted living services, including Alzheimer's care and other services allowing residents to "age in place" within the facility as they develop further physical and cognitive frailties; and - designed to encourage family and community involvement. The Company believes that assisted living has become the preferred approach to long-term care for seniors due to: (i) increased emphasis by both federal and state governments to contain long-term care costs; (ii) limitations imposed in many states on construction of additional skilled nursing facilities; and (iii) the relative affluence of the 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 the activities of daily living. Also, the limited availability of governmental payment programs has created a strong and growing market demand for non-institutional long-term care services designed to fill the gap between independent living facilities and skilled nursing facilities. OPERATING PHILOSOPHY The Company's operating philosophy is to provide a wide variety of assisted living services in a professionally managed environment while allowing its residents to maintain their dignity and independence. In addition, the Company continuously seeks to refine and improve the care and services it offers. Residents of the Company's communities are typically unable to live alone, but do not require the intensive care provided in skilled nursing facilities. Under the Company's operating approach, seniors reside in a private or semi-private residential unit for a monthly fee based on each resident's individual service needs. The Company believes its focus on residential assisted living communities allows seniors to maintain a more independent lifestyle than is possible in the institutionalized environment of skilled nursing facilities. In addition, the Company believes its services, such as assisting residents with their activities of daily living (including medication management, bathing, dressing, personal hygiene, and grooming) are attractive to seniors who are inadequately served by independent living facilities. RESIDENT SERVICES The Company's assisted living communities offer residents a full range of services based upon individual resident needs in a supportive "home-like" environment. By offering a full range of services, including FlexAssist programs and Alzheimer's Care, the Company can accommodate residents with a broad range of service needs and therefore enable residents to "age in place". Services provided by the Company to its residents are designed to respond to their individual needs and to improve their quality of life. BASIC CARE The Company's basic care program is provided to all residents and includes: three meals per day served in a common dining room; social and recreational activities; weekly housekeeping and linen service; building maintenance and grounds keeping; 24-hour emergency response and security; licensed nurses on staff to monitor and coordinate care needs; and transportation to appointments, etc. FLEXASSIST The Company's FlexAssist programs allow residents who require more frequent or intensive assistance or increased care or supervision to receive additional services. The FlexAssist program allows the Company, through consultation with the resident, the resident's physician and the resident's family, to create an individualized care program for residents who might otherwise be forced to move to a more medically-intensive facility. An individual resident's level of care is determined by the degree of assistance he/she requires in each of several categories. The categories of care include, but are not limited to: medication management and supervision; reminders for dining and recreational activities; assistance with bathing, dressing and grooming; incontinence; behavior management; dietary assistance; and miscellaneous (which consists of diabetic management, PRN medication, transfer, simple treatment, oxygen set up/maintenance and prosthesis). The Company charges an additional fee for these services based on the level of care provided. ALZHEIMER'S CARE Alzheimer's is a debilitating disease and persons afflicted with it require special care. The Company believes its Alzheimer's Care program distinguishes it from other assisted living providers who do not provide such specialized care. 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 provides limited reimbursement for the type of assisted living services provided by the Company. The Company currently serves a limited number of residents who receive aid from various states' (Washington, Florida, Texas and Massachusetts) financial assistance programs, some of which are an extension of federal recipient assistance programs, as well as from alternate sources, such as private insurance. 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 1997 and 1998 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 and other alternative forms of payment continue to grow, 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 or other reimbursement programs. COMPANY OPERATIONS OPERATING STRATEGY The Company believes there is a significant demand for alternative long-term care services that are well-positioned between the limited services offered by independent living facilities and the more medical and institutional care offered by skilled nursing facilities. The Company seeks to provide high-quality services in its assisted living communities while increasing operating margins primarily by: (i) increasing its focus on occupancy levels throughout the Company's portfolio; (ii) maintaining residents longer by providing programs that offer residents a full range of service options, enabling residents to "age in place" as their needs change; (iii) increasing revenues through modifications in rate structures; and (iv) identifying opportunities to create operating efficiencies and reduce costs. The Company believes its emphasis on quality and continuity of service will enable it to increase its communities' occupancy levels, thereby enhancing revenues. The Company also believes that the physical configuration of its facilities, combined with its diversified levels of service, contributes to resident satisfaction and allows seniors residing at the Company's communities to maintain their dignity and independence. During 1998 the Company: (i) increased its focus on community operations; (ii) slowed its development and acquisition activities in order to shift its focus from growth to operations; and (iii) disposed of select communities previously operated at a loss. The Company's increased focus on community operations is primarily the result of continued losses throughout the Company's portfolio and initially lower levels of occupancy than expected at the Company's communities. Since the focus shift to operations, the Company has generated substantial occupancy gains in its communities. Occupancy at December 31, 1998 was 81% compared to 72% at December 31, 1997. In addition, average occupancy for 1998 was 77% compared to 73% for 1997. The Company's slowed development and acquisition activities in 1998 decreased the Company's financial obligations thereby releasing its resources for other purposes. These additional resources enabled the Company to refine and improve community operations. The Company opened five newly developed communities in 1998 compared to 20 in 1997 and 11 in 1996. In addition, the Company acquired only two communities in 1998, compared to seven in 1997 and 35 in 1996. In an effort to reduce the impact of start-up losses from acquired and newly developed communities on its current portfolio, the Company began a major restructuring of its portfolio during 1998. This restructuring included an evaluation by the Company of the financial performance of its communities. For those communities with significant losses, the Company negotiated their sale of with buyers focused on the real estate component while the Company retained its focus on the operations through management agreements. To that end, in 1998 the Company disposed of interests in three assisted living communities to related parties, but has retained management agreements with respect to each community. These dispositions will generate expected management fees of $450,000 in 1999 versus 1998 net losses of $5.0 million. The Company retains a 20% interest in one community and holds notes that are convertible into a 20% interest in one other community. In addition, effective December 31, 1998, the Company completed a transaction whereby a related entity acquired 22 assisted living communities previously leased by the Company from Meditrust and three communities previously owned by the Company for a combined purchase price of approximately $168 million (the "Emeritrust transaction"). The Company is continuing to operate all 25 communities pursuant to a three year management agreement and will receive management fees equal to 5% of revenues, as well as an additional 2% of revenues contingent on such communities achieving positive cash flows. In addition, the Company has an option and a right of first refusal to purchase the 22 previously leased communities and the three previously owned communities, respectively, during the three year period at a purchase price equal to the original cost to the entity plus an amount calculated to provide the entity with a specified rate of return on its invested capital. The combined transaction will accomplish several strategic objectives for the Company including: (i) expected management fee income of $2.5 million in 1999 versus 1998 losses from operations from these communities of $11.0 million and (ii) an immediate improvement of approximately $800,000 in monthly cash flow from operations. Daniel R. Baty, the Company's Chairman and Chief Executive Officer, and William E. Colson, a director, have financial interests in the entity that is a party to this arrangement. In March 1999, the Company also completed the disposition of its leasehold interest in an additional 19 communities, consisting of 14 currently operational communities and five development communities (the "Emeritrust II communities") to a related entity in a similar transaction. The Company will continue to operate the Emeritrust II communities pursuant to a three year management contract and will receive management fees equal to 5% of revenues, as well as an additional 2% of revenues contingent on such communities achieving positive cash flows. In addition, the Company has an option to purchase the 19 communities during the three year period at a purchase price equal to the original cost to the entity plus an amount calculated to provide the entity with a specified rate of return on its invested capital. Management fee income of $1.8 million is expected to be generated from the 19 Emeritrust II communities in 1999 compared to 1998 net losses from these communities of approximately $300,000. ACQUISITIONS The Company has previously acquired, and will consider acquiring, if attractive opportunities are made available, existing assisted living communities. In evaluating possible acquisitions, the Company considers, among other factors: (i) location, construction quality, condition and design of the facility, (ii) the ability to generate revenue and cash flow and increase occupancy; (iii) costs of repositioning the community; and (iv) the extent to which the acquisition will complement the Company's existing portfolio of communities. 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. The Company leases one Medicare Certified skilled nursing facility (Heritage Health) pursuant to a multi-facility acquisition completed in February 1996. Due to the nature of sub-acute care services required in this skilled nursing facility, the Company has engaged third party managers who have the expertise and systems to operate a facility in this line of business. 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. DEVELOPMENT In 1998, the Company slowed its development activities in order to increase its focus on operations. In 1998 and 1997, the Company began operating five and 20 newly developed communities in which it has leasehold or ownership interests, respectively. The Company currently anticipates opening five additional developments in 1999, all of which will be disposed as part of the Emeritrust II transaction . 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. MANAGEMENT AGREEMENTS 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 Company currently provides management services for a total of 42 communities, representing 1999 annualized income of approximately $2.8 million. Eight of these 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." In conjunction with the closing of the Emeritrust transaction, the Company also operates 25 communities pursuant to a three year management agreement and will receive management fees equal to 5% of revenues, as well as an additional 2% of revenue contingent on such communities achieving positive cash flows. See "--Operating Strategy." ADMINISTRATION The Company employs an integrated structure of management, financial systems and controls to maximize operating efficiency and contain costs. In addition, the Company has developed the internal procedures, policies and standards it believes are necessary for effective operation and management of its assisted living communities. The Company has recruited experienced key employees from several established operators in the long-term-care services field and believes it has assembled the administrative, operational and financial personnel that will enable it to continue to manage its operating strategies effectively. The Company has established Central, Eastern and Western Operational Divisions. Each division is headed by a divisional director who reports to the Company's Vice President of Operations. Each division is comprised of several operating regions headed by a regional director who provides management support services for each of the communities in his/her respective region. Day to day community operations are supervised by an on-site community director who, in certain jurisdictions, must satisfy certain licensing requirements. The Company provides management support services to each of its residential communities, including establishing operating standards, recruiting, training, and financial and accounting services. The Company has centralized finance and other operational functions at its headquarters in Seattle, Washington in order to allow community-based personnel to focus on resident care. The Seattle office as a whole is responsible for: establishing Company-wide policies and procedures; financial and marketing functions; management of the Company's acquisition and development activities; and providing overall strategic direction to the Company. INFORMATION TECHNOLOGY The Company utilizes a blend of centralized and decentralized accounting and computer systems that link each community with the Company's headquarters. These systems enables the Company to closely monitor operating costs and quickly distribute financial and operating information to appropriate levels of management in a cost efficient manner. Management believes that its current data systems are adequate for current operations and provide the flexibility to meet the continued growth of its operations without disruption or significant modification to existing systems through fiscal year 1999. The Company uses high quality hardware and operating systems from current and proven technologies to support its current technology infrastructure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Year 2000". INTERNATIONAL EXPANSION Demographic trends in Japan suggest a tremendous future need for assisted living services as part of the health care system. The percentage of Japanese citizens over the age of 65 is expected to increase from 7.1% in 1970 to 23.3% by 2010. In April 1998 the Company entered into a joint venture, Sanyo Emeritus Corporation, with Sanyo Electric Company, Ltd. ("Sanyo") of Osaka, Japan to provide assisted living services in Japan. The Company's first assisted living community in Japan is under construction and is anticipated to open in December 1999. The community will be among the first assisted living communities in Japan to offer private apartments on a month-to-month rental. See "Strategic Relationships--Sanyo Relationship". BRANDING In 1998, the Company developed a brand concept for the Company's communities. The Company adopted the "Loyalton" name for its newly developed communities as well as selected existing communities. The Company believes that this branding will allow its residents, shareholders and employees to develop some brand loyalty and recognition of the Emeritus and Loyalton name throughout the Company's markets. 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 117 Operating Communities and 17 Development Communities, 29 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 --Holiday Relationship". STRATEGIC RELATIONSHIPS ALERT RELATIONSHIP 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 issued and outstanding shares of common stock of Alert and 950,000 issued and outstanding shares of Class A non-voting stock of Alert both at an exercise price of $3.25 per share (Cdn). If all options were exercised, the Company would own 60.0% of Alert. 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 23, 1999 there are approximately 23.9 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 Company's total investment in Alert represented on an as-converted basis approximately 24.2% of the outstanding common and Class A nonvoting shares combined. In 1998, the Company purchased an additional 3,300,000 shares of preferred stock resulting in an ownership interest of 31.3% or 10,888,466 shares. 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 23, 1999. 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 in which Mr. Baty holds an indirect 60% interest, develops, owns and leases low income senior housing projects. The Company has entered into 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 eight communities owned by Columbia House consisting of approximately 720 units and provides administrative services for another community consisting of approximately 100 units. HOLIDAY RELATIONSHIP Twenty-nine of the Company's Operating 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 (i) development of assisted living communities on sites near existing or proposed Holiday independent living facilities and (ii) 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. 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, the Company and a Holiday affiliate entered into four management agreements whereby a Holiday affiliate will provide management services relating to four assisted living communities located in Texas and developed by the Company. The Company sold interests in three of these communities in conjunction with the Emeritrust transaction, but Holiday will continue to manage all four properties in accordance with the original management agreements. The agreements consist of initial terms of two years six months and management fees based on 6% of gross revenues payable monthly. 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. 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 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 provides for cumulative quarterly dividend payments of 9% and has a mandatory redemption date of October 24, 2004. PAINTED POST PARTNERS RELATIONSHIP During 1995, the Company's two most senior executive officers, CEO and then current 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 non-competition agreements of the CEO and former President, each has agreed that in the event he were to cease as 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. SANYO RELATIONSHIP In April 1998, the Company entered into a joint venture with Sanyo to provide assisted living services in Japan. The joint venture, Sanyo Emeritus Corporation ("Sanyo Emeritus"), has been formed to provide a residential based health care alternative for Japan's growing elderly population. Sanyo Emeritus was initially capitalized with Y50 million ($384,000 US), with the Company and Sanyo each providing half the funds. The joint venture's first assisted living community in Japan is under construction and is anticipated to open in late 1999. Similar to the United States, the elderly population in Japan is experiencing dramatic growth. The percentage of Japan's citizens over 65 years of age is expected to increase from 7.1% in 1970 to 23.3% by 2010. 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 choosing their health care. COMPETITION The number of assisted living communities in the United States, the ownership of which is fragmented, is increasing rapidly. As the assisted living industry continues to grow, fewer attractive development sights may be available. This market saturation could have an adverse effect on the Company's newly developed communities and their ability to reach stabilized occupancy levels. 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 multi-facility operations. While there are several national and regional companies that provide senior living alternatives, the Company anticipates that its primary source of competition will originate 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, physical appearance and price will be significant competitive factors. Some of the Company's competitors have significantly greater resources, experience and recognition within the healthcare community than does the Company. EMPLOYEES As of December 31, 1998, the Company had 5,108 employees, including 3,627 full time employees, of which 92 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 sufficiently 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, but not limited to, 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. A number of the matters and subject areas discussed in this report are not historical or current facts and refer to potential future circumstances, operations, and prospects. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience involving any one or more of such matters and subject areas relating to demand, pricing, competition, construction, licensing, construction delays on new developments contractual and licensure, and other delays on the disposition of assisted living communities in the Company's portfolio, and the ability of the Company to continue managing its costs while maintaining high occupancy rates and market rate assisted living charges in its assisted living communities. The Company has attempted to identify, in context, certain of the factors that they currently believe may cause actual future experience and results to differ from the Company's current expectations regarding the relevant matter or subject area. 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 1997 and 1998, the Company recorded a net loss of $28.2 million and $31.0 million, respectively. These historical losses are attributable to the growth in the size of the Company's portfolio fueled by both acquisitions and developments. The majority of the acquired Operating Communities operate at a loss following acquisition and the Company expects such facilities to continue to operate at a loss for at least 12 to 18 months after the date of acquisition. Although the Company has slowed its development activities, it continues to develop new assisted living communities, all of which are expected to incur start-up losses for at least 12 months after commencing operations. As a result, the Company expects to continue to incur losses at least through the end of 1999. In an effort to reduce the impact of start-up losses from acquired and newly developed communities on its current portfolio, the Company began a major restructuring of its portfolio during 1998, selling its ownership and lease interests in 28 communities which represented net losses of $12.7 million and $16.5 million or 45% and 54% of the Company's 1997 and 1998 net losses, respectively. Continuing with this trend, in March 1999, the Company completed a disposition of an additional 19 communities with aggregate 1998 net losses of $300,000. See "Company Operations - Operating Strategy". There can be no assurance, however, that the Company's operations will become profitable at the rate currently expected by the Company, or 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, financial condition and the market price of its Common Stock. DIFFICULTIES INCREASING AND STABILIZING OCCUPANCY RATES; DIFFICULTIES CONTAINING COSTS Prior to the second quarter of 1998 the Company had experienced challenges regarding its ability to increase occupancy levels as well as its ability to match variable cost levels with occupancy. The Company's losses are partially the result of lower than expected occupancy levels at the Company's newly developed and acquired communities. In addition, the Company incurred higher than expected variable costs as it established staffing and other costs configurations to fluctuate effectively with occupancy. The Company has increased occupancy levels significantly in the last three quarters of 1998, filling more than 1,500 units. The Company has also improved and streamlined a cost containment program geared at matching costs with occupancy levels. However, there is no assurance that occupancy levels will continue to increase at the rate currently expected by the Company, or at all or that cost levels will continue to vary according to occupancy levels. The Company's inability to increase occupancy levels or to control costs throughout its portfolio could have an adverse effect on the Company's business, financial condition and operating results. SUBSTANTIAL DEBT AND LEASE OBLIGATIONS OF THE COMPANY At December 31, 1998, the Company had mortgage indebtedness in an aggregate amount of $125.4 million, with minimum principal payments estimated to be approximately $12.6 million in 1999. As of December 31, 1998, approximately $108.4 million principal amount of the Company's indebtedness bore interest at fluctuating rates; 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, 1998, the Company was also a party to long-term operating leases for 52 of its residential communities, which require minimum annual lease payments estimated to be approximately $29.8 million in 1999. In addition, the Company will have approximately $13.3 and $75.1 million in principal amount of debt repayment obligations that become due in 2000 and 2001, 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. 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 re-negotiate 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 has experienced negative operating cash flow due to its significant developments and acquisitions of assisted living communities since its inception. The Company expects its newly developed assisted living communities to generate positive cash flow nine to twelve 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. In an effort to reduce the impact of start-up losses from acquired and newly developed communities on its current cash flow, the Company began a major restructuring of its portfolio during 1998, selling its ownership and lease interests in 28 communities. See "Company Operations - Operating Strategy". 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 outstanding indebtedness secured by the community through sale/leaseback transactions. 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 and Colson, 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 him 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. 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. The loss of the services of Mr. Baty could have a material adverse effect on the Company's operating results and financial condition. 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 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 life of of Mr. Baty in the amount of $10.0 million. 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. In March 1999, Raymond R. Brandstrom and Frank A. Ruffo retired from their offices of President and Executive Vice President of the Company, respectively, and will continue consulting on behalf of the Company. Mr. Brandstrom will maintain his involvement in the Company's Board of Directors as Vice Chairman. 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 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. 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 excessive, 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. 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, but not limited to, 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. 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. Twenty-two of the Company's Operating Communities offer independent living services and four are operating as skilled nursing facilities. The table below summarizes certain information regarding the Operating Communities.
Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - -------------------------------------------- ------------------- -------------- ---------- ---------- -------------------- ARIZONA La Villita * (2) Phoenix Jun. 1994 87 87 Manage Loyalton of Phoenix (3) Phoenix Jan. 1999 101 111 Lease Olive Grove * Phoenix Jun. 1994 98 111 Lease Scottsdale Royale + Scottsdale Aug. 1994 63 63 Own Villa Ocotillo Scottsdale Sep. 1994 102 106 Own CALIFORNIA Creston Village + Paso Robles Mar. 1998 97 107 Joint Venture Emerald Hills * Auburn Jun. 1998 89 98 Manage Fulton Villa Stockton Apr. 1995 81 81 Own Laurel Place *+ (2) San Bernadino Apr. 1996 70 71 Manage Northbay Retirement + Fairfield Apr. 1998 172 189 Joint Venture Rosewood Court Fullerton Mar. 1996 71 78 Lease The Terrace + (2) Grand Terrace Jan. 1996 87 87 Manage Villa Del Rey * Escondido Mar. 1997 84 84 Own CONNECTICUT Cold Spring Commons * Rocky Hill May 1997 80 88 Joint Venture DELAWARE Gardens at White Chapel (2) Newark Sep. 1998 99 109 Manage Green Meadows at Dover Dover Oct. 1995 49 60 Lease FLORIDA Barrington Place (2) LeCanto May 1996 80 120 Manage Beneva Park Club (2) Sarasota Jul. 1995 96 102 Manage Central Park Village *+ (2) Orlando Jul. 1995 179 193 Manage College Park Club * (2) Brandenton Jul. 1995 87 93 Manage Colonial Park Club (3) Sarasota Aug. 1996 90 90 Lease La Casa Grande New Port Richey May 1997 195 232 Own The Lodge at Mainlands (2) Pinellas Park Aug. 1996 154 162 Manage Madison Glen (2) Clearwater May 1996 130 154 Manage Park Club of Brandon Brandon July 1995 90 88 Lease Park Club of Ft. Myers Ft. Myers July 1995 79 82 Lease Park Club of Oakbridge Lakeland July 1995 89 88 Lease River Oaks Englewood May 1997 153 200 Own Springtree (2) Sunrise May 1996 180 246 Manage Stanford Centre Altamonte Springs May 1997 118 181 Own IDAHO Camlu Retirement + Coeur d'Alene Nov. 1996 82 85 Manage Highland Hills (3) Pocatelo Oct. 1996 49 55 Lease Juniper Meadows Lewiston Dec. 1997 80 88 Own The Lakewood Inn + (3) Coeur d'Alene Mar. 1996 104 114 Lease Ridge Wind (3) Chubbock Aug. 1996 80 106 Lease Summer Wind Boise Sep. 1995 49 53 Lease ILLINOIS Canterbury Ridge Urbana Nov. 1998 101 111 Manage
Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - -------------------------------------------- ------------------- -------------- ---------- ---------- -------------------- IOWA Silver Pines Cedar Rapids Jan. 1995 80 80 Own KANSAS Elm Grove Estates (2) Hutchinson Jun. 1997 116 128 Manage KENTUCKY Stonecreek Lodge * Louisville May 1997 80 88 Joint Venture MARYLAND Martin's Glen Essex Feb. 1999 97 107 Manage MASSACHUSETTS Meadow Lodge at Drum Hill * Chelmsford Oct. 1997 80 88 Joint Venture The Pines at Tewksbury *(3) Tewksbury Jan. 1996 49 65 Lease Woods at Eddy Pond * Auburn Jun. 1997 80 88 Joint Venture MISSISSIPPI Loyalton of Biloxi Biloxi Feb. 1999 83 91 Manage Ridgeland Court * Ridgeland Aug. 1997 79 87 Joint Venture Silverleaf Manor Meridian Aug. 1998 101 111 Manage MISSOURI Autumn Ridge + Herculaneum Jun. 1997 94 94 Manage MONTANA Springmeadows Residence Bozeman May 1997 74 81 Own NEVADA Concorde * Las Vegas Nov. 1996 113 125 Own NEW JERSEY Laurel Lake Estates Voorhees Jul. 1995 113 115 Lease NEW YORK Bassett Manor (1) Williamsville Nov. 1996 104 106 Lease Bassett Park Manor (1) Williamsville Nov. 1996 78 80 Lease Bellevue Manor (1) Syracuse Nov. 1996 90 90 Lease Colonie Manor (1) Latham Nov. 1996 94 94 Lease East Side Manor (1) Fayettville Nov. 1996 79 87 Lease Green Meadows at Painted Post (1) Painted Post Oct. 1995 73 96 Lease Perinton Park Manor (1) Fairport Nov. 1996 78 86 Lease West Side Manor - Rochester (1) Rochester Nov. 1996 72 72 Lease West Side Manor - Syracuse (1) Syracuse Nov. 1996 77 79 Lease Woodland Manor (1) Vestal Nov. 1996 60 116 Lease NORTH CAROLINA Heritage Health Center # Hendersonville Feb. 1996 67 135 Lease Heritage Hills Retirement Community + Hendersonville Feb. 1996 99 99 Own Heritage Lodge Assisted living Hendersonville Feb. 1996 20 24 Lease Pine Park Retirement Community + Hendersonville Feb. 1996 110 110 Lease Pines of Goldsboro Goldsboro Nov. 1998 101 111 Manage OHIO Brookside Estates (2) Middleburg Heights Oct. 1998 99 101 Manage Park Lane + Toledo Jan. 1998 92 101 Manage OREGON Meadowbrook (3) 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
Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - -------------------------------------------- ------------------- -------------- ---------- ---------- -------------------- SOUTH CAROLINA Anderson Place - The Summer House + (3) Anderson Oct. 1996 30 40 Lease Anderson Place - The Village (3) Anderson Oct. 1996 75 75 Lease Anderson Place - The Health Center # (3) Anderson Oct. 1996 22 44 Lease Bellaire Place * (2) Greenville Jul. 1997 81 89 Manage Countryside Park Easley Feb. 1996 48 66 Lease Countryside Village Assisted living Easley Feb. 1996 47 77 Lease Countryside Village Health Care Center # Easley Feb. 1996 24 44 Lease Countryside Village Retirement Center + Easley Feb. 1996 75 78 Lease Skylyn Health Center # Spartanburg Feb. 1996 26 48 Lease Skylyn Personal Care Center Spartanburg Feb. 1996 80 119 Lease Skylyn Retirement Community + Spartanburg Feb. 1996 155 155 Lease York Care York Apr. 1997 50 100 Manage TENNESSEE Walking Horse Meadows *+ (2) Clarksville Jun. 1997 50 55 Manage TEXAS Amber Oaks *+ San Antonio Apr. 1997 155 267 Lease Cambria * El Paso Oct. 1996 79 87 Lease Dowlen Oaks (2) Beaumont Mar. 1997 79 87 Manage Eastman Estates (2) Longview Jul. 1997 70 77 Manage Elmbrook Estates (3) Lubbock Feb. 1997 79 87 Lease Lakeridge Place (2) Wichita Falls Jul. 1997 80 88 Manage Meadowlands Terrace * (2) Waco Jul. 1997 71 78 Manage Myrtlewood Estates (2) San Angelo Aug. 1997 79 87 Manage The Palisades *+ El Paso Apr. 1997 158 215 Lease Redwood Springs + San Marcos Apr. 1997 90 90 Lease Saddleridge Lodge (2) Midland Mar. 1997 79 87 Manage Seville Estates * (2) Amarillo Mar. 1997 50 55 Manage Sherwood Place * Odessa Oct. 1996 79 87 Lease Vickery Towers at Belmont + Dallas Apr. 1995 301 331 Manage UTAH Emeritus Estates (2) Ogden Apr. 1998 83 91 Manage VIRGINIA Carriage Hill Retirement Bedford Sep. 1994 88 134 Lease Cobblestones at Fairmont * Manassas Sep. 1996 75 82 Own Wilburn Gardens Fredericksburg Jan. 1999 101 111 Manage WASHINGTON Charlton Place Tacoma Jul. 1998 95 104 Manage Cooper George *+ Spokane Jun. 1996 141 159 Partnership Courtyard at the Willows * Puyallup Oct. 1997 100 110 Own Evergreen Lodge (3) Federal Way Apr. 1996 98 124 Lease Fairhaven Estates *(3) Bellingham Oct. 1996 50 55 Lease Garrison Creek Lodge * Walla Walla Jun. 1996 80 88 Lease Harbour Pointe Shores (2) Ocean Shores Mar. 1997 50 55 Manage The Hearthstone (3) Moses Lake Nov. 1996 84 92 Lease Kirkland Lodge Kirkland Feb. 1996 75 85 Own Renton Villa * Renton Sep. 1993 79 97 Lease Richland Gardens Richland Jul. 1998 100 110 Manage Seabrook * Everett Jun. 1994 60 62 Lease Van Vista/Columbia House Vancouver Oct. 1997 100 100 Admin Services
Emeritus Operations Community Location Commenced Units (a) Beds (b) Interest - -------------------------------------------- ------------------- -------------- ---------- ---------- -------------------- WYOMING Park Place + (2) Casper Feb. 1996 60 60 Manage Sierra Hills Cheyenne Jun. 1998 83 91 Manage ---------- ---------- Total Operating Communities 10,354 11,910 ---------- ---------- ---------- ----------
* Near an existing or proposed Holiday facility. + Currently offers independent living services. # Currently operates as a skilled nursing facility. (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. (1) 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". (2) The interest in this community has been sold effective 12/31/98, but Emeritus will manage the buildings pursuant to a three year management contract. (3) The interest in this community has been sold pursuant to the consummation of Emeritrust II. See "Company Operations - Operating Strategy". 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.
Scheduled Site Community Location Opening Units (a) Beds (b) Interest - ------------------------------------- --------------------- -------------- ----------- ----------- ----------------- ANTICIPATED 1999 OPENINGS: ARIZONA Loyalton of Flagstaff (1) Flagstaff 2nd Quarter 61 67 Lease FLORIDA The Allegro St. Augustine 3rd Quarter 111 122 Manage Heritage Oaks Tallahassee 4th Quarter 120 132 Manage MARYLAND Baltimore Baltimore 4th Quarter 120 134 Manage Loyalton of Hagerstown (1) Hagerstown 3rd Quarter 100 110 Lease MISSISSIPPI Trace Point Clinton 3rd Quarter 100 110 Joint Venture Loyalton of Hattiesburg Hattiesburg 3rd Quarter 83 91 Manage NEW YORK Brockport Brockport 3rd Quarter 84 92 Manage Queensbury Commons Queensbury 4th Quarter 84 92 Manage Loyalton of Lakewood (1) Lakewood 4th Quarter 83 91 Lease VIRGINIA Loyalton of Staunton (1) Staunton 3rd Quarter 101 111 Lease WASHINGTON Arbor Place at Silver Lake Everett 2nd Quarter 101 111 Manage JAPAN Kurashiki Kurashiki 4th Quarter 116 116 Joint Venture ----------- ----------- TOTAL 1999 OPENINGS 1,264 1,379 ----------- ----------- ----------- ----------- ANTICIPATED 2000 OPENINGS: ARIZONA Green Valley Green Valley 3rd Quarter 83 91 Own CALIFORNIA Village at Granite Bay Granite Bay 3rd Quarter 100 110 Joint Venture MISSISSIPPI Brandon Brandon 4th Quarter 100 110 Manage NEW JERSEY Loyalton of Cape May Cape May 4th Quarter 100 110 Own ----------- ----------- TOTAL 2000 OPENINGS 383 421 ----------- ----------- ----------- -----------
* Near an existing or proposed Holiday facility. (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. (1) The interest in this community has been sold pursuant to the consummation of Emeritrust II. 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 On April 24, 1998, the Company commenced a lawsuit against ARV Assisted Living Inc. ("ARV") in Superior Court of the State of California for the County of Orange alleging that share purchases on January 16, 1998 by Prometheus Assisted Living LLC ("Prometheus") triggered the so-called flip-in feature of ARV's poison pill. The effect of the flip-in feature having been triggered by Prometheus is to require ARV to distribute to all shareholders (other than Prometheus) certificates for one Right per share owned on January 16, 1998. The Company believes that each Right would be exercisable for approximately 9.56 shares at a purchase price of $7.32 per share. The Rights are exercisable until August 8, 2007 and are transferable separate from the ARV common stock. In connection with Prometheus' initial investment in ARV in July 1997, ARV adopted a Rights Agreement (commonly referred to as a poison pill) which provides that the flip-in feature is triggered if Prometheus acquires "beneficial ownership" of 50% or more of ARV's outstanding common stock. The flip-in is a defensive feature intended to discourage accumulation of control of stock in excess of a specified level by allowing all shareholders other than the acquiror to purchase additional common stock at a 50% discount to the average closing market price of ARV's stock for the 30 trading days prior to the flip-in being triggered. In a Schedule 13D filing on January 20, 1998, Prometheus disclosed that on January 16th it had acquired additional shares of ARV common stock, increasing Prometheus' direct share ownership to 45% of the outstanding ARV common stock. Previous Schedule 13D filings by Prometheus disclose that Prometheus also then beneficially owned another 9% of ARV's common stock as a result of the Stockholders' Voting Agreement dated October 29, 1997, between Prometheus and certain management stockholders of ARV (collectively, the "Management Stockholders"). Under the Stockholders' Voting Agreement, each Management Stockholder agreed with Prometheus to vote its shares of ARV common stock in support of Prometheus' nominees to ARV's Board of Directors. The Company' complaint alleges that the Stockholders' Voting Agreement increases Prometheus' beneficial ownership from its 45% direct ownership to 54%, thereby triggering the flip-in feature of the poison pill. For purposes of determining Prometheus' beneficial ownership, the Rights Agreement treats Prometheus as beneficially owning shares held by "any other person with which Prometheus has any agreement, arrangement or understanding whether or not in writing, for the purpose of acquiring, holding, voting or disposing of any securities of ARV." The Company' complaint seeks the following injunctive and declaratory relief: (i) an order directing ARV to distribute Right Certificates to all holders of common stock of ARV (other than Prometheus) as of January 16, 1998; and (ii) an order declaring that a "Trigger Event" (as defined in the Rights Agreement) occurred on January 16, 1998 when Prometheus acquired beneficial ownership of more than 50% of ARV's common stock. Prometheus is an investment vehicle controlled by Lazard Freres Real Estate Investors L.L.C. ("Lazard"). Lazard's activities consist principally of acting as general partner of several real estate investment partnerships affiliated with Lazard Freres & Co. LLC. 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, 1998. 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 54 Chairman of the Board and Chief Executive Officer Gary D. Witte 54 Vice President, Operations Kelly J. Price 30 Vice President, Finance, Chief Financial Officer, Principal Accounting Officer and Secretary Sarah J. Curtis 36 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. 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 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 the Company's Director of Finance. From September 1991 until joining the Company, Mr. Price was employed at Deloitte & Touche LLP in both the Management Consulting and Accounting practice, last serving as a senior consultant in the real estate and healthcare industries. 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.............................................. $ 21.7500 $ 11.6250 Second Quarter............................................. $ 20.8750 $ 17.6250 Third Quarter.............................................. $ 18.0000 $ 14.0000 Fourth Quarter............................................. $ 16.0000 $ 10.0000 1997 First Quarter.............................................. $ 13.5000 $ 11.1250 Second Quarter............................................. $ 16.2500 $ 11.5000 Third Quarter.............................................. $ 15.5000 $ 13.8750 Fourth Quarter............................................. $ 16.2500 $ 11.8750 1998 First Quarter.............................................. $ 13.5020 $ 10.6875 Second Quarter............................................. $ 10.7500 $ 13.3750 Third Quarter.............................................. $ 9.1250 $ 12.4375 Fourth Quarter............................................. $ 8.6250 $ 11.3750 1999 First Quarter (through March 23, 1999)..................... $ 15.1250 $ 11.3750
As of March 26, 1999, the number of record holders of the Company's Common Stock was 160. 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. 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 years ended December 31, 1994, 1995, 1996, 1997 and 1998. 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.
Year ended December 31, ------------------------------------------------------------------------- 1994 1995 1996 1997 1998 -------------- -------------- -------------- ------------ ----------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total operating revenues..................... $ 4,409 $ 21,277 $ 68,926 $117,772 $151,820 Total operating expenses..................... 4,761 22,149 74,053 139,323 171,405 -------------- -------------- -------------- ------------ -------- Loss from operations........................ (352) (872) (5,127) (21,551) (19,585) -------------- -------------- -------------- ------------ -------- Net other expense............................ (1,080) (6,815) (3,075) (6,660) (9,194) Extraordinary loss on extinguishment of debt......................................... -- (1,267) -- -- (937) Cumulative effect of change in accounting principle.................................... -- -- -- -- (1,320) -------------- -------------- -------------- ------------ -------- Net loss........................... (1,432) (8,954) (8,202) (28,211) (31,036) -------------- -------------- -------------- ------------ -------- -------------- -------------- -------------- ------------ -------- Preferred stock dividends.................... -- -- -- 425 2,250 -------------- -------------- -------------- ------------ -------- Net loss to common shareholders.... $ (1,432) $ (8,954) $ (8,202) $(28,636) $(33,286) -------------- -------------- -------------- ------------ -------- -------------- -------------- -------------- ------------ -------- Loss per common share before extraordinary item and cumulative effect of change in accounting principle- Basic and diluted.......................... $ (0.95) $ (0.75) $ (2.60) $ (2.96) Extraordinary loss per common share - Basic and diluted.......................... $ (0.16) $ -- $ -- $ (.09) Cumulative effect of change in accounting principle loss per common share - Basic and diluted.......................... $ -- $ -- $ -- $ (.12) Net loss per common share - Basic and diluted.......................... $ (1.11) $ (0.75) $ (2.60) $ (3.17) Weighted average number of common shares Outstanding (1) - Basic and diluted.......................... 8,062 11,000 11,000 10,484 -------------- -------------- ------------ -------- -------------- -------------- ------------ -------- CONSOLIDATED OPERATING DATA: Communities operated (2).......................................... 6 22 69 99 109 Number of units (2).......................................... 494 1,857 5,807 8,624 11,112
(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.
------------------------------------------------------------------------------ As of December 31, ------------------------------------------------------------------------------ 1994 1995 1996 1997 1998 -------------- ------------- -------------- ------------- --------------- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents..................... $ 220 $ 9,507 $ 23,039 $ 17,537 $ 11,442 Working capital (deficit)..................... (2,762) 4,091 9,757 12,074 (977) Total assets.................................. 24,493 115,635 158,038 228,573 192,870 Long-term debt, less current portion.......... 22,684 66,814 60,260 108,117 119,674 Minority interests............................ 77 2,229 1,918 1,176 910 Shareholders' equity (deficit)................ (1,462) 34,895 26,188 1,207 (45,964)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Emeritus is a nationally integrated senior housing services organization focused on operating residential-style assisted living communities. The Company is one of the largest and most experienced providers of assisted living communities in the United States. These communities provide a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services. The Company's revenues are derived primarily from rents and service fees charged to its residents. For 1996, 1997 and 1998, the Company generated total operating revenues of $68.9 million, $117.8 million and $151.8 million, respectively. As of December 31, 1998, the Company's accumulated deficit was $80.5 million and its total shareholders' deficit was $46.0 million. For 1996, 1997 and 1998, the Company incurred losses of $8.2 million, $28.6 million and $28.8 million (excluding the extraordinary item and a charge related to the cumulative effect of a change in accounting principle in 1998), respectively. The Company's losses to date result from a number of factors. These factors include, but are not limited to: the development of 48 and acquisition of 69 assisted living communities since inception that incurred operating losses during the initial 12 to 24 month rent-up phase; initially lower levels of occupancy at the Company's communities than originally anticipated; financing costs arising from sale/leaseback transactions and mortgage financing; refinancing transactions at proportionately higher levels of debt; and increased administrative and corporate expenses to facilitate the Company's growth. During 1998 the Company adopted an operating strategy focused on: 1) increasing occupancy throughout the Company's portfolio, 2) reducing acquisition and development activities and 3) disposing of select communities operating at a loss. Occupancy at December 31, 1998 increased 9% to 81% compared to 72% at December 31, 1997. In addition, average occupancy increased 4% to 77% for 1998 compared to 73% for 1997. The Company has significantly reduced its acquisition and development activities during 1998. The Company acquired 36 and 10 communities in 1996 and 1997, respectively, and two communities during 1998. In addition, the Company opened 11, 20 and five development communities in 1996, 1997 and 1998 respectively. Slowing its acquisition and development activities has enabled the Company to utilize its resources more efficiently and increase its focus on community operations. During 1998 the Company disposed of its interests in 28 communities, 22 of which were leased from Meditrust. The Company retains a management interest in all 28 facilities through three year management contracts and has an option and a right of first refusal to purchase 22 and three of these facilities, respectively, during this three year period. In addition, the Company has disposed of its leasehold interests in an additional 19 communities during the first quarter of 1999. As of March 23, 1999, the Company held ownership, leasehold or management interests in 117 residential communities (the "Operating Communities") consisting of approximately 10,400 units with the capacity for 12,000 residents, located in 29 states. Of the 117 Operating Communities, 20 and 11 newly developed communities were opened during 1997 and 1998, respectively. The Company owns, has a leasehold interest in, management interest in or has acquired an option to purchase development sites for 17 new assisted living communities (the "Development Communities"). Of the Development Communities, 13 are scheduled to open during 1999, the remainder in 2000. The Company leases 53 of its residential communities, typically from a financial institution such as a Real Estate Investment Trust ("REIT"), owns 15 communities, manages or provides administrative services for 41 communities and has a partnership interest or joint venture in seven communities. Additionally, the Company holds a minority interest in Alert Care Corporation ("Alert"), an Ontario, Canada based owner and operator of 21 assisted living communities consisting of approximately 1,200 units with a capacity of approximately 1,300 residents. See "--Strategic Relationships - Alert Relationship". Assuming completion of the Development Communities scheduled to open throughout 1999 and including the minority interest in Alert, the Company will own, lease, have an ownership or partnership interest in, joint venture or manage 151 properties in 29 states, Canada and Japan, containing an aggregate of approximately 12,900 units with capacity of over 14,500 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. The following table sets forth a summary of the Company's property interests.
As of December 31, ---------------------------------------------------------------------------------------------- 1995 1996 1997 1998 --------------------- --------------------- ----------------------- ----------------------- Buildings Units Buildings Units Buildings Units Buildings Units --------------------- --------------------- ----------------------- ----------------------- Owned 14 1,496 15 1,485 19 2,099 15 1,492 Leased 9 662 53 4,165 76 6,124 52 3,937 Managed/Admin Services -- -- 1 83 4 327 38 3,734 Joint Venture/Partnership 1 22 2 162 1 140 8 809 --------------------- --------------------- ----------------------- ----------------------- Sub Total 24 2,180 71 5,895 100 8,690 113 9,972 Annual Growth 243% 273% 196% 170% 41% 47% 13% 15% Pending Acquisitions 13 895 8 1,028 -- -- -- -- New Developments 26 2,112 27 2,296 26 2,483 21 2,029 Minority Interest (Alert) -- -- 17 959 22 1,248 21 1,203 --------------------- --------------------- ----------------------- ----------------------- Total 63 5,187 123 10,178 148 12,421 155 13,204 --------------------- --------------------- ----------------------- ----------------------- Annual Growth 232% 194% 95% 96% 20% 22% 5% 6%
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) 1996 1997 1998 1996-1997 1997-1998 ------------ ------------ ------------ -------------- -------------- Revenues......................................... 100 % 100 % 100 % 71% 29 % Expenses: Community operations ....................... 71 70 73 69 34 General and administrative ................. 9 9 9 76 26 Depreciation and amortization .............. 4 6 4 131 (14) Rent ....................................... 23 29 27 115 20 Other ...................................... -- 4 -- N/A N/A ------------ ------------ ------------ Total operating expenses .............. 107 118 113 88 23 ------------ ------------ ------------ Loss from operations .................. (7) (18) (13) 320 (9) ------------ ------------ ------------ Other expense: Interest expense, net ...................... 4 6 9 141 69 Other, net ................................. -- (1) (3) N/A 531 Extraordinary loss on early extinguishment of debt ...................................... -- -- 1 -- N/A Cumulative effect of change in accounting principle .................................... 1 -- N/A ------------ ------------ ------------ Net loss .............................. (12)% (24)% (20)% 244 % 10 % ------------ ------------ ------------ ------------ ------------ ------------
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 REVENUES. Total operating revenues for 1998 were $151.8 million, reflecting a $34.0 million increase, or 29% compared to $117.8 million for 1997. The increase is primarily due increased occupancy throughout the Company's portfolio. Occupancy at December 31, 1998 increased 9% to 81% compared to 72% as of December 31, 1997. Furthermore, average occupancy for 1998 was 77% compared to 73% for 1997, an increase of 4%. In addition to the increase in occupancy, the Company opened five newly developed communities in 1998 which accounted for a $3.0 million increase in revenue. COMMUNITY OPERATIONS. Community operating expenses increased to $110.6 million for 1998 from $82.8 for 1997, an increase of $27.8 million, or 34%. As a percentage of total revenues, community operations increased to 73% for 1998 compared to 70% for 1997. These increases are the result of 1) increased labor costs due to the overall census increase throughout the Company's portfolio, 2) the opening of five newly developed communities during 1998, 3) increased sales and marketing costs and 4) the recording of start-up and organization costs as operating expenses in accordance with SOP 98-5, which would previously have been deferred and amortized. GENERAL AND ADMINISTRATIVE. General and Administrative ("G&A") costs have increased $2.8 million, or 26% to $13.6 million for 1998 compared to $10.8 million for 1997. As a percentage of revenues, G&A costs have stayed relatively constant at 9% for 1998 and 1997. The overall increase of $2.8 million is primarily attributable to greater personnel costs due to the growth of the Company. DEPRECIATION AND AMORTIZATION. For 1998 depreciation and amortization expense decreased 14% to $5.7 million from $6.6 million for 1997. As a percentage of total revenue, depreciation and amortization expense decreased to 4% for 1998 compared to 6% for 1997. The decrease is the result of expensing previously deferred start-up in accordance with SOP 98-5. RENT. Rent expense for 1998 increased 20% or $6.8 million to $41.5 million from $34.7 million for 1997. This increase is primarily attributable to the opening of five newly developed communities in 1998 and 20 in 1997. In addition, the increase is partly the result of lease provisions providing for additional payments based on a percentage of revenue in the 1998 period. As a percentage of total revenue, rent expense decreased 2% to 27% for the year ended December 31, 1998 compared to 29% for the year ended December 31, 1997. OTHER. As compared to 1997 where the Company incurred $4.4 million of charges related to the termination of the Company's tender offer for ARV and changes in the Company's operating structure, the Company incurred no such operating costs in 1998. INTEREST EXPENSE. Interest expense increased $5.8 million or 69% to $14.2 million for 1998 compared to $8.4 million for 1997, As a percentage of revenue, interest expense increased 3% to 9% for 1998 compared to 6% for 1997. This increase is primarily the result of an increase in mortgage interest expense due to the refinancing of several properties during the second quarter of 1998. In addition, total debt increased approximately $11 million to $132 million as of December 31, 1998 compared to $121 million as of December 31, 1997. OTHER, NET. For 1998, other, net increased $3.2 million to $3.8 million from approximately $600,000, a 531% increase. The increase is a result of gains realized on the sale of investment securities and the dispositions of communities. EXTRAORDINARY ITEM. The Company recognized an extraordinary loss of approximately $937,000 for 1998, representing the write-off of loan fees and other related costs of the Company's early extinguishment of debt when it refinanced 10 communities. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In 1998, the Company incurred a cumulative effect of a change in accounting principle of $1.3 million related to the early adoption of SOP 98-5, which requires that costs of start-up activities and organization costs be expensed as incurred. 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. G&A 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, G&A 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 G&A 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. G&A costs are expected to continue to increase proportionally 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. SAME COMMUNITY COMPARISON The Company operated 86 communities ("Same Community") on a comparable basis during both the three months ended December 31, 1997 and 1998. The following table sets forth a comparison of Same Community results of operations for the three months ended December 31, 1997 and 1998.
Three Months Ended December 31, (In thousands) Dollar Percentage 1997 1998 Change Change ------------------ ------------------ --------------- ------------------ Revenue.................................... $31,377 $36,849 $5,472 17.4 % Community operating expense................ 22,149 24,686 2,537 11.5 ------------------ ------------------ --------------- ------------------ Community operating income............ 9,228 12,163 1,776 17.1 ------------------ ------------------ --------------- ------------------ Depreciation and amortization.............. 1,846 1,229 (617) (33.4) Rent....................................... 10,003 9,312 (691) (6.9) ------------------ ------------------ --------------- ------------------ Operating income (loss)............... (2,621) 1,622 4,243 161.9 ------------------ ------------------ --------------- ------------------ Interest expense, net...................... 1,785 1,761 (24) (1.4) Other (income) expense, net................ (84) 10 94 111.9 ------------------ ------------------ --------------- ------------------ Net loss.............................. $(4,322) $ (149) $4,173 96.6 % ------------------ ------------------ --------------- ------------------ ------------------ ------------------ --------------- ------------------
The Same Communities represented $36.8 million or 90% of the Company's total operating revenue for the quarter ended December 31, 1998. Same Community revenues increased $5.5 million or 17% to $36.8 million for the three months ended December 31, 1998 compared to $31.4 million for the comparable period in 1997. This increase in revenue is the result of increased occupancy at the Same Communities and monthly rate increases due to an expanded range of services offered at the communities. For the quarter ended December 31, 1998 occupancy increased 11% to 85% from 74% for the quarter ended December 31, 1997. In addition, revenue per occupied unit increased to $2,016 for the quarter ended December 31, 1998 compared to $1,972 for the quarter ended December 31, 1997. For the quarter ended December 31, 1998 the Company generated operating income of $1.6 million compared to an operating loss of $2.6 million for the comparable period in 1997, an improvement of $4.2 million or 162%. The Company operated 63 communities ("Same Community") on a comparable basis during both the year ended December 31, 1997 and 1998. The following table sets forth a comparison of Same Community results of operations for the year ended December 31, 1997 and 1998.
Year Ended December 31, (In thousands) Dollar Percentage 1997 1998 Change Change ---- ---- ------ ---------- Revenue ............................ $94,786 $100,361 $5,575 5.9% Community operating expense ........ 63,538 68,473 4,935 7.8 ------- -------- ------ ----- Community operating income ...... 31,248 31,888 640 2.0 ------- -------- ------ ----- Depreciation and amortization ...... 3,410 2,656 (754) (22.1) Rent ............................... 26,391 25,498 (893) (3.4) ------- -------- ------ ----- Operating income ................ 1,447 3,734 2,287 158.1 ------- -------- ------ ----- Interest expense, net .............. 2,392 2,480 88 3.7 Other income, net .................. (17) (8) 9 52.2 ------- -------- ------ ----- Net income (loss) ............... $ (928) $ 1,262 $2,190 235.9% ------- -------- ------ ----- ------- -------- ------ -----
The Same Communities represented $100.4 million or 66% of the Company's total operating revenue for 1998. Same Community revenues increased $5.6 million or 6% to $100.4 million for 1998 compared to $94.8 million for 1997. This increase in revenue is the result of increased occupancy at the Same Communities and monthly rate increases due to an expanded range of services offered at the communities. For 1998 occupancy increased 3% to 84% from 81% for 1997. In addition, revenue per occupied unit increased to $2,033 for 1998 compared to $1,965 for 1997. For 1998 the Company generated both operating and net income of $3.7 million and $1.3 million, respectively, compared to operating income and a net loss of $1.4 million and $0.9 million, respectively, for 1997, an improvement of over $2 million and in excess of 100% for both figures. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998. For 1998, net cash used in operating activities was $21.8 million, primarily due to losses incurred on newly acquired and developed communities. The Company obtained $20.4 million in proceeds from the sale of communities in sales transactions and repaid related mortgage indebtedness of $12.7 million as well as $56.6 million of unrelated mortgage indebtedness which primarily relates to the refinancing of 10 assisted living communities. The Company obtained $5.4 million in proceeds from the sale of investment securities. The Company also incurred additional long-term debt of $105.2 million related to the aforementioned refinancing and purchased additional property and equipment and property held for development of $30.4 million. As a result of these acquisition and financing transactions the Company decreased its cash position by approximately $6.0 million. As of December 31, 1998, the Company had a working capital deficiency of $977,000. In 1997 and 1998, the Company purchased 517,200 shares of its common stock at an aggregate cost of $5.7 million. In April 1998, the Company entered into a lending arrangement with Deutsche Bank North America ("Deutsche"). The loan terms specify a three year loan not to exceed $77.9 million with a 30-day LIBOR rate plus 2.95%. The Company used the proceeds to refinance 10 of its Operating Communities. At December 31, 1998, the Company has $73.2 million outstanding with Deutsche under this arrangement. During 1998, the Company disposed of 28 of its buildings through the Emeritrust transaction and through sales to related parties. These dispositions netted proceeds of $33.2 million after repayment of outstanding debt of $12.8 million. In addition, the Emeritrust transaction will reduce operating lease payments of the Company by $11.3 million. See "--Company Operations--Operating Strategy." The Company was committed to enter into long-term operating leases with a REIT for communities currently under development. In March 1999, the Company completed a disposition of its leasehold interest in these development communities. See "--Company Operations--Operating Strategy." The Company has been, and expects to continue to be, dependent on third-party financing for its cash needs in connection with operating losses as well as with its acquisition and development of communities. There can be no assurance that financing for these requirements will be available to the Company on acceptable terms. Moreover, to the extent the Company acquires communities that do not generate positive cash flow, the Company may be required to seek additional capital or borrowings for working capital and liquidity purposes. YEAR 2000 GENERAL The Company has developed a plan (the "Plan") to modify its information technology to address "Year 2000" problems. The concerns surrounding the Year 2000 are the result of computer programs being written using two digits rather than four to define the applicable year. Programs that employ time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could cause system errors or failures. PLAN The Plan is comprised of three components including assessment of: a) the IT infrastructure (hardware and systems software other than application software); b) application software; and b) third party suppliers/vendors. The Company commenced work on the Plan in the fourth quarter of 1998 by taking inventory of Year 2000 problems in the areas of IT infrastructure as well as application software. In addition, the Company has determined the priority of the items based on their materiality to the Company's operations. No material items have been noted to date. For each component, the Company will address Year 2000 problems in six phases: 1) taking inventory of Year 2000 problems; 2) assigning priorities to identified items; 3) assessing materiality of items to the Company's operations; 4) replacing/repairing material non-compliant items; 5) testing material items; and 6) designing and implementing business continuation plans. Material items are those believed by the Company to have a risk that may affect revenue or may cause a discontinuation of operations. The Company estimates a completion date of June 30, 1999. COSTS The project is not expected to be material to the Company's operations or financial position. The total cost is not expected to exceed $50,000 of which approximately $2,500 have been incurred to date. RISKS The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, normal business activities or operations. Such failures could materially affect the Company's results of operations, liquidity, and financial condition. The Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its results of operations, liquidity or financial condition due, in part, to uncertainty regarding compliance by third parties. The Plan is expected to significantly reduce the Company's level of uncertainty regarding the Year 2000 problem, however, particularly compliance and readiness of its third-party suppliers/vendors. The Company believes that, with the completion of the Plan as scheduled, the possibility of significant interruptions of normal operations will be reduced and, therefore, a contingency plan has not been deemed necessary to date. 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. FORWARD-LOOKING STATEMENTS "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: A number of the matters and subject areas discussed in this report that are not historical or current facts deal with potential future circumstances, operations, and prospects. The discussion of such matters and subject areas is qualified by the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience involving any one or more of such matters and subject areas relating to demand, pricing, competition, construction, licensing, permitting, construction delays on new developments contractual and licensure, and other delays on the disposition of assisted living communities in the Company's portfolio, and the ability of the Company to continue managing its costs while maintaining high occupancy rates and market rate assisted living charges in its assisted living communities. The Company has attempted to identify, in context, certain of the factors that they currently believe may cause actual future experience and results to differ from the Company's current expectations regarding the relevant matter or subject area. These and other risks and uncertainties are detailed in the Company's reports filed with the Securities and Exchange Commission, including the Company's Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's earnings are affected by changes in interest rates as a result of its short and long term borrowings. The Company manages this risk by obtaining fixed rate borrowings when possible. At December 31, 1998, the Company's variable rate borrowings totaled $97.3 million. If market interest rates average 2% more in 1999 than they did in 1998, the Company's interest expense would increase and income before taxes would decrease by $1.9 million. These amounts are determined by considering the impact of hypothetical interest rates on the Company's outstanding variable rate borrowings as of December 31, 1998 and does not consider changes in the actual level of borrowings which may occur subsequent to December 31, 1998. This analysis also does not consider the effects of the reduced level of overall economic activity that could exist in such an environment nor does it consider likely actions that management could take with respect to the Company's financial structure to mitigate the exposure to such a change. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and the Independent Auditors report 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. 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 Comprehensive Operations......................... F-6 Consolidated Statements of Cash Flows....................................... F-7 Consolidated Statements of Shareholders' Equity (Deficit)................... F-9 Notes to Consolidated Financial Statements.................................. F-10
(2) FINANCIAL STATEMENT SCHEDULES. Schedule II Valuation and Qualifying Accounts (contained on page F-23) 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, 1998. (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 3.1). (2) 3.2 Amended and Restated Bylaws of the registrant (Exhibit 3.2). (1) 4.1 Forms of 6.25% Convertible Subordinated Debenture due 2006 (Exhibit 4.1). (2) 4.2 Indenture dated February 15, 1996 between the registrant and Fleet National Bank ("Trustee") (Exhibit (2) 4.2). 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 Shareholders Agreement) dated October 24, 1997 between the registrant ("Seller") (12) and Merit Partners, LLC ("Purchaser") (Exhibit 4.1).
10.1 Amended and Restated 1995 Stock Incentive Plan (Exhibit 99.1). (14) 10.2 Stock Option Plan for Nonemployee Directors (Exhibit 10.2). (2) 10.3 Form of Indemnification Agreement for officers and directors of the registrant (Exhibit 10.3). (1) 10.4 Noncompetition Agreements entered into between the registrant and each of the following individuals: 10.4.1 Daniel R. Baty (Exhibit 10.4.1), Raymond R. 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 Founders and certain Investors, as defined therein (Exhibit 10.5). (1) 10.6 Form of Stock Purchase Agreement dated July 31, 1995, entered into between Daniel R. Baty and each of Michelle A. Bickford, Jean T. Fukuda, James S. Keller, George T. Lenes and Kelly J. Price (Exhibit 10.6). (1) 10.7 Series A Preferred Stock and Note Purchase Agreement dated as of April 17, 1995 among the registrant and the investors listed on Schedule I thereto (Exhibit 10.7). (1) 10.8 SCOTTSDALE ROYALE IN SCOTTSDALE, ARIZONA, AND VILLA OCOTILLO IN SCOTTSDALE, ARIZONA. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.8.1 Loan Agreement dated December 31, 1996 in the amount of $12,275,000 by the registrant ("Borrower") and Lender (Exhibit 10.9.1). (5) 10.8.2 Promissory Note dated December 31, 1996 in the amount of $5,500,000 between the registrant to Bank United (the "Lender") with respect to Scottsdale Royale and Villa Ocotillo (Exhibit 10.9.3). (5) 10.8.3 Deed of Trust, Security Agreement, Assignment of Leases and Rents, and Fixture Filing (Financial Statement) dated as of December 31, 1996, by the registrant, as Trustor and debtor, to Chicago Title 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). (5) 10.9 ROSEWOOD COURT IN FULLERTON, CALIFORNIA, THE ARBOR AT OLIVE GROVE IN PHOENIX, ARIZONA, RENTON VILLA IN RENTON, WASHINGTON, SEABROOK IN EVERETT, WASHINGTON, LAUREL LAKE ESTATES IN VORHEES, NEW JERSEY, GREEN MEADOWS - ALLENTOWN IN ALLENTOWN, PENNSYLVANIA, GREEN MEADOWS - DOVER IN DOVER, DELAWARE, GREEN MEADOWS - LATROBE IN LATROBE, PENNSYLVANIA, GREEN MEADOWS - PAINTED POST IN PAINTED POST, NEW YORK, HERITAGE HEALTH CENTER IN HENDERSONVILLE, NORTH CAROLINA. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.9.1 Lease Agreement dated March 29, 1996 between the registrant ("Lessee") and Health Care Property Investors, Inc. ("Lessor") (Exhibit 10.10.1). (3) 10.9.2 First Amendment Lease Agreement dated April 25, 1996 by and between the registrant ("Lessee") and Health Care Property Investors, Inc. ("Lessor") (Exhibit 10.10.2). (3) 10.10 FLORIDA COMMUNITIES. 10.10.1 Lease Agreement dated March 15, 1996 between Meditrust Acquisition Corporation I ("Lessor") and ESC I, G.P., Inc. ("Lessee") with respect to Park Club of Brandon (Exhibit 10.16.4). (2) 10.10.2 Lease Agreement dated March 15, 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect to Park Club of Fort Myers (Exhibit 10.16.5). (2) 10.10.3 Lease Agreement dated March 15, 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect to Park Club of Oakbridge (Exhibit 10.16.6). (2) 10.11 SUMMER WIND IN BOISE, IDAHO 10.11.1 Lease Agreement dated as of August 31, 1995 between AHP of Washington, Inc. and the (1) registrant (Exhibit 10.18.1). 10.11.2 First Amended Lease Agreement dated as of December 31, 1996 by and between the registrant and AHP of Washington, Inc. (Exhibit 10.16.2). (5) 10.12 SILVER PINES (FORMERLY WILLOWBROOK) IN CEDAR RAPIDS, IOWA 10.12.1 Purchase and Sale Agreement (including Real Estate Contract) dated January 4, 1995 between Jabo, Ltd. ("Jabo") and the registrant (Exhibit 10.19.1). (1) 10.12.2 Assignment and Assumption Agreement with respect to facility leases dated as of January 17, 1995 by and between Jabo, as Assignor, and the registrant, as Assignee (Exhibit 10.19.2). (1) 10.13 THE PALISADES IN EL PASO, TEXAS, AMBER OAKS IN SAN ANTONIO, TEXAS AND REDWOOD SPRINGS IN SAN MARCOS, TEXAS. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES. 10.13.1 Lease Agreement dated April 1, 1997 between ESC III, L.P. D/B/A Texas-ESC III, L.P. ("Lessee") and Texas HCP Holding , L.P. ("Lessor") (Exhibit 10.4.1). (6) 10.13.2 First Amendment to Lease Agreement dated April 1, 1997 between Lessee and Texas HCP Holding , L.P. Lessor (Exhibit 10.4.2). (6) 10.13.3 Guaranty dated April 1, 1997 by the registrant ("Guarantor") in favor of Texas HCP Holding , (6) L.P. (Exhibit 10.4.3) 10.13.4 Assignment Agreement dated April 1, 1997 between the registrant ("Assignor") and Texas HCP Holding , L.P. ("Assignee") (Exhibit 10.4.4). (6)
10.14 CARRIAGE HILL RETIREMENT IN BEDFORD, VIRGINIA 10.14.1 Lease Agreement dated August 31, 1994 between the registrant, as Tenant, and Carriage Hill Retirement of Virginia, Ltd. as Landlord (Exhibit 10.23.1). (1) 10.14.2 Supplemental Lease Agreement dated September 2, 1994 (Exhibit 10.23.2). (1) 10.15 GREEN MEADOWS COMMUNITIES 10.15.1 Consent to Assignment of and First Amendment to Asset 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 "Partnerships"), together with Asset Purchase Agreement dated July 27, 1995 among The Standish Care Company and the Partnerships (Exhibit 10.24.1). (1) 10.15.2 Agreement to Provide Administrative Services to an Adult Home dated October 23, 1995 between the registrant and P. Jules Patt and Pamela J. Patt (Exhibit 10.24.6). (1) 10.15.3 Assignment Agreement dated October 19, 1995 between the registrant, HCPI Trust and Health Care Property Investors, Inc. (Exhibit 10.24.8). (1) 10.15.4 Assignment and Assumption Agreement dated August 31, 1995 between the registrant and The Standish Care Company (Exhibit 10.24.9). (1) 10.15.5 Guaranty dated October 19, 1995 by Daniel R. Baty in favor of Health Care Property Investors, Inc., and HCPI Trust (Exhibit 10.24.10). (1) 10.15.6 Guaranty dated October 19, 1995 by the registrant in favor of Health Care Property Investors, (1) Inc. (Exhibit 10.24.11). 10.15.7 Second Amendment to Agreement to provide Administrative Services to an Adult Home dated January 1, 1997 between Painted Post Partners and the registrant (Exhibit 10.2). (10) 10.16 CAROLINA COMMUNITIES 10.16.1 Lease Agreement dated January 26, 1996 between the registrant and HCPI Trust with respect to Countryside Facility (Exhibit 10.23.1). (2) 10.16.2 Management Services Agreement between the registrant and Sunrise Healthcare Corporation ("Manger") dated December 1997. (13) 10.16.3 Promissory Note dated as of January 26, 1996 in the amount of $3,991,190 from Heritage Hills Retirement, Inc. ("Borrower") to Health Care Property Investors, Inc. ("Lender") (Exhibit (2) 10.23.4). 10.16.4 Loan Agreement dated January 26, 1996 between the Borrower and the Lender (Exhibit 10.23.5). (2) 10.16.5 Guaranty dated January 26, 1996 by the registrant in favor of the Borrower (Exhibit 10.23.6). (2) 10.16.6 Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing dated as of January 26, 1996 by and among Heritage Hills Retirement, Inc. ("Grantor"), Chicago Title Insurance Company ("Trustee") and Health Care Property Investor, Inc. ("Beneficiary") (2) (Exhibit 10.23.7). 10.16.7 Lease Agreement dated as of January 26, 1996 between the registrant and Health Care Property Investor, Inc. with respect to Heritage Lodge Facility (Exhibit 10.23.8). (2) 10.16.8 Lease Agreement dated as of January 26, 1996 between the registrant and Health Care Property Investor, Inc. with respect to Pine Park Facility (Exhibit 10.23.9). (2) 10.16.9 Lease Agreement dated January 26, 1996 between the registrant and HCPI Trust with respect to Skylyn Facility (Exhibit 10.23.10). (2) 10.16.10 Lease Agreement dated January 26, 1996 between the registrant and HCPI Trust with respect to Summit Place Facility (Exhibit 10.23.11). (2) 10.16.11 Amendment to Deed of Trust dated April 25, 1996 between Heritage Hills Retirement, Inc. ("Grantor"), and Health Care Property Investors, Inc. ("Beneficiary") (Exhibit 10.21.12). (5) 10.17 Letter of Intent dated January 31, 1996 between the registrant and Meditrust Acquisition Corporation I relating to developments (Exhibit 10.33). (2) 10.18 Letter of Intent dated January 31, 1996 between the registrant and Meditrust Acquisition Corporation I relating to acquisitions (Exhibit 10.34). (2) 10.19 Letter of Intent dated August 13, 1996 between the registrant and Meditrust Acquisition Corporation I relating to acquisitions (Exhibit 10.24). (5) 10.20 Letter of Intent dated August 13, 1996 between the registrant and Meditust Acquisition Corporation I relating to developments (Exhibit 10.24). (5) 10.21 Assignment, Assumption and Consent Agreement dated as of April 17, 1995 Between the registrant and Columbia-Pacific Group, Inc. (Exhibit 10.32). (1)
10.22 DEVELOPMENT PROPERTY IN FAIRFIELD, CALIFORNIA 10.22.1 Loan Agreement in the amount of $12,800,000 dated January 10, 1997, between Fairfield Retirement Center, LLC ("Borrower") and the Finova Capital Corporation ("Lender") (Exhibit 10.31.1). (5)
10.22.2 Promissory Note dated January 10, 1997 in the amount of $12,800,000 between Fairfield Retirement Center, LLC ("Borrower") and Finova Capital Corporation ("Lender") (Exhibit (5) 10.31.2). 10.22.3 Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated January 10, 1997 between Fairfield Retirement Center, LLC ("Trustor"), Chicago Title Company ("Trustee") and Finova Capital Corporation ("Beneficiary") (Exhibit 10.31.3). (5) 10.22.4 Guaranty Agreement dated January 10, 1997 between the registrant ("Guarantor") and Finova Capital Corporation ("Lender") (Exhibit 10.31.4). (5) 10.23 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. 10.23.1 Lease Agreement dated May 1, 1997 and May 23, 1997 between Emeritus Properties I, Inc., ("Lessee") and Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.1.1). (9) 10.24 THE PINES AT TEWKSBURY IN TEWKSBURY, MASSACHUSETTS 10.24.1 Lease Agreement dated March 15, 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc., ("Lessee") with respect to Tewksbury (Exhibit 10.37.1). (2) 10.25 GARRISON CREEK LODGE IN WALLA WALLA, WASHINGTON, CAMBRIA IN EL PASO TEXAS, AND SHERWOOD PLACE IN ODESSA, TEXAS. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.25.1 Lease Agreement dated July, August and September 1996 between the registrant ("Lessee") and American Health Properties, Inc. ("Lessor") (Exhibit 10.3.1). (4) 10.25.2 First Amendment to Lease Agreement dated December 31, 1996 between the registrant ("Lessee") and AHP of Washington, Inc., ("Lessor") (Exhibit 10.35.2). (5) 10.26 COBBLESTONE AT FAIRMONT IN MANASSAS, VIRGINIA 10.26.1 Loan Agreement effective as of October 26, 1995 between the registrant and Health Care REIT, Inc. (Exhibit 10.42.1). (1) 10.26.2 Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated as of October 26, 1995 by the registrant to Health Care REIT, Inc. (Exhibit 10.42.2). (1) 10.26.3 Note dated October 26, 1995 from the registrant to Health Care REIT, Inc. (Exhibit 10.42.3). (1) 10.26.4 Unconditional and Continuing Guaranty dated as of October 26, 1995 by Daniel R. Baty in favor of Health Care REIT, Inc. (Exhibit 10.42.4). (1) 10.27 ROSEWOOD COURT IN FULLERTON, CALIFORNIA, THE ARBOR AT OLIVE GROVE IN PHOENIX, ARIZONA, RENTON VILLA IN RENTON, WASHINGTON, SEABROOK IN EVERETT, WASHINGTON AND LAUREL LAKE ESTATES IN VOORHEES, NEW JERSEY, GREEN MEADOWS - ALLENTOWN IN ALLENTOWN, PENNSYLVANIA, GREEN MEADOWS - DOVER IN DOVER, DELAWARE, GREEN MEADOWS - LATROBE IN LATROBE, PENNSYLVANIA, GREEN MEADOWS - PAINTED POST IN PAINTED POST, NEW YORK. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.37.1 Second Amended Lease Agreement dated as of December 30, 1996 by and between the registrant and Health Care Property Investors, Inc. (Exhibit 10.37.1). (5) 10.28 COOPER GEORGE PARTNERS LIMITED PARTNERSHIP 10.28.1 Deed of Trust, Trust Indenture, Assignment, Assignment of Rents, Security Agreement, Including Fixture Filing and Financing Statement dated June 30, 1998 between Cooper George Partners Limited Partnership (`Grantor"), Chicago Title Insurance Company ("Trustee") and Deutsche Bank AG, New York Branch ("Beneficiary") (Exhibit 10.3.1) (15) 10.28.2 Partnership Interest Purchase Agreement dated June 4, 1998 between Emeritus Real Estate LLC IV ("Seller") and Columbia Pacific Master Fund 98 General Partnership ("Buyer") (Exhibit 10.3.2). (15) 10.28.3 Credit Agreement dated June 30, 1998 between Cooper George Partners Limited Partnership ("Borrower") and Deutsche Bank AG, New York Branch ("Lender") (Exhibit 10.3.3). (15) 10.28.4 Amended and Restated Agreement of Limited Partnership of Cooper George Partners Limited Partnership dated June 29, 1998 between Columbia Pacific Master Fund '98 General Partnership, Emeritus Real Estate IV, L.L.C. and Bella Torre De Pisa Limited Partnership (Exhibit 10.3.4). (15) 10.28.5 Guaranty and Limited Indemnity Agreement dated June 30, 1998 between Daniel R. Baty ("Guarantor") and Deutsche Bank AG, New York Branch ("Lender") (Exhibit 10.3.6). (15) 10.28.6 Promissory Note dated June 30, 1998 between Cooper George Limited Partnership ("Borrower") and Deutsche Bank, AG, New York Branch ("Lender") (Exhibit 10.3.7) (15) 10.29 Registration Rights Agreement dated February 8, 1996 with respect to the registrant's 6.25% Convertible Subordinated Debentures due 2006 (Exhibit 10.44). (2) 10.30 Registration Rights Agreement dated February 8, 1996 with respect to the registrant's 6.25% Convertible Subordinated Debentures due 2006 (Exhibit 10.45). (2)
10.31 LAKEWOOD INN IN COEUR D'ALENE, IDAHO, EVERGREEN LODGE IN FEDERAL WAY, WASHINGTON, AND RIDGE WIND IN CHUBBOCK, IDAHO. THE FOLLOWING AGREEMENT IS REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.31.1 Lease Agreement dated April and June 1996 between Emeritus Properties I, Inc. ("Lessee") and Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.5.1). (3) 10.32 LAKEWOOD INN IN COEUR D'ALENE, IDAHO 1032.1 Leasehold Improvement Agreement dated April and June 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I ("Lessee") (Exhibit 10.6.1). (3) 10.33 Office Lease Agreement dated April 29, 1996 between Martin Selig ("Lessor") and the registrant (3) ("Lessee") (Exhibit 10.8). 10.34 COLONIAL 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: 10.34.1 Lease Agreement dated August and October 1996 between Emeritus Properties I, Inc. ("Lessee") and Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.1.1). (4) 10.35 COLONIAL PARK CLUB IN SARASOTA, FLORIDA. 10.35.1 Leasehold Improvement Agreement dated August 21, 1996 between Emeritus Properties I, Inc. ("Lessee") and Meditrust Acquisition Corporation I ("Lessor") (Exhibit 10.2.1). (4) 10.36 COLONIE MANOR IN LATHAM, NEW YORK, BASSETT MANOR IN 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: 10.36.1 Lease Agreement dated September 1, 1996 between Philip Wegman ("Landlord") and Painted Post Partners ("Tenant") (Exhibit 10.4.1). (4) 10.36.2 Agreement to Provide Administrative Services to an Adult Home dated September 2, 1996 between the registrant and Painted Post Partners ("Operator") (Exhibit 10.4.2). (4) 10.36.3 First Amendment to Agreement to Provide Administrative Services to an Adult Home dated January 1, 1997 between Painted Post Partners and the registrant (Exhibit 10.1). (10) 10.37 COLUMBIA HOUSE COMMUNITIES. 10.37.1 Management Services Agreement between the Registrant ("Manager") and Columbia House, LLC ("Lessee") dated November 1, 1996 with respect to Camlu Retirement (Exhibit 10.6.1). (4) 10.37.2 Management Services Agreement dated January 1, 19998 between the registrant ("Manager") and Columbia House LLC ("Lessee") with respect to York Care. (13) 10.37.3 Commercial Lease Agreement dated January 13, 1997 between Albert M. Lynch ("Landlord") and Columbia House, LLC ("Tenant") with respect to York Care (Exhibit 10.3.2). (6) 10.37.4 Management Services Agreement dated June 1, 1997 between the registrant ("Manager") and Columbia House LLC ("Owner") with respect to Autumn Ridge (Exhibit 10.3.1). (9) 10.37.5 Agreement to Provide Accounting and Administrative Services dated October 1, 1997 between Acorn Service Corporation ("Administrator") and Vancouver Housing, L.L.C., ("Manager") with respect to Van Vista and Columbia House (Exhibit 10.6.1). (12) 10.37.6 Assignment and First Amendment to Agreement to Provide Management Services dated September 1, 1997 between the registrant, Columbia House, L.L.C., Acorn Service Corporation and Camlu Coeur d'Alene, L.L.C. with respect to Camlu. (13) 10.37.7 Assignment and First Amendment to Agreement to Provide Management Services dated September 1, 1997 between the registrant, Columbia House, L.L.C., Acorn Service Corporation and Autumn Ridge Herculaneum, L.L.C. with respect to Autumn Ridge. (13) 10.37.8 Management Services Agreement dated January 1, 1998 between the registrant ("Manager") and Columbia House LLC ("Owner") with respect to Park Lane. (13) 10.38 VICKERY TOWERS IN DALLAS, TEXAS 10.38.1 Partnership Interest Purchase and Sale Agreement dated June 4, 1998 between ESC GP II, Inc. and Emeritus Properties IV, Inc. (together "Seller") and Columbia Pacific Master Fund 98 General Partnership and Daniel R. Baty (together "Purchaser") (Exhibit 10.4.1). (15) 10.38.2 Amended and Restated Agreement of Limited Partnership of ESC II, LP dated June 30, 1998 between Columbia Pacific Master Fund '98 General Partnership and Daniel R. Baty (Exhibit (15) 10.4.2). 10.38.3 Agreement to Provide Management Services To An Independent and Assisted Living Facility dated June 30, 1998 between ESC II, LP ("Owner") and ESC III, LP ("Manager") (Exhibit 10.4.3). (15)
10.39 CONCORDE IN LAS VEGAS, NEVADA 10.39.1 Purchase and Sale Agreement dated July 9, 1996 between the registrant ("Purchaser") and Sunday Estates, Inc. ("Seller") (Exhibit 10.56.1). (5) 10.39.2 First Amendment to Purchase and Sale Agreement dated July 11, 1996 between the registrant the Seller (Exhibit 10.56.2). (5) 10.40 DEVELOPMENT PROPERTIES IN AUBURN AND CHELMSFORD, MASSACHUSETTS, LOUISVILLE, KENTUCKY AND ROCKY HILL, CONNECTICUT. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.40.1 Lease Agreement dated February 1996 between the registrant ("Lessee") and LM Auburn Assisted Living LLC, and LM Louisville Assisted Living LLC, ("Landlords") with respect to the development properties in Auburn and Louisville (Exhibit 10.58.1). (5) 10.40.2 Amended and Restated Lease Agreement dated February 26, 1996 between the registrant ("Lessee") and LM Rocky Hill Assisted Living Limited Partnership, ("Landlord") with respect to the development property in Rocky Hill (Exhibit 10.58.2). (5) 10.40.3 Lease Agreement dated October 10, 1996 between the registrant ("Lessee") and LM Chelmsford Assisted Living LLC, ("Landlord") with respect to the development property in Chelmsford (Exhibit 10.58.3). (5) 10.40.4 Promissory Note in the amount of $1,255,000 dated December 1996 between the registrant ("Lender") and LM Auburn Assisted Living LLC, ("Borrower") with respect to the development property in Auburn (Exhibit 10.58.4). (5) 10.40.5 Promissory Note in the amount of $1,450,000 dated January 1997 between the registrant ("Lender") and LM Louisville Assisted Living LLC, ("Borrower") with respect to the development property in Louisville (Exhibit 10.58.5). (5) 10.40.6 Promissory Note in the amount of $1,275,000 dated January 1997 between the registrant ("Lender") and LM Rocky Hill Assisted Living Limited Liability Partnership, ("Borrower") with respect to the development property in Rocky Hill (Exhibit 10.58.6). (5) 10.40.7 Promissory Note in the amount of $300,000 dated January 1997 between the registrant ("Lender") and LM Chelmsford Assisted Living LLC, ("Borrower") with respect to the development property in Chelmsford (Exhibit 10.58.7). (5) 10.41 PARK CLUB BRANDON, PARK CLUB FORT MYERS AND PARK CLUB OAKBRIDGE, EVERGREEN LODGE AND THE PINES AT TEWKSBURY. THE FOLLOWING DOCUMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES: 10.41.1 First Amendment to Facility Lease dated December 31, 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc. ("Lessee") (Exhibit 10.59.1). (5) 10.41.2 Amended and Restated Memorandum of Lease dated December 31, 1996 between Meditrust Acquisition Corporation I ("Lessor") and Emeritus Properties I, Inc. ("Lessee") (Exhibit (5) 10.59.2). 10.42 DEVELOPMENT PROPERTIES IN CHEYENNE, WYOMING AND AUBURN, CALIFORNIA. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES. 10.42.1 Management Agreement dated May 30, 1997 between Willard Holdings, Inc., ("Owner") and the registrant ("Manager") (Exhibit 10.5.1). (9) 10.42.2 Lease Agreement dated May 30, 1997 between Willard Holdings, Inc., ("Lessor") and the registrant ("Lessee") (Exhibit 10.5.2). (9) 10.43 SENIOR MANAGEMENT EMPLOYMENT AGREEMENTS AND AMENDMENTS ENTERED INTO BETWEEN THE REGISTRANT AND EACH OF THE FOLLOWING INDIVIDUALS: 10.43.1 Frank A. Ruffo (Exhibit 10.6.2), Kelly J. Price (Exhibit 10.6.3), Gary D. Witte (Exhibit 10.6.4), Sarah J. Curtis (Exhibit 10.6.4) and Raymond R. Brandstrom (Exhibit 10.6.5). (9) 10.43.2 Raymond R. Brandstrom (Exhibit 10.11.1), Gary D. Witte ( Exhibit 10.11.2), Frank A. Ruffo (Exhibit 10.11.3), Sarah J. Curtis (Exhibit 10.11.4) and Kelly J. Price (Exhibit 10.11.5) (15) 10.44 LA CASA GRANDE IN NEW PORT RICHEY, FLORIDA, RIVER OAKS IN ENGLEWOOD, FLORIDA, AND STANFORD CENTRE IN ALTAMONTE SPRINGS, FLORIDA. THE FOLLOWING AGREEMENTS ARE REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES. 10.44.1 Stock Purchase Agreement dated September 30, 1996 between Wayne Voegele, Jerome Lang, Ronald Carlson, Thomas Stanford, Frank McMillan, Lonnie Carlson, and Carla Holweger ("Seller") and the registrant ("Purchaser") with respect to La Casa Grande (Exhibit 10.1). (7) 10.44.2 First Amendment to Stock Purchase Agreement dated January 31, 1997 between the Seller and the registrant with respect to La Case Grande (Exhibit 10.2). (7) 10.44.3 Stock Purchase Agreement dated September 30, 1996 between the Seller and the registrant with respect to River Oaks (Exhibit 10.3). (7) 10.44.4 First Amendment to Stock Purchase Agreement dated January 31, 1997 between the Seller and the registrant with respect to River Oaks (Exhibit 10.4). (7) 10.44.5 Stock Purchase Agreement dated September 30, 1996 between the Seller and the registrant with respect to Stanford Centre (Exhibit 10.5). (7) 10.44.6 First Amendment to Stock Purchase Agreement dated January 31, 1997 between the Seller and the registrant with respect to Stanford Centre (Exhibit 10.6). (7)
10.45 PAINTED POST PARTNERSHIP 10.45.1 Painted Post Partners Partnership Agreement dated October 1, 1995 (Exhibit 10.24.7). (1) 10.45.2 First Amendment to Painted Post Partners Partnership Agreement dated October 22, 1996 between Daniel R. Baty and Raymond R. Brandstrom (Exhibit 10.20.20). (5) 10.45.3 Indemnity Agreement dated November 3, 1996 between the registrant and Painted Post Partners (10) (Exhibit 10.3). 10.45.4 First Amendment to Indemnity Agreement dated January 1, 1997 between the registrant and Painted Post Partners (Exhibit 10.4). (10) 10.45.5 Undertaking and Indemnity Agreement dated October 23, 1995 between the registrant, P. Jules Patt and Pamela J. Patt and Painted Post Partnership (Exhibit 10.5). (10) 10.45.6 First Amendment to Undertaking and Indemnity Agreement dated January 1, 1997 between Painted post Partners and the registrant (Exhibit 10.6). (10) 10.45.7 First Amendment to Non-Competition Agreement between the registrant and Daniel R. Baty (Exhibit 10.1.1) and Raymond R. Brandstrom (Exhibit 10.1.2). (11) 10.46 RIDGELAND COURT IN RIDGELAND, MISSISSIPPI 10.46.1 Master Agreement and Subordination Agreement dated September 5, 1997 between the registrant, Emeritus Properties I, Inc., and Mississippi Baptist health Systems, Inc. (Exhibit 10.1.1). (12) 10.46.2 License Agreement dated September 5, 1997 between the registrant and its subsidiary and affiliated corporations and Mississippi Baptist health Systems, Inc. (Exhibit 10.1.2). (12) 10.46.3 Economic Interest Assignment Agreement and Subordination Agreement dated September 5, 1997 between the registrant, Emeritus Properties I, Inc., and Mississippi Baptist Health Systems, Inc. (Exhibit 10.1.3). (12) 10.46.4 Operating Agreement for Ridgeland Assisted Living, L.L.C. dated December 23, 1998 between the registrant, Emeritust Properties XI, L.L.C. and Mississippi Baptist Medical Enterprises, Inc. (Exhibit 10.46.4) (16) 10.46.5 Purchase and Sale Agreement dated December 23, 1998 between the registrant and Meditrust Company LLC. (Exhibit 10.46.5) (16) 10.46.6 Loan Agreement dated December 28, 1998 between the registrant and Guaranty Federal Bank (Exhibit 10.46.6) (16) 10.46.7 Promissory Note Agreement dated December 28, 1998 between Ridgeland Assisted Living, L.L.C. and Guaranty Federal Bank. (Exhibit 10.46.7) (16) 10.46.8 Guaranty Agreement dated December 28, 1998 between the registrant and Guaranty Federal Bank (Exhibit 10.46.8) (16) 10.47 DEVELOPMENT PROPERTY IN URBANA, ILLINOIS. 10.47.1 Lease Agreement dated September 10, 1997 between ALCO IV, L.L.C. ("Lessor") and the registrant ("Lessee") (Exhibit 10.2.1). (12) 10.47.2 Management Agreement dated September 10, 1997 between the registrant ("Manager" and ALCO IV, L.L.C. ("Owner") (Exhibit 10.2.2). (12) 10.48 Settlement Agreement dated April 25, 1997 by and between the registrant and Carematrix Corporation (formerly The Standish Care Company). (13) 10.49 Amendment to Office Lease Agreement dated September 6, 1996 between Martin Selig ("Lessor") and the (13) registrant. 10.50 VILLA DEL REY IN ESCONDIDO, CALIFORNIA 10.50.1 Purchase and Sale Agreement dated December 19, 1996 between the registrant ("Purchaser") and Northwest Retirement ("Seller") (Exhibit 10.1.1). (6) 10.51 DEVELOPMENT PROPERTY IN PASO ROBLES, CALIFORNIA 10.51.1 Agreement of TDC/Emeritus Paso Robles Associates dated June 1, 1995 between the registrant and TDC Convalescent, Inc. (Exhibit 10.2.1). (6) 10.51.2 Loan Agreement in the amount of $6,000,000 dated February 15, 1997 between Finova Capital Corporation ("Lender") and TDC/Emeritus Paso Robles Associates ("Borrower") (Exhibit 10.2.2). (6) 10.51.3 Promissory Note dated February 28, 1997 in the amount of $6,000,000 between Finova Capital Corporation ("Lender") and TDC/Emeritus Paso Robles Associates ("Borrower") (Exhibit 10.2.3). (6) 10.51.4 Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated February 18, 1997 between TDC/Emeritus Paso Robles Associates ("Trustor"), Chicago Title Company ("Trustee") and Finova Capital Corporation ("Beneficiary") (Exhibit 10.2.4). (6) 10.51.5 Guaranty between TDC Convalescent, Inc. ("Guarantor") and Finova Capital Corporation (Exhibit (6) 10.2.5). 10.51.6 Guaranty between the registrant ("Guarantor") and Finova Capital Corporation (Exhibit 10.2.6). (6) 10.52 DEVELOPMENT PROPERTY IN STAUNTON, VIRGINIA 10.52.1 Purchase and Sale Agreement dated February 5, 1997 between Greencastle Retirement Partners, L.L.C. ("Purchaser") and Gail G. Brown ("Seller"). (Exhibit 10.72.1) (13) 10.52.2 Assignment and Assumption of Purchase and Sale Agreement dated February 12, 1997 between Greencastle Retirement Partners, L.L.C. and the registrant. (13)
10.53 DEVELOPMENT PROPERTY IN JAMESTOWN NEW YORK 10.53.1 Purchase Agreement dated December 12, 1996 between June Fagerstrom ("Seller") and Wegman Family LLC ("Buyer"). (Exhibit 10.73.1) (13) 10.53.2 Assignment and Assumption Agreement dated December 30, 1997 between Wegman Family LLC ("Assignor") and Painted Post Partners ("Assignee"). (Exhibit 10.73.2) (13) 10.54 DEVELOPMENT PROPERTY IN DANVILLE, ILLINOIS 10.54.1 Purchase and Sale Agreement dated October 14, 1997 between South Bay Partners, Inc. ("Purchaser") and Elks Lodge No. 332, BPOE ("Seller"). (Exhibit 10.74.1) (13) 10.54.2 Assignment and Assumption of Purchase and Sale Agreement dated October 21, 1997 between South Bay Partners, Inc. and the registrant. (Exhibit 10.74.2) (13) 10.55 DEVELOPMENT PROPERTY IN BILOXI, MISSISSIPPI 10.55.1 Management Agreement dated December 18, 1997 between the registrant ("Manager") and ALCO VII, L.L.C. ("Owner"). (Exhibit 10.75.1) (13) 10.56 SANYO ELECTRIC CO., LTD. 10.56.1 Agreement entered into on May 30, 1996 between the registrant and Sanyo Electric Co., Ltd. for the interest in jointly entering the development, construction and /or operation of the Senior Housing Business in Japan. (Exhibit 10.76.1) (13) 10.56.2 Joint Venture Agreement entered into on July 9, 1997, between the registrant and Sanyo (13) Electric Co., Ltd. (Exhibit 10.76.2) 10.57 DEVELOPMENT PROPERTY IN NORTH PHOENIX, ARIZONA, FLAGSTAFF ARIZONA AND WASHINGTON COUNTY, MARYLAND. THE FOLLOWING AGREEMENT IS REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES. 10.57.1 Leasehold Improvement Agreement dated December 30, 1997 between Emeritus Properties I, Inc., ("Lessee") and Meditrust Acquisition Corporation I, ("Lessor"). (Exhibit 10.77.1) (13) 10.57.2 Facility Lease Agreement dated February 27, 1998 between Emeritus Properties I, Inc., ("Lessee") and Meditrust Acquisition Corporation I, ("Lessor"). (Exhibit 10.6.1) (15) 10.58 LAKERIDGE PLACE IN WICHITA FALLS, TEXAS, MEADOWLANDS 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. 10.58.1 Management and Consulting Agreement dated February 1, 1997 between ESC I, L.P., and XL Management Company L.L.C. (Exhibit 10.78.1) (13) 10.59 1998 Employee Stock Purchase Plan (Exhibit 99.2) (14) 10.60 RIVER OAKS IN ENGLEWOOD, CALIFORNIA, STANFORD CENTER IN ALAMONTE SPRINGS, LA CASA GRANDE IN NEW PORT RICHEY, FLORIDA, SILVER PINES IN CEDAR RAPIDS, IOWA, VILLA DEL REY IN ESCONDIDO, CALIFORNIA, SPRING MEADOWS IN BOZEMAN, MONTANA, JUNIPER MEADOWS IN LEWISTON, IDAHO AND FULTON VILLA IN STOCKTON, CALIFORNIA. 10.60.1 Credit Agreement dated April 29, 1998 between Emeritus Properties II, Inc., Emeritus Properties V, Inc., and Emeritus Properties VII, Inc. ("Borrowers") and Deutsche Bank AG, New York Branch ("Lender"). (Exhibit 10.2.1) (15) 10.60.2 Amended and Restated Guaranty and Limited Indemnity Agreement dated June 30, 1998 between Emeritus Corporation ("Guarantor") and Deutsche Bank AG ("Lender"). (Exhibit 10.2.2) (15) 10.60.3 Amendment to Credit Agreement and Restatement of Article IX dated June 30, 1998 between Emeritus Properties II, Inc., Emeritus Properties III, Inc., Emeritus Properties V and Emeritus Properties VII, Inc. (together "Borrowers") and Deutsche Bank AG ("Lender"). (Exhibit 10.2.3) (15) 10.60.4 Guaranty and Limited Indemnity Agreement dated April 29, 1998 between Emeritus Corporation ("Grantor") and Deutsche Bank AG, New York Branch ("Lender"). (Exhibit 10.2.4) (15) 10.60.5 Promissory Note dated June 30, 1998 between Emeritus Properties III, Inc. ("Borrower") and Deutsche Bank AG, New York Branch ("Lender"). (Exhibit 10.2.5) (15) 10.60.6 Future Advance Promissory Note dated April 29, 1998 between Emeritus Properties V, Inc. ("Borrower") and Deutsche Bank AG, New York Branch ("Lender"). (Exhibit 10.2.6) (15) 10.61 COURTYARD AT THE WILLOWS 10.61.1 Deed of Trust, Trust Indenture, Assignment, Assignment of Rents, Security Agreement, Including Fixture Filing and Financing Statement dated June 30, 1998 between Emeritus Properties III, Inc. ("Grantor") and Chicago Title Insurance Company ("Trustee") and Deutsche (15) Bank AG, New York Branch ("Beneficiary"). (Exhibit 10.7.1) 10.61.2 Mortgage, Open-End Mortgage, Advance Money Mortgage, Trust Deed, Deed Of Trust, Trust Indenture, Assignment, Assignment of Rents, Security Agreement, Including Fixture Filing and Financing Statement dated June 30, 1998 between Emeritus Properties III, Inc. ("Grantor, Mortgagor") and Deutsche Bank, AG, New York Branch. (Exhibit 10.7.2) (15)
10.62 SILVER PINES IN CEDAR RAPIDS, IOWA, SPRING MEADOWS IN BOZEMAN, MONTANA AND JUNIPER MEADOWS IN LEWISTON, IDAHO. 10.62.1 Promissory Note dated April 29, 1998 between Emeritus Properties II ("Borrower") and Deutsche Bank AG, New York Branch. (Exhibit 10.8.1) (15) 10.63 RICHLAND GARDENS IN RICHLAND, WASHINGTON, WOODWAY INN IN TACOMA WASHINGTON, THE PINES OF GOLDSBORO IN GOLDSBORO, NORTH CAROLINA, SILVERLEAF MANOR IN MERIDIAN, MISSISSIPPI AND WILBURN GARDENS IN FREDERICKSBURG, VIRGINIA. THE FOLLOWING AGREEMENT IS REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES. 10.63.1 Agreement To Provide Management Services To An Assisted Living Facility dated February 2, 1998 between Richland Assisted, L.L.C. ("Owner") and Acorn Service Corporation ("Manager"). (Exhibit 10.9.1) (15) 10.64 RICHLAND GARDENS IN RICHLAND, WASHINGTON, THE PINES OF GOLDSBORO IN GOLDSBORO, NORTH CAROLINA, SILVERLEAF MANOR IN MERIDIAN, MISSISSIPPII, WILBURN GARDENS IN FREDERICKSBURG, VIRGINIA AND PARK LANE IN TOLEDO, OHIO. THE FOLLOWING AGREEMENT IS REPRESENTATIVE OF THOSE EXECUTED IN CONNECTION WITH THESE PROPERTIES. 10.64.1 Marketing Agreement dated February 2, 1998 between Acorn Service Corporation ("Acorn") and Richland Assisted, L.L.C. ("RALLC"). (Exhibit 10.10.1) (15) 10.65 KIRKLAND LODGE IN KIRKLAND, WASHINGTON 10.65.1 Purchase and Sale Agreement dated December 23, 1998 between the registrant and Meditrust Company LLC. (Exhibit 10.46.5) (16) 10.65.2 Loan Agreement dated December 28, 1998 between Emeritus Properties X, L.L.C and Guaranty Federal Bank. (Exhibit 10.65.2) (16) 10.65.3 Promissory Note Agreement dated December 28, 1998 between Emeritus Properties X, L.L.C and Guaranty Federal Bank. (Exhibit 10.65.3) (16) 10.65.4 Guaranty Agreement dated December 28, 1998 between the registant and Guaranty Federal Bank. (16) (Exhibit 10.65.3) 10.66 EMERITRUST COMMUNITIES 10.66.1 Purchase and Sale Agreement dated December 30, 1998 between the registrant, Emeritus Properties VI, Inc., ESC I, L.P. and AL Investors LLC. (Exhibit 10.66.1) (16) 10.66.2 Supplemental Purchase Agreement in Connection with Purchase of Facilities dated December 30, 1998 bewteen the registrant, Emeritus Properties I, Inc. Emeritus Properties VI, Inc., ESC I, L.P. and AL Investors LLC. (Exhibit 10.66.2) (16) 10.66.3 Management Agreement with Option to Purchase dated December 30, 1998 between the registrant, Emeritus Management I LP, Emeritus Properties I, Inc, ESC I, L.P., Emeritus Management LLC and AL Investors LLC. (Exhibit 10.66.3) (16) 10.66.4 Guaranty of Management Agreement and Shortfall Funding Agreement dated December 30, 1998 between the registrant and AL Investors LLC. (Exhibit 10.66.4) (16) 10.66.5 Put and Purchase Agreement dated December 30, 1998 between Daniel R. Baty and AL Investors LLC. (Exhibit 10.66.5) (16) 21.1 Subsidiaries of the registrant. (16) 23.1 Consent of KPMG LLP. (16) 27.1 Financial Data Schedule. (16)
(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) Incorporated by reference to the indicated exhibit filed with the Company's Annual Report on Form 10-K (File No. 1-14012) on March 30, 1998. (14) Incorporated by reference to the indicated exhibit filed with the Company's Registration Statement on Form S-8 (File No. 333-60323) on July 31, 1998. (15) 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, 1998 (16) Filed herewith. 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 29, 1999 EMERITUS CORPORATION (Registrant) /s/ Daniel R. Baty ---------------------------------------------------- Daniel R. Baty, Chief Executive 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' Reports ................................................................................ F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 ................................................. F-4 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 ................... F-5 Consolidated Statements of Comprehensive Operations for the years ended December 31, 1996, 1997 and 1998 ..... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 ................... F-7 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1996, 1997 and 1998 F-9 Notes to Consolidated Financial Statements ................................................................... F-10 Schedule II - Valuation and Qualifying Accounts .............................................................. F-23
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, 1998 and 1997, and the related consolidated statements of operations, comprehensive operations, shareholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for start-up costs and organization costs. /s/ KPMG LLP Seattle, Washington February 26, 1999, except as to Note 20, which is as of March 29, 1999 F-2 INDEPENDENT AUDITORS' REPORT ON SCHEDULE The Board of Directors Emeritus Corporation Under date of February 26, 1999, except as to Note 20, which is as of March 29, 1999, we reported on the consolidated balance sheets of Emeritus Corporation and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, comprehensive operations, shareholders' equity (deficit), and cash flows for each of the years in the three year period ended December 31, 1998, as contained in the 1998 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 LLP Seattle, Washington February 26, 1999 F-3 EMERITUS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS
December 31, ----------------------- 1997 1998 ---------- ---------- Current assets: Cash and cash equivalents .................................................................... $ 17,537 $ 11,442 Short-term investments ....................................................................... 17,235 4,491 Current portion of restricted deposits ....................................................... 550 2,160 Trade accounts receivable, net ............................................................... 2,191 2,235 Other receivables ............................................................................ 1,362 5,944 Prepaid expenses and other current assets .................................................... 3,716 5,719 Property held for sale ....................................................................... 8,202 3,661 --------- --------- Total current assets ................................................................. 50,793 35,652 --------- --------- Property and equipment, net .................................................................... 145,831 128,659 Property held for development .................................................................. 2,754 1,855 Notes receivable from and investments in affiliates ............................................ 10,247 6,422 Restricted deposits, less current portion ...................................................... 10,273 6,271 Lease acquisition costs, net.................................................................... 8,677 6,558 Other assets, net............................................................................... 3,823 3,628 --------- --------- Total assets ......................................................................... $ 228,573 $ 192,870 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Short-term borrowings ........................................................................ $ -- $ 5,000 Current portion of long-term debt ............................................................ 12,815 7,591 Margin loan on short-term investments ........................................................ 9,165 2,324 Trade accounts payable........................................................................ 7,115 2,541 Accrued employee compensation and benefits ................................................... 3,987 3,386 Accrued interest ............................................................................. 1,812 2,320 Accrued real estate taxes .................................................................... 1,940 2,915 Other accrued expenses........................................................................ 5,312 4,991 Other current liabilities..................................................................... 1,147 987 --------- --------- Total current liabilities ............................................................ 38,719 36,629 --------- --------- Deferred rent .................................................................................. 8,474 4,352 Deferred gains on sale of communities .......................................................... 12,314 19,483 Deferred income................................................................................. 114 216 Convertible debentures ......................................................................... 32,000 32,000 Long-term debt, less current portion............................................................ 108,117 119,674 Security deposits and other long-term liabilities 1,452 570 --------- --------- Total liabilities..................................................................... 201,190 212,924 --------- --------- Minority interests.............................................................................. 1,176 910 Redeemable preferred stock ..................................................................... 25,000 25,000 Shareholders' equity (deficit): Common stock, $.0001 par value. Authorized 40,000,000 shares; issued and outstanding 10,974,650 and 10,484,050 shares at December 31, 1997 and 1998, respectively .................. 1 1 Additional paid-in capital..................................................................... 44,449 38,995 Accumulated other comprehensive income (loss) ................................................. 4,011 (4,420) Accumulated deficit ........................................................................... (47,254) (80,540) --------- --------- Total shareholders' equity (deficit) ................................................. 1,207 (45,964) --------- --------- Total liabilities and shareholders' equity (deficit) ................................. $ 228,573 $ 192,870 --------- --------- --------- ---------
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, ------------------------------------------------------- 1996 1997 1998 ------------------ ----------------- ----------------- Revenues: Community revenue....................................................... $67,243 $114,299 $148,226 Other service fees...................................................... 1,494 3,370 2,796 Management fees......................................................... 189 103 798 ------------------ ----------------- ----------------- Total operating revenues........................................ 68,926 117,772 151,820 ------------------ ----------------- ----------------- Expenses: Community operations.................................................... 48,900 82,783 110,569 General and administrative.............................................. 6,158 10,819 13,615 Depreciation and amortization........................................... 2,881 6,644 5,722 Rent.................................................................... 16,114 34,651 41,499 Other................................................................... -- 4,426 -- ------------------ ----------------- ----------------- Total operating expenses........................................ 74,053 139,323 171,405 ------------------ ----------------- ----------------- Loss from operations............................................ (5,127) (21,551) (19,585) ------------------ ----------------- ----------------- Other income (expense): Interest income......................................................... 1,236 1,157 1,151 Interest expense........................................................ (4,259) (8,427) (14,192) Other, net.............................................................. (52) 610 3,847 ------------------ ----------------- ----------------- Net other expense............................................... (3,075) (6,660) (9,194) ------------------ ----------------- ----------------- Loss before extraordinary item and cumulative effect of change in accounting principle............................................ (8,202) (28,211) (28,779) ------------------ ----------------- ----------------- Extraordinary loss on early extinguishment of debt........................ -- -- (937) Cumulative effect of change in accounting principle....................... -- -- (1,320) ------------------ ----------------- ----------------- Net loss........................................................ (8,202) (28,211) (31,036) ------------------ ----------------- ----------------- ------------------ ----------------- ----------------- Preferred stock dividends................................................. -- 425 2,250 ------------------ ----------------- ----------------- Net loss to common shareholders................................. $ (8,202) $(28,636) $(33,286) ------------------ ----------------- ----------------- ------------------ ----------------- ----------------- Loss per common share before extraordinary item and cumulative effect of change in accounting principle - basic and diluted...................... $ (0.75) $ (2.60) $ (2.96) Extraordinary loss per common share - basic and diluted................... $ -- $ -- $ (.09) Cumulative effect of change in accounting principle loss per common share - basic and diluted............................................... $ -- $ -- $ (.12) Net loss per common share - basic and diluted....................................................... $ (0.75) $ (2.60) $ (3.17) Weighted average number of common shares outstanding - basic and diluted....................................................... 11,000 11,000 10,484 ------------------ ----------------- ----------------- ------------------ ----------------- -----------------
See accompanying notes to consolidated financial statements. F-5 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS (In thousands)
Years Ended December 31, --------------------------------- 1996 1997 1998 --------- -------- -------- Net loss .................................................................................... $ (8,202) $(28,211) $(31,036) Other comprehensive income (loss): ........................................................ Foreign currency translation adjustments ............................................... -- (4) (17) Unrealized gains (losses) on investment securities: Unrealized holding gains (losses) arising during the year ........................... 18 4,015 (7,955) Reclassification for gains included in net loss ..................................... -- -- (459) -------- -------- -------- Total other comprehensive income (loss) .......................................... 18 4,011 (8,431) -------- -------- -------- Comprehensive loss .......................................................................... $ (8,184) $(24,200) $(39,467) -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. F-6 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years Ended December 31, --------------------------------- 1996 1997 1998 --------- --------- --------- Cash flows from operating activities: Net loss .............................................................................. $ (8,202) $(28,211) $(31,036) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ...................................................... 3,641 7,759 6,407 Amortization of deferred gains and income .......................................... (1,254) (1,887) (2,345) Allowance for bad debts ............................................................ 128 317 695 Extraordinary loss on early extinguishment of debt ................................. -- -- 937 Cumulative effect of change in accounting principle ................................ -- -- 1,320 Other .............................................................................. (365) (75) 317 Changes in operating assets and liabilities: Trade accounts receivable ..................................................... (1,615) (699) (771) Other receivables ............................................................. (416) 533 (3,026) Prepaid expenses and other current assets ..................................... (2,493) (947) (12) Other assets .................................................................. (420) -- -- Trade accounts payable ........................................................ 458 (2,166) 4,992 Accrued employee compensation and benefits .................................... 2,034 853 (515) Accrued interest .............................................................. 718 692 508 Accrued real estate taxes ..................................................... (336) 1,645 975 Other accrued expenses ........................................................ (443) (969) (1,770) Other current liabilities ..................................................... 392 384 (157) Security deposits and other long-term liabilities ............................. 274 293 (768) Deferred rent ................................................................. 2,467 4,812 702 -------- -------- -------- Net cash used in operating activities ...................................... (5,432) (17,666) (23,547) -------- -------- -------- Cash flows from investing activities: Acquisition of property and equipment ................................................. (36,650) (17,471) (28,612) Acquisition of property held for development .......................................... (30,069) (22,743) (1,780) Proceeds from sale of property and equipment .......................................... 73,290 28,675 33,182 Purchase of investment securities ..................................................... (54) (13,285) (557) Proceeds from the sale of investment securities ....................................... 670 3,207 5,421 Construction advances - leased communities ............................................ 43,411 25,139 25,613 Construction expenditures - leased communities ........................................ (37,024) (31,101) (22,586) Advances to and investments in affiliates ............................................. (2,626) (4,188) (9,529) Sale of investments in affiliates ..................................................... 800 -- 4,092 Acquisition of businesses and partnership interests ................................... (4,339) -- -- -------- -------- -------- Net cash provided by (used in) investing activities ........................ 7,409 (31,767) 5,244 -------- -------- --------
See accompanying notes to consolidated financial statements. F-7 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (In thousands)
Years Ended December 31, -------------------------------- 1996 1997 1998 -------- -------- -------- Cash flows from financing activities: Increase in restricted deposits.............................................................. (6,247) (3,014) (647) Proceeds from (repayment of) short-term borrowings, net ..................................... (520) 9,165 (1,841) Proceeds from long-term borrowings .......................................................... 64,356 44,597 105,179 Repayment of long-term borrowings ........................................................... (69,977) (29,023) (82,019) Increase in lease acquisition and deferred financing costs .................................. (6,554) (2,452) (2,235) Proceeds from sale of redeemable preferred stock ............................................ -- 25,000 -- Proceeds from issuance of convertible debentures ............................................ 30,620 -- -- Repurchase of common stock .................................................................. -- (341) (5,406) Other.......................................................................................... (123) 3 (806) -------- -------- -------- Net cash provided by financing activities ........................................ 11,555 43,935 12,225 Effect of exchange rate changes on cash -- (4) (17) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ............................. 13,532 (5,502) (6,095) Cash and cash equivalents at beginning of year ................................................ 9,507 23,039 17,537 -------- -------- -------- Cash and cash equivalents at end of year ...................................................... $ 23,039 $ 17,537 $ 11,442 -------- -------- -------- -------- -------- -------- Supplemental disclosure of cash flow information - cash paid during the year for interest .................................................................. $ 3,300 $ 9,444 $ 12,999 -------- -------- -------- -------- -------- -------- Noncash investing and financing activities: Acquisition of business and controlling interest in a partnership: Assets acquired........................................................................... $ 11,215 $ 37,347 $ 6,232 Liabilities assumed....................................................................... 7,042 36,997 4,798 Transfer of property held for development to property and equipment .......................... 22,500 26,345 -- Transfer of property and equipment to property held for sale ................................. -- 8,202 1,450 Assumption of debt by buyer through disposition of property .................................. -- -- (14,800) Vehicles acquired through debt financing ..................................................... -- 2,375 --
See accompanying notes to consolidated financial statements. F-8 EMERITUS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (In thousands, except share data)
Common stock Accumulated --------------------------- other Additional comprehensive Total Number paid-in income Accumulated shareholders' of shares Amount capital (loss) deficit equity (deficit) --------------- ----------- ------------ -------------- ------------ ---------------- Balances at December 31, 1995............. 11,000,000 $ 1 $ 44,910 $ 400 $(10,416) $ 34,895 Common stock issue costs.................. -- -- (123) -- -- (123) Unrealized loss on investment securities.. -- -- -- (382) -- (382) Net loss for the year ended December 31, 1996. -- -- -- -- (8,202) (8,202) --------------- ----------- ------------ -------------- ------------ ---------------- Balances at December 31, 1996.............. 11,000,000 $ 1 44,787 18 (18,618) 26,188 --------------- ----------- ------------ -------------- ------------ ---------------- Unrealized gain on investment securities... -- -- -- 3,997 -- 3,997 Foreign currency translation adjustment.... -- -- -- (4) -- (4) Repurchase of common stock................. (25,600) -- (341) -- -- (341) Stock options exercised.................... 250 -- 3 -- -- 3 Preferred stock dividends.................. -- -- -- -- (425) (425) Net loss for the year ended December 31, 1997 -- -- -- -- (28,211) (28,211) --------------- ----------- ------------ -------------- ------------ ---------------- Balances at December 31, 1997.............. 10,974,650 $ 1 44,449 4,011 (47,254) 1,207 --------------- ----------- ------------ -------------- ------------ ---------------- Unrealized loss on investment securities... -- -- -- (8,414) -- (8,414) Foreign currency translation adjustment.... -- -- -- (17) -- (17) Repurchase of common stock................. (491,600) -- (5,466) -- -- (5,466) Stock options exercised.................... 1,000 -- 12 -- -- 12 Preferred stock dividends.................. -- -- -- -- (2,250) (2,250) Net loss for the year ended December 31, 1998 -- -- -- -- (31,036) (31,036) --------------- ----------- ------------ -------------- ------------ ---------------- Balances at December 31, 1998............... 10,484,050 $ 1 $ 38,995 $ (4,420) $(80,540) $ (45,964) --------------- ----------- ------------ -------------- ------------ ---------------- --------------- ----------- ------------ -------------- ------------ ----------------
See accompanying notes to consolidated financial statements. F-9 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Emeritus Assisted Living - Emeritus Corporation ("Emeritus" or the "Company") is a nationally integrated assisted living organization focused on operating residential style communities. These communities provide a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services. The Company also provides management services to third-party owners of assisted living communities. 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 limited liability companies and partnerships ("LLCs") have been consolidated where the Company maintains effective control over the LLCs' assets and operations, not withstanding a lack of technical majority ownership of the LLCs. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Operating revenue consists of resident fee revenue and management services revenue. 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. Management services revenue is comprised of revenue from management contracts and is recognized in the month in which it is earned in accordance with the terms of the management contract. CASH AND CASH EQUIVALENTS All short-term investments, consisting primarily of commercial paper and certificates of deposit, 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, five to seven 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 component of other comprehensive income (loss). Investments in 20% to 50% owned affiliates are accounted for under the equity method except where lack of voting power exists. Investments in less than 20% owned entities are accounted for under the cost method. F-10 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) INTANGIBLE ASSETS Intangible assets, which are comprised of deferred financing costs, (included in other assets) as well as lease acquisition costs are amortized on the straight-line method over the term of the related debt or lease agreement. 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. DEFERRED RENT 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/leasebacks of communities 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 resident activities, 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 Basic net income (loss) per share is computed based on weighted average shares outstanding and excludes any potential dilution. Diluted net income (loss) per share is computed on the basis of the weighted average number of shares outstanding plus dilutive potential common shares using the treasury stock method. 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 net loss per share as their effect is anti-dilutive. 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. F-11 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) FOREIGN CURRENCY TRANSLATION 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 a component of other comprehensive income (loss). RECLASSIFICATIONS Certain reclassifications of the 1996 and 1997 amounts have been made to conform to the 1998 presentation. (2) CHANGES IN ACCOUNTING PRINCIPLES In April 1997, the Accounting Standards Executive Committee issued Statement of Position 98-5 (SOP 98-5), REPORTING ON THE COSTS OF START-UP ACTIVITIES. This statement provides guidance on financial reporting for start-up costs and organization costs and requires such costs to be expensed as incurred. The Company elected early adoption of this statement effective January 1, 1998 and has reported a charge of $1,320,000 for the cumulative effect of this change in accounting principle. The adoption of SOP 98-5 on January 1, 1998 resulted in the Company expensing approximately $967,000 of start-up costs incurred in 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 130 (SFAS 130), REPORTING COMPREHENSIVE INCOME. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. The Company adopted SFAS 130 effective January 1, 1998. (3) RESTRICTED DEPOSITS 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. As of December 31, 1997 and 1998, the Company had $10.8 million and $8.4 million in restricted deposits, respectively. (4) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
December 31, In thousands 1997 1998 - ------------------------------------------------------------------------------------ --------- Land and improvements........................................... $ 10,810 11,881 Buildings and improvements...................................... 104,199 108,221 Furniture and equipment......................................... 11,368 11,321 Vehicles ....................................................... 2,997 2,760 Leasehold improvements.......................................... 2,433 1,958 --------- ------- 131,807 136,141 Less accumulated depreciation and amortization ................. 7,700 9,499 --------- ------- 124,107 126,642 Construction in progress........................................ 21,724 2,017 --------- ------- $145,831 $128,659 --------- ------- --------- -------
F-12 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (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 $1.4 million, $2.7 million and $0.1 million for 1996, 1997 and 1998, respectively. At December 31, 1998, the Company was committed to enter into long-term operating leases with a REIT for communities currently under development. In March 1999, the Company completed a disposition of its leasehold interests in these development communities (note 20). (6) INVESTMENT SECURITIES During 1997, the Company purchased common stock of ARV Assisted Living, Inc. ("ARV") in market transactions and at December 31, 1997, the Company held 1,077,200 shares of ARV common stock. 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. During 1998, the Company sold a portion of the ARV common stock in market transactions realizing gains approximating $450,000 which are included in other income, net. Details regarding the ARV investment as of December 31, follow:
Gross Amortized Unrealized Fair Market In thousands Cost Gains (Losses) Value -------------------------------------------------------------------- ---------------- ---------------- 1997................................................. $ 13,220 $ 4,015 $ 17,235 -------- --------- -------- -------- --------- -------- 1998................................................. $ 8,890 $ (4,399) $ 4,491 -------- --------- -------- -------- --------- --------
(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 $28.6 million versus a book value of $32.0 million at December 31, 1998. (8) NOTES RECEIVABLE FROM AND INVESTMENTS IN AFFILIATED COMPANIES 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 issued and outstanding shares of common stock of Alert and 950,000 issued and outstanding shares of Class A non-voting stock of Alert both at an exercise price of $3.25 per share (Cdn). There was no cost in acquiring the option to purchase additional shares from Alert and no value was assigned to the option by the Company. F-13 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The investment in Alert is accounted for under the cost method, as the Company's equity ownership consists of non-voting preferred stock. Details regarding the Alert holdings as of December 31 are as follows:
Percentage Ownership on Total As-converted In thousands (except share data) Shares Cost Basis -------------------------------------------------------------------------- --------- ---------- 1997 Preferred shares.......................................... 7,588,466 $ 4,111 24.2% ---------- --------- ----- ---------- --------- ----- 1998 Preferred shares.......................................... 10,888,466 $ 6,391 31.3% ---------- --------- ----- ---------- --------- -----
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 to develop its future construction projects in Ontario. No communities have been developed under these agreements as of December 31, 1998. During 1998, the Company sold its interest in a community located in Texas to a partnership in which the principal shareholder of the Company is a partner. Pursuant to the purchase and sale agreement, the Company advanced funds to the partnership of $1.0 million and $800,000 subject to promissory notes bearing interest at 9% and payable in 10 years and on demand, respectively. The $1.0 million note contains additional funding provisions whereby the Company funds 20% of the losses generated by the community up to $500,000, of which $350,000 is outstanding at December 31, 1998. The Company at its option can then convert its $1.5 million investment into a 20% interest in the partnership. In addition, the Company has advanced the partnership $450,000 under a repair note bearing interest at 9% and due June 2008. At December 31, 1998, the Partnership's obligations to the Company total $2.6 million. In 1998, the Company entered into a $5.0 million credit agreement with Aurora Bay Investments, L.L.C. ("Aurora Bay"), a limited liability company that acquires, develops and operates Alzheimer's special care facilities. In September 1998, the credit agreement was assumed by a related party for $4.2 million which equaled the total advances made under the facility. (9) CONVERTIBLE DEBENTURES The Company has $32.0 million of 6.25% convertible subordinated debentures (the "Debentures") which are due in 2006. The Debentures 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 payable semiannually on January 1 and July 1 of each year. The Debentures are unsecured and subordinated to all other indebtedness of the Company. 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. 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%
F-14 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (10) LONG-TERM DEBT Long-term debt consists of the following:
December 31, In thousands 1997 1998 ----------------------------------------------------------------------------------------- ----------------- Notes payable, interest only at rates from 10.5% to 18% payable monthly, unpaid principal and interest due May 2000........ $ 7,000 $ -- Notes payable, interest only at the 30 day LIBOR rate plus 2.25% payable monthly, unpaid principal and interest due March 1999...... 10,220 -- Notes payable, interest at rates from 6.9% to 12%, payable in monthly installments, due through July 2009........................ 10,279 -- Notes payable, interest only at the LIBOR rate plus 2.95% (8.0% at December 31, 1998) payable monthly, unpaid principal and interest due April 2001..................................................... -- 73,235 Notes payable, interest only at the LIBOR plus 2.25% (7.3% at December 31, 1998), payable monthly, unpaid principal and interest due March 1999..................................................... -- 5,270 Note payable, interest at the prime rate plus .75% (8.5% at December 31, 1998), payable in monthly installments, unpaid principal and interest due July 2004............................................. -- 12,800 Notes payable, interest at the LIBOR rate plus 2.50%, payable monthly, unpaid principal and interest due April 1999.............. 26,000 -- Note payable, interest only at the LIBOR rate plus 2.25% 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 -- Note payable, interest at the prime rate plus .75% (8.5% at December 31, 1998), payable in monthly installments, unpaid principal and interest due February 2003......................................... -- 5,965 Notes payable, interest only at 8.5% payable monthly, unpaid -- 11,140 principal and interest due December 2000........................... Notes payable, interest at rates from 8.0% to 10.86%, payable in monthly installments, due through July 2009........................ -- 15,892 Construction loan, total commitment of $17.0 million, interest only through November 1998 at the 30 day LIBOR rate plus 2.75%, principal and interest payments over remaining term, unpaid principal and interest due through November 2001................... 14,066 -- Construction loan, total commitment of $4.9 million, interest only at the prime rate plus 3.5% payable monthly, unpaid principal and interest due February 2004........................... 4,799 -- Construction loan, total commitment of $4.7 million, interest only at 9.75%, payable monthly, unpaid principal and interest due May 1999............................................................... 4,695 -- Construction loan, total commitment of $12.8 million, interest only during the construction term (completion date or 18 months after loan closing) at the prime rate plus .75%, 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 7,578 -- construction.......................................................
F-15 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
December 31, In thousands 1997 1998 ----------------------------------------------------------------------------------------- ----------------- Construction loan, total commitment of $6.5 million, interest only during the construction term at the prime rate plus 1.25%, 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................................................................. 4,452 2,963 ------------------ ----------------- Subtotal......................................................... 106,537 127,265 ------------------ ----------------- 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 -- ------------------ ----------------- 120,932 127,265 Less current portion.................................................. 12,815 7,591 ------------------ ----------------- Long-term debt, less current portion............................. $108,117 $119,674 ------------------ ----------------- ------------------ -----------------
Substantially all long-term debt is secured by the Company's property and equipment. During 1998, the Company consolidated approximately $60.3 million of outstanding debt through a refinancing with a single lender and wrote off $937,000 of related deferred costs as an extraordinary item. 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 net worth. As of December 31, 1998, the Company was in compliance with such covenants or obtained waivers for noncompliance. Principal maturities of long-term debt at December 31, 1998 are as follows:
In thousands ---------------------------------------------------- ---------------- 1999.............................................. $ 7,591 2000.............................................. 13,320 2001.............................................. 75,117 2002.............................................. 1,636 2003.............................................. 6,177 Thereafter........................................ 23,424 ---------------- Total............................................. $127,265 ---------------- ----------------
(11) SHORT-TERM BORROWINGS The Company maintains a $5,000,000 unsecured revolving account from U.S. Bank which bears interest at the prime rate (7.75% at December 31, 1998) and expires in August 1999. The line of credit is guaranteed by a principal shareholder of the Company. F-16 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (12) 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 and $2,324,000 at December 31, 1997 and 1998, respectively, secured by marketable equity securities with respective market values of $17,235,000 and $4,491,000. This loan is due upon the sale of the securities and bears interest at 0.375% under broker call (6.125% as of December 31, 1998). (13) 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 deferred tax assets and liabilities are comprised of the following:
December 31, In thousands 1997 1998 ------------------------------------------------------------------------------------- ------------- Deferred tax liabilities: Depreciation and amortization........................................ $(1,470) $(1,266) Other................................................................ (361) -- -------------- ------------- Gross deferred tax liabilities............................... (1,831) (1,266) -------------- ------------- Deferred tax assets: Net operating loss carryforwards..................................... 10,966 19,563 Deferred gains on sale/leaseback..................................... 4,187 6,624 Unearned rental income............................................... 382 329 Vacation accrual..................................................... 349 403 Health insurance accrual............................................. 263 398 Other................................................................ 464 585 -------------- ------------- Gross deferred tax assets.................................... 16,611 27,902 Less valuation allowance............................................... (14,780) (26,636) -------------- ------------- Deferred tax assets, net............................................... 1,831 1,266 -------------- ------------- Net deferred tax assets...................................... $ -- $ -- -------------- ------------- -------------- -------------
The net increase in the total valuation allowance was $9,380,000 and $11,856,000 for 1997 and 1998, 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, 1998, available to offset future federal taxable income, if any, of approximately $57,539,000 expiring beginning in 2011. (14) RELATED-PARTY MANAGEMENT AGREEMENTS During 1995, the Company's two most senior executive officers, CEO and now former President, formed a New York general partnership (the "Partnership") to facilitate the operation of assisted-living communities in the state of New York, which generally requires that natural persons be designated as the licensed operators of assisted-living communities. The 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 February 1999, the President of the Company ceased to be an officer of the Company and has agreed to transfer his ownership in the Partnership to his successor at a nominal value. As the Company has 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. F-17 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A number of limited partnerships which are partly owned indirectly by Mr. Baty, the Company's Chairman and Chief Executive Officer, develop, own and lease senior housing projects, some of which cater to low income seniors. The Company has agreements with these partnerships to provide certain administrative support, due diligence and financial support services with respect to the acquisition, development and administration of these communities. The agreements have terms ranging from two to four years, with options to renew, and provide for management fees ranging from 4% to 7% of gross operating revenues and fixed administrative fees. Management fee revenue earned under these agreements was approximately $103,000 and $535,000 in 1997 and 1998, respectively. In 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 have initial terms of two years six months with management fees based on 6% of gross revenues payable monthly. Total fees in 1998 amounted to $187,000. 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. In addition to the foregoing, the Company entered into 25 management agreements with a related party for properties previously leased and owned (note 18). (15) SHAREHOLDERS' EQUITY 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. At December 31, 1998, the Company had acquired 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 1,600,000 shares of common stock to be reserved for grants under the 1995 Plan of which 155,384 remained available for future awards at December 31, 1998. Options generally vest between three-year to five-year periods, at the discretion of the Compensation Committee of the Board of Directors, in cumulative increments 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. In November 1998, the Company offered, at the election of individual employees, a repricing of options granted to date at an exercise price of $9.8125 which was equal to the fair market value of the stock on the grant date. A total of 1,005,166 shares were forfeited and reissued under the repricing transaction. F-18 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Had compensation cost for the Company's stock option plan been determined pursuant to SFAS 123, the Company's pro forma net loss and pro forma net loss per share, including the effect of the repricing, would have been as follows:
Year ended December 31, In thousands, except per share data 1996 1997 1998 -------------------------------------------------- --------------- ----------------- --------------- Net loss to common shareholders: As reported.................................. $(8,202) $(28,636) $(33,286) Pro forma.................................... (8,477) (29,236) (34,676) Net loss per common share - basic and diluted: As reported.................................. $ (0.75) $ (2.60) $ (3.17) Pro forma.................................... (0.77) (2.66) (3.31)
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 1996, 1997 and 1998: dividend yield of 0.0% for all periods; expected volatility of 55% for 1996, 49.1% for 1997 and 48.9% for 1998; risk-free interest rates of 5.47% to 6.39% for 1996, 5.45% to 5.50% for 1997, and 4.51% to 4.70% for 1998; and an expected option term of 4.5 years and 5 years for 1996 and 1997, respectively, and for 1998 of 2 to 5 years, giving effect to the option repricing. A summary of the activity in the Company's stock option plans follows:
1996 1997 1998 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 1,089,650 $12.86 Granted................. 363,500 $11.06 703,000 $13.43 1,471,666 $ 9.79 Exercised............... -- $ -- (250) $15.25 (1,000) $10.50 Canceled................ (80,600) $14.34 (98,000) $12.32 (1,116,950) $12.80 ---------------------------- ------------------------------- ------------------------------ Outstanding at end of year.................... 484,900 $11.90 1,089,650 $12.86 1,443,366 $ 9.84 Options exercisable at year-end................ 37,950 $14.38 101,800 $12.40 308,352 $10.06 Weighted-average fair value of options granted during the year......... $ 5.67 $ 6.65 $ 4.11
F-19 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following is a summary of stock options outstanding at December 31, 1998:
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 ------------------------------- -------------- ------------------ ------------------ -------------- ----------------- $ 9.63 407,500 9.88 $ 9.63 -- $ -- $ 9.81 1,005,166 8.36 $ 9.81 293,652 $ 9.81 $11.00 - 15.00 30,700 8.26 $ 13.55 14,700 $14.95 -------------- ------------------ ------------------ -------------- ----------------- 1,443,366 8.79 $ 9.84 308,352 $10.06 -------------- ------------------ ------------------ -------------- ----------------- -------------- ------------------ ------------------ -------------- -----------------
EMPLOYEE STOCK PURCHASE PLAN In July 1998, the Company adopted an Employee Stock Purchase Plan (the Plan) to provide substantially all employees who have completed six months of service an opportunity to purchase shares of its common stock through payroll deductions, up to 15% of eligible compensation. A total of 200,000 shares are available for purchase under the Plan. Monthly, participant account balances are used to purchase shares of stock on the open market at the lesser of the fair market value of shares on the first or last day of the participation period. Employees may not exceed $25,000 in annual purchases. The Employee Stock Purchase Plan expires in May 2008. At December 31, 1998, 900 shares have been purchased by employees under the Plan. (16) 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. (17) LEASES At December 31, 1998, the Company leases office space and 54 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. F-20 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Minimum lease payments under noncancelable operating leases at December 31, 1997 are as follows:
In thousands ---------------------------------------------------- ---------------- 1999............................................... $ 29,818 2000............................................... 29,818 2001............................................... 29,824 2002............................................... 30,196 2003............................................... 30,445 Thereafter......................................... 205,320 ---------------- ---------------- $355,421 ---------------- ----------------
Rent expense under noncancelable operating leases was approximately $16,114,000, $34,651,000 and $42,217,000 for 1996, 1997 and 1998, respectively. A number of operating leases provide for additional lease payments, computed as 5% of gross community revenues, beginning 24 months after the inception of the lease. In 1998, such additional rents were not significant. (18) SALES AND ACQUISITIONS During 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) Villa Del Rey.................................. March 1997 $ 4,252 84 La Casa Grande................................. May 1997 12,900 200 River Oaks..................................... May 1997 11,200 155 Stanford Center................................ May 1997 8,900 118 ------------------ ----------------- $ 37,252 557 ------------------ ----------------- ------------------ -----------------
The foregoing acquisitions were generally financed through borrowings. During 1997, the Company completed three acquisitions of communities through operating lease transactions. The results of operations of the communities have been included in the Company's consolidated financial statements from the dates the leases commenced. During 1997, the Company entered into sale/leaseback transactions with a REIT, pursuant to which the REIT acquired one new community developed by the Company and two existing communities and leased the communities back to the Company. The Company has no continuing involvement outside of operating the communities. F-21 EMERITUS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 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 through lease financings and sale/leaseback financings had been consummated as of January 1, 1997.
December 31, In thousands, except per share data (unaudited) 1997 --------------------------------------------------------------- ------------------ Revenues....................................................... $122,703 Net loss to common shareholders................................ (29,061) Pro forma net loss per common share - basic and diluted........ $ (2.64)
During 1998, the Company entered into a sale/leaseback transactions with a REIT, pursuant to which the REIT acquired a community previously owned by the Company and leased it back to the Company. The Company has no continuing involvement outside of operating the community. In 1998, the Company acquired two communities which it previously leased from a REIT for an aggregate purchase price of $13.5 million. These acquisitions were financed through borrowings. In 1998 the Company sold interests in three assisted living communities for an aggregate sales price of $25 million, including the assumption of a $14.8 million mortgage obligation and $1.8 million in notes receivable, to partnerships in which the Company's principal shareholder is a partner and realized cumulative gains of $475,000 which are included in other income, net. The Company retains a management interest in each community through management contracts and a residual economic interest in two of the communities. In December 1998 the Company disposed of its leasehold interest in 22 leased communities and three owned communities (the "Emeritrust communities"). The Emeritrust communities were sold to an entity in which a principal shareholder and a Board member of the Company are investors. Pursuant to the transaction, the Company will manage all 25 communities in accordance with a three year management contract and will receive management fees of 5% of revenues currently payable as well as 2% of revenues which is contingent upon the communities achieving positive cash flows. The management agreement provides the Company an option to purchase the 22 previously leased communities at a formula price and a right of first refusal on the three previously owned communities. The management agreement further stipulates a cash shortfall funding requirement by the Company to the extent the Emeritrust communities generate cash deficiencies in excess of $4.5 million. Previously deferred gains and the gain on this transaction collectively totaling approximately $13 million have been deferred given the continuing financial involvement of the Company stipulated in the management agreement. (19) CONTINGENCIES The Company is involved in legal proceedings, claims and litigation arising in the ordinary course of business. In the opinion of management, the outcome of these matters will not have a material effect on the Company's results of operations or financial position. The Company is self insured for certain employee health benefits. The Company's policy is to accrue amounts equal to the actuarial liabilities which are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as health care costs and actual experience could cause these estimates to change. (20) SUBSEQUENT EVENT In March 1999, the Company completed a disposition of its leasehold interests in 19 additional communities, consisting of 14 currently operational communities and five development communities (the "Emeritrust II communities"). The Emeritrust II communities were sold to an entity in which a principal shareholder and a Board member of the Company are investors. Pursuant to the transaction, the Company will manage all 19 communities in accordance with a three year management contract and will receive management fees of 5% of revenues currently payable as well as 2% of revenues which is contingent upon the communities achieving positive cash flows. The management agreement provides the Company an option to purchase the 19 previously leased communities at a formula price. The management agreement further stipulates a cash shortfall funding requirement by the Company to the extent the development communities generate cash deficiencies in excess of $2.3 million. F-22 EMERITUS CORPORATION VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1998, 1997 and 1996 (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, 1996: Valuation accounts deducted from assets: Allowance for doubtful receivables $14 $128 $15 $127 ------------- ---------------- ------------- ------------- ------------- ---------------- ------------- ------------- Year ended December 31, 1997: Valuation accounts deducted from assets: Allowance for doubtful receivables $127 $317 $96 $348 ------------- ---------------- ------------- ------------- ------------- ---------------- ------------- ------------- Year ended December 31, 1998: Valuation accounts deducted from assets: Allowance for doubtful receivables $348 $695 $505 $538 ------------- ---------------- ------------- ------------- ------------- ---------------- ------------- -------------
- ------------------- (1) Represents amounts written off F-23 EX-10.46-4 2 EX-10.46.4 THE MEMBERSHIP INTERESTS AND PERCENTAGE INTERESTS REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND WERE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE INTERESTS MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED AT ANY TIME EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS CONTAINED IN THIS AGREEMENT AND PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW UNLESS AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND UNDER ANY SUCH APPLICABLE STATE LAWS IS AVAILABLE IN CONNECTION WITH SUCH TRANSFER. OPERATING AGREEMENT FOR Ridgeland Assisted Living, LLC as of December 23,1998 OPERATING AGREEMENT OF Ridgeland Assisted Living, LLC This Limited Liability Company Operating Agreement (including the schedules, appendices and exhibits attached hereto, collectively, this "Agreement") of Ridgeland Assisted Living, LLC, a Washington limited liability company (the "Company"), is made as of the 23rd day of December, 1998 among the members of the Company ("Members" and each "Member") whose names and addresses are set forth on Appendix A to this Agreement, who are all of the Members as of this date. ARTICLE I DEFINITIONS 1.1 Definitions. Capitalized terms used in this Agreement have the meanings set forth in Schedule 1 unless otherwise expressly provided. ARTICLE II FORMATION; TERM; STATUS; ADOPTION OF AGREEMENT; PRINCIPAL OFFICE; OTHER BUSINESS VENTURES; TITLE TO ASSETS 2.1 Acknowledgment of Formation: Term. The Members acknowledge that the Company was formed pursuant to the Act by the filing of a Certificate of Formation in the form attached hereto as Appendix B with the Washington Secretary of State on December 11, 1998. The term of the Company shall continue until December 31, 2028, unless sooner terminated as provided in this Agreement. 2.2 Name; Purpose; Registered Agent and Registered Office. The name of the Company is Ridgeland Assisted Living, LLC. The Company has been organized for the following purposes: (a) To acquire, own and operate the Project and to provide and market related facilities and programs from the Project which are commonly associated with assisted living centers; and 2 (b) To the extent permitted by any and all applicable laws, rules, and regulations and not inconsistent with the purposes specified in Section 2.2(a), or as otherwise agreed to by its Members, to transact any and all lawful business under the Act. The address of the initial registered office of the Company is 3131 Elliott Avenue, Suite 500 Seattle, Washington 9812l. The initial registered agent of the Company is Corporate Service Company with an address of 1010 Union Avenue, SE, Olympia, Washington 98501. 2.3 Adoption of Agreement; Entire Agreement. The Members hereby execute and adopt this Agreement as the Limited Liability Company Operating Agreement of the Company; pursuant to the Act, and acknowledge that this Agreement, including the schedules, appendices and exhibits referenced herein, sets forth the entire understanding of the Members regarding its subject matter, and supersedes all prior understandings and agreements of the Members regarding its subject matter, including but not limited to any materials used in discussions by the Members prior to the organization of the Company. 2.4 Confirmation of Status: Scope of Authority. Each Member hereby agrees to its status as a Member upon the terms and conditions set forth in this Agreement. Except as may be otherwise expressly and specifically provided in this Agreement, no Member shall have any authority to act for, assume any obligations or responsibility on behalf of, any other Member of the Company. Neither this Company nor this Agreement shall be deemed for any purpose to create or be a general partnership, limited partnership, "joint venture" or any similar relationship between the Members, and the Members intend that no Member or Representative be a partner of any other Member or Representative for any purpose other than federal and state tax purposes. This Agreement shall not be construed to suggest otherwise. In this context "joint venture" shall mean a legal entity in the nature of a partnership in the joint undertaking of a particular transaction for mutual profit. 2.5 Principal Office. The principa1 office of the Company shall be located at 3131 Elliott Avenue, Suite 500, Seattle, Washington 98121 or at such other place or places as the Members may determine from time to time. 2.6 Other Business Ventures. Subject to the limitations set forth in Section 2.7, 2.8 and 6.4, any Member may engage in or possess an interest in other business ventures of every nature and description, independently or with others, and neither the Company nor the Members shall have any right by virtue of this Agreement in such other business ventures or to the income or profits derived therefrom. 2.7 First Right to Participate. (a) Neither Emeritus nor any Affiliate of Emeritus shall, directly or indirectly, participate in any capacity, or contract with any third party to act in 3 any such capacity on its behalf, as an owner, creditor, manager, consultant or otherwise, in the development, construction or operation of any assisted living facility similar to the Project located within Mississippi without giving MBME or its Affiliate the first right to participate in such future project or development opportunity on terms between MBME and Emeritus similar to chose contained herein. Emeritus shall provide MBME with written notice of any proposed project which is the subject of this subsection (a) including documentation reasonably necessary for MBME or its Affiliate to determine whether to participate. Such participation shall provide for a 50% interest in the project, with MBME's investment calculated based on the development/acquisition cost, as applicable, of the project. MBME shall provide Emeritus with its internal management recommendation within fifteen (15) days from receipt of such information and shall present its recommendation to the MBME Board of Directors for approval at the next regularly scheduled meeting (such time period shall not exceed forty-five (45) days). If MBME determines not to participate or does not respond within such initial fifteen (15) day period or if the MBME Board of Directors does not approve the proposal within such forty-five (45) day period, then Emeritus or its Affiliates shall be free to pursue such project either independently or with a third party. If Emeritus or its Affiliates subsequently offers such project to a third-party on materially different terms than those on which the project was offered to MBME, then Emeritus or its Affiliates shall provide notice and details of such revised terms to MBME and MBME and it Affiliate shall again have the above referenced time periods in which to determine whether MBME or its Affiliate wishes to participate on such revised terms. Provided, however, if MBME or its Affiliate declines to participate on three (3) projects, including any facilities covered by Section 2.7(b), located within Mississippi but outside of Hinds, Madison and Rankin Counties, Mississippi, the right to participate granted by this Section 2.7 shall terminate and have no further force or effect for any areas outside of Hinds, Madison and Rankin Counties, Mississippi and if MBME or its Affiliate declines to participate three (3) projects, including any facilities covered bv Section 2.7(b), located within Hinds, Madison and Rankin Counties, Missippi, the right to participate granted by this Section 2.7 shall terminate and have no further force or effect for such three county area. (b) In the event Emeritus or an Affiliate thereof undertakes a multi-facility acquisition which includes assisted living facilities located in Mississippi, Emeritus shall have no restriction on closing any such acquisition, provided, however, Emeritus shall grant to MBME and its Affiliates a right to participate in such assisted living facilities included within such multi-facility acquisition which are located in Mississippi on terms fairly allocated by Emeritus or its Affiliate to reflect its investment in said Mississippi facilities including without limitation, a reasonable allocation of all costs associated with such multi-facility 4 acquisition. Such right to participate shall be offered within thirty (30) days after the closing of such multi-facility acquisition and shall conform to the requirements of Section 2.7(a). MBME shall be required to respond to such offer to participate within the time periods specified in Section 2.7(a). In the event MBME elects to participate in the ownership of such facility or facilities. Emeritus or its Affiliate shall be required to document such participation in accordance with Section 2.7(a) hereof. 2.8 First Right to Participate. Neither MBME nor any of its Affiliates shall, directly or indirectly, participate in any capacity, as an owner, creditor, manager, consultant or otherwise, in the development and operation of any assisted living facility located within Mississippi without giving Emeritus or its Affiliates the first right to participate in such future development opportunity on terms similar to those contained herein. MBME shall provide Emeritus with written notice of any proposed project including documentation reasonably necessary for Emeritus or its Affiliate to determine whether to participate. Such parcicipation shall provide for a 50% interest in the project, which Emeritus' investment calculated based on the development/acquisition cost, as applicable, of the project. Emeritus shall have forty-five (45) days from receipt of such information to provide a written response. If Emeritus determines not to participate or does not respond within such forty-five (45) day period, then MBME or its Affiliate shall be free to pursue such project either independently or with a third party. If MBME or its Affiliate subsequently offers such project to a third-party on materially different terms than those offered to Emeritus, then MBME or its Affiliate shall provide notice and details of such revised terms to Emeritus and Emeritus or its Affiliates shall again have forty-five (45) days in which to determine whether Emeritus or its Affiliates wishes to participate on such revised terms. Provided, however, if Emeritus or its Affiliates declines to participate on three (3) projects, the right to participate granted by this Section 2.8 shall terminate and have no further force or effect. 2.9 Title to Company Assets. Title to all assets of the Company shall be held in the name of and belong to the Company, as an entity, and no individual Member shall have any ownership interest in such assets. The Company shall be the sole owner of all Project specific marketing and sales materials and other materials, literature and information developed by or on behalf of the Company. Unless otherwise agreed by the Members, the Project shall be operated under the name "Ridgeland Pointe", it being understood and agreed that as of the date hereof the Project is operated under the name "Ridgeland Court" and that, notwithstanding anything to the contrary set forth in this Agreement or the Management Agreement, any and all costs incurred by the Company in changing the name of the Facility, including the replacement/reprinting of signage, letterhead, marketing materials and any other property of the Company shall be borne solely by MBME and shall not be an expense of the Company. Moreover, notwithstanding the foregoing, each Member hereby acknowledges and agrees that any rights to use the name "Baptist" in any form is a limited non-exclusive non-assignable license to use such name only in connection with the operation of the Company and only in a manner and for time period expressly authorized by MBME. In the event MBME cease to 5 be a Member of the Company for any reason, the Company's right to use the name "Baptis", in any form shall terminate effective as of the date on which MBME ceases to be a Member of the Company but the Company shall have the right, for a period of up to sixty (60) days thereafter to continue to use the name "Baptist" in connection with the operation of the Facility, it being understood and agreed that the Company shall be required to take all necessary action to remove the name "Baptist" from all signage, letterhead, marketing materials and any other property of the Company within such sixty (60) day period. 2.10 Guiding Principles. The Members acknowledge that elder care is an integral part of the health care mission of Mississippi Baptist Health Systems. Inc., a Mssissippi not for profit corporation ("MBHS"), the parent entity of MBME. The investment and participation by MBME in the Company is based on the Members' mutual agreement that the projects owned by the Company will be operated in the spirit of and consistently with the Mission Statement of MBHS attached hereto and incorporated as Exhibit B hereto (the "Guiding Principles"). The Members agree to support the Guiding Principles and understand that MBHS is a Southern Baptist healthcare organization. As such, the Members agree not advocate, allow or condone euthanasia or assisted suicide, even were these practices to be legalized. 2.11 Ancillary Services. Subject to the right of choice by the residents of the Project, the Members agree that any and all ancillary services which may from time to time be offered to to residents of the Project including but not limited to, rehabilitation therapy services and pharmacy services, shall be provided by MBME or its Affiliates as a preferred provider thereof; provided, however, that nothing herein shall be construed as requiring the Company or the manager of the Project pursuant to the Management Agreement to contract with MBME or such Affiliate at rates which are not reasonably competitive with other ancillary and pharmaceutical service providers in the relevant Jackson, Mississippi market or to enter into or continue to contract with MBME or such Affiliate in the event MBME or such Affiliate, as applicable, fails to provide the services for which it has been retained in accordance with the terms of such service agreements or otherwise breaches its obligations thereunder or hereunder. ARTICLE III CAPITAL CONTRIBUTIONS 3.1 Initial Capital Contributions. The Initial Capital Contribution of each Member shall be set forth opposite such Member's name and address on the attached Appendix A. Subject to approval of the Members, the Initial Capital Contributios may include amounts expended by a Member prior to the execution of this Agreement and amounts associated with certain licenses or rights to use certain intellectual property and knowhow which is being, or may in the future be, contributed by MBME and/or Emeritus. Hereafter, the names, addresses and Capital Contributions of the Members shall be reflected in the books and records of the 6 Company. 3.2 Additional Capital Contributions. If from time to time the Company has insufficient cash to pay its normal operating expenses or other expenses set forth in a budget approved by the Board, each Member hereby agrees to make Additional Capital Contributions to the Company in order to fund budgeted items. If the Board is not able to establish a mutually acceptable budget for any given year, the last agreed upon budget shall continue as the Company's budget with adjustments for any cost of living increases since such last approved budget year, provided that a Member may in the event of an emergency make an Additional Capital Contribution in order to provide the Company with sufficient funds as required by such emergency. Such cost of living adjustment shall be determined using the U.S. Department of Labor Consumer Price Index (urban-all items) or its successor, with the base year being the actual year of the last mutually approved budget year. Such Additional Capital Contributions (including any emergency Additional Capital Contribution) shall be made directly to the Company within thirty (30) days of receipt of a written request from either Member together with a statement of sources and uses, purposes and such other supporting information as reasonably deemed necessary by such Member. Each Member shall be obligated to contribute to the Company amounts in proportion to the Member's Percentage Interest as may be necessary to enable the Company to meet its necessary and reasonable operating expense needs or budget obligations. Any and all additional capital contributions pursuant to this Section shall be collectively referred to as an "Additional Capital Contributions." In the event a Member fails to fund its share of any Additional Capital Contribution (including any emergency Additional Capital Contribution) within the time required and the other Member(s) elect to and actually fund such non-funding Member's share of any Additional Capital Contribution, then the funding Member shall be entitled to all rights and privileges granted herein with respect to the entire Excess Additional Capital Contribution (as defined below). Such funding Member shall be entitled to (i) a Cumulative Preferred Return which shall accrue from time to time on the entire excess of such Member's contribution over the amount contributed by the other Member(s) until such excess is fully recouped (any such excess contribution shall be referred to as an "Excess Additional Capital Contribution"), and (ii) certain distribution priorities specified in Appendix C, Section C.8. until such funding Member has recouped such Member's entire Excess Additional Capital Contribution, including, without limitation, any advance for the non-funding Member, together with any Cumulative Preferred Return. Such right of the other Member(s) to fund a non-funding Member's applicable share of any Additional Capital Contributions shall be in addition to, and not in lieu of, such Member's rights and remedies to enforce the specific terms and obligations of this Agreement against such non-funding Member, either at law or in equity. 7 3.3 Maintenance of Capital Accounts. The Company shall maintain for each Member a Capital Account in accordance with the rules applicable to partnerships in Regulation 1.704-1(b)(2)(iv) or any successor Regulation which by its terms would be applicable to the Company. 3.4 Capital Withdrawal Rights; Interest; Priority. (a) Except as expressly provided in this Agreement or required by law, no Member shall be entitled to withdraw or reduce such Member's Capital Contribution or to receive any distribution from the Company. (b) No Member shall be entitled to receive or be credited with any interest on the balance of such Member's Capital Account at any time other than with respect to a Member funding another Member's share of any Additional Capital Contribution. (c) Subject to Section C.8 of Appendix C, no Member shall have priority over any other Member for the return of Capital Contributions or for Profits, Losses, or distributions of Net Cash from Operations. 3.5 Guaranty of Borrowings. The Members anticipate that the Company will, from time to time, seek financing/refinancing in connection with the ownership if the Project. Emeritus agrees that, if any lender requires that the Members guarantee the Company's borrowings or to pledge its Membership Interest as security for the Company's borrowings, Emeritus will guarantee such borrowings or execute such pledge agreement. Emeritus shall have no obligation to guarantee any operating loans and MBME shall have no obligation to guarantee any type of debt or obligation of the Company. It is also contemplated that the Company will attempt to cause any such financing to be nun-recourse financing (without any personal liability). Each Member acknowledges that non-recourse financing may increase interest rates and require additional capital which shall be provided by the Members in accordance with the terms of this Agreement. In the event of a transfer of a Member's Membership Interest which is also a Guarantor of Company debt or which has pledged its Membership Interest as security for Company debt or entered into an Assumption Agreement with respect to any Company debt, the Company and the purchaser shall use their reasonable efforts to obtain the release of such transferring Member from any and all such guaranties, pledges and/or Assumption Agreements and if such release is not obtainable within sixty (60) days after the transfer, the Company and such purchaser shall provide other financial assurances reasonable acceptable to the Member which is party to such guaranty, pledge and/or Assumption Agreement. 8 ARTICLE IV ALLOCATIONS AND DISTRIBUTIONS 4.1 Allocations. Certain provisions regarding allocations and distributions, including the timing of the payment of such distributions, are set forth in Appendix C. ARTICLE V MANAGEMENT 5.1 Management. Except for situations in which the approval of the Members is required by non-waivable provisions of the Act, (i) the powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed by the Members implemented under the direction of a board (the "Board") composed of Representatives selected as set forth in Section 5.6; and (ii) the Board shall determine and approve the overall objectives, policies, procedures, methods, and make all decisions and take all actions for the Company permitted by the Act, in order to carry on the Company's business consistent with the purposes of the Company as stated in Section 2.2 and not inconsistent with applicable law or the other provisions of this Agreement. Any decision or action of the Board taken in accordance with the provisions of this Agreement shall control and shall bind the Company. 5.2 Authority of the Board. Subject to the terms and provisions of this Areement and the Act, including, without limitation, the requirement of an unanimous vote of the Representatives, the Board shall have the authority to manage and operate the business of the Company. Without limiting the generality of the foregoing sentence, the Board, on behalf of the Company, shall have the authority to, or delegate authority to: (a) Enter into any and all agreements, contracts, documents, certificates and instruments necessary or convenient in connection with the management, maintenance and operation of the Company, or in connection with managing the affairs of the Company, including amendments to this agreement and the Certificate of Formation in accordance with the terms of this Agreement; (b) Borrow money and issue evidences of indebtedness necessary, convenient or incidental to the accomplishment of the purposes of the Company, and secure the same by mortgage, pledge or other lien on any property of the Company; provided, however, that except as provided in Section 3.5, no such debt shall be guaranteed or otherwise secured by the property and/or credit of the Members unless expressly consented to by each such Member; (c) Execute in furtherance of any or all of the purposes of the Company, 9 any agreement, contract or other instrument purporting to convey or encumber any or all of the property of the Company; (d) Invest, manage and distribute Company funds to the Members in accordance with the provisions of this Agreement, and perform all matters in furtherance of the objectives of the Company or this Agreement, including, but not limited to, opening and maintaining Company bank accounts and authorizing signatories with respect thereto, subject to Section 11.5 of this Agreement; (e) Employ accountants, legal counsel, managing agents, and other Persons, including, but not limited to, Affiliates of Members, however, in the case of Affiliates subject to Section 5.8, 5.9 and 5.10 of this Agreement, to perform services for the Company and to compensate them from Company funds; (f) Make any and all elections for federal, state, and local tax purposes including, without limitation, any election, if permitted by applicable law: (i) to adjust the basis of property of the Company pursuant to Code Sections 754, 734(b) and 743(b), or comparable provisions of state or local law, in connection with transfers of interests in the Company and Company distributions; (ii) to extend the statute of limitations for assessment of tax deficiencies against Members with respect to adjustments to the Company's federal, state, or local tax returns; and (iii) to the extent provided in Code Sections 6221 through 6231, to represent the Company and its Members before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company and its Members, and to file any tax returns and to execute any agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Members with respect to such tax matters or otherwise affect the rights of the Company or the Members; (g) Institute, prosecute, defend, settle, compromise and dismiss lawsuits or other judicial or administrative proceedings brought on behalf of, or against, the Company in connection with activities arising out of, connected with, or incidental to this Agreement, and to engage counsel or others in connection therewith; (h) Distribute in accordance with Appendix C and the terms of this Agreement any Net Cash from Operations in excess of any reserves established by the Board: (i) Engage in any kind of activity and perform and carry out contracts of any kind (including contracts of insurance covering risks to property of the Company and Members' liability) necessary or incidental to, or in connection with, the accomplishment of the purposes of the Company, as may be lawfully 10 carried on or performed by a limited liability company under the Act; and (j) Take all actions not expressly proscribed or limited by or addressed in this Agreement, as may be necessary or appropriate to accomplish the purposes of the Company, including, but not limited to, the establishment, maintenance, and expenditure of reserves to provide for working capital, depreciation, debt service and such other purposes as it may deem necessary or advisable. The Members acknowledge that the Company has delegated certain responsibilities set forth above pursuant to the terms of the Management Agreement. 5.3 Right to Rely on Board. Any Person dealing with the Company may rely (without duty of further inquiry) upon a certificate signed by all of the Representatives as to: (i) The identitv of any Member or Representative; (ii) The existence or nonexistence of any fact or facts which constitute a condition precedent to acts by the Board or the Members or which are in any other manner germane to the affairs of the Company; (iii) The person(s) who are authorized to execute and deliver any instrument or document of the Company; or (iv) Any act or failure to act by the Company or any other matter whatsoever involving the Company. 5.4 Functioning of Management. (a) Quorum. Representatives representing all of the Membership Interests in the Company shall constitute a quorum for the conducting of business. Therefore a quorum shall exist if at least on (1) Representative of each Member is present at a meeting of the Board. In the absence of a quorum at any meeting of the Board, a majority of the Representatives present may adjourn the meeting from time to time for a period not exceeding sixty (60) days without further notice. If a quorum exists at a subsequently reconvened meeting, any business may be transacted at such meeting held puruant to such adjournment which might have been transacted at the meeting as originally noticed. (b) Voting. The MBME Representative(s), either individually or collectively, shall vote the total Percentage Interest of MBME and the Emeritus Representative(s), either individually or collectively, shall vote the total Percentage Interest of Emeritus. 11 (c) Meetings. Regular meetings of the Board shall be held at least annually or more frequently as may be determined the Board. Any Member may upon three (3) days prior written notice to the ocher Members, call a special meeting of the Board at any time. Representatives may participate in a meeting by means of a conference telephone or similar communication equipment whereby all persons participating in the meeting can hear each ocher. Participation in a meeting in this manner shall constitute presence in person at the meeting. (d) Notice; Waiver; Minutes. All Members shall receive a notice of each meeting of the Board together with a copy of the proposed agenda fir such meeting at least three (3) days prior to a scheduled regular meeting date or upon the serving of notice of a special meeting. Attendance at a meeting if the Board (either in person or by means of conference telephone or similar communications equipment) shall constitute waiver of notice thereof, except where a Representative attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. The Board shall keep minutes of their meetings which shall be open for inspection by any Representative at any time. (e) Action Without Meeting. Any action which may be taken by the Board at a meeting may be taken without a meeting by the unanimous written consent of all the Representatives if the action is evidenced by one or more written consents describing the action taken, signed off by or on behalf of all the Representatives. Action taken under this Section is effective when all consents have been signed by or on behalf of all the Representatives, unless the consent specifies a different effective date. 5.5 Delegation of Authority. No Representative shall have the authority to bind the Company, nor shall any Representative be, nor hold himself out as, an agent of the Company, in each case, except pursuant to a collective action of the Board taken pursuant to Section 5.4. If a Representative falsely represents or inappropriately holds himself out as agent of the Company, the Member he represents shall be responsible to the Company for such false representations. 5.6 Board Members. The number of members of the Board shall be four, two of whom shall be elected or appointed by MBME ("MBME Representatives") and two of whom shall be elected by Emeritus ("Emeritus Representatives"). Each Member shall from time to time designate, by written notice to the other Member, its Representatives to serve on the Board. By like Notice, each Member may designate alternative Representatives, who shall have the authority to act in the absence of the Representatives. Each Member may at any time, by written notice to the other Member, remove its Representatives or alternate Representatives and designate replacements. The Representatives of each Member shall be authorized to take any and all actions with respect to the functions of the Board. The resignation or removal of a Representative shall not invalidate any act of such person taken 12 prior to the giving of written notice of his resignation or removal. The initial designees as Representatives are reflected on Appendix E. The members of the Board shall select a Representative who shall serve as chairman of the meetings of the Board. 5.7 Lovalty of Representatives. Each Representative shall be the agent of the Member that designated such Representative. Accordingly, (i) each Representative shall act (or refrain from acting) with respect to the business and affairs of the Company solely in accordance with the wishes of the Member that designated such Representative and (ii) no Representative acting in his capacity as a Representative, shall owe (or be deemed to owe) any duty (fiduciary or otherwise) to the Company or any Member other than the Member that designated such Representative. Provided, however, the Members shall act in good faith with respect to each other in connection with the operations of the Company. 5.8 Transactions with Affiliates. The Company is specifically authorized to engage Members or their Affiliates to perform services to or for the Company, provided that: (a) no agreement, whether written or oral, between the Company and any Member or Affiliate (an "Affiliate Agreement") shall be entered into on behalf of the Company without prior disclosure to all Members of all of its material terms and provisions; (b) amounts paid to any Member or Affiliate and the terms and provisions of any Affiliate Agreement shall not be more favorable to such Member or Affiliate than would be the case with respect to an agreement negotiated on an arm's length basis with a Person that was not a Member or an Affiliate. By entering into this Agreement, the Members shall be deemed to have given their consent to the engagement of another Member or its Affiliate pursuant to an Affiliate Agreement; (c) the Members acknowledge that the Company shall enter into a Management Agreement in substantially the form attached as Appendix D with EC ; and (d) subject to Section 2.11, the Members acknowledge that the Compnay or entity managing the Project, as applicable, shall take an assignment of the Lease Agreement attached as Appendix E pursuant to an Assignment and Assumption Agreement and shall enter into an Ancillary Services Agreement with MBME or its Affiliates in substantially the form attached as Appendix F and Apppendix G, respectively. 5.9 Compensation; Expenses; Loans. (a) Except pursuant to an Affiliate Agreement or as provided in this Section 13 5.9, no Member or employee of such a Member shall receive any salary, fee or draw for services rendered to or on behalf of the Company, but a Member shall be reimbursed for any reasonable expenses incurred by such Member on behalf of the Company upon approval by the Members either before or after any such expenditure. (b) Members and their Affiliates may, with consent of the Members, lend or advance money to the Company. If any Member shall make a loan to the Company or advance money on its behalf, the amount of any such loan or advance shall not be treated as a Capital Contribution but shall be a debt due to such Member from the Company. The amount of any such loan or advance by a lending Member shall bear interest at a rate per annum equal to the prime rate of interest quoted from time to time in the money rate section of The Wall Street Journal or its legal successor in interest plus one percent (1%) per annum but not in excess of the maximum rate permitted by law. Any change in the prime rate shall adjust the interest rate effective as of the date of such change. No Member shall be obligated to make any loan or advance to the Company. This subsection 5.9(b) shall have no effect on or application to the provisions of this Agreement relating to Additional Capital Contributions and Excess Additional Capital Contributions. 5.10 Standard of Conduct; Liability for Certain Acts. Each Member shall perform and cause its employees to perform its duties in good faith, in a manner reasonably believed to be in the best interests of the Company, and with such care as a corporate officer of like position would exercise under similar circumstances. A Member performing duties in compliance with this standard will not be liable for any action so taken or any failure to take action. ARTICLE VI MEMBERS 6.1 Powers of Members; Voting Rights. Except as expressly provided for herein, no Member shall act as an agent of the Company or have authority to act for or bind the Company. At any meeting of the Members, each Member shall have a vote proportionate to its Membership Interest. The affirmative vote of a makority of the total Membership Interests shall be the act of the Company, except as may otherwise be required by the Act, the Certificate of Formation, or this Agreement. The Members may designate a chairman to facilitate a meeting of the Members. Unless required by the Act, the Members anticipate taking all actions through meetings of the Board as opposed to meetings of the Members. 6.2 Proxies. At all meetings, a Member may vote in person or by proxy executed in writing by the Member or a duly authorized Designee. The proxy shall 14 be delivered to the other Members present before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. 6.3 Confidentiality. From the date of this Agreement until that date that is two (2) years after the date of withdrawal of any Member, such Member shall not in any manner, through its Affiliates, employees, agents or otherwise, or on behalf of or for the benefit of any other Person, directly or indirectly disclose or divulge to any Person, any sales, marketing or management materials, handbooks, customer, patient or supplier lists, business plans or other business information of the Company which relates solely to the Project or any other or future projects of the Company, each Member hereby stipulating that, among the Members, each such item of business information is material to the effective and successful conduct of the business and goodwill of the Company. The foregoing shall not preclude Emeritus from using similar marketing and sales techniques with respect to its other operations. Each Member shall advise and enforce the obligations of confidentiality with respect to its Affiliates, agents and representatives. 6.4 Non-Competition. (a) Emeritus and MBME, severally, agree that, except as otherwise specifically provided in this Section 6.4 or with the consent of the Company during the term of its ownership of any interest in the Company, it will not, directly or indirectly, enter into or in any manner develop or operate any assisted living facility or take part in any business operation or other endeavor which provides assisted living facilities, programs or services similar to the Project or as otherwise then being provided by the Company within the counties of Rankin, Hinds and Madison, Mississippi in any capacity, or contract with a third party to act in any such capacity on its behalf, as an employee, consultant, director, agent, owner, independent contractor or otherwise, or employ or solicit the employment of any of the Company's then current employees or former employees who had been employed by the Company within the prior twelve (12) month period. (b) Emeritus and MBME, severally, further agree that, for a period of three (3) years from the effective date of its withdrawal, disassociation or departure (pursuant to the terms hereof and as distinguished from a complete liquidation and dissolution of the Company) from the Company, it will not, directly or indirectly, enter into or in any manner take part in any business operation or other endeavor which provides facilities, programs or services similar to those then being provided by the Company within the counties of Rankin, Hinds and Madison, Mississippi as employee, consultant, director, agent, owner, independent contractor or otherwise, or solicit the employment of any of the 15 Company's then current employees or former employees who had been employed by the Company within the twelve (12) month period prior to any such withdrawal, disassociation or departure. (c) The Members agree and acknowledge that any breach of Section 6.3 or Section 6.4 will result in damage or loss to the Company which cannot be reasonably or adequately compensated by monetary damages alone and will cause irreparable injury. The Members expressly agree that the Compay shall be entitled to injunctive and other equitable relief to prevent or remedy such a breach, and shall be entitled to reasonable attorneys' fees in connection therewith. (d) Notwithstanding the following, this Section 6.4 shall not apply to (i) any project or development in which a Member has declined to participate pursuant to Sections 2.7 and 2.8, (ii) that specific project to be located in Hattiesburg, Mississippi which is currently being contemplated by Emeritus or (iii) those projects in which MBME or its Affiliates are currently involved or anticipate to be involved in Clinton and Brandon, Mississippi with Columbia Pacific Management Group, Inc. or an affiliate thereof. With respect to the Hattiesburg, Mississippi project, Emeritus will make a good faith effort to afford MBME an opportunity to participate in such project at a future date in accordance with Section 2.7. Such participation shall provide for a 50% interest in the project, with MBME's investment calculated based on the development cost of the Hattiesburg project. Provided, however, if a Member declines to participate in accordance with Section 2.7 and 2.8 on three (3) projects within the counties of Rankin, Hinds and Madison, Mississippi during the time in which both MBME and Emeritus are Members of the Company, the non-competition provisions contained in this Section 6.4 shall terminate and have no further force or effect as to the Member who is participating in such other projects but shall continue in full force and effect as to the Member who declined to participate in such other projects. ARTICLE VII LIABILITY AND INDEMNIFICATION 7.1 Liability of Members. (a) A Member shall be liable only to make the payment of its Initial Capital Contribution and Additional Capital Contribution, required pursuant to Section 3.2 from time to time. No Member shall be liable, solely by reason of being a Member, under a judgment, decree, or order of a court, or in any other manner, for a debt, obligation, or liability of the Company, whether arising in contract, 16 tort, or otherwise, or for the acts or omissions of any other Member, agent, representative, or employee of the Company. (b) No distribution or other payment made to any Member shall be determined a return or withdrawal of a Capital Contribution unless so designated by the express provisions of this Agreement or by the Members in their sole and exclusive discretion, and no Member shall be obligated to pay any amount determined to be a return or withdrawal of a Capital Contribution to any Person for the account of the Company. (c) No Member shall have any obligation to the Company or any other Member to restore a negative balance in such Member's Capital Account to zero. 7.2 Indemnification. The Members, the Representatives and the officers and directors of the Members, (each, an "Indemnitee") shall be indemnified and held harmless by the Company from and against any and all losses, claims, damages, liabilities, expenses (including reasonable legal fees and expenses), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise by reason of such Indemnitee's status as a Member or an Affiliate of the Company which relates to or arises out of the Company, its assets, business or affairs, if in each of the foregoing cases (i) the Indemnitee acted in good faith and, with respect to any criminal proceeding, had no reasonable cause to believe such Indemnitee's conduct was unlawful and (ii) the Indemnitee's conduct did not constitute gross negligence or willful misconduct. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere, or its equivalent, shall not, of itself, create a presumption that the Indemnitee acted in a manner contrary to that specified in (i) or (ii) above. Any indemnification pursuant to this Article VII shall be made only out of the assets the Company, and no Member shall have any personal liability on account thereof. Notwithstanding anything contained herein to the contrary, the foregoing indemnification shall have no application or effect with respect to any actions or omissions of a Member acting in a capacity, contractual or otherwise, other than as a Member hereunder. Any recovery pursuant to the terms and provisions of this indemnification provision shall be reduced dollar-for-dollar by proceeds of any applicable insurance collected by such Member. 7.3 Expenses. Expenses (including reasonable attorney's fees and expenses) incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding described in Section 7.2 may be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding, in the discretion of the Members, upon the receipt by the Company of a written undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that the Indemnitee is not entitled to be indemnified as authorized in this Article VII. 17 7.4 Non-Exclusivity. The indemnification and advancement of expenses set forth in this Article VII shall not be exclusive of any other rights to which those seeking indemnification or advancement of expenses may also be entitled, and shall not limit in any way any right which the Company may have to indemnify the same or different Persons or classes of Persons. 7.5 Insurance. The Company' shall purchase and maintain insurance with limits and coverages referenced on Exhibit 7.5 (insurance) or as otherwise determined by the Board from insurance companies approved by the Board. ARTICLE VIII TRANSFERS OF INTERESTS; EVENTS OF WITHDRAWAL 8.1 Transfer of Membership Interests Restricted. No Member shall Transfer all or any part of a Membership Interest except with the prior written consent of Members holding least a majority of all of the non-transferring Member's Membership Interests in the Company. A transferee of the entire Membership Interest of a Member shall become a substitute Member in place of the transferor only if the Transfer has received the approval of Members (such approval to be given or withheld at the sole discretion of such Members) and the transferee has executed an instrument accepting and agreeing to be bound by the terms and provisions of the Certificate of Formation and this Agreement. A Transfer to which other Members have so consented, as provided above, shall be effective as of the date specified in the instruments relating thereto. Transfer of any Membership Interest in the Company may be made only on the transfer books of the Company. Any transferee desiring to make a further Transfer shall become subject to all the provisions of this Article VIII to the same extent and in the same manner as any Member desiring to make any Transfer. Any Transfer purported to be made without complying with the applicable provisions of this Section shall be void but the Member may be required to sell and the Company may be required to purchase the Membership Interest of the transferring Member pursuant to this Article VIII. The Members acknowledge and agree that the restrictions on the Transfer of Membership Interests under this Agreement are reasonable, are related to the objectives of the Members, and are in the best interests of the Members and the Company. 8.2 Events of Dissociation. Upon the occurrence of an event of dissociation describe in Section (1)(a) through (I) of Section 25-15-130 of the Act with respect to any Member ("Event of Dissociation"), such Member shall sell, and the Company shall purchase, all of the Membership Interest owned by such Member, at such price and on such terms as provided in Section 8.4; provided, however, the Company may elect to dissolve and terminate in accordance with Article IX in liey of purchasing such dissociated Member's Membership Interest. 18 8.3 Rights Following Triggering Event. Upon the occurrence of a Triggering Event and subject to the Company's right to dissolve and terminate under Article IX in lieu of purchasing such Member's Membership Interest, the Company and/or the non-offending Member(s) shall have the right, but not the obligation, to purchase such offending Member's Membership Interest in accordance with Section 8.4. If such right to purchase is exercised, the offending Member or such Member's successor in interest shall sell its Membership Interest to the Company or the non-offending Member and shall only have the following rights with respect to the Membership Interest of such offending Member after the occurrence of a Triggering Event: (a) the rights provided under Section 25-15-135 of the Act; (b) the right to receive, up to the date of closing under Section 8.4, the share of allocations and distributions, including distributions representing the return of Capital Contributions, to which such Member would have otherwise been entitled; and (c) the right to receive the purchase price for such Membership Interest as determined in Section 8.4. In no event shall any such offending Member or his successor in interest be entitled to exercise any other rights of a Member, including the right to vote. The rights set forth in this Section 8.3 shall supersede any right such Member would otherwise have to receive from the Company the fair value of its Membership Interest pursuant to the Act. 8.4 Closing; Payment of Purchase Price. The provisions of this Section 8.4 shall apply upon the occurrence of a Triggering Event or pursuant to the option to purchase granted in Section 8.7 below. (a) The closing of any sale under this Section 8. shall take place at th2 principal office of the Company' on the date and the time specified to the selling Member, but in no event later than one hundred twenty (120) days after the Company receives notice of the Triggering Event. If the closing date is not a day upon which commercial banks are open for business in Seattle, Washington, the closing shall occur on the next such day. (b) The fair market purchase price for the Membership Interest under this Section 8.4 will be an amount mutually determined by the Members and if no agreement is reached by the Members within thirty (30) days after the Triggering Event an amount equal to the fair market value of the Company as a "going concern" with no discount due to minority ownership interests or lack of marketability of the Membership Interests but with such discount as the appraiser deems to be appropriate due to the impact of existing and potential 19 competition with the Project or the Company, as determined by an expert appraiser with at least five (5) years experience in valuing healthcare related projects similar to the Project and who is mutually acceptable to the Members. If the Members are unable to mutually select an expert appraiser, the provision for determining fair market value contained in Section 9.5 shall govern. With such amount adjusted by any amounts due to the Company by, or payable to, the offending Member relating to any unrepaid loans or Additional Capital Contribution made to fund a non-funding Member's share of an Additional Capital Contribution. In the event of a transfer of a Member's Membership Interest which is also a guarantor of Company debt, the Company and the purchaser shall use their reasonable efforts to obtain the release of such transferring Member(s) from any and all such guaranties, pledges and/or Assumption Agreements and if such release is not obtainable within sixty (60) days after the transfer, the Company and such purchaser shall provide other financial assurances reasonably acceptable to the Member which is a party to such guaranty, pledge and/or Assumption Agreement. At the closing, the Company shall pay to the offending Member the purchase price in immediately available funds. All Membership Interests purchased by another Member or an approved third party shall at all times remain subject to the terms and provisions of this Agreement, including, without limitation, the transfer restrictions contained herein. 8.5 Forfeiture. No Member may withdraw, resign or retire from or otherwise cause a voluntary dissolution of the Company except as expressly provided in this Agreement. In the event a Member withdraws from the Company in violation of this Agreement or otherwise violates the terms of this Agreement following withdrawal, the Member shall not be entitled to a return of such Member's Capital Contribution, shall not be entitled to receive any other type or form of payment or property from the Company for its Membership Interest, and shall be deemed to have forfeited such Membership Interest. All of the Members hereby acknowledge that the damages suffered by the Company and the other Members as a result of such withdrawal are not susceptible of definite determination, and that therefore such forfeiture of a withdrawn Member's entire Membership Interest shall be deemed to constitute the amount by which any amount otherwise payable to a withdrawn Member would be reduced pursuant to Section 25-15-130 of the Act. 8.6 Additional Members. After the formation of the Company, any Person may become a Member upon obtaining the approval of the Members of the Company holding a majority of the Membership Interests. No additional Member shall be entitled to any retroactive allocation of losses, income or expense deductions incurred by the Company. 20 (a) Upon the second anniversary of formation of the Company and every two years thereafter, MBME shall have the right, notwithstanding any other provision of this Agreement to the contrary, to put to Emeritus for purchase. MBME's Membership Interests in the Company at a purchase price equal to $909,377 (MBME's initial investment in the Company) if the yield on a Member's cash investment in the Company after debt service is less than ten percent (10%) on an annualized basis during the second year of the applicable two year period. MBME must exercise such put right within sixty (60) days after receipt of the Company's financial statements for the second year of the applicable two year period. In the event MBME elects to put its Membership Interest to Emeritus for purchase, Emeritus shall be obligated to purchase for cash the entire Membership Interest of MBME within six (6) months following the date of MBME's election. In such a case, Emeritus shall have a mandatory obligation to purchase al1 of the Membership Interests of MBME. (b) In the event that the management agreement between Emeritus the owner of Trace Pointe located on Northside Drive, Clinton, Mississippi, is terminated for cause due to a default by Emeritus, Emeritus shall promptly provide MBME written notice of such termination and MBME shall have a one time right to put to Emeritus for purchase MBME's Membership Interests in the Company at a purchase price of $909,377 (MBME's initial investment in the Company). MBME must exercise such put right within sixty (60) days after receipt of actual notice from Emeritus of such termination. In the event MBME elects to put its Membership Interest to Emeritus for purchase, Emeritus shall be obligated to purchase for cash the entire Membership Interest of MBME within six (6) months following the date of MBME's election. In such a case, Emeritus shall have a mandatory obligation to purchase all of the Membership Interests of MBME. (c) In the event that (i) EC is in default with respect to its obligations under the Management Agreement, (ii) MBME has given written notice of such default in accordance with the terms of the Management Agreement and (iii) EC has failed to cure such default within any applicable cure periods provided for in the Management Agreement (an "Uncured Default"), MBME shall have the right after the expiration of such cure periods to put to Emeritus for purchase MBME's Membership Interests in the Company at a purchase price equal to the greater of (i) fair market purchase price as determined in accordance with Section 8.4, or (ii) $909,377 (MBME's initial investment in the Company). MBME must exercise such put right within sixty (60) days after the later of the expiration of the applicable cure periods or the date of the determination of the fair market value purchase price. In the event MBME elects to put its Membership Interest to Emeritus for purchase pursuant to this Section 8.7(c), 21 Emeritus shall have the right to provide MBME with written notice within twenty (20) days thereafter of its intent to submit to arbitration in accordance with the terms of this Agreement, the existence of an Uncured Default: provided, however, in the event Emeritus either does not timely elect to arbitrate the existence of an Uncured Default or an Uncured Default is found to exist after the matter has been submitted for arbitration, Emeritus shall be obligated to purchase for cash the entire Membership Interest of MBME within six (6) months following the date of MBME's election. In such a case, Emeritus shall have a mandatory obligation to purchase all of the Membership Interests of MBME. (d) Emeritus or MBME shall provide to the other prompt written notice of any event, notice or series of events of which it has actual knowledge relating to the Project or its operations that is likely to, or which may after the passage of time, be reasonably expected to jeopardize or have a material adverse effect on the accreditation of MBME with the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") in any manner or have a substantial and material adverse effect on the economic operation of the Company or the Project as a result of compliance with JCAHO standards or requirements. In such a case, MBME shall have the right, notwithstanding any other provision of this Agreement to the contrary, to put to Emeritus for purchase MBME's Membership Interests in the Company at a fair market purchase price determine in accordance with Section 8.4. MBME must exercise its option to put its Membership Interest to Emeritus by written notice to Emeritus within sixty (60) days after the receipt or delivery of the notice referenced above, a applicable. In the event MBME elects to put its Membership Interest to Emeritus for purchase, Emeritus shall be obligated to purchase for cash the entire Membership Interest of MBME. In such a case, Emeritus shall have a mandatory obligation to purchase all of the Membership Interests of MBME. (e) MBME's put right contemplated by subsection (b) shall be a one time right and only the put rights set forth in subsections (a), (c) and (d) shall continue from year to year in the event MBME elects not to exercise its put right on any occasion on which the same applies, it being understood and agreed that a waiver of the put right provided in subsections (a), (c) and (d) at any applicable periodshall not be considered a waiver of any future put rights of MBME triggered by future events under subsections (a), (c) or (d). 22 ARTICLE IX DISSOLUTION AND TERMINATION 9.1 Events of Dissolution. The Company may be dissolved upon the occurrence of any of the following events: (a) the affirmative vote by or on behalf of Members holding a majority of all Membership Interests in the Company to dissolve the Companv; (b) the expiration of the term stated in Section 2.1; (c) the sale or other disposition of substantially all of the assets of the Company and the receipt and distribution of all of the proceeds therefrom; (d) the occurrence of an event of dissociation with respect to a Member under Section 25-15-130(1)(a) through (i) of the Act (other than a Transfer of a Membership Interest permitted under Section 8.1) unless, within ninety (90) days of such event, a proposal to continue the Company receives the approval of Members holding a majority of all Membership Interests in the Company, other than that of those of the subject Member (provided, that if such collective approvals do not constitute the approval of owners of a majority of the profits interests and capital interests in the Company determined in accordance with Rev. Proc. 95-10 and, excluding the Membership Interest held by the subject Member, then only the approval of Members owning such a majority of the profits interests and capital interests in the Company shall constitute approval of such proposal), in which event the business of the Company shall be continued in accordance with this Agreement; (e) when so required in accordance with other provisions of this Agreement; or (f) as otherwise required by the Act, including but not limited to the entry of a decree of involuntary dissolution pursuant to Section 25-15-275 of the Act. 9.2 Conclusion of Affairs. Subject to the operation of Section 9.5, in the event of the dissolution of the Company for any reason, if the Company is not continued as permitted by this Agreement, the Members shall proceed promptly to wind up the affairs of the Company and to file with the Washington Secretary of State a Certificate of Dissolution disclosing such dissolution. Except as otherwise provided in this Agreement, the Members and their successors in interest shall continue to share distributions and allocations during the period of winding up in the same manner as before the dissolution. The Members shall determine the time, manner and terms of any sale or sales of the Company property pursuant to such winding up, having due 23 regard to the activity and the condition of the Company and relevant market and financial and economic conditions, and consistent with their obligations to the Members. 9.3 Liquidating Distributions. After paying or providing for the payment of all debts and liabilities of the Company and all expenses of winding up, and subject to the right of the Members to set up such reserves as they may deem reasonably necessary for any contingenct or unforeseen liabilities or obligations of the Company, the proceeds of the liquidation, and any other remaining assets of the Company, shall be distributed to or for the benefit of the Members (and their successors in interest) in accordance with Section C.8 of Appendix C. Subject to Section 9.5, no Member shall have any right to demand or receive property other than cash upon dissolution and winding up of the Company; however, the Members shall have the right and power to distribute assets in kind (whether to some or all of the persons entitled to such distributions), valued at the then estimated fair market value of such assets, as a liquidating distribution to Members or their successors in interest. 9.4 Termination. Within a reasonable time following the completion of the winding up of the Company, the Company shall supply to each Member a statement which shall set forth the assets and the liabilities of the Company as of the date of complete winding up and the portion to be received by each Member of the distributions pursuant to this Agreement. Upon completion of the winding up of the Company and the distribution of all Company's assets, the existence of the Company shall be terminated, and the Members shall execute and file with the Washington Secretary of State a Certificate of Cancellation of the Company, as well as any and all other documents required to effectuate the dissolution and termination of the Company. 9.5 Required Distribution in Kind Under Certain Circumstances. In the event that the Company is dissolved and not continued after an event of dissolution described in Section 9.1(d) of this Agreement, and neither the Company nor the non-offending Member elect to exercise its option to purchase under Article VIII, then any Member(s) who desires to continue operating its business in substantially the same manner as prior to such event of dissolution, shall have the right (but not the obligation) to demand that the appropriate portion of the assets of the Company be distributed in kind to them and to the successors in interest of any former Member desiring to participate in the continuation of the business, on the condition that any other Member is first paid for his or her Membership Interest (including any and all Additional Capital Contributions, Excess Additional Capital Contributions and Preferred Cumulative Returns as applicable) in the Company in cash (such cash may be provided by the continuing Member(s) as Additional Capital Contributions) or on any such other terms as may be agreed to by the continuing Members, on the one hand, and those entitled to payment, on the other hand and that sufficient funds, reserves or commitments are established to fully satisfy all liabilities or obligations of the Company. The net fair market value of Company assets shall be determined by agreements between (i) the Members desiring to continue the business, and (ii) the persons whose interests are to be purchased. If the interested parties are unable to agree within ten (10) days after the event of dissolution, the Members desiring to continue the business shall have 24 the right to select one appraiser, the persons whose interests are to be purchased shall have the right to select a second appraiser. Each appraiser shall be instructed to value the Company as a "going concern" with no discount due to minority ownership interests or lack of marketability of the Membership Interests but with such discount as the appraiser deems to be appropriate due to the impact of existing and potential competition with the Project or the Company. The Members shall compare the two appraisals and calculate the arithmetic mean of the two values. If both values are within five percent (5%), plus or minus, of the mean value, the Members shall accept the mean value as the appraisal value. If the appraised values are not within the range of five percent (5%), plus or minus, of the mean value, the Members shall engage the services of a third appraiser, who shall be chosen by the two original appraisers unless the Members shall otherwise agree on a third appraiser. The Members shall equally bear the expenses of the third appraiser. The third appraiser shall not be privy to the valuation of the first two appraisers. When the parties receive the opinion of the third appraiser, they shall compare it to the original two values. The Purchase Price shall be the arithmetic mean of the two values that are closest to each other. All appraisers shall have at least five (5) years of experience in valuing healthcare related businesses similar to the Project and the Company and all reports and recommendations of each appraiser shall be provided, in writing, no later than forty-five (45) days after the date of the engagement. ARTICLE X REPRESENTATIONS AND WARRANTIES 10.1 In General. As of the date hereof, each of the Members hereby makes each of the representations and warranties applicable to such Member as set forth in Section 10.2 hereof, and such warranties and representations shall survive the execution of this Agreement. 10.2 Representations and Warranties. Each Member hereby represents and warrants the following: (a) Due Organization or Formation; Authorization of Agreement. If an Entity, such Member is duly organized or duly formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation and has the power and authority to own its property and carry on its business as owned and carried on at the date hereof and as contemplated hereby. Such Member is duly licensed or qualified to do business and in good standing in each of the jurisdictions in which the failure to be so licensed or qualified would have a material adverse effect on its financial condition or its ability to perform its obligations hereunder. Each Member has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder and the execution, delivery and performance of this Agreement has been duly authorized. This Agreement constitutes the legal, valid, and binding obligation of each Member, except as such enforceability may be limited by creditors 25 rights laws and gencral principles of equity. (b) No Conflict With Restrictions, No Default. Neither the execution, delivery and performance of this Agreement nor the consummation by a Member of the transactions contemplated hereby will (i) conflict with, violate or result in a breach of any law, regulation, order, writ, injunction, decree, determination, or award of any court, any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator, applicable to such Member or any of its Affiliates; (ii) conflict with, violate, result in a breach of, or constitute a default under any governing document of such Member or any of its Affiliates or of any material agreement or instrument to which such Member or any of its Affiliates is a party or by which such Member or any of its Affiliates is or may be bound or to which any of its material properties or assets is subject; (iii) conflict with, violate, result in a breach of, constitute a default under (whether with notice or lapse of time or both), accelerate or permit the acceleration of the performance required by, give to others any material interests or rights, or require any consent, authorization or approval, under any indenture, mortgage, lease agreement or instrument to which such Member or any of its Affiliates is a party or by which such Member or any of its Affiliates is or may be bound; or (iv) result in the creation or imposition of any lien upon any of the material properties or assets of such Member or any of its Affiliates. (c) Governmental Authorizations. Any registration, declaration or filing with, or consent, approval, license, permit or other authorization or order by any governmental or regulatory authority, domestic or foreign, that is required in connection with the valid execution, delivery, acceptance and performance by such Member under this Agreement or the consummation by such Member of the investment contemplated hereby has been completed, made or obtained on or before the effective date of this Agreement. (d) Litigation. There are no actions, suits, proceedings or investigations pending or, to the knowledge of such Member or any of its Affiliates, threatened against or affeccing such Member or any of its Affiliates or any of their properties, assets or businesses in any court or before or by any governmental department, board, agency or instrumentality, domestic or foreign, or any arbitrator which could, if adversely determined (or, in the case of an investigation, could lead to any action, suit, or proceeding, which would, if adversely determined) reasonably be expected to materially impair such Member's ability to perform its obligations under this Agreement or to have a material adverse effect on the consolidated financial condition of such Member; and such Member or any of its Affiliates has not received any currently effective notice of any default, and such Member or any of its Affiliates is not in default, 26 under any applicable order, writ, injunction, decree, permit, determination, or award of any court, any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator which could reasonably be expected to materially impair such Member's ability to perform its obligations under this Agreement or to have a material adverse effect on the consolidated financial condition of such Member. (e) Investment Company Act; Public Utility Holding Company Act. Neither Member nor any of its Affiliates is, nor will the Company as a result of such Member holding an interest in the Company be, an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended. Neither Member nor any of its Affiliates is, nor will the Company as a result of such Member holding an interest in the Company be, a "holding company," "an affiliate of a holding company," or a "subsidiary of a holding company" as defined in, or subject to regulations under, the Public Utility Holding Company Act of 1935, as amended. (f) Accredited Investor; Acquisition for Investment Purposes Only. Member is an "Accredited Investor" as that term is defined in Rule 501(a) of Regulation D of the General Rules and Regulations promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Member is acquiring its Membership Interest individually and as principal for its own account, for investment purposes only, and not as a nominee or agent for any other Person and not with a view to, or for the offer or sale in connection with, any resale or other distribution of any such Membership Interest. Member agreed and acknowledges that it will not, directly or indirectly, offer, transfer, sale, assign, pledge, hypothecate or otherwise dispose of (collectively, "Offer") any Membership Interest unless such Offer complies with the terms of this Agreement and is either: (i) pursuant to an effective registration statement under the Securities Act and qualification or other compliance under applicable blue sky or state securities laws, or (ii) exempt from registration under the Securities Act and applicable blue sky or state securities laws. ARTICLE XI ACCOUNTING AND BANK ACCOUNTS 11.1 Accounting Method. The books of the Company shall be kept on the accrual method or any other accounting method as may be designated by the Members from time to time in accordance with the Code. 11.2 Books and Records. The books and records of the Company shall be maintained at its principal place of business. Each Member (or such Member's designated representative) 27 shall have the right upon prior notice and during ordinary business hours and upon reasonable notice to inspect and copy (at such Member's own expense) the books and records or the Company. 11.3 Financial Reports. As soon as reasonably, practicable after the end of each fiscal year of the Company, the Company shall cause to be prepared and delivered to each Member the financial statements of the Company together with all information with respect to the Company necessary for the preparation of the Members' federal, state, and local income tax returns. 11.4 Tax Returns and Elections/Tax Matters Member. The Company shall cause to be prepared and timely filed all federal, state and local income tax returns or other returns or statements required by applicable law. The Company shall claim all deductions and make such elections for federal or state income tax purposes which the Members reasonably believe will produce the most favorable tax results for the Members. Emeritus is specifically authorized to act as the "Tax Matters Member (Partner)" under the Code and in any similar capacity under state or local law, provided that such Member shall at all times consult with and keep advised all other Members with respect to all communications to and from the relevant tat authorities 11.5 Bank Accounts. If required by the Board, all funds of the Company shall be deposited in a separate bank, money market or similar account or accounts approved by the Members and in the name of the Company. Withdrawals therefrom shall be made only by persons authorized to do so by the Board, and only as follows: (a) for operating expenses within budgets have been approved by the Board; (b) for capital expenditures within budgets which have been approved by the Board; and (c) for other purposes as approved by the Board. ARTICLE XII MISCELLANEOUS PROVISIONS 12.1 Notices. Any notice, demand, or communication required or permitted to be given by any provision of this Agreement shall be deemed to have been sufficiently given or served for all purposes if delivered personally to a Member or to an executive officer of a Member to whom the same is directed or if sent by registered or certified mail, postage and charges prepaid, return receipt requested, or by overnight courier of national reputation or transmitted by facsimile transmission, in each case addressed to the Member's and/or 28 Company's address or facsimile number, as appropriate, which is set forth in the books and records of the Company. Any such notice shall be deemed to be given as of the date so delivered or "faxed", as of the next business day if delivered by overnight courier, and if sent by mail, five (5) business days after deposit with the United States mail, addressed and sent as aforesaid. 12.2 Governing Law. This Agreement and all questions with respect to its construction, enforcement, or interpretation, the rights and obligations of the Members, or the formation, administration, or termination of the Company shall be governed by the Act and other applicable internal laws of the State of Washington. 12.3 Waiver of Action for Partition. Each Member irrevocably waives during the term of the Company any right that it may otherwise have to maintain any action for partition with respect to the property of the Company. 12.4 Execution of Additional Instruments. Each Member hereby agrees to execute such documents or instruments as may be necessary to comply with applicable laws, rules, or regulations. 12.5 Construction. Whenever the singular number is used in this Agreement and when required by the context, the same shall include the plural and vice versa, and the neuter gender shall include the masculine and feminine genders and vice versa. 12.6 Headings. The headings in this Agreement are for convenience only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any of its provisions. 12.7 Waivers. The failure of any Member to seek redress for violation of or to insist upon the strict performance of any covenant or condition of this Agreement shall not constitute a waiver of any subsequent violation or of the right to so insist. Any Waiver by a Member shall be in writing, shall only apply to express events or terms set forth therein and shall be signed by the Member granting such waiver in order to constitute a valid waiver. 12.8 Rights and Remedies Cumulative. The rights and remedies provided by this Agreement are cumulative, and also are provided in addition to any other rights the Members may have by law, statute, ordinance or otherwise. 12.9 Severability. Any provision of this Agreement that is invalied, illegal, or unenforceable in any jurisdiction shall be ineffective only in such jurisdiction and only to the extent of such invalidity, illegality, or unenforceability, and without rendering ineffective the remaining provisions of the Agreement in any jurisdiction. 12.10 Heirs, Successors, and Assigns. Each and all of the covenants, terms, 29 provisions, and agreements contained in this Agreement shall be binding upon and inure to the benefit of the Members and, to the extent permitted by this Agreement, their successors in interest. 12.11 No Third Party Beneficiaries. None of the provisions of this Agreement (other than Section 5.3) shall be construed to be for the benefit of or enforceable by any Person other than the Members and, to the extent permitted by this Agreement, their successors in interest. The terms and provisions hereof are exclusively for the benefit of the Members and not for the benefit of any third party. 12.l2 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. 12.13 Facsimile Signatures. In order to expedite any actions of the Company, telecopied signatures may be used in place of original signatures on this Agreement or any documents or certificates contemplated hereby. All Members intend to be bound by the signatures on the telecopied document, are aware that other Members will rely on the telecopied signatures, and hereby waive any and all defenses to the enforcement of the terms of this Agreement or any documents or certificates contemplated hereby based on the form of signature. 12.14 Attorneys' Fees. If any Member commences legal proceedings for any relief against another Member arising out of this Agreement or any exhibits or certificates contemplated hereby, the losing party shall pay the prevailing party's reasonable attorneys' fees upon final settlement, judgment or appeal thereof. 12.l5 Arbitration Provisions. (a) Each Member shall have the right to submit any dispute between the Members relating to this Agreement or the Company to binding arbitration and each Member hereby consents to binding arbitration. All disputes between the Members submitted to arbitration shall be resolved by binding arbitration administered by the American Arbitration Association (the "AAA") in accordance with, and in the following order of priority: (i) the terms of these arbitration provisions; (ii) the Commercial Arbitration Rules of the AAA; (iii) the Federal Arbitration Act (Title 9 of the United States Code); and (iv) to the extent the foregoing are inapplicable, unenforceable or invalid, the Laws of the State of Washington. The validity and enforceability of these arbitration provision shall be determined in accordance with this same order of priority. In the event of any inconsistency between these arbitration provisions and such rules and statutes, these arbitration provisions shall control. Judgment upon any award rendered hereunder may be entered in any court having jurisdiction. 30 (b) All statutes of limitation applicable to any dispute shall apply to any proceeding in accordance with these arbitration provisions. (c) Arbitrators are empowered to resolve disputes by summary rulings substantially similar to summary judgments and motions to dismiss. Arbitrators shall resolve all disputes in accordance with the applicable substantive law. Any arbitrator selected shall be required to be experienced and knowledgeable in the substantive laws applicable to the subject matter of the dispute. With respect to a dispute in which the claims or amounts in controversy do not exceed $250,000, a single arbitrator shall be chosen in good faith by the Members and shall resolve the dispute. In such case, the arbitrator shall be required to make specific, written findings of facts, and shall have authority to render an award up to but not to exceed $250,000, including all amounts properly payable and costs, fees and expenses. A dispute involving claims or amounts in controversy exceeding $250,000, may be decided by a single arbitrator if mutually agreed upon by the Members and if they are unable to mutually agree by a majority vote of a panel of three arbitrators selected in good faith by the Members (an "Arbitration Panel"), the determination of any two of the three arbitrators constituting the determination of the Arbitration Panel; provided, however, that all three arbitrators on the Arbitration Panel must actively participate in all hearings and deliberations. Arbitrators, including any Arbitration Panel, may grant any remedy or relief deemed just and equitable and within the scope of these arbitration provisions and may also grant such ancillary relief as is necessary to make effective any award. Arbitration Panels shall be required to make specific, written findings of fact and conclusions of law. The determination of an arbitrator or Arbitration Panel shall be binding on all Members and the Company and shall not be subject to review or appeal. (d) To the maximum extent practicable, the AAA, the arbitrator (or the Arbitration Panel, as appropriate) and the Members shall take any action necessary to require that an arbitration proceeding hereunder shall be concluded within 180 days of the filing of the dispute with the AAA. Unless the Members shall agree otherwise, arbitration proceedings hereunder shall be conducted in Seattle, Washington. Arbitrators shall be empowered to impose sanctions, permit or order depositions and discovery and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure and applicable law. With respect to any dispute, each Member agrees that all discovery activities shall be expressly limited to matters directly relevant to the dispute and any arbitrator, Arbitration Panel and the AAA shall be required to fully enforce this requirement. The provisions of these arbitration provisions shall survive any termination, amendment or expiration of this Agreement, unless the Members otherwise expressly agree in 31 writing. To the extent permitted by applicable law, arbitrators, including any Arbitration Panel, shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees and arbitrators' fees) to the prevailing Member or, if no clear prevailing Member, as the arbitrator (or Arbitration Panel, if applicable) shall deem just and equitable. Each Member agrees to keep all disputes and arbitration proceedings strictly confidential, except for disclosures of information required by applicable law. IN WITNESS WHEREOF, the Members have executed this Agreement as of the date first written above. Mississippi Baptist Medical Enterprises, Inc. By: /s/ Michael K. Stevens -------------------------------------------- Michael K. Stevens, Executive Director Emeritus Properties XI, LLC By : Emeritus Corporation -------------------------------------------- Its : Sole Member By: /s/ Kelly J. Price -------------------------------------------- Its: Vice President of Finance 32 SCHEDULE I DEFINITIONS "Act" means the Washington Limited Liability Company Act, as amended from time to time. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(d)(ii)(4),1.704-1(b)(2)(d)(ii)(5),and 1.704-1(b)(2)(d)(ii)(6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. "Adjusted Capital Account" means the Capital Account balance of a Member, increased by such Member's share of Company Minimum Gain and Member Nonrecourse Debt Minimum Gain. "Adjusted Capital Contribution" means, as of any day, a Member's Capital Contributions adjusted as follows: (i) Increased by any amounts actually assumed by such Member to any Company lender pursuant to the terms of any Assumption Agreement; and (ii) Reduced, but not below zero, by the amount of cash distributed to such Member pursuant to Section C-6 of Appendix C attached hereto. In the event any Member transfers all or any portion of its interest in the Company in accordance with the terms of this Agreement, such Member's transferee shall succeed to the Adjusted Capital Contribution of the transferor to the extent it relates to the transferred interest. "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly 33 controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person. (iii) any officer, director, trustee or general partner of such Person, or (iv) any Person who is an officer, director, general partner, trustee, or holder of ten percent (10%) or more of the voting interests of any Person described in clauses (i) through (iii) of this sentence. For purposes of this definition, the term "controls, " is controlled by, " or "is under common control with" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person or Entity, whether through the ownership of voting securities, by contract or otherwise. For al1 purposes, neither Holiday Retirement Corp. nor Columbia Pacific Group, Inc. or any subsidiary or affiliate thereof shall be considered an affiliate of Emeritus. "Assumption Agreement" means any agreement and any amendment, modification or renewal thereof between the Company, any of the Members, and/or any Person or Entity to whom the Company is indebted pursuant to a loan agreement, any seller financing with respect to an installment sale, a reimbursement agreement, or any other arrangement (collective1y referred to as a "loan" for purposes of this Agreement) pursuant to which any Member expressly assumes any individual liability with respect to such loan. The amount of any such loan shall be treated for all purposes under this Agreement as assumed by the Member(s) who enter(s) into an Assumption Agreement in the proportions set forth in such Assumption Agreement, and their respective amounts so assumed shall be credited to their respective Capital Accounts as described under the definition of Adjusted Capital Contribution (provided such amounts shall not be considered in determining any purchase price of a Member's Membership Interest under the terms of this Agreement). To the extent such loan is repaid by the Company, such Members' Capital Accounts shall be debited with their respective shares of the repayments as described under the definition of Adjusted Capital Contribution. To the extent such loan is repaid by some or all of the Members from their own funds, there shall be no adjustments to their Capital Accounts. "Capital Account" means the Capital Account maintained for any Member in accordance with Regulation Section 1.704-1(b). By way of enumeration, and not of limitation: (i) To each Member's Capital Account there shall be credited such Member's Capital Contributions, such Member's distributive share of Profits and any items in the nature of income or gain that are specially allocated pursuant to Section C.2 or C.3 if Appendix C attached hereto and the amount of any Company liabilities assumed by such Member and debited to such Member's distributive share of Losses, any items in the nature of expenses or losses that are specially allocated pursuant to Section C.2 or C.3 of Appendix C attached hereto, the amount of cash distributed to the Member pursuant to this Agreement and the amount of any liabilities of such Member assumed by the Company; and (ii) In the event all or a portion of a Membership Interest in the Company is 34 transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Interest. It is intended that Capital Accounts be maintained in compliance with Regulation Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Members shall determine it is prudent to modify the manner in which the Capital Accounts or any debits or credits thereto are computed in order to comply with such Regulations, the Members may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member pursuant to Section C.8 of Appendix C attached hereto upon the dissolution of the Company. The Members also shall make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company's balance sheet, as computed for book purposes, in accordance with Regulation Section 1.704-1(b)(2)(iv)(g), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulation Section 1.704-1(b). Notwithstanding anything contained herein to the contrary, any provisions requiring or permitting the purchase of a Member's Membership Interest under the terms of this Agreement based on such Member's Capital Account shall not include any portion of said Capital Account associated with any Assumption Agreement relating to such Member. "Capital Contribution" means, with respect to any Member, the amount of money and the initial Gross Asset Value of any property (other than money) contributed to the Company with respect to the interest in the Company held by such Member. The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed to the Company by the maker of the note (or a person or Entity relate to the maker of the note within the meaning of Regulation Section 1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Account of any Member until the Company makes a taxable disposition of the note or until (and to the extent) principal payments are made on the note, all in accordance with Regulation Section l.704-1(b)(2)(iv)(d)(2). "Certificate of Formation" means the Certificate of Formation of the Company as filed with the Secretary of State of Washington, as the same may be amended or restated from time to time. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Company Minimum Gain" has the same meaning as "partnership minimum gain" as set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations. "Cumulative Preferred Return" shall be equal to an interest rate accruing from the date any Excess Capital Contributions until such amount is actually repaid in full at the lesser of: (i) the prime rate as quoted from time to time in the money rate section of the 35 Wall Street Journal plus five percent (5%) per annum or (ii) the maximum nonusurious interest rate allowed by law, compounded annually, on the then outstanding balance thereof. The outstanding balance of accrued interest as of January 1 of each year in which an Excess Additional Capital Contribution is outstanding shall be compounded annually by adding the unpaid interest to the then outstanding principal amount of the Excess Additional Capital Contribution plus any previously compounded interest. "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year. Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other such recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Members. "EC" means Emeritus Corporation, a Washington corporation, and any permitted successor or assignee thereof. "Emeritus" means Emeritus Properties XI, LLC, a Washington limited liability company and any permitted successor or assignee thereof. "Emeritus Representative" is defined in Section 5.6. "Entity" means any general partnership, limited partnership, limited liability company, corporation, joint venture, trust, business trust, cooperative or association, or any foreign trust, or foreign business organization. "Fiscal Year" means (i) the period commencing on the effective date of this Agreement and ending on the immediately succeeding December 31, (ii) any subsequent twelve (12) month period commencing on January 1 and ending on December 31, or (iii) any portion of the period described in clause (ii) for which the Company is required to allocate Profits, Losses, and other items of Company income, gain, loss, or deduction pursuant to Appendix C hereof. "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member of the Company shall be the gross fair market value of such asset as determined by the Members. 36 (ii) The Gross Asset Value of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Members, as of the following times: (a) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Member of more than a de minimis amount of property as consideration for an interest in the Company; and (c) the liquidation of the Company within the meaning of Regulation Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Members reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company. (iii) The Gross Asset Values of Company assets distributed to any Member shall be adjusted to equal the gross fair market value of such asset on the date of distribution as determined by the Members; and (iv) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and Sections l.27 and C.2(g) hereof; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph(i), subparagraph(ii), or subparagraph(iv) hereof such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. "Lease Agreement" means that certain Lease Agreement dated June 10, 1998 between Emeritus Properties I, Inc. and Mississippi Baptist Health Systems, Inc. "Management Agreement" means that certain Management Agreement for the operations and management of the Project between the Company and EC, dated December 23, 1998 and any amendment, modification or renewal thereof. "MBME" shall mean Mississippi Baptist Medical Enterprises, Inc., a Mississippi corporation, and any permitted successor or assignee thereof. "MBME Representative" is defined in Section 5.6. "Member" means each of the parties listed on Appendix A and also any Person 37 subsequently admitted to membership in the Company. "Member Nonrecourse Debt" has the same meaning as "partner nonrecourse debt" as set forth in Section 1.704-2(b)(4) of the Regulations. "Member Nonrecourse Debt Minimum Gain" means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. "Member Nonrecourse Deductions" has the same meaning as "partner nonrecourse deductions" as set forth in Section 1.7042(i)(l) and 1.704-2(i)(2) of the Regulations. "Membership Interest" means all of the interests (management, ownership, voting or otherwise) of a Member in the Company in the percentage set forth on Appendix A to this Agreement. "Net Cash Flow" means Net Cash from Operations less the proceeds from any nonrecurring sale or disposition of any Company assets or the refinancing or refunding of any Company property. "Net Cash from Operations" means the gross cash proceeds from Company operations less all Company expenses, debt payments (principal and interest), capital improvements, reserves, replacements and contingencies, all as determined by the Members. "Net Cash from Operations" shall not be reduced by depreciation, amortization, cost recovery deduction, or similar allowances, but shall be increased by any reductions of reserves previously established pursuant to the first sentence of this paragraph. "Net Cash from Operations" shall include all principal and interest payments with respect to any note or other obligation received by the Company. "Nonrecourse Deductions" shall have the meaning set forth in Section 1.704-2(b)(1) of the Regulations. "Nonrecourse Liability" shall have the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "Percentage Interest" means the percentage set forth opposite the name of a Member on Appendix A which shall be such Member's percentage share of (i) the total amount of each Additional Capital Contribution required; (ii) total Profits or Losses of the Company to be allocated; and (iii) the total amount of each distribution. "Person" means any individual or Entity, and the heirs, executors, administrators, legal representatives, successors, and assigns of a "Person" when the context so permits. 38 "Profits" and "Losses" means, for each Fiscal Year, an amount equal to the Company's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses pursuant to this definition shall be added to such taxable income or loss; and (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulation Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits and Losses pursuant to this definition shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deduction taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year, computed in accordance with the definition of Depreciation; (vi) To the extent an adjustment to the adjusted tax basis of any Company pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulation Section l.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in complete liquidation of a Member's Membership Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits and Losses; and (vii) Notwithstanding any other provision of this definition, any items specially allocated pursuant to Section C.2 or Section C.3 of Appendix C attached hereto shall not be taken into account in computing Profits and Losses. 39 The amounts of the items of Company income, gain, loss or deduction available to be specially allocated pursuant to Section C.2 of Appendix C attached hereto shall be determined by applying rules analogous to those set forth in subparagraphs (i) through (vi) above. "Project" means the assisted living facility, consisting of approximatelv 80 units located at 410 Orchard Park, Ridgeland, Madison County, Mississippi on a portion of the property described on Appendix D, and any future improvements located on such property. "Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Representatives" means either or both a MBME Representative and/or an Emeritus Representative or any designated successor, replacement or alternate for such person. "Transfer" means, in either noun or verb form: (i) Any voluntary transfer, sale, gift or other disposition of all or part of a Membership Interest and any attempted such transfer, sale, gift or other disposition: (ii) Any involuntary transfer, sale or other disposition, including but not limited to involuntary transfers pursuant to any bankruptcy or insolvency law or by the action of any trustee, whether by law, in equity or otherwise, of, and any attempt to make or cause such involuntary transfer, sale or other disposition of, any Membership Interest; (iii) Any voluntary or involuntary security interest, lien, claim, collateral pledge or other encumbrance, writ of attachment, levy or other similar restriction upon, and any attempt to create, impose or foreclose any of the same upon, any Membership Interest; or (iv) any direct or indirect change of control in the owners or ownership structure of any Member. "Triggering Event" means any one of the following events: (i) any attempted or purported Transfer in violation of this Agreement including without limitation the restrictions on Transfer contemplated by Section 8.1; or (ii) any Event of Dissociation referred to in Section 8.2. "Withdrawal Date" is defined in Section 8.4. "Withdrawing Member" is defined in Section 8.4. 40 APPENDIX A TO LIMITED LIABILITY COMPANY AGREEMENT OF RIDGELAND ASSISTED LIVING, LLC MEMBERS AS OF DECEMBER 23, 1998 Amount Initial Membership Name and Address Capital Contribution Interest Mississippi Baptist Medical Enterprises, Inc. $909,377 (1) 50% Emeritus Properties XI, LLC $974,577 (2) 50%
(1) $100,000 of such initial capital contribution was paid concurrently with the execution of that Economic Interest Assignment Agreement and Subordination Agreement dated September 5, 1997 and the balance of such initial capital contribution shall be paid concurrently with the execution of this Operating Agreement. (2) All of such initial capital contribution has already been paid through the prior operation of the Project. A-1 APPENDIX B TO LIMITED LIABILITY COMPANY AGREEMENT OF RIDGELAND ASSISTED LIVING, LLC CERTIFICATE OF FORMATION B-1 APPENDIX C ALLOCATIONS OF PROFITS AND LOSSES: DISTRIBUTIONS C.1 Allocation of Profits. Except as otherwise provided in Section C.2 or Section C.3 of this Appendix C, Profits and Losses shall be allocated as follows: (a) Profits. (i)First, pro rata to the Members in proportion to their adjusted Capital Account Deficit balances, in an amount equal to the sum of the adjusted Capital Account Deficit balances; and (ii) To the Members pro rata in accordance with their Percentage Interests. (b) Losses. (i)First, to the Members in accordance with their respective Percentage Interests to the extent their Adjusted Capital Accounts balance exceed their Adjusted Capital Contributions; (ii)Second, to the Members in proportion to their Adjusted Capital Contributions until their respective Adjusted Capital Accounts equal zero; and (iii)Third, to the Members pro rata in accordance with their Percentage Interests. C.2 Special Allocations. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Appendix C, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Regulation Section 1.704-2(g). Allocation pursuant to the previous sentence shall be made in proportion to the respective C-1 amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Section, 1.704-2(f)(6) and l.704-2(j)(2) of the Regulations. This Section C.2(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (b)Member Nonrecourse Debt Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Appendix C, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Fiscal Year, each Member who has a share of the Member Nonrecourse Debt attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each ember pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section C.2(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. (c)Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Section 1.704-1(b)(2)(d)(ii)(4), Section l.704-1(b)(2)(d)(ii)(5), or Section 1.704-1(b)(2)(d)(ii)(6) of the Regulations, items of income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section C.2(c) shall be made only if and to the extent that such Member would have Adjusted Capital Account Deficit after all other allocations provided for this Appendix C have been tentatively made as if this Section C.2(c) were not part of the Agreement. (d)Gross Income Allocation. In the event that any Member has a deficit Capital Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such Member is obligated to restore pursuant to any provision of this Agreement and (ii) the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and C-2 I.704-2(i)(5), each such Member shall be specially allocated items of income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section C.?(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Appendix C have been made as if Section C.2(c) hereof and this Section C.2(d) were not in the Agreement. (e)Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year shall be allocated to the Members pro rata in accordance with their Percentage Interests. (f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations section 1.704-2(i)(1). (g)Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) or Regulations Section 1.704-1(b)(2)(iv)(m)(2), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of its interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in accordance with their Percentage Interests in the event that Regulations Section l.704-1(b)(2)(iv)(m)(2) applied, or to the Member to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. (h) Allocations Relating to Taxable Issuance of Member Interests. Any income, gain, loss, or deduction realized as a direct or indirect result of the issuance of an interest by the Company to a Member (the "Issuance Items") shall be allocated among the Members so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Member, shall be equal to the net amount that would have been allocated to each such Member if the Issuance Item had not been received. C.3 Curative Allocations. The allocations set forth in Sections C.2(a), (b), (c), (d), (e), (f), and (g) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be C-3 offset either with other Regulatory Allocations or with special allocations of other items of income, gain, loss or deduction pursuant to this Section C.3. Therefore, notwithstanding any other provision of this Appendix C (other than the Regulatory Allocations), the Members shall make offsetting special allocations of 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 items were allocated pursuant to Section C-1. In exercising its discretion under this Section C.3, the Members shall take into account future Regulatory Allocations under Section C.2(a)and C.2(b) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections C.2(e) and C.2(f). C.4 Other Allocation Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Members using any permissible method under Code Section 706 and the Regulations thereunder. (b) The Members are aware of the income tax consequences of the allocations made by this Appendix C and hereby agree to be bound by the provisions of this Appendix C in reporting their shares of income and loss for income tax purposes. (c) To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Members shall endeavor to treat distributions of Net Cash From Operations or Net Cash From Sales or Refinancings as having been made from the proceeds of a nonrecourse Liability or a Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member. (d) The Members may upon the unanimous approval thereof, request that the Internal Revenue Service waive the provisions of Sections C.2(a) and C.2(b) hereof in accordance with Section 1.704-2(f)(4) of the Regulations. C.5 Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members as to take accounts of any variation between the adjusted basis of such property of the Company for federal income tax purposes and its Initial Gross Asset Value. In the event the Gross Asset Value of any Company asset is adjusted pursuant to the provisions contained in the definition of "Gross Asset Value" in C-4 Schedule 1 to this Agreement, subsequent allocations of income, gain, loss, and deduction with respect is to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Members in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section C.5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provisions of this Agreement. C.6 Distributions of Net Cash From Operations. The Members shall review the financial results of the Company at least annually in the month of February and consider distributions to the Members. Except as otherwise provided in Section C.7 or Section C.8 hereof or as otherwise resolved by the Members, Net Cash From Operations, if any, shall be distributed to the Members not later than ninety (90) days after the end of each Fiscal Year in accordance with their Percentage Interests. C.7 Limitations on Distributions and Persons Entitled to Distributions. (a) Notwithstanding anything to the contrary herein, no distribution hereunder shall be permitted unless the assets of the Company exceed the liabilities of the Company. (b) All distributions to the Members under this Agreement shall be made to the Persons shown on the records of the Company to be entitled thereto as of the last day of the fiscal period prior to the time for which such distribution is to be made, unless the transferor and transferee of any interest in the Company otherwise agree in writing to a different distribution and such distribution is consented to in writing by the Members. With respect to any period in which a transferee of any interest of a Member is first entitled to a share of the Profits or Losses, the Company shall, with respect to such Profits and Losses, allocate such items among the Persons who were entitled to such items on a basis consistent with the provisions of the Code and the Treasury Regulations. C.8 Distributions. Any and all distributions to the Members under this Agreement other than distributions pursuant to a winding up of the Company) shall be applied and distributed in the following order: C-5 (a) First, to the payment and discharge of all of the Company's debts and liabilities excluding debts and liabilities to Members and their Affiliates; (b) Second, to the payment and discharge to the funding Members an amount equal to any Cumulative Preferred Return, pro rata in accordance with their respective Cumulative Preferred Return which have not previously been distributed to any such Members; (c) Third, to the payment and discharge to the funding Members an amount equal to any Excess Additional Capital Contribution, pro rata in accordance with their respective Excess Additional Capital Contribution which have not previously been distributed to any such Members; (d) Fourth, to the payment and discharge to the funding Members an amount equal to any Additional Capital Contribution, pro rata in accordance with their respective Additional Capital Contribution which have not previously been distributed to any such Members; (e) Fifth, to the payment and discharge of all of the Company's operating debts and liabilities to Members and their Affiliates. (f) Sixth, to the Members pro rata in accordance with their positive Capital Account balances, after giving effect to all contributions, distributions, and allocations for all periods; and (g) Thereafter, to the Members in accordance with their Percentage Interests. Upon the occurrence of an Event of Dissolution set forth in Section 9.1 of the Agreement, the Company shall continue in accordance with the provisions of Sections 9.2, 9.3, 9.4, and 9.5 solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members, and no Member shall take any action that is inconsistent with, or not necessary to or appropriate for, winding up the Company's business and affairs. To the extent not inconsistent with the foregoing, all covenants and obligations in this Agreement shall continue in full force and effect until such time as the Company property has been distributed pursuant to this Section C-8. The Members shall be responsible for overseeing the winding up and dissolution of the Company, shall take full account of the Company's liabilities and property, shall cause the Company property to be liquidated as promptly as is consistent with obtaining the fair market value thereof and shall cause the proceeds therefrom, to the extent sufficient therefor, to be applied and distributed in the following order: (a) First, to the payment and discharge of all of the Company's debts and liabilities to creditors: C-6 (b)Second, to the payment and discharge of all of the Company's debts and liabilities to Members and their Affiliates; (c) Third, to the payment and discharge to the funding Members an amount equal to any Cumulative Preferred Return, pro rata in accordance with their respective Cumulative Preferred Return which have not previously been distributed to any such Members; (d) Fourth, to the payment and discharge to the funding Members an amount equal to any Excess Additional Capital Contribution, pro rata in accordance with their respective Excess Additional Capital Contribution which have not previously been distributed to any such Members; (e) Fifth, to the payment and discharge to the funding Members an amount equal to any Additional Capital Contribution, pro rata in accordance with their respective Additional Capital Contribution which have not previously been distributed to any such Members; (f) Sixth, subject to the provisions of Section 3.4(c) to the Members pro rata in accordance with their positive Capital Account balances, after giving effect to all contributions, distributions, and allocations for all periods. (g) Thereafter, to the Members in accordance with their Percentage Interests. No Member shall receive any additional compensation for any services performed pursuant to this Section C.8. Members shall have no obligation hereunder to subordinate in any manner their rights, or the rights of their Affiliates, as creditors of the Company. C.9 Amounts Withheld. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment, distribution, or allocation to the Company or any Member shall be treated as amounts distributed to the Members pursuant to Sections C. 6, C. 7 and C. 8 of this Appendix C for all purposes under this Agreement. The Members are authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over to any federal, state, or local government any amounts required to be so withheld pursuant to the Code or any provision of any other federal, state, or local law and shall allocate any such 3mounts to the vlembecs with respect to which such amount was withheld. C-7 EXHIBIT 7.5 INSURANCE Comprehensive General Liability in an amount of at least $ 1 million per occurrence; $3 million aggregate. Business Auto Coverage in an amount of at least $l million per occurrence; $3 million aggregate. Fire and Extended Property coverage in the full amount of the replacement cost of all improvements (estimated to be $6,600,000) or "All Risk" coverage as applicable. Professional liability in an amount of at least $1 million per occurrence; $3 million aggregate. Excess Liability in an amount of at least $50 million umbrella coverage. C-8 EX-10.46-5 3 EX-10.46.5 PURCHASE AND SALE AGREEMENT THIS PURCHASE AND SALE AGREEMENT is made and entered into as of this 23 day of December,1998, by and between EMERITUS CORPORATION, a Washington corporation, (hereinafter referred to as the "Purchaser") and MEDITRUST COMPANY LLC, a Delaware limited liability company, successor by merger to Meditrust Acquisition Corporation I, a Massachusetts corporation (hereinafter referred to as the "Seller"). WITNESSETH WHEREAS, the parties hereto desire Seller to sell to the Purchaser and the Purchaser to purchase, on the Closing Date (as hereinafter defined), fee simple title to the Real Estate (as hereinafter defined) and all of Seller's rights in the Other Property Rights (as hereinafter defined), all in accordance with the terms and conditions herein set forth. NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual covenants and agreements set forth herein, and other good and valuable consideration, all of which each party respectively agrees constitutes sufficient consideration received at or before the execution hereof, the parties hereto do hereby agree as follows: 1. DEFINITIONS AND MEANINGS. In addition to any other terms whose definitions are fixed and defined by this Agreement, each of the following defined terms, when used in this Agreement with an initial capital letter or letters, shall have the meaning ascribed thereto by this Section 1: 1.1 "Agreement" means this Purchase and Sale Agreement, together with all Exhibits and Schedules attached hereto as amended, restated and supplemented from time to time. 1.2 "Closing" means the consummation of the purchase and sale contemplated by this Agreement by the deliveries required under Section 11 hereof. 1.3 "Closing Date" means the time and date, established under Section 11.1 hereof, when the purchase and sale contemplated by this Agreement is to be consummated, as such date may be extended by mutual agreement of the parties or pursuant to the provisions of this Agreement. I.4 "Facilities" (and each a "Facility") means the two facilities identified in attached Schedule 1.4., and known as Ridgeland Court, Ridgeland, Mississippi and Kirkland 1 Lodge, Kirkland, Washington. 1.5 "Improvements" means the buildings, related structures and other improvements located on the Land (including the Facilities) together with all trade and other fixtures associated therewith, to the extent owned by Seller. 1.6 "Land" means the tracts or parcels of land on which the Facilities are located more particularly described in attached Schedule 1.6. 1.7 "Leases" (and each a "Lease") means the Facility Lease Agreements by and between Seller (or its affiliate) and a Lessee, as more specifically identified in attached Schedule I.7. 1.8 "Lessees" means the lessees under the Leases, each of which is Purchaser or its affiliate. 1.9 "Other Property Rights" means collectively the Personal Property, the Service Contracts, and all of Seller's rights in all prepaid rents, impound accounts, and all other rights owned by Seller in the Facilities or in which Seller has an interest as landlord under the Leases. 1.10 "Permitted Exceptions" shall mean (i) the liens, encumbrances, rights, licenses, covenants, restrictions, agreements, encroachments, overlaps, special assessments, claims, leases, tenancies, adverse interests, and defects of record as of the date of this Agreement other than monetary encumbrances, and (ii) real estate taxes on the Real Estate not yet due and payable on the Closing Date. 1.11 "Person" shall mean a corporation (including a business trust), association, trust, partnership, joint venture, joint stock company, organization, proprietorship, natural person, government or governmental agency or political subdivision thereof or any other entity of whatever nature. 1.12 "Personal Property" means all personal property and equipment, if any, owned by Seller which is used in the operation of the Real Estate or a Facility, and located therein or thereon. 1.13 "Purchase Price" means the amount which the Purchaser shall pay to consummate the purchase and sale for all of the Facilities as provided for in this Agreement. 1.14 "Real Estate" means (i) the Land, (ii) the Improvements, and (iii) all rights, 2 rights-of way, easements, mineral rights, privileges, options, leases, real estate licenses, appurtenances, and all of Seller' s interest (if any) in all Permits (as defined in the Leases) in any manner belonging to, or pertaining to, the Land and the Improvements. 1.15 "Service Contracts" means all of Seller's rights (if any) in all maintenance , service, construction or equipment warranties and Contracts (as defined in the Leases), if any, related to or used in connection with the Real Estate. 1. I 6 "Transaction Documents" shall mean this Agreement and those documents set forth in Section 11.2 hereof or delivered in connection herewith. 2. SALE AND PURCHASE. The Seller agrees to sell the Real Estate and Other Property Rights to the Purchaser on the terms and conditions contained in this Agreement and the Purchaser agrees to purchase the Real Estate and Other Property Rights from the Seller on the terms and conditions contained in this Agreement. 3. PURCHASE PRICE. The Purchase Price for each Facility is set forth on attached Schedule 3.1. The Purchase Price shall be paid by the Purchaser to the Seller at Closing by wire transfer without adjustment of any kind or nature except for as provided in Section 7.3. In no event shall Seller be obligated to sell any one or more of the Facilities unless Purchaser acquires all of the Facilities. The Purchase Price shall be allocated among the Real Estate and Other Property Rights as set forth in Schedule 3.1. 4. Intentionally Omitted. 5. SELLER'S REPRESENTATIONS. As an inducement to the Purchaser to enter into this Agreement and to purchase the Real Estate and Other Property Rights, the Seller warrants and represents to, and covenants with, the Purchaser, as follows (which representations, warranties and covenants shall survive as set forth in Section 13.15): 5.1 Existence; Power; Qualification. Seller is a limited liability company duly organized, validity existing and in good standing under the laws of the State of Delaware. Seller has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted and to enter into and carry out the terms of the Transaction Documents. 52 Valid and Binding. Upon obtaining the approval and consent of its Members, Seller will be duly authorized to make and enter into this Agreement and to carry out the transactions contemplated therein and is, or will be by Closing, duly authorized to make and enter into all of the other Transaction Documents to which it is or will be a party and to carry out 3 the transactions contemplated therein. Subject to obtaining such approval and consent, this Agreement has been duly executed and delivered by Seller and is the legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms. Subject to obtaining such approval and consent, all of the other Transaction Documents to which Seller is or will be a party have been, or will be by Closing, duly executed and delivered by Seller, and each is, or will be by Closing, a legal, valid and binding obligation of Seller, enforceable against Seller in accordance with their respective terms. 5.3 No Violation. The execution, delivery and performance of the Transaction Documents and the consummation of the transaction thereby contemplated shall not result in any breach of, or constitute a default under, or result in the acceleration of, or constitute an event which, with the giving of notice or the passage of time, or both, could result in default or acceleration of any obligations of Seller under any permit, contract, mortgage, lien, lease, agreement; instrument, franchise, arbitration award, judgement, decree, bank loan or credit agreement, trust indenture or other instrument to which Seller is a party or by which Seller may be bound or affected. 5.4 FIRPTA Representation. The Seller is not a "foreign person" as that term is defined in the Internal Revenue Code of I986, as amended (the "Code"), and the regulations promulgated pursuant thereto. 5.5 Other Agreements. Other than the Leases and as set forth in documents duly recorded in the public records of the jurisdiction in which a Facility is located, Seller has not entered into and will not enter into any other agreements granting any Person a right or interest in the Real Estate or Personal Property or any of the Facilities. Seller has not obligated and will not obligate itself in any manner whatsoever to sell the Real Estate, Other Property Rights or any portion thereof to any party other than Purchaser. Purchaser acknowledges that the Lessees may have sublet portions of the Facilities and Seller makes no representation or warranty with respect thereto. 5.6 Litigation. To Seller's current actual knowledge, there is no claim, litigation, or proceeding pending against Seller with respect to which Seller has been served notice (except for mechanics' liens and other litigation, claims or proceedings arising or occurring as a result of the actions or inactions of Purchaser its affiliates or any Person acting by, through or under them), or, to Seller's current actual knowledge, threatened against Seller, which relate to the Real Estate, the Other Property Rights, the Facilities, the Leases, or the transactions contemplated by this Agreement. 5.7 Seller's Current Actual Knowledge. The representations and warranties herein which are based upon the current actual knowledge of Seller are based upon the current actual knowledge of Michael S. Benjamin and Michael F. Bushee, who are Senior Vice President 4 and General Counsel and Chief Operating Officer, respectively, of Seller, without any imputation of knowledge as a result of agency or constructive knowledge principles, and without any obligation on Seller's or such Person's part to undertake any investigation or take any affirmative action to acquire any knowledge or to undertake any review of any files or records. 5.8 As-Is. Except for Seller's representations and warranties contained in this Agreement and the other Transaction Documents, the Purchaser is acquiring the Real Estate and Other Property Rights "AS IS" and "WHERE IS", without express or implied warranty of any kind or nature from Seller or from anyone acting for, by, through or under Seller. 6. PURCHASER'S REPRESENTATIONS. As an inducement to the Seller to enter into this Agreement and to sell the Real Estate, the Purchaser warrants and represents to, and covenants with, the Seller, as follows: 6.1 Existence; Power; Qualification. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Washington. Purchaser and its affiliates listed in Schedule 13.3 (the "Acquisition Affiliates") have all requisite power to own and operate their respective properties and to carry on their respective business as proposed to be conducted and to enter into and carry out the Transaction Documents to which they are a party and are duly qualified to transact business and are, or by the Closing Date will be, in good standing in each jurisdiction where such qualification is necessary or desirable in order to carry out their respective business as proposed to be conducted. 6.2 Valid and Binding. Purchaser is duly authorized to make and enter into this Agreement and Purchaser and the Acquisition Affiliates are, or will be by Closing, duly authorized to carry out the transactions contemplated herein and are, or will be by Closing, duly authorized to make and enter into all of the other Transaction Documents to which they are a party and carry out the transactions contemplated therein. All of the Transaction Documents to which Purchaser or the Acquisition Affiliates are a party have been, or will be by the Closing Date, duly executed and delivered by Purchaser and the Acquisition Affiliates, and as of the Closing Date, each will be a legal, valid and binding obligation of Purchaser and the Acquisition Affiliates, enforceable in accordance with their respective terms. 6.3 No Violation. The execution, delivery and performance of the Transaction 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, could result in default or acceleration of any obligation of Purchaser under any permit, contract, mortgage, lien, lease, agreement, instrument, franchise, arbitration award, judgment, decree, bank loan or credit agreement, trust indenture or other instrument to which Purchaser is a party or by which Purchaser may be bound or affected and do not violate or contravene any requirements of law. 5 6.4 Consents and Approvals. Except as already obtained or filed, or will be obtained or filed prior to the Closing Date, 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 required as a condition of the execution, delivery and performance of Purchaser's obligations under the Transaction Documents. 6.5 Pending Actions Notices and Reports. There is no action or investigation pending or, to the current actual knowledge of Purchaser, threatened, anticipated or contemplated (nor, to the current actual knowledge of Purchaser, is there any reasonable basis therefor) against or affecting Purchaser 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 Transaction 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 the Purchaser. 6.6 Purchaser's Documents. All copies of documents furnished or to be furnished to the Seller by the Purchaser or on its behalf in connection with this Agreement and the proposed purchase and sale of the Real Estate are true and complete copies of the originals. 6.7 Hart-Scott-Rodino. The value of this transaction is less than $ I 5 million. Based on the foregoing, no filing is required under the HSR Act. 6.8 Acknowledgment. Purchaser confirms and acknowledges to, and agrees with Seller that: (a)Purchaser or its affiliate has been the sole and exclusive operator of the Facilities since the acquisition thereof by Seller and knows or should know about all matters, facts and circumstances regarding the Facilities, including, without limitation, the operation thereof, all licensing and regulatory matters related thereto and all physical plant, structural, environmental, title, zoning, land use and other related matters. To the extent Purchaser deems necessary, it will make its own further inquiry and investigation into, and based thereon and on its own knowledge, will form an independent judgment concerning the Real Estate and the Facilities and the operation thereof and is not relying on Seller for any facts or information with respect to those or any other matters, except for those expressly set forth in Section 5; (b)Except for any claim for indemnification by Purchaser as a result of a material breach of the representations, warranties, and covenants contained in this Agreement or any of the Transaction Documents, it will not assert 6 any claim against Seller or hold the Seller liable for any inaccuracies, misstatements or omissions with respect to information, if any, furnished by the Seller or any of its directors, officers, employees, partners, agents, advisor, consultants, representatives, affiliates, successors or assigns, in connection with the transactions contemplated hereby. (c)Except for the express representations and warranties contained in Section 5 of this Agreement, or any of the Transaction Documents, the Seller is not making, and Purchaser is not relying upon, any representation or warranty, express or implied, or any nature whatsoever. (d)Without limiting the foregoing, Purchaser understands that (i) there may be no Service Contracts, Permits or Other Personal Property in which Seller has any rights or interests and (ii) in any event, Purchaser is only acquiring Seller's interest therein, if any. 6.9 Nothing Omitted. None of the Transaction Documents as they relate to Purchaser, nor any certificate, agreement, statement or other document, furnished to or to be furnished to Seller by Purchaser in connection with the transactions contemplated b5 the Transaction Documents, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact relating to Purchaser necessary in order to prevent all statements contained herein and therein from being misleading. 7. RISKS. CONDUCT AND COVENANTS OF THE PARTIES. 7.1 Leases. Until the Closing and the payment of the Purchase Price, the terms and provisions of the Leases shall remain in full force and effect. 7.2 Publicity. All press releases, filings and other publicity prior to Closing concerning the transactions contemplated hereby will be subject to review and approval by both the Seller and the Purchaser, such approval not to be unreasonably withheld or delayed. Such approval shall not be required if the Person issuing such publicity reasonably believes it to be necessary for compliance with law, but such Person shall provide, to the extent reasonably practical, the other party with reasonable notice and an opportunity to review same before release. Both the Seller and the Purchaser hereby covenant and agree prior to the Closing Date to keep the terms and conditions of this Agreement confidential except to the extent that disclosure is required by law, and except to Seller's and Purchaser's lenders, members or partners of any tier and their respective professionals, advisors and other third parties to whom Seller or Purchaser, as the case may be, is obligated to make disclosure or who are advising Seller or Purchaser or its members or partners of any tier in connection herewith. 7 7.3 Transfer Fees and Closing Prorations. Each of the parties shall be responsible for the fees and expenses of its counsel in connection with the transactions contemplated hereby. The Purchaser shall be responsible for payment of all customary closing costs in connection with the transfers contemplated by this Agreement, including, without limitation, stamp taxes, documents taxes, transfer fees or any other payments in the nature of or in lieu of transfer fees and costs of title policies and endorsements. Base Rent and Additional Rent under the Leases will be prorated as of Closing and all prepaid Rent and other deposits will be credited to Purchaser. All prepaid Rent and other deposits (if any) are listed on Schedule 7.3. It is understood that no proration of taxes, insurance, assessments or other operating expenses will be required between Seller and Purchaser based on local custom and practice and that Purchaser will be responsible for all of the same. 8. PURCHASER'S CONDITIONS PRECEDENT TO CLOSING. The Closing and the Purchaser's obligations hereunder and with respect thereto are expressly contingent and conditional upon the fulfillment, compliance, satisfaction and performance of each of the following conditions prior thereto, any one or more of which may be waived or deferred in whole or in part, but only in writing, by the Purchaser at its option and sole discretion. 8.1 Accuracy of Warranties; Compliance with Covenants. All representations and warranties by the Seller contained in and made pursuant to this Agreement shall be accurate in all material respects at and as of the Closing Date. In addition to the specific matters referred to in this Section 8, the Seller shall have tendered to the Purchaser all of the instruments and certificates, required from the Seller on or before the Closing Date pursuant to the terms of this Agreement; and the Seller shall have complied with all of its affirmative and negative covenants set forth herein. 8.2 Absence of Injunction. There shall be no injunction, or any order of any nature issued by or pending before any court or governmental agency directing that the transactions contemplated by this Agreement not be consummated. 8.3 Closing Certificate. The Seller shall deliver to the Purchaser a duly executed confirmatory closing certificate executed by the Seller which represents and warrants that all conditions set forth in this Section 8.1 have been fulfilled and satisfied. 8.4 Financing. Purchaser shall have secured financing for the purchase of the Facilities on terms and conditions reasonably acceptable to Purchaser. 8.5 Deemed Waiver of Conditions Precedent. Any condition precedent to the Closing which has not been fulfilled, complied with, satisfied or performed at or prior to the Closing Date shall be conclusively deemed waived if the Purchaser consummates the Closing 8 despite knowledge of the lack of fulfillment, compliance with, satisfaction or performance of such condition. 9. SELLER'S CONDITION PRECEDENT TO CLOSING. The Closing and the Seller's obligations hereunder and with respect thereto are expressly contingent and conditional upon the fulfillment, compliance, satisfaction and performance of each of the following conditions prior thereto; any one or more of which may be waived or deferred in whole or in part, but only in writing, by the Seller at its option and sole discretion. 9.1 Accuracy of Warranties; Compliance with Covenants and Title to Real Estate. All representations and warranties by the Purchaser contained in and made pursuant to this Agreement shall be accurate and complete in all material respects at and as of the Closing Date. In addition to the specific matters referred to in this Section 9, the Purchaser shall have complied with all of its covenants hereunder and tendered to the Seller all of the agreements, instruments, documents, certificates and other materials required from the Purchaser on or before the Closing Date pursuant to the terms of this Agreement. 9.2 Absence of Injunction. There shall be no injunction, or any order of any nature issued by or pending before any court or Governmental Agency directing that the transactions contemplated by this Agreement not be consummated. 9.3 Closing Certificate. The Purchaser shall deliver to the Seller a duly executed confirmatory closing certificate executed by the Purchaser which represents and warrants that all conditions set forth in this Section 9 have been fulfilled and satisfied. 9.4 Member Approval. Seller shall have obtained the approval and consent of its members to consummate the transactions contemplated hereby. 9.5 Deemed Waiver of Conditions Precedent. Any condition precedent to the Closing which has not been fulfilled, complied with, satisfied or performed at or prior the Closing Date shall be conclusively deemed waived if the Seller consummates the Closing despite knowledge of the lack of fulfillment, compliance with, satisfaction or performance of such condition. 10. RIGHTS OF TERMINATION. 10.1 Termination of Agreement. This Agreement and the transactions contemplated hereby may (at the option of the party having the right to do so) be terminated at any time on or prior to the Closing Date: (a) Mutual Consent. By mutual written consent of Purchaser and the Seller; 9 (b)Court Order. By Purchaser or Seller if any court of competent jurisdiction shall have issued an order pursuant to the request of a third party restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; (c)Failure to Close By January 15,1999. By Purchaser or Seller if the transactions contemplated hereby shall not have been consummated on or before January 15,1999, provided, however, that such right to terminate this Agreement shall not be available to any party whose failure to fulfill any obligation of this Agreement has been the cause of, or resulted in, the failure of the transactions contemplated hereby to be consummated on or before such date; (d)Termination by Seller. By the Seller upon notice to Purchaser if (i) a condition to the performance of the Seller set forth in Section 9 hereof shall not be fulfilled at the time specified for the fulfillment thereof, (ii) a material default under or a material breach of this Agreement shall be made by Purchaser or (iii) any representation or warranty set forth in this Agreement or in any instrument delivered by Purchaser pursuant hereto shall be materially false or misleading; or (e)Termination by Purchaser. By Purchaser by notice to the Seller if (i) a condition to the performance of the Purchaser set forth in Section 8 hereof shall not be fulfilled at the time specified for the fulfillment thereof, (ii) a material default under or a material breach of this Agreement shall be made by the Seller or (iii) any representation set forth in this Agreement or in any instrument delivered by Seller pursuant hereto shall be materially false or misleading. 10.2 Effect of Termination and Right to Proceed. If this Agreement is terminated pursuant to Section 10.1, then except as provided below, all further obligations of Purchaser and Seller under this Agreement shall terminate without further liability of Purchaser or any affiliate thereof to the Seller or the Seller or any affiliate thereof to Purchaser or any affiliate thereof, except, in the case of termination pursuant to Section 10.1 (d) or Section I 0.1 (e), as to liability for material misrepresentation, breach or default in connection with any warranty, representation, covenant or obligation given, occurring or arising to the date of termination. 11. CLOSING. 11.1 Closing Date. The Closing under this Agreement shall take place through Chicago Title Insurance Company at :00 a.m. on , or at such other time 10 and place designated by Purchaser and Seller (such date of Closing being referred to herein as the "Closing Date"). 11.2 Deliveries of the Seller at Closing. At the Closing, the Seller shall deliver to the Purchaser the following: (a)Deeds to the Real Estate, free from all liens, except for the Permitted Exceptions ("Deeds"). (b)A bill of sale conveying the Personal Property "as is" and "where is" and without any warranty or representation of any kind or nature, except that the Personal Property shall be free and clear of all liens and encumbrances arising by, through or under Seller ("Bills of Sale"). (c)Certificates of resolutions of the members of the Seller authorizing the transactions contemplated hereby, certified by the Managing Member of the Seller. (d)Certificates of the Managing Member of the Seller as to incumbency and other related matters. (e)Closing Certificate referred in Section 8.3 executed by the Seller. (f)Certificate of Seller, executed under the pains and penalties of perjury, stating that the Seller is not a "foreign person," as defined in Section 1445(f) of the Code and the regulations issued thereunder, in order to comply with Section 1445(b)(2) and the regulations issued thereunder, in such form as the Purchaser may require in its reasonable discretion or the title insurance company issuing the title policy may reasonably require. (g)A certification of the information necessary to complete and file with the Internal Revenue Service a Form 1099-S in connection with the conveyance of the Real Estate. (h)Assignment and Assumption Agreements with respect to all of Seller's right, title and interest (if any) and to Service Contracts and Permits (if any) to Purchaser. (i)Termination of Leases from Seller, unless otherwise directed by Purchaser pursuant to Section 12 below. 11 (j)Such other documents and instruments as are customary in the jurisdiction in which each Facility is located to vest in Purchaser fee simple title to the Real Property and title to the Other Property Rights and release all security interests and rights of Seller therein and thereto. 11.3 Deliveries of Purchaser at Closing. At the Closing, the Purchaser shall deliver to the Seller the following: (a)Payments in accordance with Section 3 hereof. (b)Closing Certificate referred to in Section 9.3. (c)Certificates of resolutions of the members of the Purchaser and the Acquisition Affiliates, authorizing the transactions contemplated hereby, certified by the managing member of the Purchaser and/or the Acquisition Affiliates. (d)Certificates of the managing member of the Purchaser and the Acquisition Affiliates as to incumbency and other related matters. (e)Termination of Leases from the Lessees, unless otherwise directed by Purchaser pursuant to Section 12 below. (f)Letter regarding Survival of Representations from the Lessees. 12. EFFECT OF CLOSING. Purchaser has informed Seller that concurrently with the Closing, Purchaser is acquiring all of the Lessees' interests under the Leases from its. affiliates and that as between Purchaser and its managers of the Facilities, the Leases may be amended and restated without the Seller or its affiliates being a party thereto or expressly or impliedly consenting thereto. Notwithstanding the foregoing, the Leases and the Lease Documents (as that term is defined in the Leases) shall be deemed to have terminated at Closing as between Seller and Lessee and neither Purchaser nor its affiliates shall have any rights or remedies against Seller as Lessor thereunder, and Seller and its affiliates are hereby released from all liabilities and obligations thereunder, provided that the indemnification provisions of the Leases and the Lease Documents made by the Lessees under the Leases for the benefit of Seller shall survive pursuant to separate agreement between Seller and Purchaser. 12 13. MISCELLANEOUS. 13.1 No Broker. The Purchaser represents to the Seller, and the Seller represents to Purchaser, that no agent, finder or broker has acted for it or was the producing and effective cause of this Agreement or the transactions contemplated herein, and that no commissions or finder's fees are due by it to any third parties. Purchaser agrees to indemnify and hold Seller harmless, and Seller agrees to indemnify and hold Purchaser harmless, with respect to any and all expenses, obligations, and liabilities resulting from the claims or causes of action relating to any claims made by any person retained or used by it for any agent's, broker's or finder's fees or commissions relating to the transactions contemplated herein. 13.2 Entire Agreement. This Agreement, together with the Schedules and Exhibits attached hereto and the Transaction Documents contain the entire understanding of the parties with respect to the subject matters hereof and supersede and terminate all prior and other contemporaneous oral or written understandings and agreements between the parties hereto. 13.3 Binding Effect Assignment. This Agreement, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, personal representatives and permitted assigns. Neither party may assign its rights hereunder without the written consent of the other. Notwithstanding the foregoing, Seller's prior written consent shall not be required for Purchaser to assign, in whole or in part, this Agreement as to each Facility to those affiliates of Purchaser designated on Schedule 13.3 except that no such assignment shall relieve Purchaser from its obligations hereunder. In such event, Deeds, Bill of Sale and other Transaction Documents required to close the purchase of a Facility shall be in the name of Purchaser's designated affiliate. 13.4 Notices. Any notice, demand, offer or other writing required or permitted pursuant to this Agreement shall be in writing, furnished in duplicate and shall be transmitted by hand delivery, facsimile, certified mail, return receipt requested, or Federal Express or another nationally recognized overnight courier service, postage prepaid, as follows: (a) If to the Seller: Meditrust Company LLC c/o Meditrust Corporation 197 First Avenue Needham Heights, MA 02194-9127 Attn: Michael S. Benjamin Senior Vice President and General Counsel Fax No. (781) 433-1224 With a copy to: 13 Hutchins, Wheeler & Dittmar A Professional Corporation 101 Federal Street Boston, Massachusetts 02110 Attn: Jack H. Fainberg, Esq. Fax No. (617) 951-1295 (b) If to the Purchaser: Emeritus Corporation 3131 Elliot Avenue, Suite 500 Seattle, WA 98121 Fax No. (206) 301-4500 With a copy to: Perkins Coie 1201 Third Avenue Seattle, Washington 98101 Attn: Mike Stansbury Fax No. 206-583-8500 Any party shall have the right to change the place to which such notice shall be given by similar notice sent in like manner to all other parties hereto. Any such notice, if sent by private express overnight courier service, shall be deemed delivered on the earlier of the date of actual delivery or the next business day following deposit, postage prepaid, with such private express overnight courier service and if delivered by hand delivery shall be deemed delivered on the date of the actual delivery and if sent by mail, shall be deemed delivered on the earlier of the third day following deposit with the U.S. Postal Service or actual delivery. 13.5 Captions. The captions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provisions hereof. 13.6 Joint Effort. The preparation of this Agreement has been the joint effort of the parties, and the resulting document shall not be construed more severely against one of the parties than the other. 13.7 Counterparts. This Agreement may be executed in counterparts and each executed copy shall be deemed an original which shall be binding upon all parties hereto. 14 13.8 Partial Invalidity. The invalidity of one or more of the phrases, sentences, clauses, sections or articles contained in this Agreement shall not affect the remaining portions so long as the material purposes of this Agreement can be determined and effectuated. 13.9 No Offer. Neither the negotiations to date nor the preparation of this Agreement shall be deemed an offer by any party to the other. No such contract shall be deemed binding on any party until such party has executed and delivered a written agreement. 13.10 Amendments. This Agreement may not be amended in any respect whatsoever except by a further agreement, in writing, fully executed by each of the parties. 13.11 Schedules and Exhibits. All Schedules and Exhibits referred to in this Agreement shall be incorporated into this Agreement by such reference and shall be deemed a part of this Agreement as if fully set forth in this Agreement. 13.12 Governing Law; Attorneys Fees. This Agreement including the validity thereof and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, provided that the law of the state where the Real Estate is located shall govern the enforceability, form, enforceability and content of the Deeds, Bill of Sale and other Transaction Documents (other than this Agreement). In the event either party brings an action or any other proceeding against the other party to enforce or interpret any of the terms, covenants or conditions hereof, the party prevailing in any such action or proceeding shall be paid all costs and reasonable attorneys' fees by the other party in such amounts as shall be set by the court, at trial and on appeal. 13.13 Third Parties. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any Persons other than the parties hereto and their respective legal representatives, successors and permitted assigns. No Person, other than the Purchaser and Seller, may rely hereon or derive any benefit hereby as a third party beneficiary or otherwise, including, without limitation, the Agent. 13.14 Rules of Construction. References in this Agreement to "herein," "hereof' and "hereunder" shall be deemed to refer to this Agreement and shall not be limited to the particular text in which such words appear. The use of any gender shall include all genders, and the singular number shall include the plural and vice versa as the context may require. 13.15 Survival. Seller's representations and warrantees set forth in Section 5 in the Deeds and Bills of Sale and Purchaser's representations, warranties and indemnity in this Agreement shall survive the Closing and shall not be merged in the Transaction Documents. Anything to the contrary contained herein notwithstanding, the Purchaser's ability to commence an action ("Claim") against the Seller for breach of any of Seller's representations or warranties 15 contained herein shall be limited in certain respects as follows: (a)In determining the amount of losses for which any party is responsible hereunder, such losses shall reflect an appropriate adjustment for (i) tax benefits to the other party (including, for example, the deductions of paying for the cost of the matter in question) and (ii).insurance proceeds. (b)If Seller pays at any time an amount pursuant to any Claim and Purchaser or its affiliates subsequently becomes entitled to recover from some other person any amount with respect to the losses previously paid by Seller, the Purchaser shall take all reasonable actions to enforce such recovery and shall promptly forward to the Seller any such amounts received which were previously paid by Seller. (c)In no event shall any party hereto be liable for consequential or diminution of value damages. (d)If any matters giving rise to a Claim may be covered by any insurance policy, then no amount shall be recovered hereunder unless or until Purchaser shall have made a claim against its insurers under such policy and such insurance claim shall have been finally decided for all such losses. [Remainder of Page Intentionally Left Blank) 16 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals as Of the date first above appearing. MEDITRUST COMPANY LLC, a Delaware Limited liability company By: /s/ Michael S. Benjamin - ---------------------------- Title: Senior Vice President Witness: /s/ Kim M. Priesing ------------------- EMERITUS CORPORATION By: /s/ Kelly J. Price - -------------------------------- Title: Vice President of Finance Witness: /s/ Jennifer A. Valenta ----------------------- 17 EX-10.46-6 4 EX-10.46.6 RIDGELAND, MISSISSIPPI LOAN AGREEMENT THIS AGREEMENT, made and entered into as of the 28th day of December,1998, by and between RIDGELAND ASSISTED LIVING, LLC, a Washington limited liability company (hereinafter called "Borrower"), and GUARANTY FEDERAL BANK, F.S.B., a federal savings bank (hereinafter called "Lender"); WITNESSETH: WHEREAS, Borrower has obtained from Lender a Commitment (as hereinafter defined) for a Loan (as hereinafter defined); and WHEREAS, Borrower and Lender wish to enter into this Agreement in order to set forth the terms and conditions of the Loan to be made in accordance with the Commitment; NOW THEREFORE, in consideration of the mutual promises hereinafter contained and of other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings shown: (a) "Administrative Notices". All (i) Deficiency Notices, (ii) all Agency inspection reports, audits, surveys, investigations, reviews and evaluations, and (iii) all notices and written communications from any state or any Agency relating to material adjustments in reimbursement amounts or to rate reviews, modifications of rates, inflation adjustments, rate agreements and the like. (b) "Agency". The Health Care Financing Administration, the Drug Enforcement Administration, the Environmental Protection Agency, any other state or federal licensing or regulatory authority (including any licensing or regulatory authority responsible for administering or dispensing Medicaid or Medicare payments or any other third party payor billing policies, procedures, limitations or restrictions), or any other public or private agency or organization, including without limitation, any public or private accreditation agency or organization. (c) "Assignment of Leases and Rents". The Assignment of Leases and Rents of even date herewith from Borrower to Lender covering certain leases and other interests described therein, providing a source of future payment of the Note. (d) "Certificate of Non Foreign Status". A certificate by Borrower as required by Section 1445 of the Internal Revenue Code of 1986. (e) "Collateral Assignment of Agreements Affecting Real Estate". The Collateral Assignment of Agreements Affecting Real Estate as provided for herein and in the form approved by Lender. (f) "Commitment". A commitment agreement dated December 28,1998, by and between Lender and Borrower, in which Lender agrees to lend, and Borrower agrees to borrow and take down, the Loan in accordance with the terms, provisions and conditions set forth therein, together with all modifications and amendments to said commitment agreement. (g) "Escrow and Security Agreement". An Escrow and Security Agreement made by Borrower for the benefit of Lender. (h) "Deed of Trust". A Deed of Trust, Mortgage and Security Agreement of even date herewith, conveying the Premises to the Trustee named therein, and granting a security interest in certain property and rights, to secure the payment of the Note. (i) "Emeritus Properties". Emeritus Properties XI, LLC, a Washington limited liability company. (j) "Facility". An assisted living facility. (k) "Deficiency Notices". All notices and other written communications from any Agency, Governmental Authority or agent which licenses, regulates, certifies, accredits or evaluates the Borrower, the Premises or the Borrower's operation of the Premises alleging that the Borrower, the Premises or the Borrower's operation of the Premises in whole or in part fails to comply or, if corrective action is not taken, shall fail to comply with, any or all of the Agency's or Governmental Authority's requirements for and conditions of licensing, regulation, certification or accreditation by or participation in programs of the Agency or Governmental Authority or otherwise relating to the continuous operation of all or any portion of the Premises or the Borrower's programs or its eligibility or entitlement to receive reimbursement from any Agency or Governmental Authority. (1) "Financing Statement". A Financing Statement executed by Borrower in favor of Lender, perfecting the security interest in personal property created by the Deed of Trust. 2 (m) "GAAP". Generally accepted accounting principles, as from time-to-time in effect in the United States of America, or such alternative accounting standard as may be acceptable to the Lender, consistently applied. (n) "Governmental Authority". The United States, the State, the county, and the city, or any other political subdivision in which the Land is located, and any other political subdivision, agency or instrumentality exercising jurisdiction over Borrower, Guarantor or the Premises. (o) "Governmental Requirements". All laws, ordinances, statutes, codes, rules, regulations, orders and decrees of any Governmental Authority applicable to Borrower, Guarantor or the Premises. (p) "Guaranty". A Guaranty of even date herewith made by Emeritus Corporation, a Washington corporation (hereinafter called "Guarantor"). (q) "Improvements". The improvements constructed on the Land. (r) "Land". The real property described in Exhibit A attached hereto and made a part hereof. (s) "Licenses". Any and all licenses, certificates of need, certificate of need waivers, operating permits, franchises, and other licenses, authorizations, certifications, permits, or approvals, other than construction permits, issued by, or on behalf of, any Governmental Authority now existing or at any time hereafter issued, with respect to the acquisition, construction, renovation, expansion, leasing, ownership and/or operation of the Premises, accreditation of the Premises, and/or the participation or eligibility for participation in any third party payor or reimbursement programs (but specifically excluding any and all Participation Agreements), any and all operating licenses issued by any Governmental Authority, any and all pharmaceutical licenses and other licenses related to the purchase, dispensing, storage, prescription or use of drugs, medications, and other "controlled substances," and any and all licenses relating to the operation of food or beverage facilities or amenities, if any. (t) "Liquid Assets" means (i) cash on hand or on deposit in banks, (ii) readily marketable securities issued by the United States, (iii) readily marketable commercial paper rated A-1 by Standard & Poor's Corporation (or a similar rating by any similar organization that rates commercial paper), (iv) certificates of deposit issued by commercial banks operating in the United States with maturities of one year or less. and (v) publicly traded stocks and bonds. (u) "Loan". A loan in the principal amount of Five Million Six Hundred Thousand and No/100 Dollars ($5,600,000.00) from Lender to Borrower, secured by a first lien on the Premises (as hereinafter defined), as more fully described in the Commitment. 3 (v) "Loan Documents". This Agreement, the documents described in certain subsections of this Section I.1 pertaining to the Loan and all other documents securing, evidencing or executed in connection with the Loan. (w) "Managed Care Plans". Any health maintenance organization. preferred provider organization, individual practice association, competitive medical plan, referral service or similar arrangement, entity, organization, or Person. (x) "Manager". Emeritus Corporation, or such other party or parties who, with the prior written approval of Lender, enter into a Management Agreement with Borrower. (y) "Material Adverse Change". As to the specified Person, a material adverse change in the business, operations, property, condition (financial or otherwise) or prospects of such Person and, in addition, as to the Borrower, any material adverse change in (i) the ability of the Borrower to perform its obligations under this Agreement or any of the other Loan Documents or (ii) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Lender hereunder or thereunder. (z) "Note". A promissory note of even date herewith payable to the order of Lender and in the principal amount of the Loan. (aa) "Notice and Agreement". An instrument executed by Borrower and Lender pursuant to Subsection 26.02 of the Texas Business and Commerce Code. (bb) "Obligations". The unpaid principal of and interest on any promissory note or other indebtedness (including, without limitation, interest accruing after the maturity of any promissory note or indebtedness and interest accruing thereon after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) and all other obligations and liabilities, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel) or otherwise. (cc) "Operating Agreements and Management Contracts". Any and all contracts and agreements previously, now- or at any time hereafter entered into by the Borrower with respect to the acquisition, construction, renovation, expansion. ownership, operation, maintenance, use or management of the Premises or otherwise concerning the operations and business of the Premises, including, without limitation, the Management Agreement, any and all service and maintenance contracts, any employment contracts, any and all management agreements, any and all consulting agreements, laboratory servicing agreements, pharmaceutical contracts, physician, other clinician or other professional services provider contracts, therapy referral, food and beverage service contracts, and other contracts for the operation and maintenance of, or provision of services to, the Premises. 4 Page 5 missing 5 ARTICLE III. REPRESENTATIONS AND WARRANTIES OF BORROWER 3.1 Representations. Warranties and Covenants of Borrower. Borrower hereby represents, warrants and covenants to Lender that: (a) Deed of Trust. All of the representations and warranties of Borrower under the Deed of Trust are true and correct. (b) Financial Statements. The financial statements and information regarding Borrower heretofore delivered to Lender are true and correct in all material respects, having been prepared in accordance with GAAP, and fairly present the financial condition of Borrower as of the date thereof. No Material Adverse Change has occurred in the financial condition of Borrower reflected therein since the date thereof. (c) Brokerage Commissions. Any brokerage commissions due to any broker with whom Borrower has dealt in connection with the transaction contemplated hereby have been paid in full and any such commissions coming due in the future will be promptly paid by Borrower. Borrower agrees to and shall indemnify Lender from any liability, claims or losses arising by reason of any such brokerage commissions. This provision shall survive the repayment of the Loan made in connection herewith and shall continue in full force and effect so long as the possibility of such liability, claims or losses exists. (d) No Homestead. The Land and the Improvements thereon do not and will not constitute the residential or business homestead of Borrower. (e) Certain Payments. Neither the Borrower nor any director, officer, member, partner, employee or agent of the Borrower acting for or on behalf of the Borrower has paid or caused to be paid, directly or indirectly, in connection with the business of the Borrower any bribe, kickback or similar payment to any Governmental Authority or any agent of any supplier. (f) Operating Agreements and Management Contracts. The Borrower has furnished to the Lender photocopies of all material Operating Agreements and Management Contracts entered into with the Borrower, and all amendments, supplements and modifications thereto. With respect to each such Operating Agreement and Management Contract, (i) such Operating Agreement and Management Contract is or will be at the time execution and delivery thereof valid and binding on the parties thereto and in full force and effect, (ii) no default has occurred or is continuing under the terms thereof, and no event has occurred which, with the giving of notice or the lapse of time, or both, would constitute a default thereunder, and no party thereto has attempted or threatened to terminate any such Operating Agreement and Management Contract, (iii) the Borrower has not made any previous assignment of the Operating Agreements and Management Contracts to any Person. except as security for loans and other financial 6 accommodations, if any, which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof, and (iv) no financing statement covering any of the Operating Agreements and Management Contracts is on file in any public office, except for those financing statements relating to loans and other financial accommodations which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof. (g) Participation Agreements. (i) The Borrower has furnished to the Lender, on or before the date hereof, all material Participation Agreements entered into with the Borrower, including all amendments, supplements and modifications thereto. (ii) Each Participation Agreement (A) is or will be at the time of execution and delivery thereof the valid and binding obligation of the parties thereto and in full force and effect, (B) provides for payment to the Borrower of allowable costs incurred by the Borrower in the provision of services to patients and/or residents, and (C) no default has occurred or is continuing under the terms thereof and no event has occurred, which, upon the giving of notice or the lapse of time or both, would constitute a default under the terms thereof. (iii) Borrower does not participate in any Medicare or Medicaid payment and reimbursement programs. (h) Hill-Burton Act. The Borrower has not, nor to the best of the Borrower's knowledge, has any prior owner of the Premises during the twenty (20) year period immediately preceding the date hereof, received any funds to finance the construction and/or acquisition of the Premises pursuant to Title VI of the Public Health Service Act (commonly referred to as the Hill-Burton Act) or Title XVI of the Public Health Service Act. (i) Eligibility. The Borrower is eligible for third party payments under, and in connection with, any and all Participation Agreements to which it is presently a party. (j) Patient Admission Agreements and Resident Agreements. Each Patient Admission Agreement and Resident Agreement to which the Borrower is a party is or will be valid and binding on the parties thereto, is or will be at the time of execution and delivery thereof in full force and effect and any payments due to the Borrower thereunder are not and will not be evidenced by, any chattel paper or instrument. (k) Fraud and Abuse. The Borrower, its directors, officers and employees and other Persons providing services on behalf of the Borrower have not engaged in any activities which are in violation of Sections 1128A, 1128C or 1877 of the Social Security Act (42 U.S.C. ss.ss. 1320a-7a. 1320a-7c and 1395nn), the False Claims Act (31 U.S.C. ss. 7 3729 et seq.), the Program Fraud Civil Remedies Act of 1986 (31 U.S.C. ss. 3801 et seq.) or other federal or state laws and regulations, including, but not limited to, the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment; (ii) knowingly and willfully making or causing to be made a false statement or representation of a material fact for use in determining rights to any benefit or payment; (iii) failing to disclose knowledge of the occurrence of any event affecting the initial or continued right to any benefit or payment on its own behalf or on behalf of another, with intent to fraudulently secure such benefit or payment; (iv) knowingly and willfully offering, paying, soliciting, or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind (A) in return for referring an individual to a Person for the furnishing or arranging for the furnishing of any item or service, (B) in return for purchasing, leasing or ordering, or arranging for or recommending, leasing or ordering any good, facility, service or item; or (v) billing a patient, resident or payor for health services specified in 42 U.S.C. ss. 1395nn or any other similar or comparable federal or state laws, or providing such health services to a patient or resident, upon a referral from a physician where such physician has a financial relationship with the Borrower to which no exception applies under each of the applicable laws. (1) Licenses and Certifications. The Borrower has obtained all Licenses. necessary or desirable under all Governmental Requirements for the operation of the Premises as a Facility. With respect to each License the Borrower possesses or has applied for, (i) no default has occurred or is continuing under the terms thereof, and no event has occurred which, with the giving of notice or the lapse of time, or both, would constitute a breach of any condition to the issuance, maintenance, renewal and/or continuance thereof, (ii) the Borrower has paid all fees, charges and other expenses to the extent due and payable with respect to, and has provided all information and otherwise complied with all material conditions precedent to, the issuance. maintenance, renewal and continuance of such License, (iii) none of the Licenses are conditional, provisional, probationary or restricted in any way, except temporarily as a result of the change in ownership, (iv) the Borrower has not received any notice from any Governmental Authority relating to any actual or pending suspension, revocation, restriction, or imposition of any probationary use of such License, nor has any License been materially amended, supplemented, rescinded, terminated, or otherwise modified except as 8 otherwise disclosed in writing to, and approved by, the Lender, (v) the Borrower has not made any previous assignment of any of the Licenses to any Person, except as security for loans and other financial accommodations, if any, which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof, (vi) no financing statement covering any of the Licenses has been executed by the Borrower or is on file in any public office, except for those financing statements relating to loans and other financial accommodations, if any, which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof, and (vii) each License has been issued for a period of at least twelve (12) months from the date of issuance or for such lesser time to the extent the issuance for less than twelve (12) months is not the consequence of any sanctions imposed by any Governmental Authority. ARTICLE IV. COVENANTS OF BORROWER 4.1 Borrower hereby covenants and agrees with Lender as follows: (a) Commitment. Borrower shall permit no Borrower default under the terms of the Commitment. (b) Title Insurance. Borrower shall furnish to Lender, at Borrower's expense, a mortgagee title insurance policy (herein called the "Mortgagee Title Policy") showing Lender as the insured thereunder, in the amount of the Loan and in form and substance and written by the Title Company on behalf of an underwriter reasonably satisfactory to Lender insuring a valid first lien upon the Premises by virtue of the Deed of Trust and containing no exceptions except those specifically waived in writing by Lender. If the underwriter issuing the Mortgagee Title Policy becomes insolvent or is placed in receivership or for any other reason such Policy becomes unenforceable, Borrower shall furnish Lender, at Borrower's expense, another mortgagee title insurance policy in the amount and in substitution for the original Mortgagee Title Policy and meeting the above requirements. (c) Insurance. Borrower shall obtain and maintain such insurance or evidence of insurance as Lender may reasonably require, including but not limited to the following: (i) Public Liability and Worker's Compensation Insurance - a certificate from an insurance company indicating the Borrower is covered to the satisfaction of Lender by public liability and worker's compensation insurance. (ii) Business Interruption Insurance - business interruption insurance equal to not less than twelve (12) months estimated gross revenues less expenses not ordinarily incurred during the period of business interruption. 9 (iii) Other Insurance - such other insurance as may be required by the Deed of Trust. (d) Collection of Insurance Proceeds. Borrower shall cooperate with Lender in obtaining for Lender the benefits of any insurance or other proceeds lawfully or equitably payable to it in connection with the transactions contemplated hereby and the collection of any indebtedness or obligation of Borrower to Lender incurred hereunder (including the payment by Borrower of the expense of an independent appraisal on behalf of Lender in case of a fire or other casualty affecting the Premises). (e) Indemnity of Lender. Borrower shall indemnify and hold harmless Lender (for purposes of this subsection, the term "Lender" shall include the directors, officers, employees and agents of Lender and any persons or entities owned or controlled by, owning or controlling, or under common control or affiliated with Lender) from and against, and reimburse them for, all claims, demands, liabilities, losses, damages, causes of action, judgments, penalties, costs and expenses (including, without limitation, reasonable attorney's fees) which may be imposed upon, asserted against or incurred or paid by them by reason of, on account of or in connection with any bodily injury or death or property damage occurring in or upon or in the vicinity of the Premises through any cause whatsoever or asserted against them on account of any act performed or omitted to be performed hereunder or on account of any transaction arising out of or in any way connected with the Premises or with this Agreement or any other Loan Document. WITHOUT LIMITATION, IT IS THE INTENTION OF BORROWER AND BORROWER AGREES THAT THE FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTURNEY'S FEES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY OR ANY STRICT LIABILITY. HOWEVER, SUCH INDEMNITIES SHALL NT APPLY TO ANY INDEMNIFIED PARTY TO THE EXTENT THE SUBJECT OF THE INDEMNIFICATION IS CAUSED BY OR ARISES OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. The foregoing indemnities shall survive the termination of this Agreement, the foreclosure of the Deed of Trust or conveyance in lieu of foreclosure and the repayment of the loan and the discharge and release of the Loan Documents. Any amount to be paid hereunder shall be subject to and governed by the provisions of Section 4.2 hereof. (f) Expenses and Approval of Documents. Borrower shall pay all costs of closing the Loan and all expenses of Lender with respect thereto, including but not limited to, reasonable legal fees (including legal fees incurred by Lender subsequent to the closing of the Loan but incurred in connection with the disbursement or collection of the Loan), title insurance premiums and other charges of the title company issuing the Mortgagee Title Policy, appraisal fees, consulting architect fees, consulting inspection fees. advances, 10 recording expenses, surveys, intangible taxes, expenses of foreclosure (including reasonable attorneys' fees) and similar items, and shall allow all closing papers, Loan Documents and other legal matters to be subject to the approval of Lender's attorneys. (g) Further Assurances. Borrower shall sign and deliver to Lender such documents, instruments, assignments and other writings, and do such other acts necessary or desirable, to preserve and protect the collateral at any time securing or intended to secure the Note, as Lender may require; and shall do and execute all and such further lawful and reasonable acts, conveyances and assurances in the law for the better and more effective carrying out of the intents and purposes of this Agreement as Lender shall reasonably require from time to time. (h) Appraisal. Borrower shall submit from time to time, within thirty (30) days following written request of Lender, which request may not be made earlier than one (1) year after the date of the Appraisal furnished pursuant to the Commitment and not more often than annually thereafter, an MAI appraisal of the Premises by a licensed appraiser satisfactory to Lender, such appraisal to be in the form and amount satisfactory to Lender. In lieu of obtaining an appraisal from Borrower hereunder, but subject to the limitation set forth in the previous sentence, Lender may itself obtain the appraisal and Borrower shall pay the cost thereof to Lender within thirty (0) days following written request of Lender. (i) Cooperation Regarding Financial Condition. Borrower shall cooperate with Lender and its representatives to the end that Lender shall be fully apprised regarding the continuing financial condition of Borrower and, upon reasonable request of Lender or any of its representatives, will furnish Lender or such representatives such documents. instruments, financial statements or other information considered necessary or useful by Lender or its representatives in connection with the review and understanding of the financial condition of Borrower as it may exist from time to time. (j) Management Agreement. Lender hereby approves Manager as the manager for the Premises pursuant to terms and conditions of the Management Agreement furnished by Borrower to Lender. Borrower shall (i) permit no default under the terms of the Management Agreement, (ii) waive none of the obligations of Manager thereunder, (iii) do no act which would relieve Manager from its obligations thereunder, and (iv) enter into no material amendment, modification or termination of the Management Agreement without the prior written consent of Lender. (k) Resident Agreements. Borrower shall submit to the Lender when requested by the Lender, all information reasonably requested by the Lender with respect to all Resident Agreements. (l) Lessee Information. Borrower shall submit to the Lender when requested by the Lender, all information on all tenant leases, if any, other than Patient Admission Agreements or Resident Agreements, reasonably required to be included in a rent roll. 11 (m) Conduct of Business and Compliance with Laws. The Borrower shall (i) do or cause to be done all things necessary to obtain, enter into, preserve and keep in full force and effect its existence and material rights and, if appropriate, construction permits and all material Licenses, Participation Agreements, and Operating Agreements and Management Contracts which are necessary for its business and the operation of the Premises as a Facility, (ii) engage in and continue to engage only in the business of owning and operating the Facility and related services, (iii) observe the valid requirements of Governmental Authorities and agents and perform the terms of all Participation Agreements, the noncompliance with or the nonobservance of which might materially interfere with the performance of its obligations under the Loan Documents or the proper or prudent conduct of its business or the Premises. and (iv) comply -ith all Governmental Requirements, including, without limitation, the Occupational Safety and Health Act of 1970, regulations issued under the Omnibus Budget Reconciliation Act of 1987, any Governmental Requirement relating to "informed consents" and rights of patients and/or residents, qualifications of staff, staffing requirements and delivery of services in a manner sufficient to protect the health and safety of patients and/or residents. In addition, the Borrower covenants and agrees that it will: (i) maintain in full force and effect all Licenses necessary to the ownership and/or operation of the Premises, including, without limitation, the license to operate the Premises, Licenses and other approvals related to the storage, dispensation, use, prescription and disposal of drugs, medications and other "controlled substances" and, to the extent offered by the Borrower, the maintenance of cafeteria and other food and beverage facilities or services; (ii) administer, maintain and operate (or will cause to be administered, maintained and operated) the Premises as a revenue-producing Facility; (iii) obtain, maintain and comply with all conditions for the continuance of, all Licenses necessary or desirable for the operation of the Premises as a Facility; (iv) obtain, maintain and comply with all conditions for the continuance of each of the Licenses: (v) maintain or cause to be maintained the standard of care for the residents of the Premises at all times at a level necessary to insure a level of quality care and services for the patients and/or residents of the Premises no less than the prudent industry standard for a Facility; (vi) maintain or cause to be maintained a standard of care in the storage, use, transportation and disposal of all medical equipment, medical supplies, medical products and medical waste, of any kind and in any form. that is in accordance with, at least, that of the prudent industry standard and in conformity with all Governmental Requirements; 12 (vii) operate or cause to be operated the Premises in a prudent manner in compliance with Governmental Requirements relating thereto and cause all Licenses, permits, certificates of need, reimbursement contracts, and any other agreements necessary for the use and operation of the Premises or as may be necessary for participation in the applicable reimbursement programs to remain in effect without reduction in the number of licensed beds or beds authorized for use in applicable reimbursements programs; (viii) correct or cause to be corrected any deficiency set forth in any Medicare, Medicaid or other Agency statement of deficiencies, the curing of which is a condition of continued licensure or for accreditation of the Premises or for (1) full participation in Medicare. Medicaid or other third party payor or reimbursement programs offered by any other Governmental Authority or third party private payor (including Blue Cross and Blue Shield, Managed Care Plans, and employee assistance plans) in which the Borrower presently participates and which are material to the continued ability of the Borrower to operate the Premises in a manner consistent with the provisions of the Loan Documents and to pay the Borrower's Obligations as and when due and payable, or (2) existing patients or for new patients to be admitted with coverage under any of the foregoing third party payor and reimbursement programs, all by the date required for cure by such Agency (plus extension granted by such Agency); (ix) maintain or cause to be maintained sufficient inventory and equipment of types and quantities at the Premises to enable the Borrower or the Manager of the Premises to operate the Premises adequately, as a Facility and in a manner which will enable the Borrower to comply with the provisions of the Loan Documents; and (x) maintain or cause to be maintained all deposits, including, without limitation, deposits relating to patients or Patient Admission Agreements or Resident Agreements in accordance with customary and prudent business practices and all Governmental Requirements. Any bond or other instrument which the Borrower, or any manager of the Premises, as the case may be, is permitted to hold in lieu of cash deposits under any applicable Governmental Requirement shall be maintained in full force and effect unless replaced by cash deposits. shall be issued by an institution reasonably satisfactory to the Lender, shall. If permitted pursuant to Governmental Requirements, name the Lender as the payee or mortgagee thereunder (or at the Lender's Option. be fully assignable to the Lender) and shall, in all material respects, comply with all applicable Governmental Requirements and otherwise be reasonably satisfactory to the Lender. Following the occurrence and during the continuance of any event of default under the Loan Documents, the Borrower or Manager of the Premises as the case may be shall. Upon the Lender's request, if permitted by applicable Governmental Requirements, turn over to the Lender the deposits (and any interest earned thereon) with respect to the Premises, 13 to be held by the Lender subject to the terms of any applicable Operating Agreements and Management Contracts. (n) Insurance. The Borrower shall ensure that all healthcare providers with whom the Borrower contracts to provide services at the Premises are insured against claims arising from such services (including, without limitation, malpractice coverage). (o) Notices. The Borrower shall promptly notify the Lender in writing upon obtaining knowledge of the occurrence of any of the following which could result in a Material Adverse Change: (i) the receipt by the Borrower of any notice, claim or demand from any Governmental Authority which alleges that the Borrower is in violation of any of the terms of, or has failed to comply with any Governmental Requirement regulating its operation and business, including, but not limited to, the Health Care Financing Administration or any division thereof, the Occupational Safety and Health Act and the Environmental Protection Act; (ii) The actual, threatened or pending (A) revocation, suspension, probation, restriction, limitation, forfeiture or refusal to renew of any License, or (B) decertification, revocation, suspension, probation, restriction, limitation, forfeiture or refusal to renew any participation or eligibility in any third party payor program in which the Borrower presently participates or is eligible, including, without limitation, Medicare, Medicaid, CAMPUS, Blue Cross and Blue Shield, any Managed Care Plan, private insurer or employee assistance program, or any accreditation of the Borrower, which actual or threatened or pending decertification, revocation, suspension, probation, restriction, limitation, forfeiture or refusal to renew could have a Material Adverse Change or could adversely affect the ability of the Borrower to repay the Loan or comply with the provisions of the Loan Documents, or (C) the issuance or pending issuance of any License for a period of less than twelve (12) months, as a consequence of sanctions imposed by any Governmental Authority or agent, or (D) the assessment or threatened or pending assessment, of any civil or criminal penalties by any Governmental Authority or agent, any third party payor or any accreditation organization; or (iii) any action, including, but not limited to the amendment of any License, or the issuance of any new License or certification for the Premises, under which the Borrower proposes (A) to develop a new facility or service, (B) change any existing facility or service, or (C) to eliminate any existing or proposed service, which action requires the Borrower to seek either a certificate of need approval or exemption from certificate of need review or which requires amendment of any License or the issuance of any new License or certificate for the Premises. in each case describing in detail satisfactory to the Lender in its sole discretion the nature thereof and the action the Borrower proposes to take with respect thereto. 14 (p) Deficiency Notices. Without implying any limitation on any other provisions of this Agreement or any of the other Loan Documents, the Borrower will furnish to the Lender immediately after receipt thereof copies of all material (A) Deficiency Notices, (B) Agency inspection reports, audits, surveys, investigations, reviews or evaluations, (C) notices and written communications from any State or any Agency relating to material adjustments in reimbursement amounts or to rate reviews, modifications of rates, inflation adjustments, rate agreements or the like, and (D) responses by, or on behalf of, the Borrower with respect to any of the foregoing. The Borrower shall promptly commence and diligently pursue the correction of the subject of each Deficiency Notice, and shall correct the subject of the Deficiency Notice promptly, but in any event prior to the expiration of any period allowed by the Agency for correction. The Borrower shall, at the Lender's request, promptly provide from time to time such cost estimates, reports and other information as the Lender reasonably may require to demonstrate to the Lender's satisfaction that the Borrower has the financial and other ability to effect the correction and is taking the actions required by this Section. (q) Participation in Reimbursement Program. The Borrower will participate in any and all plans and programs for third party payment and/or reimbursement from, and claims against, private insurers, employee assistance programs and plans or programs for payment and/or reimbursement from federal, state and local governmental agencies and/or private or quasi-public insurers as shall be necessary for the prudent conduct of the Borrower's business. The Borrower shall comply with any and all conditions, rules, regulations, standards, procedures and decrees necessary to maintain the Borrower's participation in any such third party payor or reimbursement programs or plans. (r) Cost Reports. The Borrower will prepare and file all applicable cost reports to all third party payors to the extent required by any such third party pavor and will notify the Lender of any disallowance or settlement of any cost report which the Borrower has disclosed to the Lender as being open or unsettled as of the date hereof to the extent any such disallowance or settlement would have a Material Adverse Change on the Borrower. (s) Census Report and Surveys. The Borrower will furnish to the Lender promptly following the request of the Lender reports of the Borrower's periodic patient or resident census with a breakdown with respect to the source of payment, licensure survey results, accreditation survey results and such other information relating to the operation of the Premises as may reasonably be requested by the Lender from time to time. (t) Renewal of Agreements. The Borrower will take any and all steps necessary to renew all Participation Agreements, Patient Admission Agreements, Resident Agreements, and Operating Agreements and Management Contracts, except to the extent that the Borrower deems such renewal to be, in the exercise of prudent business judgment, contrary to the best interests of the Borrower. 15 (u) Specific Licensing Requirements. The Borrower shall at all times maintain the Premises as a properly licensed Facility in accordance with all Governmental Requirements and Licenses. (v) Financial Statements. The Borrower shall provide Lender and cause the Guarantor and the Manager to provide to Lender, the following financial statements and information on a continuing basis during the term of the Loan: (i) Beginning with calendar year end 1998, within ninety (90) days after the end of each calendar year, unaudited financial statements of Borrower, which statements shall be prepared in accordance with GAAP, and shall include a balance sheet and statement of income and expenses for the year then ended. Lender reserves the right to require, in its sole discretion, annual audited financial statements of Borrower. (ii) Once each month within thirty (30) days after month end, unaudited monthly financial statements of the operations of the Premises, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the month then ended, together with a rent roll of the Premises as of the end of such month, certified by a representative of Borrower to be true and correct to the best of the representative's knowledge and belief. Such statements shall also be prepared on a "rolling" quarterly basis. Such statements of the Premises shall be accompanied by the information required pursuant to the Summary of Financial Statements and Census Data (in the form attached hereto as Schedule I), which information shall be provided in the format utilized by Borrower and certified by a representative of the Borrower to be true and correct. (iii) The financial statements and information required of Guarantor under the Guaranty. (iv) The financial statements required under this Agreement shall be accompanied by a Certificate Accompanying Financial Statements in the form attached hereto as Schedule II. (v) The Lender further reserves the right to require such other financial information of Borrower, the Guarantor, Manager and/or the Premises, in such form and at such other times (including monthly or more frequently) as Lender reasonably shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. (w) Capital Improvements. Borrower shall make minimum annual capital expenditures (or maintain a reserve for such expenditures) for the Premises in each fiscal year, in the amount of $250.00 per unit (which such capital expenditures mav include 16 ordinary repairs needed to maintain or improve the conditions of the Premises), and within ninety (90) days of the end of such fiscal year, provide evidence thereof satisfactory to Lender. In the event that Borrower shall fail to do so, Borrower shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per unit and the amount per unit actually spent by the Borrower. Borrower grants to Lender a right of setoff against all moneys in the capital expenditures reserve fund, and Borrower shall not permit any other lien to exist upon such fund. The proceeds of such capital expenditures reserve fund will be disbursed upon Lender's receipt of satisfactory evidence that Borrower has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Premises in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan, shall be secured by the Deed of Trust and shall accrue interest at the Default Rate (as such term is defined in the Note) until paid. Upon an event of default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan, in such order and manner as Lender may elect. Routine maintenance and repair expenses which are necessary to improve or maintain the physical condition of the Premises shall count towards the capital s expenditures requirement. For any partial fiscal year during which the Loan is outstanding, the required expenditures amount shall be prorated by multiplying the required amount per unit by a fraction, the numerator of which is the number of days during such year for which all or part of the Loan is outstanding and the denominator of which is the number of days in such year. (x) Debt Coverage Ratio. During the first year of the Loan, the Premises shall continuously maintain a Debt Coverage Ratio (as such term is defined in the Note) of at least 1.0 to 1. During the second year of the Loan, the Premises shall continuously maintain a Debt Coverage Ratio of at least 1.15 to 1. During the Extension Period (as such term is defined in the Note), the Premises shall continuously maintain a Debt Coverage Ratio of at least 1.3 to l. Each of the foregoing shall be measured on a "rolling" quarter basis. (y) Debt Coverage Escrow. If Borrower fails to achieve or provide evidence of achievement of a minimum Debt Coverage Ratio of 1.0 to l, upon the closing of the Loan, or if such failure occurs after the closing of the Loan, then upon fifteen (15) days written notice to Borrower, Borrower will deposit with Lender cash or other liquid collateral in an amount which, when added to the first number of the debt coverage ratio calculation, would have resulted in the noncomplying debt coverage requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if Borrower again fails to achieve or provide evidence of the achievement of the Debt Coverage Ratio of 1.0 to l, upon fifteen (I5) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing 17 sentence), in an amount which, if the same had been applied on the first day to reduce the outstanding principal indebtedness of the Loan, would have resulted in the noncomplying debt coverage requirement having been satisfied, and Borrower agrees promptly to provide such additional cash or other liquid collateral. Such additional collateral shall constitute and will be held by the Lender in a standard custodial account, and shall constitute additional collateral for the Loan and, upon the occurrence of an event of default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan. Borrower shall not be entitled to any interest earned on such additional collateral, unless the escrow is over $500,000, in which event the escrow will be deposited in a money market account. Provided that there is no outstanding event of default, and no event has occurred which with the passage of time or giving of notice or both would constitute an event of default, such additional collateral which has not been applied to the Loan will be released by the Lender at such time as Borrower provides the Lender with evidence that the Debt Coverage Ratio of 1.0 to 1 has been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.1 (y)) for six (6) consecutive months. All amounts deposited by Borrower pursuant to this Section 4.1(y) are referred to as "Debt Coverage Reserve Funds". (z) Debt Service Escrow. On the date of this Agreement, Borrower shall establish the Debt Service Reserve Funds Escrow Account (as such term is defined in the Escrow and Security Agreement). At such time as the Premises has maintained a Debt Coverage Ratio of at least l.25 to 1 for three (3) consecutive months and provided no event of default or event which with the passage of time or giving of notice, or both, would constitute an event of default has occurred, Lender will release to Borrower the funds held in the Debt Service Reserve Funds Escrow Account. (aa) Repairs. Within 120 days of the date hereof, Borrower shall complete the repairs described in Article IV of that certain Property Review Summary dated December 1,1998 prepared by AECC, Inc. with respect to the Property. (bb) Licenses. To the extent within Borrower's control, Borrower will not allow any breach, withdrawal, rating reduction, restriction, suspension, probation, failure to renew, cancellation, rescission, termination, lapse or forfeiture of any License, permit, right, franchise or privilege necessary for the ownership or operation of the Premises for the purposes for which the Premises is intended. (cc) Agreements. To the extent within Borrower's control, Borrower will not allow any breach, withdrawal, restriction, suspension, probation, failure to renew, cancellation, rescission, termination, lapse, alteration, forfeiture or modification of any material Participation Agreement or any material Operating Agreements and Management Contracts. (dd) Amendments: Terminations. Borrower wi11 not amend or terminate or agree to amend or terminate any material License or consent to a waiver of, or waive, any material provisions thereof or amend or terminate or agree to amend or terminate, any 18 material Participation Agreement or any material Operating Agreements and Management Contracts. (ee) Single Asset Entity. Borrower will not (a) acquire any real or personal property other than the Premises and personal property related to the operation and maintenance of the Premises; (b) operate any business other than the management and operation of the Premises, or (c) maintain its assets in a way difficult to segregate and identity. (f) Liquidity. Throughout the term of the Loan, Guarantor shall maintain Liquid Assets of at least $5,000,000.00. 4.2 Failure to Perform. If Borrower fails to perform any act or to take any action or to pay any amount provided to be paid by it under the provisions of any of the covenants and agreements contained in this Agreement, Lender may but shall not be obligated to perform or cause to be performed such act or take such action or pay such money, and any expenses so incurred by Lender and any money so paid by Lender shall be an advance against the Note and shall bear interest from the date of making such payment until paid at the rate of interest payable on matured but unpaid principal of or interest on the Note and shall be part of the indebtedness secured by the Deed of Trust, and Lender upon making any such payment shall be subrogated to all rights of the person, corporation or body politic receiving such payment. ARTICLE V. LOAN FUNDING 5.1 Loan Funding. The funding of the Loan shall take place in the offices of Lender or at such other place as Lender may designate. 5.2 Conditions Precedent to Loan Funding. Except as otherwise provided herein, the following shall be conditions precedent to Lender's obligations to fund the Loan: (a) Representations and Warranties. On the date of disbursal of the Loan (hereinafter called the "Loan Funding Date"), all of Borrower's representations and warranties contained herein or in any other Loan Document or in the Commitment shall be true and correct in all material respects. (b) Covenants and Agreements. On the Loan Funding Date. Borrower shall have performed each covenant and agreement to be performed by Borrower on or before the Loan Funding Date pursuant to this Agreement, any other Loan Document or the Commitment, within the time specified. (c) Due Execution and Recording of Loan Documents. Borrower shall have delivered to Lender evidence, in form satisfactory to Lender, that the Loan Documents 19 have each been duly executed and constitute valid, binding documents, enforceable in accordance with their respective terms and have been filed or recorded, as appropriate, in all proper offices. (d) Mortgagee Title Policy. Borrower shall have furnished Lender with the Mortgagee Title Policy. (e) Insurance. Borrower shall have obtained the insurance and delivered all policies and certificates required hereunder. Appraisal. Borrower shall have furnished Lender or paid Lender's cost of acquiring an MAI appraisal of the Premises and the Improvements by a licensed appraiser satisfactory to Lender, such appraisal to be in the form and amount reasonably satisfactory to Lender. (g) Survey. Borrower shall have furnished to Lender a certified plat of survey of the Premises made by a licensed surveyor or civil engineer satisfactory to Lender meeting the requirements contained in the Pre-Closing Document List furnished Borrower by Lender. (h) Zoning and Compliance With Laws. Borrower shall have delivered to Lender evidence, in form reasonably satisfactory to Lender, that the Premises are zoned for the use for which the Improvements are designed and are otherwise in compliance with all applicable Governmental Requirements, including, if applicable, all provisions of environmental statutes. (i) Certificates of Occupancy and Other Permits. Borrower shall have furnished Lender (A) complete and true copies of the certificates of occupancy (if reasonably available) and any other permits, licenses or certificates which are required in connection with the Improvements, issued by the appropriate Governmental Authorities with jurisdiction over the Premises, and (B) a certificate by Borrower that no proceedings of any kind are pending or threatened by any person, firm, corporation or public agency with respect to the revocation or suspension of any permits, licenses or certificates. (j) Tax Service. If required by Lender, Borrower shall have furnished Lender a real estate tax reporting service contract in form satisfactory to Lender by which Lender shall receive periodic notices of all taxes, assessments and bonds encumbering the Premises. (k) Other Documents. Borrower shall have delivered to Lender such other documents and certificates as Lender or Lender's counsel may reasonably request. (l) Management Agreement. Lender shall have received and approved the Management Agreement. All modifications and amendments to the Management 20 Agreement or any termination of the Management Agreement must be approved by Lender. (m) Subordination of Management Agreement. Borrower shall have furnished Lender with the executed Subordination of Management Agreement. (n) Commitment Fee. Borrower shall have paid to Lender the commitment fee in the sum of $56,000 as required by the Commitment. ARTICLE VI. DEFAULTS 6.1 Event of Default. An "event of default" shall be deemed to have occurred hereunder if: (a) A default (as such term is defined therein) occurs under the Deed of Trust; or (b) Borrower breaches or fails timely and properly to observe, keep or perform any covenant, agreement, warranty or condition herein required to be observed, kept or performed, other than those referred to in any other subsection hereof, if such failure continues for thirty (30) days after receipt b% Borrower of written notice and demand for the performance of such covenant, agreement, warranty or condition, provided that if Borrower shall within such thirty (30) day period commence action to cure such failure but is unable, by reason of the nature of the performance required, to cure same within such period, and if Borrower continues such action thereafter diligently and without unnecessary delays, Borrower shall not be in default-hereunder until the expiration of a period of time as may be reasonably necessary to cure such failure, provided further that in any event Borrower shall be in default hereunder if such failure is not cured on or before ninety (90) days after receipt by Borrower of the above described written demand for performance; or (c) Any involuntary, imposed, required, actual, threatened or pending revocation, suspension, termination, probation, restriction, limitation, forfeiture or refusal to remedy, any License necessary or material to the operation of the Premises as a Facility; or (d) Any termination of or refusal to remedy any participation or eligibility in any third party payor program in which the Borrower presently participates or is eligible to participate and which is material to the operation or the financial condition of the Premises (other than with respect to any third party payor program (except Medicare or Medicaid), private insurer or payor, employee assistance program, Managed Care Plan, or accreditation which the Borrower reasonably deems, in the exercise of prudent business 21 judgment, to be unnecessary to the successful operation of the Premises and the ability of the Premises to generate and collect sufficient revenues to pay all of its obligations as and when due and payable); or (e) A final unappealable determination that the Borrower or any shareholders, partners, members, directors, officers, employees or agents of the Borrower violated Section 1128A, 1128C or 1877 of the Social Security Act (42 U.S.C. ss.ss. 1320a-7a, 1320a-7c and 1395nn), the False Claims Act ( 31 U.S.C. ss. 3729 et seq.), the Program Fraud Civil Remedies Act of 1986 (31 U.S.C. ss. 3801 et seq.) or other similar Governmental Requirements, if the same could result in a Material Adverse Change: or (f) A default occurs under Subsection 4.1 (ff). (g) Borrower fails to make any deposit required pursuant to Subsection 4.1 (y) or (z) within fifteen (15) days of demand therefor. (h) A default occurs under Subsection 4.1 (aa). ARTICLE VII. REMEDIES 7.1 Remedies. Upon the occurrence of any one or more of the events of default set out in Article VI hereof, Lender shall at its option be entitled to proceed to exercise any of the following remedies: (a) Borrower agrees that the occurrence of such event of default shall constitute a default under each of the Loan Documents, thereby entitling Lender (i) to exercise any of the various remedies therein provided including the acceleration of the indebtedness evidenced by the Note and the foreclosure of the Deed of Trust and (ii) cumulatively to exercise all other rights, options and privileges provided by law. (b) Lender shall have the right at any time and from time to time, without notice to Borrower (any such notice being expressly waived), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held, and any other indebtedness at any time owing by Lender to or for the credit or the account of Borrower, against any and all of the indebtedness of Borrower evidenced by the Note or this Agreement and/or secured by the Deed of Trust, irrespective of whether or not Lender shall have made any demand under this Agreement or the Note and although such indebtedness may be unmatured. Lender agrees to notify Borrower promptly after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of Lender under this subsection are in addition to any other rights and remedies (including, without limitation, other 22 rights of set-of which Lender may have under the Note or the other Loan Documents or otherwise. ARTICLE VIII. GENERAL CONDITIONS 8.1 Rights of Third Parties. All conditions of the obligations of Lender hereunder, including the obligation to make advances, are imposed solely and exclusively for the benefit of Lender and its successors and assigns and no other person shall have standing to require satisfaction of such conditions in accordance with their terms or be entitled to assume that Lender will make advances or refuse to make advances in the absence of strict compliance with any or all thereof and no other person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by Lender at any time if in its sole discretion it deems it desirable to do so. 8.2 Waivers. No waiver of or consent to any departure from any provision hereof shall be effective unless in writing and signed by Lender and shall be effective only in the specific instance for the purpose for which given and to the extent specified in such writing. No waiver of any default hereunder shall affect or constitute a waiver of any later default. No delay or omission of Lender to exercise any right or remedy upon the happening of any event of default shall impair any such right or remedy or be deemed to be a waiver of such event of default. 8.3 Evidence of Satisfaction of Conditions. Any condition of this Agreement which requires the submission of evidence of the existence or nonexistence of a specified fact or facts implies as a condition the existence or nonexistence, as the case may be, of such fact or facts, and Lender shall, at all times, be free independently to establish to its satisfaction and in its absolute discretion such existence or nonexistence. 8.4 Assignment by Borrower. Anything to the contrary herein notwithstanding, Borrower shall have no right to assign its rights hereunder or the proceeds of the Loan without the written consent of Lender and any such assignment or purported assignment shall, at Lender's option, relieve Lender from all further obligations hereunder and shall constitute a default under this Agreement. 8.5 Successors and Assigns Included in Parties. Whenever in this Agreement one of the parties hereto is named or referred to, the heirs, lega1 representatives, successors and assigns of such party shall be included and all covenants and agreements contained in this Agreement by or on behalf of the Borrower or by or on behalf of Lender shall bind and inure to the benefit of their respective heirs, legal representatives, successors and assigns, whether so expressed or not. 8.6 Exercise of Rights and Remedies. All rights and remedies of Lender hereunder or under the Note or under the Deed of Trust or under any other Loan Document shall be separate, distinct and cumulative and no single, partial or full exercise of any right or remedy shall exhaust 23 the same or preclude Lender from thereafter exercising in full or in part the same right or remedy or from concurrently or thereafter exercising any other right or remedy which Lender may have hereunder, under the Note o: Deed of Trust or any other Loan Document, or at law or in equity, and each and every such right and remedy may be exercised at any time or from time to time. 8.7 Headings. The headings of the sections and subsections of this Agreement are for the convenience of reference only, are not to be considered a part hereof and shall not limit or otherwise affect any of the terms hereof. 8.8 Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS ANP OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO TEXAS' PRINCIPLES OF CONFLICTS OF LAW), EXCEPT TO THE EXTENT (A) OF PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION. PFRFECTION. FORECLOSURE AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE PREMISES. WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MISSISSIPPI, AND (B) THAT THE LAWS OF THE UNITED STATES OF AMERICA AND ANY RULES, REGULATIONS, OR ORDERS ISSUED OR PROMULGATED THEREUNDER, APPLICABLE TO THE AFFAIRS AND TRANSACTIONS ENTERED INTO BY LENDER OTHERWISE PREEEMPT MISSISSIPPI OR TEXAS LAW: IN WHICH EVENT SUCH FEDERAL LAW SHALL CONTROL. BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY TEXAS OF FEDERAL COURT SITTING IN DALLAS, TEXAS OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS, AND BORROWER HEREBY AGREES AND CONSENTS THAT. IN ADDITION TO ANY METHODS OF SERVICE OR PROCESS PROVIDED FOR UNDER APPLICABLE LAW, ALL SERVTCE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS, TEXAS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL. RETURN RECEIPT REQUESTED, DIRECTED TO BORROWER AT THE ADDRESS OF BORROWER FOR THE GIVING OF NOTICES UNDER SECTION 8.14 HEREOF, AND SERVICE SO MADE SHALL BE COMPLETE FIVE (5) DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. 8.9 Supplement to Deed of Trust. The provisions of this Agreement are not intended to supersede the provisions of the Deed of Trust but shall be construed as supplemental thereto. In the event of any inconsistency between the provisions hereof and the Deed of Trust, it is intended that, during the applicability of this Agreement, this Agreement shall be controlling. 8.10 Usury. It is the intent of Lender and Borrower in the execution of the Note, this Agreement and all other instrunents now or hereafter securing the Note or executed in connection therewith or under any other written or oral agreement by Borrower in favor of Lender to contract in strict compliance with applicable usury law. In furtherance thereof, Lender and Borrower stipulate and agree that none of the terms and provisions contained in the Note, 24 this Agreement or any other instrument securing the Note or executed in connection herewith, or in any other written or oral agreement by Borrower in favor of Lender, 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 to be charged by applicable law; neither Borrower nor any Guarantor, endorsers or other parties now or hereafter becoming liable for payment of the Note or the other indebtedness secured by the Loan Documents shall ever be obligated or required to pay interest on the Note or on indebtedness arising under any instrument securing the Note or executed in connection therewith, or in any other written or oral agreement by Borrower in favor of Lender, at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this Section shall control over all other provisions of the Note, this Agreement and any other instruments now or hereafter securing the Note or executed in connection herewith or any other oral or written agreements which may be in apparent conflict herewith. Lender expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of the Note is accelerated. If maturity of the Note shall be accelerated for any reason or if the principal of the Note is paid prior to the end of the term of the Note, and as a result thereof the interest received for the actual period of existence of the Loan exceeds the applicable maximum lawful rate, Lender shall, at its option, either refund to Borrower the amount of such excess or credit the amount of such excess against the principal balance of the Note then outstanding 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 Lender 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 the Note or the other indebtedness secured by the Loan Documents to a rate in excess of that permitted to be charged by applicable law, an amount equal to interest in excess of the lawful rate shall, upon such determination, at the option of Lender, be either immediately returned to Borrower or credited against the principal balance of the Note then outstanding or the other indebtedness secured by the Loan Documents, 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 Agreement, Borrower acknowledges that it believes the Loan to be non-usurious and agrees that if, at any time, Borrower should have reason to believe, that the Loan is in fact usurious, it will give Lender notice of such condition and Borrower agrees that Lender shall have ninety (90) days after receipt of such notice 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 Section shall mean the laws of the State of Texas or the laws of the United States, whichever laws allow the greater rate of interest, as such law now exist or may be changed or amended or come into effect in the future. 8.11 Invalid Provisions to Affect No Others. If fulfillment of any provision hereof or any transaction related hereto at the time performance of such provisions shall be due, shall involve transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provisions herein contained operates or would prospectively operate to invalidate this Agreement in whole or in part, then such clause or provision only shall be held for naught, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect. 25 8.12 Number and Gender. Whenever the singular or plural number, masculine or feminine or neuter gender is used herein, it shall equally include the other. 8.13 Amendments. Neither this Agreement nor any provision hereof may 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. 8.14 Notice. Any notice or communication required or permitted hereunder shall be given in writing; sent by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States Mail: postage prepaid, registered or certified mail, or (d) prepaid telegram, telex or telecopy, addressed as follows: To Lender: 8333 Douglas Avenue Dallas, Texas 75225 Attention: Commercial Real Estate Lending Division To Borrower: 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 Attention: President with a copy to: Randi Nathanson The Nathanson Group PLLC 1411 Fourth Avenue Suite 905 Seattle, Washington 98101 or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of telegram, telex or telecopy, upon receipt. 8.15 Legal Proceedings. Lender shall have the right to commence, appear in, or to defend any action or proceeding purporting to affect the rights or duties of the parties hereunder or the payment of any funds, and in connection therewith pay necessary expenses, employ counsel and pay its reasonable fees. Any such expenditures shall be considered additional advances hereunder and shall bear interest at the rate payable under the Note for installments of principal and/or interest after maturity shall be secured by the Loan Documents and shall be paid by Borrower to Lender upon demand. 26 8.16 Assignment by Lender. Lender shall have the right to assign any portion of this Agreement and/or the Loan to a responsible institutional lender and to disseminate to such lender any information it has pertaining to the Loan, including without limitation, complete and current credit information on Borrower, any of its principals and any Guarantor. In the event of such an assignment, Borrower will agree to such modifications to this Agreement as will facilitate such assignment, provided that such modifications will not add to the obligations of Borrower. It is understood that any assignment by Lender will not result in additional cash expense to Borrower. Neither the shareholders, nor the trustees of a real estate investment trust assignee shall be personally liable for the obligations of such trust and Borrower will agree to look solely to the trust property for the payment of any claim hereunder. 8. I 7 Lender Not a Joint Venturer. Notwithstanding anything to the contrary herein contained, Lender, by entering into this Agreement or by any action taken pursuant hereto; will not be deemed a partner or joint venturer with Borrower, and Borrower will indemnify and hold Lender harmless from any and all damages resulting from such a construction of the parties and their relationship. 8.18 Survival of Covenants. All covenants of either party contained herein shall continue-and survive until the Loan has been fully paid and discharged. 8.19 Time Is of the Essence. Time is of the essence of this Agreement. 8.20 Waiver of Judicial Procedural Matters. BORROWER HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGHT BY LENDER IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS, ANY AND EVERY RIGHT IT MAY HAVE TO (i) INJUNCTIVE RELIEF, (II) A TRIAL BY JURY, (III) INTERPOSE ANY COUNTERCLAIM THEREIT (OTHER THAN A COMPULSORY COUNTERCLAIM) AND (IV) HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. Nothing herein contained shall prevent or prohibit Borrower from instituting or maintaining a separate action against Lender with respect to any asserted claim. 8.21 Loan Participation. Borrower acknowledges and agrees that Lender may, from time to time, sell or offer to sell interests in the Loan and Loan Documents to one or more participants. Borrower authorizes Lender to disseminate to such participant or prospective participant, any information it has pertaining to the Loan, including without limitation, complete and current credit information on the Borrower, any of its principals and Guarantor, provided that such participant or prospective participant shall agree to keep such information confidential. 27 IN WITNESS WHEREOF, Borrower and Lender have hereunto caused these presents to be executed on the date first above written. RIDGELAND ASSISTED LIVING, LLC, a Washington limited liability company By: Emeritus Properties XI, LLC, a Washington limited liability company, Member By: Emeritus Corporation, a Washington corporation, its Manager By: /s/ Kelly J. Price Name: Kelly J. Price Title: Vice President of Finance BORROWER 28 GUARANTY FEDERAL BANK, F.S.B, a federal savings bank By: Name: Emily W. Hillsman Title: Vice President LENDER 29 PLEASE PROVIDE BORROWER'S FORM. FORM IS SUBJECT TO LENDER'S APPROVAL. SCHEDULE I MONTHLY/QUARTERLY FINANCIAL STATEMENT AND CENSUS DATA Schedule II CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS Reference is made to that certain Loan Agreement dated December 28,1998 (the "Agreement"), by and between Emeritus Properties X, LLC and Guaranty Federal Bank, F.S.B. ("Lender"), which Agreement is in full force and effect on the date hereof. Terms which are defined in the Agreement are used herein with the meanings given them in the Agreement. This Certificate is furnished pursuant to Section 4.1(v) of the Agreement. Together herewith the Borrower is furnishing to Lender the Borrower's financial statements (the "Financial Statements") as at ____________ and for the period then ended (the "Reporting Date"). The Borrower hereby represents, warrants, and acknowledges to Lender that: (a) the officer of the Borrower signing this instrument is the duly elected, qualified and acting ________ of Borrower; (b) the Financial Statements present fairly in all material respects in accordance with GAAP the financial position of the Borrower as of the Reporting Date and its results of operations and cash flows for the periods covered thereby and satisfy the requirements of the Agreement; (c) attached hereto is a schedule of calculations showing compliance [*noncompliance] as of the Reporting Date with the requirements of Sections 4.1(w), (x), (y) and (ff) of the Agreement; (d) to the best of Borrower's knowledge, on the Reporting Date, the Borrower was, and on the date hereof the Borrower is, in full compliance with the disclosure requirements of the Agreement, and no default or event of default (as such term is defined in the Agreement) otherwise existed on the Reporting Date or otherwise exists on the date of this instrument [except for , which [is/are] more fully described on a schedule attached hereto). The officer of the Borrower signing this instrument hereby certifies that he has reviewed the Loan Documents and the Financial Statements or has otherwise undertaken such inquiry as is in his opinion necessary to enable him to execute this certificate on behalf of the Borrower. IN WITNESS WHEREOF, this instrument is executed as of EMERITUS PROPERTIES X, LLC, a Washington limited liability company By: Emeritus Corporation, a Washington corporation, its Manager By: _ _ Name: Title: Vice President of Finance EX-10.46-7 5 EX-10.46.7 PROMISSORY NOTE $5,600,000.00 Dallas, Texas December 28,1998 FOR VALUE RECEIVED, the undersigned, RIDGELAND ASSISTED LIVING, LLC, a Washington limited liability company (herein called the "Maker"), hereby promises to pay to the order of GUARANTY FEDERAL BANK, F.S.B., a federal savings bank (herein sometimes called "Payee"), the principal sum of Five Million Six Hundred Thousand and No/100 Dollars ($5,600,000.00), or so much thereof as shall be advanced, with interest on the unpaid balance thereof from date of advancement until maturity at the rate or rates hereinafter provided, both principal and interest payable as hereinafter provided in lawful money of the United States of America at the offices of Guaranty Federal Bank, F.S.B., 8333 Douglas Avenue, Dallas, Texas 752Z5, or at such other place within Dallas County, Texas as from time to time may be designated by the holder of this Note. As herein provided the unpaid Principal Amount of this Note (or portions thereof from time to time outstanding shall bear interest prior to maturity at the Commercial Based Rate and/or one or more applicable LIBO Based Rates (as elected in the manner specified in this Note), provided that in no event shall the Applicable Rate exceed the Maximum Rate, the rate of interest payable under this Note shall be limited to the Maximum Rate, but any subsequent reductions in the Commercial Based Rate or the LIBO Based Rate, as the case may be, shall not reduce the Applicable Rate below the Maximum Rate until the total amount of interest accrued on this Note equals the total amount of interest which would have accrued at the Applicable Rate if the Applicable Rate had at all times been in effect. As used in this Note, the following terms shall have the meanings indicated opposite them: "Additional Costs" -- Any costs, losses or expenses incurred by Payee which it determines are attributable to its making or maintaining the Loan, or its obligation to make any Loan advances, or any reduction in any amount receivable by Payee under the Loan or this Note. "Applicable Rate" -- The Commercial Based Rate as to that portion of Principal Amount bearing interest at the Commercial Based Rate and the LIBO Based Rate as to each Euro-Dollar Amount. "Assignment of Leases and Rents" -- The Assignment of Leases and Rents of even date herewith more particularly described herein. "Commercial Based Rate" -- one-half percent (0.5%) per annum in excess of the base rate announced or published from time to time by the Payee, which rate may not be the lowest rate charged by the Payee; it being understood and agreed that the Commercial Based 1 Rate shall increase or decrease, as the case may be, from time to time as of the effective date of each change in the base rate. "Debt Coverage Ratio" -- A fraction, the numerator of which is the Net Operating Income from the Mortgaged Property for the applicable calendar month, and the denominator of which is an amount equal to an assumed monthly payment of principal and interest resulting from a 25 year amortization of the Loan at a fixed rate of interest equal to the higher of (x) the Commercial Based Rate as of the applicable calendar month, (y) the per annum rate of two and one-half percent (2.5"%) above the Treasury Note Rate as of the applicable calendar month, or (z) seven and one-half percent (7.5%) per annum. "Deed of Trust" -- The Deed of Trust, Mortgage and Security Agreement of even date herewith more particularly described herein. "Default Rate" -- The rate per annum which is five percent (5%) above the Commercial Based Rate. "Euro-Dollar Amount" -- Each portion of the Principal Amount bearing interest at at applicable LIBO Based Rate pursuant to a Euro-Dollar Rate Request. "Euro-Dollar Business Day" -- Any day on which commercial banks are open for domestic and international business (including dealings in U.S. Dollar deposits) in New York City and Dallas, Texas. "Euro-Dollar Rate Request" -- Maker's telephonic notice (to be promptly confirmed in writing which must be received by Payee before such Euro-Dollar Rate Request will be put into effect by Payee), to be received by Payee by 12 o'clock Noon (Dallas, Texas time) three (3) Euro-Dollar Business Days prior to the Euro-Dollar Business Day specified in the Euro-Dollar Rate Request for the commencement of the Interest Period, of(a) its intention to have (1) a portion (but not all) of the Principal Amount which is not then the subject of an Interest Period (other than an Interest Period which is terminating on such Euro-Dollar Business Day), and/or (2) all or any position of any advance of Loan proceeds which is to be made on such Euro-Dollar Business Day, bear interest at the LIBO Based Rate and (b) the Interest Period desired by Maker in respect of the amount specified. "Euro-Dollar Rate Request Amount" -- The amount, to be specified by Maker in each Euro-Dollar Rate Request, which Maker desires to bear interest at the LIBO Based Rate and which shall in no event be less than $250,000 and which, at Payee's option, shall be an integral multiple of $50,000. "Euro-Dollar Reference Source" -- The display for Euro-Dollar rates provided on The Bloomberg (a data service), viewed by accessing the global deposits segment of money market rates; or, at the option of Payee, the display for Euro-Dollar rates on such other service selected from time to time by Payee and determined by Payee to be comparable to The Bloomberg, which other service may include Reuters Monitor Money Rates Service. 2 "Extension Period"-- A period of twenty-four (24) months, commencing on the first day after the Maturity Date. "Interest Period" -- The period during which interest at the LIBO Based Rate, determined as provided in this Note, shall be applicable to the Euro-Dollar Rate Request Amount in question, provided, however, that each such period shall be either one ( I ) month, two (2) months or three (3) months [or, if available, four (4) months, five (5) months, six (6) months, nine (9) months or one (1) year), which shall be measured from the date specified by Maker in each Euro-Dollar Rate Request for the commencement of the computation of interest at the LIBO Based Rate, to the numerically corresponding day in the calendar month in which such period terminates (or, if there be no numerical correspondent in such month, or if the date selected by Maker for such commencement is the last Euro-Dollar Business Day of a calendar month, then the last Euro-Dollar Business Day of the calendar month in which such period terminates, or if the numerically corresponding day is not a Euro-Dollar Business Day then the next succeeding Euro-Dollar Business Day, unless such next succeeding Euro-Dollar Business Day enters a new calendar month, in which case such period shall end on the next preceding Euro-Dollar Business Day) and in no event shall any such period be elected which extends beyond the Maturity Date, as the same may have been extended pursuant to an exercise of Maker's right, if any, to extend the same as may be provided herein or in the Loan Agreement. "LIBO Based Rate" -- With respect to any Euro-Dollar Amount, the rate per annum (expressed as a percentage) determined by Payee to be equal to the sum of(a) the quotient of the LIBO Rate for the Euro-Dollar Amount and Interest Period in question divided by (1 minus the Reserve Requirement), rounded up to the nearest 1/100 of l%, and (b) two and one-half percent (2.5%). "LIBO Rate" -- The rate determined by Payee (rounded upward, if necessary, to the nearest 1/16 of l%) equal to the offered rate (and not the bid rate) for deposits in U.S. Dollars of amounts comparable to the Euro-Dollar Rate Request Amount for the same period of time as the Interest Period selected by Maker in the Euro-Dollar Rate Request, as set forth on the Euro-Dollar Reference Source at approximately 10:00 a.m. (Dallas, Texas time) on the first day of the applicable Interest Period. "Loan" -- The $5,600,000 first mortgage loan to be made to Maker by Payee pursuant to the Loan Agreement and evidenced hereby. "Loan Agreement" -- The Loan Agreement of even date herewith between Payee and Maker pursuant to which the Loan is being made. "Loan Documents" -- The Loan Agreement, this Note, the Deed of Trust, the Assignment of Leases and Rents and other documents evidencing, securing and relating to the Loan. 3 "Maturity Date" -- December 28, 2000, being the date this Note becomes due and payable in its entirety. "Maximum Rate" -- The maximum interest rate permitted under applicable law. "Mortgaged Property" -- The real properly, improvements, fixtures and other property and interest described in the Deed of Trust. "Net Operating Income" -- The gross income received by Maker from the operation of the Mortgaged Property for the period in question, less expenses incurred and/or paid by Maker in connection with the operation and maintenance of the Mortgaged Property that are allocable to such period, computed on an accrual (as opposed to cash) basis without regard to depreciation or debt service, using generally accepted accounting principles consistently applied and assuming a management fee of5"% and annual capital expenditures of $250/unit. "Principal Amount" -- That portion of the Loan evidenced hereby as is from time to time outstanding. "Regulation D" -- Regulation D of the Board of Governors of the Federal Reserve System, as from time to time amended or supplemented. "Regulation" -- With respect to the charging and collecting of interest at the LIBO Based Rate, any United States federal, state or foreign laws, treaties, rules or regulations whether now in effect or hereinafter enacted or promulgated (including Regulation D) or any interpretations, directives or requests applying to a class of depository institutions including Payee under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" -- The average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion U.S. Dollars against "Eurocurrency Liabilities", as such quoted term is used in Regulation D. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulation against (a) any category of liabilities which includes deposits by reference to which the LIBO Rate is to be determined as provided in this Note or (b) any category of extensions of credit or other assets which includes loans the interest rate on which is determined on the basis of rates referred to in the definition of "LIBO Rate" set forth above. "Treasury Note Rate" -- The Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the applicable Business Day, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to 4 ten (10) years. Such implied yield shall be determined, if necessary, by (i) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between reported yields. The term "Business Day" as used in this paragraph means a day on which banks are open for business in New York, New York. Maker shall have the option, subject to the terms and conditions hereinafter set forth, of paying interest on the Principal Amount or portions thereof at the Commercial Based Rate or the LIBO Based Rate as herein provided. The Principal Amount (less each Euro-Dollar Amount from time to time outstanding) shall bear interest at the Commercial Based Rate. If Maker desires the application of the LIBO Based Rate, it shall submit a Euro-Dollar Rate Request to Payee. Such Euro-Dollar Rate Request shall specify the Interest Period and the Euro-Dollar Amount and shall be irrevocable, subject to Maker's right to convert the rate of interest payable hereunderwith respect to any Euro-Dollar Amount from the LIBO Based Rate to the Commercial Based Rate as hereinafter provided. In the event that Maker fails to submit a Euro-Dollar Rate Request with respect to an existing Euro-Dollar Amount not later than I 2 Noon (Dallas time) three (3) Euro-Dollar Business Days prior to the last day of the relevant Interest Period, the Euro-Dollar Amount in question shall bear interest, commencing at the end of such Interest Period, at the Commercial Based Rate. Payee, at its option, may honor a Euro-Dollar Rate Request which is submitted less than three (3) Euro-Dollar Business Days prior to the Euro-Dollar Business Day specified in the Euro-Dollar Rate Request for the commencement of the Interest Period; provided, however, Payee is not and shall not thereafter be bound to honor such a request. Maker shall not have the right to have more than three (3) Interest Periods in respect of Euro-Dollar Amounts in effect at any one time whether or not any portion of the Principal Amount is then bearing interest at the Commercial Based Rate. Maker shall pay to Payee, promptly upon demand, such amounts as are necessary to compensate Payee for Additional Costs resulting from any Regulation enacted after the date hereof which (i) subjects Payee to any tax, duty or other charge with respect to the Loan or this Note, or changes the basis of taxation of any amounts payable to Payee under the Loan or this Note (other than taxes imposed or based on the net income of Payee or of its applicable lending office by the jurisdiction in which Payee's principal office or such applicable lending office is located, whether denominated as a franchise or capital stock or other tax), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, Payee or (iii) imposes on Payee or on the interbank Euro-dollar market any other condition affecting the Loan or this Note, or any of such extensions of credit or liabilities. Payee will notify Maker of any event which would entitle Payee to compensation pursuant to this paragraph as promptly as practicable after Payee obtains knowledge thereof and determines to request such compensation. For purposes of this paragraph, of the definition of Additional Costs" set forth above and of the next succeeding four paragraphs, the term "Payee" shall, at Payee's option, be deemed to include Payee's present and future participants in the Loan. 5 Without limiting the effect of the immediately preceding paragraph, in the event that, by reason of any Regulation, (i) Payee incurs Additional Costs based on or measured by the amount of (1) a category of deposits or other liabilities of Payee which includes deposits by reference to which the LIBO Rate is determined as provided in this Note and/or (2) a category of extensions of credit or other assets of Payee which includes loans the interest on which is determined on the basis of rates referred to in the definition of LIBO Rate" set forth above, (ii) Payee becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold or (iii) it shall be unlawful or impractical for Payee to make or maintain the Loan (or any portion thereof at the LIBO Based Rate, then Payee's obligation to make or maintain the Loan (or portions thereof at the LIBO Based Rate (and Maker's right to request the same) shall be suspended and Payee shall give notice thereof to Maker and, upon the giving of such notice, interest payable hereunder at the LIBO Based Rate shall be converted to the Commercial Based Rate, unless Payee may lawfully continue to maintain the Loan (or any portion thereof then bearing interest at the LIBO Based Rate to the end of the current Interest Period(s), at which time the interest rate shall convert to the Commercial Based Rate. If subsequently Payee determines that such Regulation has ceased to be in effect, Payee will so advise Maker and Maker may convert the rate of interest payable hereunder with respect to those portions of the Principal Amount bearing interest at the Commercial Based Rate to the LIBO Based Rate by submitting a Euro-Dollar Rate Request in respect thereof and otherwise complying with the provisions of this Note with respect thereto. Determinations by Payee of the existence or effect of any Regulation on its costs of making or maintaining the Loan, or portions thereof, at the LIBO Based Rate, or on amounts receivable by it in respect thereof, and of the additional amounts required to compensate Payee in respect of Additional Costs, shall be conclusive, provided that such determinations are made on a reasonable basis (absent manifest error). Anything herein to the contrary notwithstanding, if, at the time of or prior to the determination of the LIBO Based Rate in respect of any Euro-Dollar Rate Request Amount as herein provided, Payee determines (which determination shall be conclusive [provided that such determination is made on a reasonable basis) absent manifest error) that (i) by reason of circumstances affecting the interbank Euro-dollar market generally, adequate and fair means do not or will not exist for determining the LIBO Based Rate applicable to an Interest Period or (ii) the LIBO Rate, as determined by Payee, will not accurately reflect the cost to Payee of making or maintaining the Loan (or any portion thereof at the LIBO Based Rate, then Payee shall give Maker prompt notice thereof, and the Euro-Dollar Rate Request Amount in question shall bear interest, or continue to bear interest, as the case may be, at the Commercial Based Rate. If at any time subsequent to the giving of such notice, Payee determines that because of a change in circumstances the LIBO Based Rate is again available to Maker hereunder, Payee shall so advise Maker and Maker may convert the rate of interest payable hereunder from the Commercial Based Rate to the LIBO Based Rate by submitting a Euro-Dollar Rate Request to Payee and otherwise complying with the provisions of this Note with respect thereto. Maker shall pay to Payee, immediately upon request and notwithstanding contrary provisions contained in the Deed of Trust or other Loan Documents, such amounts as shall, in the conclusive judgment of Payee reasonably exercised, compensate Payee for any loss, cost or expense incurred 6 by it as a result of (i) any payment or prepayment, under any circumstances whatsoever, of any portion of the Principal Amount bearing interest at the LIBO Based Rate on a date other than the last day of an applicable Interest Period, (ii) the conversion, for any reason whatsoever, of the rate of interest payable hereunder from the LIBO Based Rate to the Commercial Based Rate with respect to any portion of the Principal Amount then bearing interest at the LIBO Based Rate on a date other than the last day of an applicable Interest Period, (iii) the failure due to any default by Maker of all or a portion of an advance which was to have borne interest at the LIBO Based Rate pursuant to a Euro-Dollar Rate Request to be made under the Loan Agreement or (iv) the failure of Maker to borrow in accordance with a Euro-Dollar Rate Request submitted by it to Payee, which amounts shall include, without limitation, lost profits. Maker shall have the right to convert, from time to time, the rate of interest payable hereunder with respect to any portion of the Principal Amount not subject to a Euro-Dollar Rate Request, to the LIBO Based Rate or the Commercial Based Rate, subject to the terms of this Note and provided that, in the case of a conversion from the LIBO Based Rate, the entire amount of the particular Euro-Dollar Amount is the subject of the conversion. Maker shall have the right to prepay this Note, in whole or in part, without premium or penalty (subject, however, to the provisions of this Note) upon written notice thereof given to Payee in accordance with the notice provisions of the Loan Agreement at least fifteen (15) days priority to the date to be fixed therein for prepayment, and upon the payment of all accrued interest on the amount prepaid (and any interest which has accrued at the Default Rate and other sums that may be payable hereunder) to the date so fixed and any Additional Costs attributable to any Euro-Dollar Amount prepaid. Any portion of the Principal Amount to which the LIBO Based Rate is not or cannot pursuant to the terms hereof be applicable shall bear interest at the Commercial Based Rate. Interest on the Principal Amount (whether computed at the Commercial Based Rate or the LIBO Based Rate) shall be payable monthly on the first day of the first month following the first advance of Loan proceeds which are evidenced hereby and on the first day of each month thereafter until this Note is repaid in full or until the Maturity Date or the expiration of the Extension Period, as the case may be, on which date the Principal Amount and accrued interest shall be due and payable. Maker shall have the right and option to extend the Maturity Date to a date ending upon the expiration of the Extension Period, such extension being subject to the conditions that: (i) Maker shall have notified Payee in writing of its exercise of such extension at least thirty (30) days prior to the Maturity Date; (ii) on the date of such written notice and on the date of commencement of the Extension Period, there shall exist no default or event of default (as respectively defined in the Deed of Trust and the Loan Agreement) and no event shall have occurred which with the passage of time or the giving of notice or both would constitute a default or event of default; 7 (iii) such written notice given pursuant to clause (i) above shall be accompanied by a fee in the amount of one-fourth percent (.25%) of the stated principal of this Note; (iv) at or before the commencement of the Extension Period, Maker shall deliver to the Payee evidence satisfactory to Payee that the operation of the Mortgaged Property has achieved a Debt Coverage Ratio of 1.30 to 1 for a period of three (3) consecutive months prior to the beginning of the Extension Period; and (v) Maker (and any guarantor) shall have executed such documents as Payee deems reasonably appropriate to evidence such extension and shall have delivered to Payee an endorsement to the mortgagee policy of title insurance insuring the lien of the Deed of Trust, stating that the coverage of such policy has not been reduced or terminated by virtue of such extension. Commencing on the first day of the month following commencement of the Extension Period and on the first day of each month thereafter during the Extension Period, Maker shall pay an installment of principal on the Principal Amount equal to $18,667.00, which installment is in addition to accrued interest due on each such date. All payments of principal shall be credited first against principal amounts bearing interest at the Commercial Based Rate and then toward the payment of Euro-Dollar Amounts. Payments of Euro-Dollar Amounts shall be applied in such manner as Maker shall select; provided, however, that Maker shall select Euro-Dollar Amounts to be repaid in a manner designed to minimize any losses incurred by virtue of such payment. If Maker shall fail to select the EuroDollar Amounts to which such payments are to be applied, or if an event ofdefault has occurred and is continuing at the time of payment, then Payee shall be entitled to apply the payment to such Euro-Dollar Amounts in the manner it deems appropriate. Maker shall compensate Payee for any losses incurred by virtue of any payment of those portions of the Loan accruing interest at the LIBO Based Rate prior to the last day of the relevant Interest Period, which compensation shall be determined in accordance with the provisions set forth in this Note, and any payment received pursuant to this paragraph shall be applied first to losses incurred by Payee by reason of such payment. If a default shall occur under the Deed of Trust, interest on the Principal Amount shall, at the option of Payee, immediately and without notice to Maker, be converted to the Commercial Based Rate. The foregoing provision shall not be construed as a waiver by Payee of its right to pursue any other remedies available to it under the Deed of Trust or any other instrument evidencing or securing the Loan, nor shall it be construed to limit in any way the application of the Default Rate. Maker hereby agrees that it shall be bound by any agreement extending the time or modifying the above terms of payment, made by Payee and the owner or owners of the Mortgaged Property, whether with or without notice to Maker, and Maker shall continue to be liable to pay the amount due hereunder, but with interest at a rate no greater than the LIBO Based Rate or the Commercial Based Rate, as the case may be, according to the terms of any such agreement of extension or modification. Notwithstanding anything to the contrary contained in this Note, at the option of the holder of this Note and upon notice to the undersigned at any time after the occurrence of a default as 8 defined in the Deed of Trust, from and after such notice and during the continuance of such default, the unpaid principal of this Note from time to time outstanding and all past due installments of interest shall, to the extent permitted by applicable law, bear interest at the Default Rate, provided that in no event shall such interest rate be more than the Maximum Rate. All interest accruing under this Note shall be calculated on the basis of a 360-day year applied to the actual number of days in each month. The undersigned shall make each payment which it owes hereunder not later than twelve o clock, noon, Dallas, Texas time, on the date such payment becomes due and payable (or the date any voluntary prepayment is made), in immediately available funds. Any payment received by the Payee after such time will be deemed to have been made on the next following business day. As used herein, the term "business day" shall mean a day on which commercial banks are open for business with the public in Dallas, Texas. This Note has been executed and delivered pursuant to the Loan Agreement between Maker and Payee. This Note is secured, inter alia, by the Deed of Trust, evidencing a lien on certain real property in Madison County, Mississippi, described therein, and evidencing a security interest in certain personal property described therein, to which Deed of Trust reference is here made for a description of the property covered thereby and the nature and extent of the security and the rights and powers of the holder of this Note in respect of such security. In addition, the Maker has made an Assignment of Leases and Rents covering certain leases and rents described therein to provide a source of future payment of this Note, reference to which Assignment of Leases and Rents is here made for a description of the leases and rents covered thereby and the rights and powers of the Payee with respect thereto. Upon the occurrence of a default specified in the Deed of Trust which remains uncured beyond any applicable notice, cure or grace period, the holder of this Note or any part thereof shall have the option of declaring the Principal Amount hereof and the interest accrued hereon to be immediately due and payable. It is the intent of Payee of this Note 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 Rate; that 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 that 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 charge 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, the holder of this Note shall, at its option, either refund 9 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 the 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 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 holder of this Note notice of such condition and Maker agrees that said 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 Texas 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. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, Maker and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon reasonable attorneys' and collection fees. Maker and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in part, with or without notice, before or 10 after maturity. THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH. THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO TEXAS' PRINCIPLES OF CONFLICTS OF LAW), EXCEPT TO THE EXTENT (A) OF PROCEDLTRAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION PERFECTION FORECLOSURE AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE MORTGAGED PROPERTY WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MISSISSIPPI. AND (B) THE LAWS OF THE UNITED STATES OF AMERICA AND ANY RULES REGULATIONS OR ORDERS ISSUED OR PROMULGATED THEREUNDER APPLICABLE TO THE AFFAIRS AND TRANSACTIONS ENTERED INTO BY PAYEE OTHERWISE PREEMPT MISSISSIPPI OR TEXAS LAW. IN WHICH EVENT FEDERAL LAW SHALL CONTROL. THE MAKER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS TEXA R MADISON COUNTY MISSISSIPPI OVER ANY SUIT ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR ANY OF THE LOAN DOCUMENTS AND THE MAKER HEREBY AGREES AND CONSENTS THAT IN ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW ALL SERVICE OF PROCESS IN ANY SUCH SUIT ACTION OR PROCEEDING IN ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS TEXAS (OR MADISON COUNTY. MISSISSIPPI MAY BE MADE BY CERTIFIED OR REGISTERED MAIL RETURN RECEIPT RE UESTED DIRECTED TO THE MAKER AT THE ADDRESS OF THE MAKER FOR THE GIVING OF NOTICES UNDER THE DEED OF TRUST AND SERVICE SO MADE SHALL BE COMPLETE FIVE 5 DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. MAKER HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGI3tT BY THE HOLDER OF THIS NOTE IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS, ANY AND EVERY RIGHT IT MAY HAVE TO (I) INJUNCTIVE RELIEF, (II) A TRIAL BY JURY, (III) INTERPOSE ANY COUNTERCLAIM THEREIN (OTHER THAN A COMPULSORY COUNTERCLAIM) AND (IV) HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. Nothing herein contained shall prevent or prohibit Maker from instituting or maintaining a separate action against the holder of this Note with respect to any asserted claim. Time is of the essence of each obligation of Maker hereunder. Federal Tax I.D. No. RIDGELAND ASSISTED LIVING, LLC, a Washington limited liability company By: Emeritus Properties XI, LLC, a Washington limited liability company, Member By: Emeritus Corporation, a Washington corporation, its Manager By: /s/ Kelly J. Price - ------------------------- Name: Kelly J. Price Title: Vice President of Finance 11 THE STATE OF WASHINGTON COUNTY OF King Personally appeared before me, the undersigned authority in and for the said count and state, on this day of December,1998, within my jurisdiction, the within named Kelly Price, who acknowledged that he/she is the Vice President of Finance of Emeritus Corporation, a Washington corporation, which corporation is the Manager of Emeritus Properties XI, LLC, a Washington limited liability company, which limited liability company is a Member of Ridgeland Assisted Living, LLC, a Washington limited liability company and for and on behalf of said corporation in its capacity as Manager of said Emeritus Properties XI, LLC, and in Emeritus Properties XI, LLC's capacity as a Member of Ridgeland Assisted Living, LLC, and as the act and deed of Ridgeland Assisted Living, LLC, he/she executed the above and foregoing instrument after first having been duly authorized by said corporation and each such limited liability company so to do. No /s/ Amy McIntire - ---------------- Notary Public My Commission Expires: 6/20/01 12 EX-10.46-8 6 EX-10.46.8 GUARANTY For a valuable consideration, receipt of which is hereby acknowledged, the undersigned, EMERITUS CORPORATION, a Washington corporation (hereinafter called "Guarantor"), absolutely, unconditionally and irrevocably guarantees (a) payment to GUARANTY FEDERAL BANK, F.S.B., a federal savings bank (hereinafter called "Creditor") at the address designated in the Note (as hereinafter defined) for payment thereofor as such address may be changed as provided in the Note of all indebtedness of RIDGELAND ASSISTED LIVING, LLC, a Washington limited liability company (hereinafter called "Debtor") to Creditor under the promissory note dated of even date herewith, in the original principal amount of Five Million Six Hundred Thousand and No/100 Dollars ($5,600,000.00), payable to the order of Creditor, and all modifications, renewals and extensions (including, without limitation, compromises, accelerations or otherwise changing the rate of interest) of and substitutions for said promissory note [said promissory note and all modifications, renewals and extensions thereof (including, without limitation, compromises, accelerations or otherwise changing the rate of interest) and all substitutions therefor hereinafter called the "Note"], together with all interest, attorneys' fees and collection costs provided in the Note, and all indebtedness under and pursuant to the Deed of Trust, Mortgage and Security Agreement (hereinafter called the "Deed of Trust") securing the payment of the Note, and all other instruments evidencing, governing, securing or pertaining to such indebtedness and obligations (all such indebtedness hereinafter called the "Indebtedness"); (b) performance fully and promptly when due of all of the covenants, agreements and other obligations undertaken by Debtor in respect of the Note and the Deed of Trust and all other instruments evidencing, securing and/or relating to the loan evidenced by the Note, including without limitation, the Loan Agreement of even date herewith between Debtor and Creditor relating to the indebtedness evidenced by the Note (the "Loan Agreement") (such covenants, agreements and other obligations hereinafter called the "Obligations"); and (c) payment of any and all costs, attorneys' fees and expenses incurred or expended by Creditor in collecting any of the Indebtedness or due to any default in the performance of the Obligations or in enforcing any right granted hereunder. To the extent permitted by applicable law, Guarantor expressly waives presentment for payment, demand, notice of demand and of dishonor and nonpayment of the Indebtedness, notice of intention to accelerate the maturity of the Indebtedness or any part thereof, notice of acceleration of the maturity of the Indebtedness or any part thereof, notice of disposition of collateral, the defense of impairment of collateral, the right to a commercially reasonable sale of collateral, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party. Creditor shall be under no obligation to notify Guarantor of its acceptance hereof or of any advances made or credit extended on the faith hereof or the failure of Debtor to pay any of the Indebtedness as it matures or any default in the performance of any of the Obligations, or to use diligence in preserving the liability of any person on the Indebtedness or the Obligations or in bringing suit to enforce collection of the Indebtedness or performance of the Obligations. To the extent permitted by applicable law, Guarantor waives all defenses given to sureties or guarantors at law or in equity other than the actual payment of the Indebtedness and performance of the Obligations and all defenses - - 1 - based upon questions as to the validity, legality or enforceability of the Indebtedness and/or the Obligations and agrees that Guarantor shall be primarily liable hereunder. Further, Guarantor, to the extent permitted by applicable law, waives any defense based upon or arising out of a defense of Debtor or any other person to recovery by Creditor of, or the unavailability to Creditor of, a deficiency after nonjudicial sale of real or personal property. Creditor, without authorization from or notice to Guarantor and without impairing, modifying, changing, releasing, limiting or affecting the liability of Guarantor hereunder, may from time to time at its discretion and with or without valuable consideration, alter, compromise, accelerate, renew, extend or change the time or manner for the payment of any or all of the Indebtedness, increase or reduce the rate of interest thereon, take and surrender security, exchange security by way of substitution, or in any way it deems necessary take, accept, withdraw, subordinate, alter, amend, modify or eliminate security, add or release or discharge endorsers, guarantors, or other obligors, make changes of any sort whatever in the terms of payment of the Indebtedness, in the Obligations or in the manner of doing business with Debtor, or settle or compromise with Debtor or any other person or persons liable on the Indebtedness or the Obligations on such terms as it may see fit, and may apply all moneys received from the Debtor or others, or from any security held (whether held under a security instrument or not), in such manner upon the Indebtedness (whether then due or not) as it may determine to be in its best interest, without in any way being required to marshal securities or assets or to apply all or any part of such moneys upon any particular part of the Indebtedness. It is specifically agreed that Creditor is not required to retain, hold, protect, exercise due care with respect thereto, perfect security interests in or otherwise assure or safeguard any security for the Indebtedness; no failure by Creditor to do any of the foregoing and no exercise or nonexercise by Creditor of any other right or remedy of Creditor shall in any way affect any of Guarantor's obligations hereunder or any security furnished by Guarantor or give Guarantor any recourse against Creditor. The liability of Guarantor hereunder shall not be modified, changed, released, limited or impaired in any manner whatsoever on account of any or all of the following: (a) the incapacity, death, disability, dissolution or termination of Guarantor, Debtor, Creditor or any other person or entity; (b) the failure by Creditor to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of Debtor or any other person or entity; (c) recovery from Debtor or any other person or entity becomes barred by any statute of limitations or is otherwise prevented; (d) any defenses (except payment of the Indebtedness and performance of the Obligations), set-offs or counterclaims which may be available to Debtor or any other person or entity; (e) any transfer or transfers of any of the property covered by the Deed of Trust or any other instrument securing the payment of the Note; (f) any release of Debtor, any co-guarantor or any other person (other than Guarantor) primarily or secondarily liable for the payment or the Indebtedness or the performance of the Obligations or any part thereof; (g) any modifications, extensions, amendments, consents, releases or waivers with respect to the Note, the Deed of Trust, any other instrument now or hereafter securing the payment of the Note, or this Guaranty; (h) any failure of Creditor to give any notice to Guarantor of any default under the Note, the Deed of Trust, any other instrument securing the payment of the Note, or this Guaranty (except to the extent any such notice is required pursuant to - - 2 - the Guaranty or is required by applicable law and cannot validly be waived by Guarantor); (i) Guarantor is or becomes liable for any indebtedness owing by Debtor to Creditor other than under this Guaranty; or (j) any impairment, modification, change, release or limitation of the liability of, or stay of actions or lien enforcement proceedings against, Debtor, its property, or its estate in bankruptcy resulting from the operation of any present or future provision o t-the Federal Bankruptcy Code (hereinafter called the "Bankruptcy Code") or other similar Federal or state statute, or from the decision of any court. Except for any requirements of applicable law that cannot validly be waived by Guarantor, Creditor shall not be required to pursue any other remedies before invoking the benefits of the guaranties contained herein, and specifically it shall not be required to make demand upon or institute suit or otherwise pursue its remedies against Debtor or any surety other than Guarantor or to proceed against or give credit for any security now or hereafter existing for the payment of any of the Indebtedness. Creditor may maintain an action on this Guaranty without joining Debtor therein and without bringing a separate action against Debtor. If for any reason whatsoever other than payment and performance (including but not limited to ultra vires, lack of authority, illegality, force majeure, act of God or impossibility) the Indebtedness or the Obligations cannot be enforced against Debtor, such unenforceability shall in no manner affect the liability of Guarantor hereunder and Guarantor shall be liable hereunder notwithstanding that Debtor may not be liable for such Indebtedness or such Obligations and to the same extent as Guarantor would have been liable if such Indebtedness or Obligations had been enforceable against Debtor. Guarantor absolutely and unconditionally covenants and agrees that in the event that Debtor does not or is unable so to pay the Indebtedness or perform the Obligations for any reason, including, without limitation, liquidation, dissolution, receivership, conservatorship, insolvency, bankruptcy, assignment for the benefit of creditors, sale of all or substantially all assets, reorganization, arrangement, composition, or readjustment of, or other similar proceedings affecting the status, composition, identity, existence, assets or obligations of Debtor, or the disaffirmance or termination of any of the Indebtedness or Obligations in or as a result of any such proceeding, Guarantor shall pay the Indebtedness and perform the Obligations and no such occurrence shall in any way affect Guarantor's obligations hereunder. Should the status of Debtor change, this Guaranty shall continue and also cover the lndebtedness and Obligations of Debtor under the new status according to the terms hereof. In the event any payment by Debtor to Creditor is held to constitute a preference under the bankruptcy laws, or if for any other reason Creditor is required to refund such payment or pay the amount thereof to any other party, such payment by Debtor to Creditor shall not constitute a release o f Guarantor from any liability hereunder, but Guarantor agrees to pay such amount to Creditor upon demand and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments. - - 3 - Except for any requirements of applicable law that cannot validly be waived by Guarantor, Guarantor agrees that it shall not have (a) the right to the benefit of, or to direct the application of, any security held by Creditor (including the property covered by the Deed of Trust and- any other instrument securing the payment of the Note), any right to enforce any remedy which Creditor now has or hereafter may have against Debtor, or any right to participate in any security now or hereafter held by Creditor, or (b) any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or other right or remedy of Guarantor against Debtor or against any security resulting from the exercise or election of any remedies by Creditor (including the exercise of the power of sale under the Deed of Trust), or any defense arising by reason of any disability or other defense of Debtor or by reason of the cessation, from any cause, of the liability of Debtor. The payment by Guarantor of any amount pursuant to this Guaranty shall not in any way entitle Guarantor to any right, title or interest (whether by way of subrogation or otherwise) in and to any of the Indebtedness or any proceeds thereof, or any security therefor, unless and until the full amount owing to Creditor on the Indebtedness has been fully paid, but when the same has been fully paid Guarantor shall be subrogated as to any payments made by it to the rights of Creditor as against Debtor and/or any endorsers, sureties or other guarantors. Guarantor expressly subordinates its rights to payment of any indebtedness owing from Debtor to Guarantor, whether now existing or arising at any time in the future, to the prior right of Creditor to receive or require payment in full of the Indebtedness and until payment in full of the Indebtedness (and including interest accruing on the Note after any petition under the Bankruptcy Code, which post-petition interest Guarantor agrees shall remain a claim that is prior and superior to any claim of Guarantor notwithstanding any contrary practice, custom or ruling in proceedings under the Bankruptcy Code generally), Guarantor agrees not to accept any payment or satisfaction of any kind of indebtedness of Debtor to Guarantor or any security for such indebtedness. If Guarantor should receive any such payment, satisfaction or security for any indebtedness of Debtor to Guarantor, Guarantor agrees forthwith to deliver the same to Creditor in the form received, endorsed or assigned as may be appropriate for application on account of, or as security for, the Indebtedness and until so delivered, agrees to hold the same in trust for Creditor. Notwithstanding anything to the apparent contrary contained herein, Guarantor does not herein expressly or impliedly waive or release any rights of subrogation that Guarantor may have against Debtor (except as same are expressly subordinated as provided herein), rights of contribution that Guarantor may have against any other guarantor of, or other person secondarily liable for, the payment of the Indebtedness or performance of the Obligations or rights of reimbursement that Guarantor may have as against Debtor (except as same may be limited herein). It is the intent of Guarantor and Creditor in the execution and acceptance of this Guaranty to contract in strict compliance with applicable usury law. In furtherance thereof, Guarantor and Creditor stipulate and agree that none of the terms and provisions contained in this Guaranty, or in any other instrument now or hereafter 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 - - 4 - the maximum interest rate permitted to be charged by applicable law; Guarantor shall never be obligated or required to pay interest on the Indebtedness at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this paragraph shall control over all other provisions of this Guaranty, and any other instruments now or hereafter executed in connection herewith or any other oral or written agreement which may be in apparent conflict herewith. Creditor expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of the Indebtedness is accelerated. If the maturity of the Note shall be accelerated for any reason or if the principal of the Note is paid prior to the end of the term of the Note, and as a result thereof the interest received from Guarantor for the actual period of existence of the loan evidenced by the Note exceeds the amount of interest at the applicable maximum lawful rate under applicable law, Creditor shall, at its option, either refund to Guarantor the amount of such excess or credit the amount of such excess against the principal balance of the Note then outstanding 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 Creditor shall contract for, charge or receive any amount or amounts and/or any other thing of value from Guarantor which are determined to constitute interest which would increase the effective interest rate on the Indebtedness to a rate in excess of that permitted to be charged by applicable law, all such amounts determined to constitute interest in excess of the lawful rate shall, upon such determination, at the option of Creditor, be either immediately returned to Guarantor or credited against the principal balance of the Note then outstanding, in which event any and all penalties of ary kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Guaranty, Guarantor acknowledges that Guarantor believes the Indebtedness to be non-usurious and agrees that if, at any time, Guarantor should have reason to believe that the Indebtedness is in fact usurious, Guarantor will give Creditor notice of such condition and Guarantor agrees that Creditor 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 paragraph shall mean the laws of the State of Texas 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. Guarantor hereby represents, warrants and covenants to and with Creditor as follows: (a) Guarantor is solvent, is not bankrupt and has no outstanding liens, garnishments, bankruptcies or court actions which could render guarantor insolvent or bankrupt, and there has not been filed by or against Guarantor a petition in bankruptcy or a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, trustee, custodian or liquidator with respect to Guarantor or any substantial portion of Guarantor's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the Bankruptcy Code or any state law; (b) all reports, financial statements and other financial and other data which have been or may hereafter be furnished by Guarantor to Creditor in connection with this Guaranty are or shall be true and correct in all material respects and do not and will not omit to state any fact or circumstance necessary to make the statements contained therein not misleading and do or shall fairly represent the financial condition of Guarantor as of the dates and the results of Guarantor's operations for the periods for which the same are furnished, and no material adverse - - 5 - change has occurred since the dates of such reports, statements and other data in the financial condition of Guarantor; (c) the execution, delivery and performance of the Guaranty do not contravene, result in the breach of or constitute a default under any mortgage, deed of trust, lease, promissory note, loan agreement or other contract or agreement to which Guarantor is a party or by which Guarantor or any of its properties may be bound or affected and do not violate or contravene any law, order, decree, rule or regulation to which Guarantor is subject; (d) there are no judicial or administrative actions, suits or proceedings pending or, to the best of Guarantor's knowledge, threatened against or affecting Guarantor or involving the validity, enforceability or priority of this Guaranty; (e) Guarantor is duly incorporated and legally existing under the laws of the state of its incorporation; (this Guaranty constitutes 'he legal, valid and binding obligation of Guarantor enforceable in accordance with its terms; and (g) the execution and delivery of, and performance under, this Guaranty are within Guarantor's powers and have been duly authorized by all requisite action and are not in contravention of the powers of Guarantor's charter, by-laws or other corporate papers. Guarantor will deliver to Creditor within ninety (90) days after the close of each fiscal year of Guarantor: (a) a statement of condition or balance sheet of Guarantor as at the end of such fiscal year; (b) an annual operating statement showing in reasonable detail all income and expenses of Guarantor for such fiscal year; (c) a cash flow statement showing in reasonable detail all cash flow of Guarantor for such fiscal year; and (d) a projected cash flow statement showing in reasonable detail all projected cash flow, for the then current fiscal year. Al1 of the foregoing shall be in scope and detail satisfactory to Creditor and any or all of the foregoing shall be furnished quarterly, in addition to annually, upon request of Creditor. The statements in (a), (b) and (c) above shall be certified as to accuracy by an independent certified public accountant or, with the consent of Creditor, by a representative of Guarantor acceptable to Creditor. The statement described in (d) above shall contain a representation or certification in form satisfactory to Creditor from a representative of Guarantor acceptable to Creditor. Where two or more persons or entities have executed this Guaranty, unless the context clearly indicates otherwise, all references herein to "Guarantor" shall mean the guarantors hereunder or either or any of them. All of the obligations and liability of said guarantors hereunder shall be joint and several. Suit may be brought against said guarantors, jointly and severally, or against any one or more of them, less than all, without impairing the rights of Creditor against the other or others of said guarantors; and Creditor may compound with any one or more of said guarantors for such sums or sum as it may see fit and/or release such of said guarantors from all further liability to Creditor for such indebtedness without impairing the right of Creditor to demand and collect the balance of such indebtedness from the other or others of said guarantors not so compounded with or released; but it is agreed among said guarantors themselves, however, that such compounding and release shall in nowise impair the rights of said guarantors as among themselves. The rights of Creditor are cumulative and shall not be exhausted by its exercise of any of its rights hereunder or otherwise against Guarantor or by any number of successive actions until and unless all Indebtedness has been paid, all Obligations have been performed and each of the - - 6 - obligations of Guarantor hereunder has been performed. The existence of this Guaranty shall not in any way diminish or discharge the rights of Creditor under any prior or future guaranty agreement executed by Guarantor. All property of Guarantor now or hereafter in the possession or custody of or in transit to Creditor for any purpose, including safekeeping, collection or pledge, for the account of Guarantor, or as to which Guarantor may have any right or power, shall be held by Creditor subject to a lien and security interest in favor of Creditor to secure payment and performance of all obligations and liabilities of Guarantor to Creditor hereunder. The balance of every account of Guarantor with, and each claim of Guarantor against, Creditor existing from time to time shall be subject to a lien and subject to set-off against any and all liabilities of Guarantor to Creditor, and Creditor may, at any time and from time to time at its option and without notice, appropriate and apply toward the payment of any of such liabilities the balance of each such account or claim of Guarantor against Creditor. Any notice or communication required or permitted hereunder shall be given in writing, sent by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States mail, postage prepaid, registered or certified mail, or (d) prepaid telegram, telex or telecopy, sent to the intended addressee at the address shown below, or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given and received either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of telegram, telex or telecopy, upon receipt. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF GUARANTOR HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCURDANCE WITH, THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO TEXAS' PRINCIPLES OF CONFLICTS OF LAW) AND THE LAW OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN SUCH STATE. GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS, TEXAS OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OF THE LOAN DOCUMENTS, AND GUARANTOR HEREBY AGREES AND CONSENTS THAT. IN ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW, ALL SERVICE OF PROCESS IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS, TEXAS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL RETURN RECEIPT REOUESTED, DIRECTED TO GUARANTOR AT THE ADDRESS OF GUARANTOR FOR THE GIVING OF NOTICES HEREUNDER AND SERVICE SO MADE SHALL BE COMPLETE FIVE (5) DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. - - 7 - Guarantor hereby expressly and unconditionally waives, in connection with any suit, action or proceeding brought by Creditor in connection with this Guaranty or any of the loan documents, any and every-right it may have to (i) injunctive relief, (ii) a trial by jury, (iii) interpose any counterclaim therein (other than a compulsory counterclaim) and (iv) have the same consolidated with any other or separate suit, action or proceeding. Nothing herein contained shall prevent or prohibit Guarantor from instituting or maintaining a separate action against Creditor with respect to any asserted claim. This Guaranty may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. This Guaranty may only be modified, waived, altered or amended by a written instrument or instruments executed by the party against which enforcement of said action is asserted. Any alleged modification, waiver, alteration or amendment which is not so documented shall not be effective as to any party. The terms, provisions, covenants and conditions hereof shall be binding upon Guarantor and the heirs, devisees, representatives, successors and assigns of Guarantor and shall inure to the benefit of Creditor and all transferees, credit participants, successors, assignees and/or endorsees of Creditor. Within this Guaranty, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. A determination that any provision of this Guaranty is unenforceable or invalid shall not affect the enforceability or validity of any other provision and any determination that the application of any provision of this Guaranty to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances. EXECUTED as of the 28th day of December, 1998. EMERITUS CORPORATION, a Washington corporation By: /s/ Kelly J. Price - ---------------------------- Name: Kelly J. Price Title: Vice President of Finance - - 8 - The address of Guarantor is: 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 The address of Creditor is: 8333 Douglas Avenue Dallas, Texas 75225 Attention: Commercial Real Estate Lending Division THE STATE OF WASHINGTON COUNTY OF KING This instrument was acknowledged before me on December 28, 1998, by Kelly Price of Emeritus Corporation, a Washington corporation, on behalf of said corporation. /s/ Amy McIntyre - ---------------------------------- Notary Public, State of Washington Amy McIntyre (print name) My Commission Expires: 06/20/01 - - 9 - EX-10.65-2 7 EX-10.65.2 Exhibit 10.65.2 LOAN AGREEMENT THIS AGREEMENT, made and entered into as of the 28th day of December,1998, by and between EMERITUS PROPERTIES X, LLC, a Washington limited liability company (hereinafter called "Borrower"), and GUARANTY FEDERAL BANK, F.S.B., a federal savings bank (hereinafter called "Lender"); WITNESSETH: WHEREAS, Borrower has obtained from Lender a Commitment (as hereinafter defined) for a Loan (as hereinafter defined); and WHEREAS, Borrower and Lender wish to enter into this Agreement in order to set forth the terms and conditions of the Loan to be made in accordance with the Commitment; NOW THEREFORE, in consideration of the mutual promises hereinafter contained and of other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender hereby agree as follows: ARTICLE I. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings shown: (a) "Administrative Notices". All (i) Deficiency Notices, (ii) all Agency inspection reports, audits, surveys, investigations, reviews and evaluations, and (iii) all notices and written communications from any state or any Agency relating to material adjustments in reimbursement amounts or to rate reviews, modifications of rates, inflation adjustments, rate agreements and the like. (b) "Agency". The Health Care Financing Administration, the Drug Enforcement Administration, the Environmental Protection Agency, any other state or federal licensing or regulatory authority (including any licensing or regulatory authority responsible for administering or dispensing Medicaid or Medicare payments or any other third party payor billing policies, procedures, limitations or restrictions), or any other public or private agency or organization, including without limitation, any public or private accreditation agency or organization. 1 (c) "Assignment of Leases and Rents". The Assignment of Leases and Rents of even date herewith from Borrower to Lender covering certain leases and other interests described therein, providing a source of future payment of the Note. (d) "Certificate of Non Foreign Status". A certificate by Borrower as required by Section 1445 of the Internal Revenue Code of 1986. (e) "Collateral Assignment of Agreements Affecting Real Estate". The Collateral Assignment of Agreements Affecting Real Estate as provided for herein and in the form approved by Lender. (f) "Commitment". A commitment agreement dated December ?8,1998, by and between Lender and Borrower, in which Lender agrees to lend, and Borrower agrees to borrow and take down, the Loan in accordance with the terms, provisions and conditions set forth therein, together with all modifications and amendments to said commitment agreement. (g) "Escrow and Security Agreement". An Escrow and Security Agreement made by Borrower for the benefit of Lender. (h) "Deed of Trust". A Deed of Trust (With Security Agreement, Fixture Filing and Assignment of Leases and Rents) of even date herewith, conveying the Premises to the Trustee named therein, and granting a security interest in certain property and rights, to secure the payment of the Note. (i) "Facility". An assisted living facility. (j) "Deficiency Notices". All notices and other written communications from any Agency, Governmental Authority or agent which licenses, regulates, certifies, accredits or evaluates the Borrower, the Premises or the Borrowers operation of the Premises alleging that the Borrower, the Premises or the Borrower's operation of the Premises in whole or in part fails to comply or, if corrective action is not taken, shall fail to comply with, any or all of the Agency's or Governmental Authority's requirements for and conditions of licensing, regulation, certification or accreditation by or participation in programs of the Agency or Governmental Authority or otherwise relating to the continuous operation of all or any portion of the Premises or the Borrower's programs or its eligibility or entitlement to receive reimbursement from any Aaency or Governmental Authority. (k) "Financing Statement". A Financing Statement executed by Borrower in favor of Lender, perfecting the security interest in personal property created by the Deed of Trust. (1) "GAAP". Generally accepted accounting principles, as from time-to-time in effect in the United States of America, or such alternative accounting standards as may be acceptable to the Lender, consistently applied. 2 (m) "Governmental Authority". The United States, ,e State, the county, and the city, or any other political subdivision in which the Land is located, and any other political subdivision, agency or instrumentality exercising jurisdiction over Borrower, Guarantor or the Premises. (n) "Governmental Requirements". All laws, ordinances, statutes, codes, rules, regulations, orders and decrees of any Governmental Authority applicable `o Borrower, Guarantor or the Premises. (o) "Guaranty". A Guaranty of even date herewith made by Emeritus Corporation, a Washington corporation (hereinafter called "Guarantor"). (p) "Improvements". The improvements constructed on the Land. (q) "Land". The real property described in Exhibit A attached hereto and made a part hereof. (r) "Licenses". Any and all licenses, certificates of need, certificate of need waivers, operating permits, franchises, and other licenses, authorizations, certifications, permits, or approvals, other than construction permits, issued by, or on behalf of, any: Governmental Authority now existing or at any time hereafter issued, with respect to the acquisition, construction, renovation, expansion, leasing, ownership and/or operation of the Premises, accreditation of the Premises, and/or the participation or eligibility for participation in any third party payor or reimbursement programs (but specifically excluding any and all Participation Agreements), any and all operating licenses issued by any Governmental Authority, any and all pharmaceutical licenses and other licenses related to the purchase, dispensing, storage, prescription or use of drugs, medications, and other "controlled substances," and any and all license; relating to the operation of food or beverage facilities or amenities, if any. (s) "Liquid Assets" means (i) cash on hand or on deposit in banks, (ii) readily marketable securities issued by the United States, (iii) readily marketable commercial paper rated A-1 by Standard & Poor's Corporation (or a similar rating by any similar organization that rates commercial paper), (iv) certificates of deposit issued by commercial banks operating in the United States with maturities of one year or less, and (v) publicly traded stocks and bonds. (t) "Loan". A loan in the principal amount of Five Million five Hundred Forty Thousand and No/100 Dollars ($5,5400,000) from Lender to Borrower, secured by a first lien on the Premises (as hereinafter defined), as more fully described in the Commitment. (u) "Loan Documents" This Agreement, the documents described in certain subsections of this Section 1.1 pertaining to the Loan and all other documents securing, evidencing or executed in connection with the Loan. 3 (v) "Managed Care Plans". Any health maintenance organization, preferred provider organization, individual practice association, competitive medical plan, referral service or similar arrangement, entity, organization, or Person. (w ) "Manager". Emeritus Corporation, or such other party or parties who, with the prior written approval of Lender, enter into a Management Agreement with Borrower. (x) "Material Adverse Change". As to the specified Person, a material adverse change in the business, operations, property, condition (financial or otherwise) or prospects of such Person and, in addition, as to the Borrower, any material adverse change in (i) the ability of the Borrower to perform its obligations under this Agreement or any other Loan Documents or (ii) the validity or enforceability of this Agreement or any of the other Loan Documents or the rights or remedies of the Lender hereunder or thereunder. (y) "Note". A promissory note of even date herewith payable to the order of Lender and in the principal amount of the Loan. (z) "Notice and Agreement". An instrument executed by Borrower and Lender pursuant to Subsection 26.02 of the Texas Business and Commerce Code. (aa) "Obligations". The unpaid principal of and interest on any promissory note or other indebtedness (including, without limitation, interest accruing after the maturity of any promissory note or indebtedness and interest accruing thereon after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) and all other obligations and liabilities, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation all fees and disbursements of counsel) or otherwise. (bb) "Operating Agreements and Management Contracts". Any and all contracts and agreements previously, now or at any time hereafter entered into by the Borrower with respect to the acquisition, construction, renovation, expansion, ownership, operation, maintenance, use or management of the Premises or otherwise concerning the operations and business of the Premises, including, without limitation. the Management Agreement, any and all service and maintenance contracts, any employment contracts, any and all management agreements, any and all consulting agreements, laboratory servicing agreements, pharmaceutical contracts, physician, other clinician or other professional services provider contracts, therapy referral, food and beverage service contracts, and other contracts for the operation and maintenance of, or provision of services to, the Premises. (cc) "Participation Agreements". Any and all third party payor participation or reimbursement agreements now or at any time hereafter existing for the benefit of the Borrower relating to rights to payment or reimbursement from, and claims against, private 4 insurers, Managed Care Plans, employee assistance programs, Blue Cross and/or Blue Shield, federal, state and local Governmental Authorities, including without limitation, Medicare,-Medicaid, CAMPUS, VA and other third party payers. (dd) "Person". An individual, a general or limited partnership, a limited liability company, a limited liability partnership, a corporation, a business trust, a joint stock company, a trust, an unincorporated association, a joint venture, a Governmental Authority or other entity of whatever nature. (ee) "Premises". The Land and the Improvements. (ff) "Resident Agreements". Any and all contracts and agreements executed by, or on behalf of any resident or other Person seeking residency or occupancy in the Premises and related services from the Borrower. (gg) "Title Company". Chicago Title Insurance Company. ARTICLE II. THE LOAN 2.l The Loan. Subject to and upon the terms, conditions an d limitations contained in this Agreement and relying on the representations and warranties contained in this Agreement and the other Loan Documents, Lender agrees to lend, and Borrower agrees to borrow and take down, the Loan, to be evidenced by the Note. All proceeds of the Loan shall be advanced against the Note and shall be used by Borrower to refinance the current financing of the Premises and for other corporate purposes. The principal amount actually owing on the Note from time to time shall be the aggregate of all advances theretofore made by the Lender against the Note less all payments theretofore made on the principal of the Note. 2.2 Security for the Loan. The Loan, as evidenced by the Note, shall be secured by the Deed of Trust, Assignment of Leases and Rents, Collateral Assignment of Agreements Affecting Real Estate and Debt Service Agreement and shall be guaranteed by the Guaranty. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BORROWER 3.1 Representations. Warranties and Covenants of Borrower. Borrower hereby represents, warrants and covenants to Lender that: (a) Deed of Trust. All of the representations and warranties of borrower under the Deed of Trust are true and correct. 5 (b) Financial Statements. The financial statements and information regarding Borrower heretofore delivered to Lender are true and correct in all material respects, having been prepared in accordance with GAAP, and fairly present the financial condition of Borrower as of the date thereof. No Material Adverse Change has occurred in the financial condition of Borrower reflected therein since the date thereof. (c) Brokerage Commissions. Any brokerage commissions due to any broker with whom Borrower has dealt in connection with the transaction contemplated hereby have been paid in full and any such commissions coming due in the future will be promptly paid by Borrower. Borrower agrees to and shall indemnify Lender from any liability, claims or losses arising by reason of any such brokerage commissions. This provision shall survive the repayment of the Loan made in connection herewith and shall continue in full force and effect so long as the possibility of such liability, claims or losses exists. (d) No Homestead. The Land and the Improvements thereon do not and will not constitute the residential or business homestead of Borrower. (e) Certain Payments. Neither the Borrower nor any director, officer, member, partner, employee or agent of the Borrower acting for or on behalf of the Borrower has paid or caused to be paid, directly or indirectly, in connection with the business of the Borrower any bribe, kickback or similar payment to any Governmental Authority or any agent of any supplier. (f) Operating Agreements and Management Contracts. The Borrower has furnished to the Lender photocopies of all material Operating Agreements and Management Contracts entered into with the Borrower, and all amendments, supplements and modifications thereto. With respect to each such Operating agreement and Management Contract, (i) such Operating Agreement and Management Contract is or will be at the time of execution and delivery thereof valid and binding on the parties thereto and in full force and effect, (ii) no default has occurred or is continuing under the terms thereof, and no event has occurred which, with the giving of notice or the lapse of time or both, would constitute a default thereunder, and no party thereto has attempted or threatened to terminate any such Operating Agreement and Management Contract, (iii) the Borrower has not made any previous assignment of the Operating Agreements and Management Contracts to any Person, except as security for loans and other financial accommodations, if any, which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof, and (iv) no financing; statement covering any of the Operating Agreements and Management contracts is on file in any public office, except for those financing statements relating to loans and other financial accommodations which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof. 6 (g) Participation Agreements. (i) The Borrower has furnished to the Lender, on or before the date hereof, all material Participation Agreements entered into with the Borrower, including all amendments, supplements and modifications thereto. (ii) Each Participation Agreement (A) is or will be at the time of execution and delivery thereof the valid and binding obligation of the parties thereto and in full force and effect, (B) provides for payment to the Borrower of allowable costs incurred by the Borrower in the provision of services to patients and/or residents, and (C) no default has occurred or is continuing under the terms thereof and no event has occurred, which, upon the giving of notice or the lapse of time or both, would constitute a default under the terms thereof. (iii) Borrower does not participate in any Medicare or Medicaid payment and reimbursement programs. (h) Hill-Burton Act. The Borrower has not, nor to the best of the Borrower's knowledge, has any prior owner of the Premises during the twenty (20) year period immediately preceding the date hereof, received any funds to finance the construction and/or acquisition of the Premises pursuant to Title VI of the Public Health Service Act (commonly referred to as the Hill-Burton Act) or Title XVI of the Public Health Service Act. (i) Eligibility. The Borrower is eligible for third party payments under, and in connection with, any and all Participation Agreements to which it is presently a party. (j) Patient Admission Agreements and Resident Agreements. Each Patient Admission Agreement and Resident Agreement to which the Borrower is a party is or will be valid and binding on the parties thereto, is or will be at the time of execution and delivery thereof in full force and effect, and any payments due to the Borrower thereunder are not and will not be evidenced by any chattel paper or instrument. (k) Fraud and Abuse. The Borrower, its directors, officers and employees and other Persons providing services on behalf of the Borrower have not engaged in any activities which are in violation of Sections 1128A, 1128C or 1877 of the Social Security Act, the False Claims Act, the Program Fraud Civil Remedies Act of 1906 or other federal or state laws and regulations, including, but not limited to, the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment; 7 (ii) knowingly and willfully making or causing to be made a false statement or representation of a material fact for use in determining rights to any benefit or payment; (iii) failing to disclose knowledge of the occurrence of any event affecting the initial or continued right to any benefit or payment on its own behalf or on behalf of another, with intent to fraudulently secure such benefit or payment; (iv) knowingly and willfully offering, paying. soliciting, or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind (A) in return for referring an individual to a Person for the furnishing or arranging for the furnishing of anv item or service, (B) in return for purchasing, leasing or ordering, or arranging for or recommending purchasing, leasing or ordering any good, facility, service or item; or (v) billing a patient, resident or payor for health services specified in 42 U.S.C. ss. 1395nn or any other similar or comparable federal or state laws, or providing such health services to a patient or resident, upon a referral from physician where such physician has a financial relationship with the Borrower to which no exception applies under each of the applicable laws. (I) Licenses and Certifications. The Borrower has obtained all Licenses. necessary or desirable under all Governmental Requirements for the operation of the Premises as a Facility. With respect to each License the Borrower possesses or has applied for, (i) no default has occurred or is continuing under the terms thereof, and no event has occurred which, with the giving of notice or the lapse of time, or both, would constitute a breach of any condition to the issuance, maintenance, renewal and/or continuance thereof, (ii) the Borrower has paid all fees, charges and other expenses to the extent due and payable with respect to, and has provided all information and otherwise complied with all material conditions precedent to, the issuance, maintenance, renewal, and continuance of such License, (iii) none of the Licenses are conditional, provisional, probationary or restricted in any (iv) the Borrower has not received any notice from any Governmental Authority relating to any actual or pending suspension, revocation, restriction, or imposition of any probationary use of such License, nor has any License been materially amended, supplemented, rescinded, terminated. or otherwise modified except as otherwise disclosed in writing to, and approved by the lender. (v) the Borrower has not made any previous assignment of any of the Licenses to any Person, except as security for loans and other financial accommodations, if any, which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof, (vi) no financing statement covering any of the Licenses has been executed by the Borrower or is on file in any public office, except for those financing statements relating to loans and other financial accommodations, if any, which are to be paid with the proceeds of the Loan and are to be terminated promptly following the date hereof. 8 (vii) each License has been issued for a period of at least twelve (12) months from the date of issuance or for such lesser time to the extent the issuance for less than twelve (12) months is not the consequence of any sanctions imposed by any Governmental Authority. ARTICLE IV. COVENANTS OF BORROWER 4.1 Borrower hereby covenants and a5rees with Lender as follows: (a) Commitment. Borrower shall permit no Borrower default under the terms of the Commitment. (b) Title Insurance. Borrower shall furnish to Lender, at Borrower's expense, a mortgagee title insurance policy (herein called the "Mortgagee Title Policy") showing Lender as the insured thereunder, in the amount of the Loan and in form and substance and written by the Title Company on behalf of an underwriter reasonably satisfactory to Lender insuring a valid first lien upon the Premises by virtue of the Deed of Trust and containing no exceptions except those specifically waived in writing by Lender. If the underwriter issuing the Mortgagee Title Policy becomes insolvent or is placed in receivership or for any other reason such Policy becomes unenforceable, Borrower shall furnish Lender, at Borrower's expense, another mortgagee title insurance policy in the amount and in substitution for the original Mortgagee Title Policy and meeting the above requirements. (c) Insurance. Borrower shall obtain and maintain such insurance or evidence of insurance as Lender may reasonably require, including but not limited to the following: (i) Public Liability and Worker's Compensation Insurance - a certificate from an insurance company indicating the Borrower is covered to the satisfaction of Lender by public liability and worker's compensation insurance. (ii) Business Interruption Insurance - business interruption insurance equal to not less than twelve (12) months estimated gross revenues less expenses not ordinarily incurred during the period of business interruption. (iii) Other Insurance - such other insurance as may be required by the Deed of Trust. (d) Collection of Insurance Proceeds. Borrower shall cooperate with Lender in obtaining for Lender the benefits of any insurance or other proceeds lawfullv or equitably payable to it in connection with the transactions contemplated hereby and the collection of any indebtedness or obligation of Borrower to Lender incurred hereunder (including the 9 payment by Borrower of the expense of an independent appraisal on behalf of Lender in case of a fire or other casualty affecting the Premises). (e) Indemnity of Lender. Borrower shall indemnify and hold harmless Lender (for purposes of this subsection, the term "Lender" shall include the directors, officers, employees and agents of Lender and any persons or entities owned or controlled by, owning or controlling, or under common control or affiliated with Lender) from and against, and reimburse them for, all claims, demands, liabilities, losses, damages, causes of action, judgments, penalties, costs and expenses (including, without limitation, reasonable attorney's fees) which may be imposed upon, asserted against or incurred or paid by them by reason of, on account of or in connection with any bodily injury or death or property damage occurring in or upon or in the vicinity of the Premises through any cause whatsoever or asserted against them on account of any act performed or omitted to be performed hereunder or on account of any transaction arising out of or in any way connected with the Premises or with this Agreement or any other Loan Document. WITHOUT LIMITATION, IT IS THE ATTENTION OF BORROWER AND BORROWER AGREES THAT THE FOREGOING INDEMNITIES SHALL APPLY TO EACH INDEMNIFIED PARTY WITH RESPECT TO CLAIMS, DEMANDS, LIABILITIES, LOSSES, DAMAGES, CAUSES OF ACTION, JUDGMENTS, PENALTIES, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEY'S FEES) WHICH IN WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF SUCH (AND/OR ANY OTHER) INDEMNIFIED PARTY OR ANY STRICT LIABILITY. HOWEVER, SUCH INDEMNITIES SHALL NOT APPLY TO ANY INDEMNIFIED PARTY TO THE EXTENT THE SUBJECT OF THE INDEMNITIFICATION IS CAUSED BY OR ARISES OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNIFIED PARTY. The foregoing indemnities shall survive the termination of this Agreement, the foreclosure of the Deed of Trust or conveyance in lieu of foreclosure and the repayment of the Loan and the discharge and release of the Loan Documents. Any amount to be paid hereunder shall be subject to and governed by the provisions of Section 4.2 hereof. (f) Expenses and Approval of Documents. Borrower shall pay a11 costs of closing the Loan and all expenses of Lender with respect thereto, including but not limited to, reasonable legal fees (including legal fees incurred by Lender subsequent to the closing of the Loan but incurred in connection with the disbursement or collection of the Loan), title insurance premiums and other charges of the title company issuing the Mortgagee Title Policy, appraisal fees, consulting architect fees, consulting inspection fees, advances, recording expenses, surveys, intangible taxes, expenses of foreclosure (including reasonable attorneys' fees) and similar items, and shall allow all closing papers, Loan Documents and other legal matters to be subject to the approval of Lender's attorneys. (g) Further Assurances. Borrower shall sign and deliver to Lender such documents, instruments, assignments and other writings, and do such other acts necessary or desirable, to preserve and protect the collateral at any time securing or intended to 10 secure the Note, as Lender may require; and shall do and execute all and such further lawful and reasonable acts, conveyances and assurances in the law for the better and more effective carrying out of the intents and purposes of this Agreement as Lender shall reasonably require from time to time. (h) Appraisal. Borrower shall submit from time to time, within thirty (30) days following written request of Lender, which request may not be made earlier than one (1) year after the date of the Appraisal furnished pursuant to the Commitment and not more often than annually thereafter, an MAI appraisal of the Premises by a licensed appraiser satisfactory to Lender, such appraisal to be in the form and amount satisfactory to Lender. In lieu of obtaining an appraisal from Borrower hereunder, but subject to the limitation set forth in the previous sentence, Lender may itself obtain the appraisal and Borrower shall pay the cost thereof to Lender within thirty (30) days following written request of Lender. (i) Cooperation Regarding Financial Condition. Borrower shall cooperate with Lender and its representatives to the end that Lender shall be fully apprised regarding the continuing financial condition of Borrower and, upon reasonable request of Lender or any of its representatives, will furnish Lender or such representatives such documents, instruments, financial statements or other information considered necessary or useful by Lender or its representatives in connection with the review and understanding of the financial condition of Borrower as it may exist from time to time. (j) Management Agreement. Lender hereby approves Manager as the manager for the Premises pursuant to terms and conditions of the Management Agreement furnished by Borrower to Lender. Borrower shall (i) permit no default under the terms of the Management Agreement, (ii) waive none of the obligations of Manager thereunder (iii) do no act which would relieve Manager from its obligations thereunder, and (iv) enter into no material amendment, modification or termination of the Management Agreement without the prior written consent of Lender. (k) Resident Agreements. Borrower shall submit to the Lender when requested by the Lender, all information reasonably requested by the Lender with respect to all Resident Agreements. (l) Lessee Information. Borrower shall submit to the Lender when requested by the Lender, all information on all tenant leases, if any, other than Patient Admission Agreements or Resident Agreements, reasonably required to be included in a rent roil. (m) Conduct of Business and Compliance with Laws. The Borrower shall (i) do or cause to be done all things necessary to obtain, enter into, preserve and keep in full force and effect its existence and material rights and, if appropriate, construction permits and all material Licenses, Participation Agreements, and Operating Agreements and Management Contracts which are necessary to its business and the operation of the Premises as a Facility, (ii) engage in and continue to engage only in the business of owning and operating the Facility and related services, (iii) observe the valid requirement of Governmental 11 Authorities and agents and perform the terms of all Participation Agreements, the noncompliance with or the nonobservance of which might materially interfere with the performance of its obligations under the Loan Documents or the proper or prudent conduct of its business or the Premises, and (iv) comply with all Governmental Requirements, including, without limitation, the Occupational Safety and Health Act of 1970, regulations issued under the Omnibus Budget Reconciliation Act of 1987, any Governmental Requirement relating to "informed consents" and rights of patients and/or residents, qualifications of staff, staffing requirements and delivery of services in a manner sufficient to protect the health and safety of patients and/or residents. In addition, the Borrower covenants and agrees that it will: (i) maintain in full force and effect all Licenses necessary to the ownership and/or operation of the Premises, including, without limitation, the license to operate the Premises, Licenses and other approvals related to the storage, dispensation, use, prescription and disposal of drugs, medications and other "controlled substances" and, to the extent offered by the Borrower, the maintenance of cafeteria and other food and beverage facilities or services; (ii) administer, maintain and operate (or will cause to be administered, maintained and operated) the Premises as a revenue-producing Facility; (iii) administer, maintain and comply with all conditions for the continuance of, all Licenses necessary or desirable for the operation of the Premises as a Facility; (iv) obtain, maintain and comply with all conditions for the continuance of each of the Licenses; (v) maintain or cause to be maintained the standard of care for the residents of the Premises at all times at a level necessary to insure a level of quality care and services for the patients and/or residents of the Premises no less than the prudent industry standard for a Facility; (vi) maintain or cause to be maintained a standard of care in the storage, use, transportation and disposal of all medical equipment, medical supplies, medical products and medical waste, of any kind and in any form, that is in accordance with, at least, that of the prudent industry standard and in conformity with all Governmental Requirements; (vii) operate or cause to be operated the Premises in a prudent manner in compliance with Governmental Requirements relating thereto and cause all Licenses, permits, certificates of need, reimbursement contracts, and any other agreements necessary for the use and operation of the Premises or as may be necessary for participation in the applicable reimbursement programs to remain in 12 effect without reduction in the number of licensed beds or beds authorized for use in applicable reimbursements programs; (viii) correct or cause to be corrected any deficiency set forth in any Medicare, Medicaid or other Agency statement of deficiencies, the curing of which is a condition of continued licensure or for accreditation of the Premises or for (1) full participation in Medicare, Medicaid or other third party payor or reimbursement programs offered by any other Governmental Authority or third party private payor (including Blue Cross and Blue Shield, Managed Care Plans, and employee assistance plans) in which the Borrower presently participates and which are material to the continued ability of the Borrower to operate the Premises in a manner consistent with the provisions of the Loan Documents and to pay the Borrower's Obligations as and when due and payable, or (2) existing patients or for new patients to be admitted with coverage under any of the foregoing third party payor and reimbursement programs, all by the date required for cure by such Agency (plus extensions granted by such Agency); (ix) maintain or cause to be maintained sufficient inventory and equipment of types and quantities at the Premises to enable the Borrower or the Manager of the Premises to operate the Premises adequately, as a Facility and in a manner which will enable the Borrower to comply with the provisions of the Loan Documents; and (x) maintain or cause to be maintained all deposits, including, without limitation, deposits relating to patients or Patient Admission Agreements or Resident Agreements in accordance with customary and prudent business practices and all Governmental Requirements. Any bond or other instrument which the Borrower, or any manager of the premises, as the case may be, is permitted to hold in lieu of cash deposits under any applicable Governmental Requirement shall be maintained in full force and effect unless replaced by cash deposits, shall be issued by an institution reasonably satisfactory to the Lender, shall, if permitted pursuant to Governmental Requirements, name the Lender as the payee or mortgagee thereunder (or at the Lender's option, be fully assignable to the Lender) and shall, in all material respects, comply with all applicable Governmental Requirements and otherwise be reasonably satisfactory to the Lender. Following the occurrence and during the continuance of any event of default under the Loan Documents, the Borrower or Manager of the Premises as the case may be shall, upon the Lenders request, if permitted by applicable Governmental Requirements, turn over to the Lender the deposits (and any interest earned thereon) with respect to the Premises, to be held by the Lender subject to the terms of any applicable Operating Agreements and Management Contracts. (n) Insurance. The Borrower shall ensure that all healthcare providers with whom the Borrower contracts to provide services at the Premises are insured against claims arising from such services (including, without limitation, malpractice coverage). 13 (o) Notices. The Borrower shall promptly notify the Lender in writing upon obtaining knowledge of the occurrence of any of the following which could result in a Material Adverse Change: (i) the receipt by the Borrower of any notice, claim or demand from any Governmental Authority which alleges that the Borrower is in violation of any of the terms of, or has failed to comply with any Governmental Requirement regulating its operation and business, including, but not limited to, the Health Care Financing Administration or any division thereof, the Occupational Safety and Health Act and the Environmental Protection Act; (ii) The actual, threatened or pending (A) revocation, suspension, probation, restriction limitation, forfeiture or refusal to renew of any License, or (B) decertification, revocation, suspension, probation, restriction, limitation, forfeiture or refusal to renew any participation or eligibility in any third party payor program in which the Borrower presently participates or is eligible, including, without limitation, Medicare, Medicaid, CAMPUS, Blue Cross and Blue Shield, any Managed Care Plan, private insurer ot- employee assistance program, or any accreditation of the Borrower, which actual or threatened or pending decertification, revocation, suspension, probation, restriction, limitation, forfeiture or refusal to remedy could have a Material Adverse Change or could adversely affect the ability of the Borrower to repay the Loan or comply with the provisions of the Loan Documents, or (C) the issuance or pending issuance of any License for a period of less than twelve (12) months, as a consequence of sanctions imposed by any Governmental Authority or agent, or (D) the assessment or threatened or pending assessment, of any civil or criminal penalties by any Governmental Authority or agent, any third party payor or any accreditation organization; or (iii) any action, including, but not limited to the amendment of any License, or the issuance of any new License or certification for the Premises, under which the Borrower proposes (A) to develop a new facility or service, (B) change any existing facility or service, or (C) to eliminate any existing or proposed service, which action requires the Borrower to seek either a certificate of need approval or exemption from certificate of need approval or which requires amendment of any License or the issuance of any new License or certificate for the Premises. in each case describing in detail satisfactory to the Lender in its sole discretion the nature thereof and the action the Borrower proposal to take with respect thereto. (p) Deficiency Notices. Without implying any limitation on any other provisions of this Agreement or any of the other Loan Documents, the Borrower wi11 furnish to the Lender immediately after receipt thereof copies of all material (A) Deficiency Notices, (B) agency inspection reports, audits, surveys, investigations, reviews or evaluations, (C) notices and written communications from any State or any Agency relating to material advertisement in reimbursement amounts or to rate reviews, 14 modifications of rates, inflation adjustments, rate agreements or the like, and (D) responses by, or on behalf of, the Borrower with respect to any of the foregoing. The Borrower shall promptly commence and diligently pursue the correction or the subject of each Deficiency Notice, and shall correct the subject of the Deficiency Notice promptly, but in any event prior to the expiration of any period allowed by the Agency for correction. The Borrower shall, at the Lender's request, promptly provide from time to time such cost estimates, reports and other information as the Lender reasonably may require to demonstrate to the Lender's satisfaction that the Borrower has the financial and other ability to effect the correction and is taking the actions required by this Section. (q) Participation in Reimbursement Programs. The Borrower will participate in any and all plans and programs for third party payment and/or reimbursement from, and claims against, private insurers, employee assistance programs and plans or programs for payment and/or reimbursement from federal, state and local governmental agencies and/or private or quasi-public insurers as shall be necessary for the prudent conduct of the Borrower's business. The Borrower shall comply with any and all conditions, rules, regulations, standards, procedures and decrees necessary to maintain the Borrower's participation in any such third party payor or reimbursement programs or plans. (r) Cost Reports. The Borrower will prepare and file all applicable cost reports to all third party payors to the extent required by any such third party payor and will notify the Lender of any disallowance or settlement of any cost report which the Borrower has disclosed to the Lender as being open or unsettled as of the date hereof to the extent any such disallowance or settlement would have a Material Adverse Change on the Borrower. (s) Census Report and Surveys. The Borrower will furnish to the Lender promptly following the request of the Lender reports of the Borrower's periodic patient or resident census with a breakdown with respect to the source of payment, licensure survey results, accreditation survey results and such other information relating to the operation of the Premises as may reasonably be requested by the Lender from time to time. (t) Renewal of Agreements. The Borrower will take any and all steps necessary to remedy all Participation Agreements, Patient Admission Agreements, Resident Agreements, and Operating Agreements and Management Contracts, except to the extent that the Borrower deems such renewal to be, in the exercise of prudent business judgment, contrary to the best interests of the Borrower. (u) Specific Licensing Requirements. The Borrower shall al all times maintain the Premises as a properly licensed Facility in accordance with all Governmental Requirements and Licenses. (v) Financial Statements. The Borrower shall provide Lender and cause the Guarantor and the Manager to provide to Lender, the following financial statement information on a continuing basis during the term of the Loan: 15 (i) Beginning with calendar year end 1998, within ninety (90) days after the end of each calendar year, unaudited financial statements of Borrower, which statement shall be prepared in accordance with GAAP, and shall include a balance sheet and statement of income and expenses for the year then ended. Lender reserves the right to require, in its sole discretion, annual audited financial statements of Borrower. (ii) Once each month within thirty (30) days after month end , unaudited monthly financial statements of the operations of the premises, prepared in accordance with GAAP, which statements shall include a balance sheet and statement of income and expenses for the month then ended, together with a rent roll of the Premises as of the end of such month, certified by a representative of Borrower to be true and correct to the best of the representative's knowledge and belief. Such statements shall also be prepared on a "rolling" quarterly basis. Such statements of the premises shall be accompanied by the information required pursuant to the Summary of Financial Statements and Census Data (in the form attached hereto as Schedule I), which information shall be provided in the format utilized by Borrower and certified by a representative of the Borrower to be true and correct. (iii) The financial statements and information required of Guarantor under the Guaranty. (iv) The financial statements required under this Agreement shall be accompanied by a Certificate Accompanying Financial Statements in the form attached hereto as Schedule II. (v) The Lender further reserves the right to require such other financial information of Borrower, the Guarantor, Manager and/or the Premises, in such form and at such other times (including monthly or more frequently) as Lender reasonably shall deem necessary, and Borrower agrees promptly to provide or to cause to be provided, such information to Lender. All financial statements must be in the form and detail as Lender may from time to time reasonably request. (w) Capital Improvements. Borrower shall make minimum annual capital expenditures (or maintain a reserve for such expenditures) for the Premises in each fiscal year, in the amount of S?0.00 per unit (which such capital expenditures may include ordinary repairs needed to maintain or improve the conditions of the Premises), and within ninety (90) days of the end of such fiscal year provide evidence thereof satisfactory to Lender. In the event the Borrower shall fail to do so, Borrower shall, upon Lender's written request, immediately establish and maintain a capital expenditures reserve fund with Lender equal to the difference between the required amount per unit and the amount per unit actually spent by the Borrower. Borrower grants to Lender a right of setoff against all moneys in the capital expenditures reserve fund, and Borrower shall not permit any other lien to exist upon such fund. The proceeds of such capital 16 expenditures reserve fund will be disbursed upon Lender's receipt of satisfactory evidence that Borrower has made the required capital expenditures. Upon Borrower's failure to adequately maintain the Premises in good condition, Lender may, but shall not be obligated to, make such capital expenditures and may apply the moneys in the capital expenditures reserve fund for such purpose. To the extent there are insufficient moneys in the capital expenditures reserve fund for such purposes, all funds advanced by Lender to make such capital expenditures shall constitute a portion of the Loan, shall be secured by the Deed of Trust and shall accrue interest at the Default Rat (as such term is defined in the Note) until paid. Upon an event of default, Lender may apply any moneys in the capital expenditures reserve fund to the Loan, in such order and manner as Lender may elect. Routine maintenance and repair expenses which are necessary to improve or maintain the physical condition of the Premises shall count towards the capital expenditures requirement. For any partial fiscal year during which the Loan is outstanding, the required expenditure amount shall be prorated by multiplying the required amount per unit by a fraction, the numerator of which is the number of days during such year for which all or part of the Loan is outstanding and the denominator of which is the number of days in such year. (x) Debt Coverage Ratio. During the first year of the Loan, the Premises shall continuously maintain a Debt Coverage Ratio (as such term is defined in the Note). During the second year of the Loan, the Premisis shall continuously maintain a Debt Coverage Ratio of at least 1.1 to 1. During the Extension Period (as such term is defined in the Note), the Premises shall continuously maintain a Debt Coverage Ratio of at least 1.3 to 1. Each of the foregoing shall be measured on a "rolling" quarter basis. (y) Debt Coverage Escrow. If Borrower fails to achieve or provide evidence of achievement of a minimum Debt Coverage Ratio of 1.0 to 1, upon the closing of the Loan, or if such failure occurs after the closing of the Loan, then upon fifteen (l5) days written notice to Borrower, Borrower will deposit with Lender cash or other liquid collateral in an amount which, when added to the first number of the debt coverage ratio calculation, would have resulted in the noncomplying debt coverage requirement having been satisfied. If such failure continues for two (2) consecutive quarters, on the third consecutive quarter, if Borrower again fails to achieve or provide evidence of the achievement of the Debt Coverage Ratio of 1.0 to 1, upon fifteen (l5) days written notice to Borrower, Borrower will deposit with Lender additional cash or other liquid collateral (with credit for amounts currently being held by Lender pursuant to the foregoing sentence), in an amount which, if the same had been applied on the first day to reduce the outstanding principal indebtedness of the Loan, would have resulted in the noncomplying debt coverage requirement having been satisfied, and Borrower agrees promptly to provide such additional cash or other liquid collateral. Such additional collateral shall constitute and will be held by the Lender in a standard custodial account, and shall constitute additional collateral for the Loan and. upon the occurrence of an event of default, may be applied by the Lender, in such order and manner as the Lender may elect, to the reduction of the Loan. Borrower shall not be entitled to any interest earned on such 17 additional collateral, unless the escrow is over $500,000, in which event the escrow will be deposited in a money market account. Provided that there is no outstanding event of default and no event has occurred which with the passage of time or giving of notice or both would constitute an event of default, such additional collateral which has not been applied to the Loan will be released by the Lender at such time as Borrower provides the Lender with evidence that the Debt Coverage Ratio of 1.0 to 1 has been achieved and maintained (without regard to any cash deposited pursuant to this Section 4.1(y)) for si1 (6) consecutive months. All amounts deposited by Borrower pursuant to this Section 4. I (y) are referred to as "Debt Coverage Reserve Funds". (z) Debt Service Escrow. On the date of this Agreement, Borrower shall establish the Debt Service Reserve Funds Escrow Account (as such term is defined in the Escrow and Security Agreement). At such time as the Premises has maintained a Debt Coverage Ratio of at least 1.5 to 1 for three (3) consecutive months and provided no event of default or event which with the passed of time or giving of notice, or both, would constitute an event of default has occurred, Lender will release to Borrower the funds held in the Debt Service Reserve Funds Escrow Account. (aa) Intentionally Omitted. (bb) Licenses. To the extent within the Borrower's control. Borrower will not allow any breach, withdrawal, rating reduction, restriction, suspension, probation, failure to renew, cancellation, rescission, termination, lapse or forfeiture of any License, permit, right, franchise or privilege necessary for the ownership or operation of the Premises for the purposes for which the Premises is intended. (cc) Agreements. To the extent within Borrower's control, Borrower will not allow any breach, withdrawal, restriction, suspension, probation, failure to renew, cancellation, rescission, termination, lapse, alteration, forfeiture or modification of any material Participation Agreement or any material Operating Agreements and Management Contracts. (dd) Amendments: Terminations. Borrower will not amend or terminate or agree to amend or terminate any material License or consent to a waiver of, or waive, any material provisions thereof or amend or terminate or agree to amend or terminate, any material Participation Agreement or any material Operating Agreements and Management Contracts. (ee) Single Asset Entity. Borrower will not (a) acquire any real or personal property other than the Premises and personal property related to the operation and maintenance of the Premises; (b) operate any business other than the management and operation of the Premises, or (c) maintain its assets in a va1- difficult to segregate and identity. 18 (ff) Liquidity. Throughout the term of the Loan, Guarantor shall maintain Liquid Assets of at least $5,000,000.00. 4.2 Failure to Perform. If Borrower fails to perform any act or to take any action or to pay any amount provided to be paid by it under the provisions of any of the covenants and agreements contained in this Agreement, Lender may but shall not be obligated to perform or cause to be performed such act or take such action or pay such money, and any expenses so incurred by Lender and any money so paid by Lender shall be an advance against the Note and shall bear interest from the date of making such payment until paid at the rate of interest payable on matured but unpaid principal of or interest on the Note and shall be part of the indebtedness secured by the Deed of Trust, and Lender upon making any such payment shall be subrogated to all rights of the person, corporation or body politic receiving such payment. ARTICLE V. LOAN FUNDING 5.1 Loan Funding. The funding of the Loan shall take place in the offices of Lender or at such other place as Lender may designate. 5.2 Conditions Precedent to Loan Funding. Except as otherwise provided herein, the following shall be conditions precedent to Lender's obligations to fund the Loan: (a) Representations and Warranties. On the date of disbursal of the Loan (hereinafter called the "Loan Funding Date"), all of Borrower's representations and warranties contained herein or in any other Loan Document or in the Commitment shall be true and correct in all material respects. (b) Covenants and Agreements. On the Loan Funding Date, Borrower shall have performed each covenant and agreement to be performed by Borrower on or before the Loan Funding Date pursuant to this Agreement, any other Loan Document or the Commitment, within the time specified. (c) Due Execution and Recording of Loan Documents. Borrower shall have delivered to Lender evidence, in form satisfactory to Lender, that the Loan Documents have each been duly executed and constitute valid, binding documents, enforceable in accordance with their respective terms and have been fled or recorded. as appropriate, in all proper offices. (d) Mortgagee Title Policy. Borrower shall have furnished Lender with the Mortgage Title Policy. 19 (e) Insurance. Borrower shall have obtained the insurance and delivered all policies and certificates required hereunder. (f) Appraisal. Borrower shall have furnished Lender or paid Lender's cost of acquiring an MAI appraisal of the Premises and the Improvements by a licensed appraiser satisfactory to Lender, such appraisal to be in the form and amount reasonably satisfactory to Lender. (g) Survey. Borrower shall have furnished to Lender a certified plat of survey of the Premises made by a licensed surveyor or civil engineer satisfactory to Lender meeting the requirements contained in the Pre-Closing Document List furnished Borrower by Lender. (h) Zoning and Compliance With Laws. Borrower shall have delivered to Lender evidence, in form reasonably satisfactory to Lender, that the Premises are zoned for the use for which the Improvements are designed and are otherwise in compliance with all applicable Governmental Requirements, including, if applicable, all provisions of environmental statutes. (i) Certificates of Occupancy and Other Permits. Borrower shall have furnished lender (A) complete and true copies of the certificates of occupancy (if reasonably available) and any other permits, licenses or certi2icates which are required in connection with the Improvements, issued by the appropriate Governmental Authorities with jurisdiction over the Premises, and (B) a certificate by Borrower that no proceedings of any kind are pending or threatened by any person, firm, corporation or public agency with respect to the revocation or suspension of any permits, licenses or certificates. (j) Tax 5ervice. If required by Lender, Borrower shall have furnished Lender a real estate tax reporting service contract in form satisfactory to Lender by which Lender shall receive periodic notices of all taxes, assessments and bonds encumbering the Premises. (k) Other Documents. Borrower shall have delivered to Lender such other documents and certificates as Lender or Lender of counsel may reasonably request. (1) Management Agreement. Lender shall have received and approved the Management Agreement. All modifications and amendments to the Management Agreement or any termination of the Management Agreement must be approved by Lender. (m) Subordination of Management Agreement. Borrower shall have furnished Lender with the executed Subordination of Management Agreement. (n) Commitment Fee. Borrower shall have paid to Lender the commitment fee in the sum of $55,400 as required by the Commitment. 20 ARTICLE VI. DEFAULTS 6.1 Event of Default. An "event of default" shall be deemed to have occurred hereunder if: (a) A default (as such term is defined therein) occurs under the Deed of Trust; or (b) Borrower breaches or fails timely and properly to observe, keep or perform any covenant, agreement, warranty or condition herein required to be observed, kept or performed, other than those referred to in any other subsection hereof, if such failure continues for thirty (30) days after receipt by Borrower of written notice and demand for the performance of such covenant, agreement, warranty or condition, provided that if Borrower shall within such thirty (30) day period commence action to cure such failure but is unable, by reason of the nature of the performance required, to cure same within such period, and if Borrower continues such action thereafter diligently and without unnecessary delays, Borrower shall not be in default-hereunder until the expiration of a period of time as may be reasonably necessary to cure such failure, provided further that in any event Borrower shall be in default hereunder if such failure is not cured on or before ninety (90) days after receipt by Borrower of the above described written demand for performance; or (c) Any involuntary, imposed, required, actual, threatened or pending revocation, suspension, termination, probation, restriction, limitation, forfeiture or refusal to remedy, any License necessary or material to the operation of the Premises as a Facility; or (d) Any termination of or refusal to remedy any participation or eligibility in any third party payor program in which the Borrower presently participates or is eligible to participate and which is material to the operation or the financial condition of the Premises (other than with respect to any third party payor program (except Medicare or Medicaid), private insurer or payor, employee assistance program, Managed Care Plan, or accreditation which the Borrower reasonably deems, in the exercise of prudent business judgment, to be unnecessary to the successful operation of the Premises and the ability of the Premises to generate and collect sufficient revenues to pay all of its obligations as and when due and payable); or (e) A final unappealable determination that the Borrower or any shareholders, partners, memb2rs, directors. officers, employees or agents of the Borrower violated Section 1128A, 1128C or 1877 of the Social Security Act, the Program 21 Fraud Civil Remedies Act of 1986 (31 U.S.C. ss.3801 et seq.) or other similar Governmental Requirements, if the same could result in a Material Adverse Change; or (f) A default occurs under Subsection 4.1(f); or (g) Borrower fails to make any deposit required pursuant to Subsection 4.1 (y) or (z) within fifteen (15) days of demand therefor. ARTICLE VII. REMEDIES 7.1 Remedies. Borrower agrees that the occurrence of any one or more of the events of default set out in Article VI hereof shall constitute a default under each of the Loan Documents, thereby entitling Lender (i) to exercise any of the various remedies therein provided including the acceleration of the indebtedness evidenced by the Note and the foreclosure of the Deed of Trust and (ii) cumulatively to exercise all other rights, options and privileges provided by law. ARTICLE VIII GENERAL CONDITIONS 8.1 Rights of Third Parties. All conditions of the obli5ations of Lender hereunder, including the obli5ation to make advances, are imposed solely and exclusively for the benefit of Lender and its successors and assigns and no other person shall have standing to require satisfaction of such condition in accordance with their terms or be entitled to assume that Lender will make advances or refuse to make advances in the absence of strict compliance with any or all thereof and no other person shall, under any circumstances, be deemed to be a beneficiary of such conditions, any and all of which may be freely waived in whole or in part by Lender at any time if in its sole discretion it deems it desirable to do so. 8.2 Waivers. No waiver of or consent to any departure from any provision hereof shall be effective unless in writing and signed by Lender and shall be effective only in the specific instance for the purpose for which given and to the extent specified in such writing. No waiver of any default hereunder shall affect or constitute a waiver of any later default. No delay or omission of Lender to exercise any right or remedy upon the happening of any event of default shall impair any such right or remedy or be deemed to be a waiver of such event of default. 8.3 Evidence of Satisfaction of Conditions. Any condition of this agreement which requires the submission of evidence of the existence or nonexistence of a specified fact or facts implies as a condition the existence or nonexistance, as the case may be, of such fact or facts, and 22 Lender shall, at all times, be free independently to establish to its satisfaction and in its absolute discretion such existence or nonexistence. 8.4 Assignment by Borrower. Anything to the contrary herein not withstanding, Borrower shall have no right to assign its rights hereunder or the proceeds of the Loan without the written consent of Lender and any such assignment or purported assignment shall, at Lender's option, relieve Lender from all further obligations hereunder and shall constitute a default under this Agreement. 8.5 Successors and Assigns Included in Parties Whenever in this Agreement one of the parties hereto is named or referred to, the heirs, legal representatives, successors and assigns of such party shall be included and all covenants and agreements contained in this Agreement by or on behalf of the Borrower or by or on behalf of Lender shall bind and inure to the benefit of their respective heirs, legal representatives, successors and assigns, whether so expressed or not. 8.6 Exercise of Rights and Remedies. All rights and remedies of Lender hereunder or under the Note or under the Deed of Trust or under any other Loan Document shall be separate, distinct and cumulative and no single, partial or full exercise of any right or remedy shall exhaust the same or preclude Lender from thereafter exercising in full or in part the same right or remedy or from concurrently or thereafter exercising any other right or remedy which Lender may have hereunder, under the Note or Deed of Trust or any other Loan Document, or at law or in equity and each and every such right and remedy may be exercised at any time or from time to time. 8.7 Headings. The heading:; of the sections and subsections of this Agreement are for the convenience of reference only, are not to be considered a part hereof and shall not limit or otherwise affect any of the terms hereof. 8.8 Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH. THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO TEXAS PRINCIPLES OF CONFLICTS OF LAW. EXCEPT TO THE EXTENT (A) OF PROCEDURAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION, PERFECTION, FORECLOSURE AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE PREMISIS, WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF WASHINGTON, AND (B) THAT THE LAWS OF THE UNITED STATES OF AMERICA AND ANY RULES, REGULATIONS, OR ORDERS ISSUED OR PROMULGATED THEREUNDER. APPLICABLE TO THE AFFAIRS AND TRANSACTIONS ENTERED INTO BY LENDER. OTHERWISE PREEMPT WASHINGTON OR TEXAS LAW; IN WHICH EVENT SUCH FEDERAL LAW SHALL CONTROL. BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS TEXAS OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS, AND BORROWER HEREBY AGREES AND CONSENTS THAT, IN ADDITION TO ANY METHODS OF 23 SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW, ALL SERVICE OF PROCESS IN ANY SUCH SUIT ACTION OR PROCEEDING IN ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS, TEXAS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL. RETURN RECEIPT REOUESTED. DIRECTED TO BORROWER AT THE ADDRESS OF BORROWER FOR THE GIVING OF NOTICE UNDER SECTION 8.14 HEREOF, AND SERVICE SO MADE SHALL BE COMPLETE FIVE DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. 8.9 Supplement to Deed of Trust. The provisions of this Agreement are not intended to supersede the provisions of the Deed of Trust but shall be construed as supplemental thereto. In the event of any inconsistency between the provisions hereof and the Deed of Trust, it is intended that, during the applicability of this Agreement, this Agreement shall be controlling. 8.10 Usury. It is the intent of Lender and Borrower in the execution of the Note, this Agreement and all other instruments now or hereafter securing the Note or executed in connection therewith or under any other written or oral agreement by Borrower in favor of Lender to contract in strict compliance with applicable usury law. In furtherance thereof, Lender and Borrower stipulate and agree that none of the terms and provisions contained in the Note, this Agreement or any other instrument securing the Note or executed in connection herewith, or in any other written or oral agreement by Borrower in favor of Lender, 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 to be charged by applicable law: neither Borrower nor any Guarantor, endorsers or other parties now or hereafter becoming liable for payment of the Note or the other indebtedness secured by the Loan Documents shall ever be obligated or required to pay interest on the Note or on indebtedness arising under any instrument securing the Note or executed in connection therewith, or in any other written or oral agreement by Borrower in favor of Lender, at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this Section shall control over all other provisions of the Note, this Agreement and any other instruments now or hereafter securing the Note or executed in connection herewith or any other oral or written agreements which may be in apparent conflict herewith. Lender expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of the Note is accelerated. If maturity of the Note shall be accelerated for any reason or if the principal of the Note is paid prior to the end of the term of the Note, and as a result thereof the interest received for the actual period of existence of the Loan exceeds the applicable maximum lawful rate, Lender shall, at its option, either refund to Borrower the amount of such excess or credit the amount of such excess against the principal balance of the Note then outstanding and thereby shall render inapplicable any and a11 penalties of any kind provided by applicable law as a result of such excess interest. In the event that Lender 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 the Note or the other indebtedness secured by the Loan Documents to a rate in excess of that permitted to be charged by applicable law, an amount equal to interest in excess of the lawful rate shall, upon such determination, at the option of Lender, be either immediately returned to Borrower or credited against the principal balance of the Note then outstanding or the other indebtedness secured by the Loan Documents. in which event any and 24 all penalties of any kind under applicable law as a result of such excess interest shall be inapplicable. By execution of this Agreement, Borrower acknowledges that it believes the Loan to be non-usurious and agrees that if, at any time, Borrower should have reason to believe, that the Loan is in fact usurious, it will give Lender notice of such condition and Borrower agrees that Lender shall have ninety (90) days after receipt of such notice 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 Section shall mean the laws of the State of Texas 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. 8.11 Invalid Provisions to Affect No Others. If fulfillment of any provision hereto for any transaction related hereto at the time performance of such provisions shall be due, shall involve transcending the limit of validity prescribed by law, then ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if any clause or provisions herein contained operates or would prospectively operate to invalidate this Agreement in whole or in part, then such clause or provision only shall be held for naught, as though not herein contained, and the remainder of this Agreement shall remain operative and in full force and effect. 8.12 Number and Gender. Whenever the singular or plural number, masculine or feminine or neuter gender is used herein, it shall equally include the other. 8.13 Amendments. Neither this Agreement nor any provision hereof may 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. 8.14 Notice. Any notice or communication required or permitted hereunder shall be 5iven in writing, sent by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States Mail, postage prepaid, registered or certified mail, or (d) prepaid telegram, telex or telecopy, addressed as follows: To Lender: 8333 Douglas Avenue Dallas, Texas 75225 Attention: Commercial Real Estate Lending Division To Borrower: 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 Attention: President 25 with a copy to: Randi Nathanson The Nathanson Group PLLC 1411 Fourth Avenue Suite 905 Seattle, Washington 98101 or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of telegram, telex or telecopy, upon receipt. 8.15 Legal Proceeding. Lender shall have the right to commence, appear in, or to defend any action or proceeding purporting to affect the rights or duties of the parties hereunder or the payment of any funds, and in connection therewith pay necessary expenses, employ counsel and pay its reasonable fees. Any such expenditures shall be considered additional advances hereunder and shall bear interest at the rate payable under the Note for installments of principal and/or interest after maturity shall be secured by the Loan Documents and shall be paid by Borrower to Lender upon demand. 8.16 Assignment by Lender. Lender shall have the right to assign any portion of this Agreement and/or the Loan to a responsible institutional lender and to disseminate to such lender any information it has pertaining to the Loan, including without limitation, complete and current credit information on Borrower, any of its principals and any Guarantor. In the event of such an assignment, Borrower will agree to such modifications to this Agreement as will facilitate such assignment, provided that such modifications will not add to the obligations of Borrower. It is understood that any assignment by Lender will not result in additional cash expense to Borrower. Neither the shareholders, nor the trustees of a real estate investment trust assignee shall be personally liable for the obligations of such trust and Borrower will agree to look solely to the trust property for the payment of any claim hereunder. 8.17 Lender Not a Joint Venturer. Notwithstanding anything to the contrary herein contained, Lender, by entering into this Agreement or by an; action taken pursuant hereto, will not be deemed a partner or joint venturer with Borrower, and Borrower will indemnify and hold Lender harmless from any and all damages resulting from such a construction of the parties and their relationship. 8.18 Survival of Covenants. All covenants of either party contained herein shall continue and survive until the Loan has been fully paid and discharged. 8.19 Time Is of the Essence. Time is of the essence of this Agreement. 26 8.20 Waiver of Judicial Procedural Matters. BORROWER HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGHT BY LENDER IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS, ANY AND EVERY RIGHT IT MAY HAVE TO (i) INJUNCTIVE RELIEF, (II) A TRIAL BY JURY, (III) INTERPOSE ANY COUNTERCLAINI THEREII (OTHER THAN A COMPULSORY COUNTERCLAIM) AND (IVl HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. Nothing herein contained shall prevent or prohibit Borrower from instituting or maintaining a separate action against Lender with respect to any asserted claim. 8.21 Loan Participation. Borrower acknowledges and agrees that Lender may, from time to time, sell or offer to sell interests in the Loan and Loan Documents to one or more participants. Borrower authorizes Lender to disseminate to such participant or prospective participant, any information it has pertaining to the Loan, including without limitation, complete and current credit information on the Borrower, any of its principals and Guarantor, provided that such participant or prospective participant shall agree to keep such information confidential. 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. IN WITNESS WHEREOF, Borrower and Lender have hereunto caused these presents to be executed on the date first above written. EMERITUS PROPLRTIES X, LLC, a Washington limited liability company By: Emeritus Corporation, a Washington corporation, its Manager By: /s/ Kelly J. Price ---------------------------------- Name: Kelly J. Price Title: Vice President of Finance BORROWER 27 GUARANTY FEDERAL BANK, F.S.B, a federal savings bank By: ---------------------------------- Name: Emily W. Hillsman Title: Vice President LENDER 28 PLEASE PROVIDE BORROWER'S FORM. FORM IS SUBJECT TO LENDER'S APPROVAL. SCHEDULE I MONTHLY/QUARTERLY FINANCIAL STATEMENT AND CENSUS DATA Schedule II CERTIFICATE ACCOMPANYING FINANCIAL STATEMENTS Reference is made to that certain Loan Agreement dated December 28,1998 (the "Agreement"), by and between Emeritus Properties X, LLC and Guaranty Federal Bank, F.S.B. ("Lender"), which Agreement is in full force and effect on the date hereof. Terms which are defined in the Agreement are used herein with the meanings given them in the Agreement. This Certificate is furnished pursuant to Section 4.1(v) of the Agreement. Together herewith the Borrower is furnishing to Lender the Borrower's financial statements (the "Financial Statements") as at _____________ and for the period then ended (the "Reporting Date"). The Borrower hereby represents, warrants, and acknowledges to Lender that: (a) the officer of the Borrower signing this instrument is the duly elected, qualified and acting _________ of Borrower; (b) the Financial Statements present fairly in all material respects in accordance with GAAP the financial position of the Borrower as of the Reporting Date and its results of operations and cash flows for the periods covered thereby and satisfy the requirements of the Agreement; (c) attached hereto is a schedule of calculations showing compliance [*noncompliance] as of the Reporting Date with the requirements of Sections 4.1(w), (x), (y) and (ff) of the Agreement; (d) to the best of Borrower's knowledge, on the Reporting Date, the Borrower was, and on the date hereof the Borrower is, in full compliance with the disclosure requirements of the Agreement, and no default or event of default (as such term is defined in the Agreement) otherwise existed on the Reporting Date or otherwise exists on the date of this instrument [except for , which [is/are] more fully described on a schedule attached hereto). The officer of the Borrower signing this instrument hereby certifies that he has reviewed the Loan Documents and the Financial Statements or has otherwise undertaken such inquiry as is in his opinion necessary to enable him to execute this certificate on behalf of the Borrower. IN WITNESS WHEREOF, this instrument is executed as of EMERITUS PROPERTIES X, LLC, a Washington limited liability company By: Emeritus Corporation, a Washington corporation, its Manager By: -------------------------- Name: Title: Vice President of Finance EX-10.65-3 8 EX-10.65.3 Exhibit 10.65.3 PROMISSORY NOTE $5,540,000.00 Dallas, Texas December 28,1998 FOR VALUE RECEIVED, the undersigned, EMERITUS PROPERTIES X, LLC, a Washington limited liability company (herein called the "Maker"), hereby promises to pay to the order of GUARANTY FEDERAL BANK, F.S.B., a federal savings bank (herein sometimes called "Payee"), the principal sum of Five Million Five Hundred Forty Thousand and No/100 Dollars ($5,540,000.00), or so much thereof as shall be advanced, with interest on the unpaid balance thereof from date of advancement until maturity at the rate or rates hereinafter provided, both principal and interest payable as hereinafter provided in lawful money of the United States of America at the offices of Guaranty Federal Bank, F.S.B., 8333 Douglas Avenue, Dallas, Texas 75225, or at such other place within Dallas County, Texas as from time to time may be designated by the holder of this Note. As herein provided the unpaid Principal Amount of this Note (or portions thereof from time to time outstanding shall bear interest prior to maturity at the Commercial Based Rate and/or one or more applicable LIBO Based Rates (as elected in the manner specified in this Note), provided that in no event shall the Applicable Rate exceed the Maximum Rate, the rate of interest payable under this Note shall be limited to the Maximum Rate, but any subsequent reductions in the Commercial Based Rate or the LIBO Based Rate, as the case may be, shall not reduce the Applicable Rate below the Maximum Rate until the total amount of interest accrued on this Note equals the total amount of interest which would have accrued at the Applicable Rate if the Applicable Rate had at all times been in effect. As used in this Note, the following terms shall have the meanings indicated opposite them: "Additional Costs" -- Any costs, losses or expenses incurred by Payee which it determines are attributable to its making or maintaining the Loan, or its obligation to make any Loan advances, or any reduction in any amount receivable by Payee under the Loan or this Note. "Applicable Rate" -- The Commercial Based Rate as to that portion of Principal Amount bearing interest at the Commercial Based Rate and the LIBO Based Rate as to each Euro-Dollar Amount. "Assignment of Leases and Rents" -- The Assignment of Leases and Rents of even date herewith more particularly described herein. "Commercial Based Rate" -- one-half percent (0.5%) per annum in excess of the base rate announced or published from time to time by the Payee, which rate may not be the lowest rate charged by the Payee; it being understood and agreed that the Commercial Based 1 Rate shall increase or decrease, as the case may be, from time to time as of the effective date of each change in the base rate."Debt Coverage Ratio" -- A fraction, the numerator of which is the Net Operating Income from the Mortgaged Property for the applicable calendar month, and the denominator of which is an amount equal to an assumed monthly payment of principal and interest resulting from a 25 year amortization of the Loan at a fixed rate of interest equal to the higher of (x) the Commercial Based Rate as of the applicable calendar month, (y) the per annum rate of two and one-half percent (2.5"%) above the Treasury Note Rate as of the applicable calendar month, or (z) seven and one-half percent (7.5%) per annum. "Deed of Trust" -- The Deed of Trust, Mortgage and Security Agreement of even date herewith more particularly described herein. "Default Rate" -- The rate per annum which is five percent (5%) above the Commercial Based Rate. "Euro-Dollar Amount" -- Each portion of the Principal Amount bearing interest at at applicable LIBO Based Rate pursuant to a Euro-Dollar Rate Request. "Euro-Dollar Business Day" -- Any day on which commercial banks are open for domestic and international business (including dealings in U.S. Dollar deposits) in New York City and Dallas, Texas. "Euro-Dollar Rate Request" -- Maker's telephonic notice (to be promptly confirmed in writing which must be received by Payee before such Euro-Dollar Rate Request will be put into effect by Payee), to be received by Payee by 12 o'clock Noon (Dallas, Texas time) three (3) Euro-Dollar Business Days prior to the Euro-Dollar Business Day specified in the Euro-Dollar Rate Request for the commencement of the Interest Period, of(a) its intention to have (1) a portion (but not all) of the Principal Amount which is not then the subject of an Interest Period (other than an Interest Period which is terminating on such Euro-Dollar Business Day), and/or (2) all or any position of any advance of Loan proceeds which is to be made on such Euro-Dollar Business Day, bear interest at the LIBO Based Rate and (b) the Interest Period desired by Maker in respect of the amount specified. "Euro-Dollar Rate Request Amount" -- The amount, to be specified by Maker in each Euro-Dollar Rate Request, which Maker desires to bear interest at the LIBO Based Rate and which shall in no event be less than $250,000 and which, at Payee's option, shall be an integral multiple of $50,000. "Euro-Dollar Reference Source" -- The display for Euro-Dollar rates provided on The Bloomberg (a data service), viewed by accessing the global deposits segment of money market rates; or, at the option of Payee, the display for Euro-Dollar rates on such other service selected from time to time by Payee and determined by Payee to be comparable to The Bloomberg, which other service may include Reuters Monitor Money Rates Service. 2 "Extension Period"-- A period of twenty-four (24) months, commencing on the first day after the Maturity Date. "Interest Period" -- The period during which interest at the LIBO Based Rate, determined as provided in this Note, shall be applicable to the Euro-Dollar Rate Request Amount in question, provided, however, that each such period shall be either one ( I ) month, two (2) months or three (3) months [or, if available, four (4) months, five (5) months, six (6) months, nine (9) months or one (1) year), which shall be measured from the date specified by Maker in each Euro-Dollar Rate Request for the commencement of the computation of interest at the LIBO Based Rate, to the numerically corresponding day in the calendar month in which such period terminates (or, if there be no numerical correspondent in such month, or if the date selected by Maker for such commencement is the last Euro-Dollar Business Day of a calendar month, then the last Euro-Dollar Business Day of the calendar month in which such period terminates, or if the numerically corresponding day is not a Euro-Dollar Business Day then the next succeeding Euro-Dollar Business Day, unless such next succeeding Euro-Dollar Business Day enters a new calendar month, in which case such period shall end on the next preceding Euro-Dollar Business Day) and in no event shall any such period be elected which extends beyond the Maturity Date, as the same may have been extended pursuant to an exercise of Maker's right, if any, to extend the same as may be provided herein or in the Loan Agreement. "LIBO Based Rate" -- With respect to any Euro-Dollar Amount, the rate per annum (expressed as a percentage) determined by Payee to be equal to the sum of(a) the quotient of the LIBO Rate for the Euro-Dollar Amount and Interest Period in question divided by (1 minus the Reserve Requirement), rounded up to the nearest 1/100 of l%, and (b) two and one-half percent (2.5%). "LIBO Rate" -- The rate determined by Payee (rounded upward, if necessary, to the nearest 1/16 of l%) equal to the offered rate (and not the bid rate) for deposits in U.S. Dollars of amounts comparable to the Euro-Dollar Rate Request Amount for the same period of time as the Interest Period selected by Maker in the Euro-Dollar Rate Request, as set forth on the Euro-Dollar Reference Source at approximately 10:00 a.m. (Dallas, Texas time) on the first day of the applicable Interest Period. "Loan" -- The $5,540,000 first mortgage loan to be made to Maker by Payee pursuant to the Loan Agreement and evidenced hereby. "Loan Agreement" -- The Loan Agreement of even date herewith between Payee and Maker pursuant to which the Loan is being made. "Loan Documents" -- The Loan Agreement, this Note, the Deed of Trust, the Assignment of Leases and Rents and other documents evidencing, securing and relating to the Loan. 3 "Maturity Date" -- December 28, 2000, being the date this Note becomes due and payable in its entirety. "Maximum Rate" -- The maximum interest rate permitted under applicable law. "Mortgaged Property" -- The real properly, improvements, fixtures and other property and interest described in the Deed of Trust. "Net Operating Income" -- The gross income received by Maker from the operation of the Mortgaged Property for the period in question, less expenses incurred and/or paid by Maker in connection with the operation and maintenance of the Mortgaged Property that are allocable to such period, computed on an accrual (as opposed to cash) basis without regard to depreciation or debt service, using generally accepted accounting principles consistently applied and assuming a management fee of5"% and annual capital expenditures of $250/unit. "Principal Amount" -- That portion of the Loan evidenced hereby as is from time to time outstanding. . "Regulation D" -- Regulation D of the Board of Governors of the Federal Reserve System, as from time to time amended or supplemented. ' "Regulation" -- With respect to the charging and collecting of interest at the LIBO Based Rate, any United States federal, state or foreign laws, treaties, rules or regulations whether now in effect or hereinafter enacted or promulgated (including Regulation D) or any interpretations, directives or requests applying to a class of depository institutions including Payee under any United States federal, state or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reserve Requirement" -- The average maximum rate at which reserves (including any marginal, supplemental or emergency reserves) are required to be maintained under Regulation D by member banks of the Federal Reserve System in New York City with deposits exceeding one billion U.S. Dollars against "Eurocurrency Liabilities", as such quoted term is used in Regulation D. Without limiting the effect of the foregoing, the Reserve Requirement shall reflect any other reserves required to be maintained by such member banks by reason of any Regulation against (a) any category of liabilities which includes deposits by reference to which the LIBO Rate is to be determined as provided in this Note or (b) any category of extensions of credit or other assets which includes loans the interest rate on which is determined on the basis of rates referred to in the definition of "LIBO Rate" set forth above. "Treasury Note Rate" -- The Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the applicable Business Day, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to 4 ten (10) years. Such implied yield shall be determined, if necessary, by (i) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between reported yields. The term "Business Day" as used in this paragraph means a day on which banks are open for business in New York, New York. Maker shall have the option, subject to the terms and conditions hereinafter set forth, of paying interest on the Principal Amount or portions thereof at the Commercial Based Rate or the LIBO Based Rate as herein provided. The Principal Amount (less each Euro-Dollar Amount from time to time outstanding) shall bear interest at the Commercial Based Rate. If Maker desires the application of the LIBO Based Rate, it shall submit a Euro-Dollar Rate Request to Payee. Such Euro-Dollar Rate Request shall specify the Interest Period and the Euro-Dollar Amount and shall be irrevocable, subject to Maker's right to convert the rate of interest payable hereunderwith respect to any Euro-Dollar Amount from the LIBO Based Rate to the Commercial Based Rate as hereinafter provided. In the event that Maker fails to submit a Euro-Dollar Rate Request with respect to an existing Euro-Dollar Amount not later than I 2 Noon (Dallas time) three (3) Euro-Dollar Business Days prior to the last day of the relevant Interest Period, the Euro-Dollar Amount in question shall bear interest, commencing at the end of such Interest Period, at the Commercial Based Rate. Payee, at its option, may honor a Euro-Dollar Rate Request which is submitted less than three (3) Euro-Dollar Business Days prior to the Euro-Dollar Business Day specified in the Euro-Dollar Rate Request for the commencement of the Interest Period; provided, however, Payee is not and shall not thereafter be bound to honor such a request. Maker shall not have the right to have more than three (3) Interest Periods in respect of Euro-Dollar Amounts in effect at any one time whether or not any portion of the Principal Amount is then bearing interest at the Commercial Based Rate. Maker shall pay to Payee, promptly upon demand, such amounts as are necessary to compensate Payee for Additional Costs resulting from any Regulation enacted after the date hereof which (i) subjects Payee to any tax, duty or other charge with respect to the Loan or this Note, or changes the basis of taxation of any amounts payable to Payee under the Loan or this Note (other than taxes imposed or based on the net income of Payee or of its applicable lending office by the jurisdiction in which Payee's principal office or such applicable lending office is located, whether denominated as a franchise or capital stock or other tax), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, Payee or (iii) imposes on Payee or on the interbank Euro-dollar market any other condition affecting the Loan or this Note, or any of such extensions of credit or liabilities. Payee will notify Maker of any event which would entitle Payee to compensation pursuant to this paragraph as promptly as practicable after Payee obtains knowledge thereof and determines to request such compensation. For purposes of this paragraph, of the definition of Additional Costs" set forth above and of the next succeeding four paragraphs, the term "Payee" shall, at Payee's option, be deemed to include Payee's present and future participants in the Loan. 5 Without limiting the effect of the immediately preceding paragraph, in the event that, by reason of any Regulation, (i) Payee incurs Additional Costs based on or measured by the amount of (1) a category of deposits or other liabilities of Payee which includes deposits by reference to which the LIBO Rate is determined as provided in this Note and/or (2) a category of extensions of credit or other assets of Payee which includes loans the interest on which is determined on the basis of rates referred to in the definition of LIBO Rate" set forth above, (ii) Payee becomes subject to restrictions on the amount of such a category of liabilities or assets which it may hold or (iii) it shall be unlawful or impractical for Payee to make or maintain the Loan (or any portion thereof at the LIBO Based Rate, then Payee's obligation to make or maintain the Loan (or portions thereof at the LIBO Based Rate (and Maker's right to request the same) shall be suspended and Payee shall give notice thereof to Maker and, upon the giving of such notice, interest payable hereunder at the LIBO Based Rate shall be converted to the Commercial Based Rate, unless Payee may lawfully continue to maintain the Loan (or any portion thereof then bearing interest at the LIBO Based Rate to the end of the current Interest Period(s), at which time the interest rate shall convert to the Commercial Based Rate. If subsequently Payee determines that such Regulation has ceased to be in effect, Payee will so advise Maker and Maker may convert the rate of interest payable hereunder with respect to those portions of the Principal Amount bearing interest at the Commercial Based Rate to the LIBO Based Rate by submitting a Euro-Dollar Rate Request in respect thereof and otherwise complying with the provisions of this Note with respect thereto. Determinations by Payee of the existence or effect of any Regulation on its costs of making or maintaining the Loan, or portions thereof, at the LIBO Based Rate, or on amounts receivable by it in respect thereof, and of the additional amounts required to compensate Payee in respect of Additional Costs, shall be conclusive, provided that such determinations are made on a reasonable basis (absent manifest error). Anything herein to the contrary notwithstanding, if, at the time of or prior to the determination of the LIBO Based Rate in respect of any Euro-Dollar Rate Request Amount as herein provided, Payee determines (which determination shall be conclusive [provided that such determination is made on a reasonable basis) absent manifest error) that (i) by reason of circumstances affecting the interbank Euro-dollar market generally, adequate and fair means do not or will not exist for determining the LIBO Based Rate applicable to an Interest Period or (ii) the LIBO Rate, as determined by Payee, will not accurately reflect the cost to Payee of making or maintaining the Loan (or any portion thereof at the LIBO Based Rate, then Payee shall give Maker prompt notice thereof, and the Euro-Dollar Rate Request Amount in question shall bear interest, or continue to bear interest, as the case may be, at the Commercial Based Rate. If at any time subsequent to the giving of such notice, Payee determines that because of a change in circumstances the LIBO Based Rate is again available to Maker hereunder, Payee shall so advise Maker and Maker may convert the rate of interest payable hereunder from the Commercial Based Rate to the LIBO Based Rate by submitting a Euro-Dollar Rate Request to Payee and otherwise complying with the provisions of this Note with respect thereto. Maker shall pay to Payee, immediately upon request and notwithstanding contrary provisions contained in the Deed of Trust or other Loan Documents, such amounts as shall, in the conclusive judgment of Payee reasonably exercised, compensate Payee for any loss, cost or expense incurred 6 by it as a result of (i) any payment or prepayment, under any circumstances whatsoever, of any portion of the Principal Amount bearing interest at the LIBO Based Rate on a date other than the last day of an applicable Interest Period, (ii) the conversion, for any reason whatsoever, of the rate of interest payable hereunder from the LIBO Based Rate to the Commercial Based Rate with respect to any portion of the Principal Amount then bearing interest at the LIBO Based Rate on a date other than the last day of an applicable Interest Period, (iii) the failure due to any default by Maker of all or a portion of an advance which was to have borne interest at the LIBO Based Rate pursuant to a Euro-Dollar Rate Request to be made under the Loan Agreement or (iv) the failure of Maker to borrow in accordance with a Euro-Dollar Rate Request submitted by it to Payee, which amounts shall include, without limitation, lost profits. Maker shall have the right to convert, from time to time, the rate of interest payable hereunder with respect to any portion of the Principal Amount not subject to a Euro-Dollar Rate Request, to the LIBO Based Rate or the Commercial Based Rate, subject to the terms of this Note and provided that, in the case of a conversion from the LIBO Based Rate, the entire amount of the particular Euro-Dollar Amount is the subject of the conversion. Maker shall have the right to prepay this Note, in whole or in part, without premium or penalty (subject, however, to the provisions of this Note) upon written notice thereof given to Payee in accordance with the notice provisions of the Loan Agreement at least fifteen (15) days priority to the date to be fixed therein for prepayment, and upon the payment of all accrued interest on the amount prepaid (and any interest which has accrued at the Default Rate and other sums that may be payable hereunder) to the date so fixed and any Additional Costs attributable to any Euro-Dollar Amount prepaid. Any portion of the Principal Amount to which the LIBO Based Rate is not or cannot pursuant to the terms hereof be applicable shall bear interest at the Commercial Based Rate. Interest on the Principal Amount (whether computed at the Commercial Based Rate or the LIBO Based Rate) shall be payable monthly on the first day of the first month following the first advance of Loan proceeds which are evidenced hereby and on the first day of each month thereafter until this Note is repaid in full or until the Maturity Date or the expiration of the Extension Period, as the case may be, on which date the Principal Amount and accrued interest shall be due and payable. Maker shall have the right and option to extend the Maturity Date to a date ending upon the expiration of the Extension Period, such extension being subject to the conditions that: (i) Maker shall have notified Payee in writing of its exercise of such extension at least thirty (30) days prior to the Maturity Date; (ii) on the date of such written notice and on the date of commencement of the Extension Period, there shall exist no default or event of default (as respectively defined in the Deed of Trust and the Loan Agreement) and no event shall have occurred which with the passage of time or the giving of notice or both would constitute a default or event of default; 7 (iii) such written notice given pursuant to clause (i) above shall be accompanied by a fee in the amount of one-fourth percent (.25%) of the stated principal of this Note; (iv) at or before the commencement of the Extension Period, Maker shall deliver to the Payee evidence satisfactory to Payee that the operation of the Mortgaged Property has achieved a Debt Coverage Ratio of 1.30 to 1 for a period of three (3) consecutive months prior to the beginning of the Extension Period; and (v) Maker (and any guarantor) shall have executed such documents as Payee deems reasonably appropriate to evidence such extension and shall have delivered to Payee an endorsement to the mortgagee policy of title insurance insuring the lien of the Deed of Trust, stating that the coverage of such policy has not been reduced or terminated by virtue of such extension. Commencing on the first day of the month following commencement of the Extension Period and on the first day of each month thereafter during the Extension Period, Maker shall pay an installment of principal on the Principal Amount equal to $18,467.00, which installment is in addition to accrued interest due on each such date. All payments of principal shall be credited first against principal amounts bearing interest at the Commercial Based Rate and then toward the payment of Euro-Dollar Amounts. Payments of Euro-Dollar Amounts shall be applied in such manner as Maker shall select; provided, however, that Maker shall select Euro-Dollar Amounts to be repaid in a manner designed to minimize any losses incurred by virtue of such payment. If Maker shall fail to select the EuroDollar Amounts to which such payments are to be applied, or if an event ofdefault has occurred and is continuing at the time of payment, then Payee shall be entitled to apply the payment to such Euro-Dollar Amounts in the manner it deems appropriate. Maker shall compensate Payee for any losses incurred by virtue of any payment of those portions of the Loan accruing interest at the LIBO Based Rate prior to the last day of the relevant Interest Period, which compensation shall be determined in accordance with the provisions set forth in this Note, and any payment received pursuant to this paragraph shall be applied first to losses incurred by Payee by reason of such payment. If a default shall occur under the Deed of Trust, interest on the Principal Amount shall, at the option of Payee, immediately and without notice to Maker, be converted to the Commercial Based Rate. The foregoing provision shall not be construed as a waiver by Payee of its right to pursue any other remedies available to it under the Deed of Trust or any other instrument evidencing or securing the Loan, nor shall it be construed to limit in any way the application of the Default Rate. Maker hereby agrees that it shall be bound by any agreement extending the time or modifying the above terms of payment, made by Payee and the owner or owners of the Mortgaged Property, whether with or without notice to Maker, and Maker shall continue to be liable to pay the amount due hereunder, but with interest at a rate no greater than the LIBO Based Rate or the Commercial Based Rate, as the case may be, according to the terms of any such agreement of extension or modification. 8 Notwithstanding anything to the contrary contained in this Note, at the option of the holder of this Note and upon notice to the undersigned at any time after the occurrence of a default asdefined in the Deed of Trust, from and after such notice and during the continuance of such default, the unpaid principal of this Note from time to time outstanding and all past due installments of interest shall, to the extent permitted by applicable law, bear interest at the Default Rate, provided that in no event shall such interest rate be more than the Maximum Rate. All interest accruing under this Note shall be calculated on the basis of a 360-day year applied to the actual number of days in each month. The undersigned shall make each payment which it owes hereunder not later than twelve o clock, noon, Dallas, Texas time, on the date such payment becomes due and payable (or the date any voluntary prepayment is made), in immediately available funds. Any payment received by the Payee after such time will be deemed to have been made on the next following business day. As used herein, the term "business day" shall mean a day on which commercial banks are open for business with the public in Dallas, Texas. This Note has been executed and delivered pursuant to the Loan Agreement between Maker and Payee. This Note is secured, inter alia, by the Deed of Trust, evidencing a lien on certain real property in King County, Washington, Mississippi, described therein, and evidencing a security interest in certain personal property described therein, to which Deed of Trust reference is here made for a description of the property covered thereby and the nature and extent of the security and the rights and powers of the holder of this Note in respect of such security. In addition, the Maker has made an Assignment of Leases and Rents covering certain leases and rents described therein to provide a source of future payment of this Note, reference to which Assignment of Leases and Rents is here made for a description of the leases and rents covered thereby and the rights and powers of the Payee with respect thereto. Upon the occurrence of a default specified in the Deed of Trust which remains uncured beyond any applicable notice, cure or grace period, the holder of this Note or any part thereof shall have the option of declaring the Principal Amount hereof and the interest accrued hereon to be immediately due and payable. It is the intent of Payee of this Note 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 Rate; that 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 that 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 charge 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 9 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, the 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 the 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 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 holder of this Note notice of such condition and Maker agrees that said 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 Texas 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. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, Maker and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon reasonable attorneys' and collection fees. Maker and all endorsers, guarantors and sureties of this Note and all other persons liable or to become liable on this Note severally waive presentment for payment, demand, notice of demand and of dishonor and nonpayment of this Note, notice of intention to accelerate the maturity of this Note, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party, and agree to all renewals, extensions, modifications, partial payments, releases or substitutions of security, in whole or in part, with or without notice, before or after maturity. THIS NOTE AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH. THE LAWS OF THE STATE OF TEXAS (WITHOUT GIVING EFFECT TO TEXAS' PRINCIPLES OF CONFLICTS OF LAW), EXCEPT TO THE EXTENT (A) OF PROCEDLTRAL AND SUBSTANTIVE MATTERS RELATING ONLY TO THE CREATION PERFECTION FORECLOSURE AND ENFORCEMENT OF RIGHTS AND REMEDIES AGAINST THE MORTGAGED PROPERTY WHICH MATTERS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MISSISSIPPI. AND (B) THE LAWS OF THE UNITED STATES OF AMERICA AND ANY RULES REGULATIONS OR ORDERS ISSUED OR PROMULGATED THEREUNDER APPLICABLE TO THE AFFAIRS AND TRANSACTIONS ENTERED INTO BY PAYEE OTHERWISE PREEMPT MISSISSIPPI OR TEXAS LAW; IN WHICH 10 EVENT FEDERAL LAW SHALL CONTROL. THE MAKER HEREBY IRREVO-ABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS TEXAS (OR KING COUNTY, WASHINGTON) OVER ANY SUIT ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE OR ANY OF THE LOAN DOCUMENTS AND THE MAKER HEREBY AGREES AND CONSENTS THAT IN ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW ALL SERVICE OF PROCESS IN ANY SUCH SUIT ACTION OR PROCEEDING IN ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS TEXAS (OR KING COUNTY, WASHINGTON. MISSISSIPPI MAY BE MADE BY CERTIFIED OR REGISTERED MAIL RETURN RECEIPT RE UESTED DIRECTED TO THE MAKER AT THE ADDRESS OF THE MAKER FOR THE GIVING OF NOTICES UNDER THE DEED OF TRUST AND SERVICE SO MADE SHALL BE COMPLETE FIVE 5 DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. MAKER HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING BROUGHT BY THE HOLDER OF THIS NOTE IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS, ANY AND EVERY RIGHT IT MAY HAVE TO (I) INJUNCTIVE RELIEF, (II) A TRIAL BY JURY, (III) INTERPOSE ANY COUNTERCLAIM THEREIN (OTHER THAN A COMPULSORY COUNTERCLAIM) AND (IV) HAVE THE SAME CONSOLIDATED WITH ANY OTHER OR SEPARATE SUIT, ACTION OR PROCEEDING. Nothing herein contained shall prevent or prohibit Maker from instituting or maintaining a separate action against the holder of this Note with respect to any asserted claim. Time is of the essence of each obligation of Maker hereunder. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE ENFORCEABLE UNDER WASHINGTON LAW. Federal Tax I.D. No. 91-1935103 EMERITUS PROPERTIES X, LLC, a Washington limited liability company By: Emeritus Corporation, a Washington corporation, its Manager By: /s/ Kelly J. Price Name: Kelly J. Price Title: Vice President of Finance 11 THE STATE OF WASHINGTON COUNTY OF King On this 28th day of December, 1998, before me personally appeared Kelly J. Price to me known to be the Vice President of Finance of Emeritus Corporation, a Washington corporation and the Manager of Emeritus Properties X, LLC, a Washington limited liability company, the limited liability company that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation and limited liability company, for the uses and purposes therein mentioned, and an oath stated that [he/she] was authorized to execute said instrument on behalf of said corporation and that said corporation was authorized to do so on behalf of said limited liability company. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal the day and year first above written. Signature: /s/ Amanda Ray Printed Name: Amanda Ray NOTARY PUBLIC in and for the State of Washington Residing at Seattle, WA My Commission Expires: 01-05-02 12 EX-10.65-4 9 EX-10.65.4 Exhibit 10.65.4 GUARANTY For a valuable consideration, receipt of which is hereby acknowledged, the undersigned, EMERITUS CORPORATION, a Washington corporation (hereinafter called "Guarantor"), absolutely, unconditionally and irrevocably guarantees (a) payment to GUARANTY FEDERAL BANK, F.S.B., a federal savings bank (hereinafter called "Creditor") at the address designated in the Note (as hereinafter defined) for payment thereof or as such address may be changed as provided in the Note of all indebtedness of EMERITUS PROPERTIES X, LLC, a Washington limited liability company (hereinafter called "Debtor") to Creditor under the promissory note dated of even date herewith, in the original principal amount of Five Million Five Hundred Forty Thousand and No/ 100 Dollars ($5,540,000.00), payable to the order of Creditor, and all modifications, renewals and extensions (including, without limitation, compromises, accelerations or otherwise changing the rate of interest) of and substitutions for said promissory note [said promissory note and all modifications, renewals and extensions thereof (including, without limitation, compromises, accelerations or otherwise changing the rate of interest) and all substitutions therefor hereinafter called the "Note"], together with all interest, attorneys' fees and collection costs provided in the Note, and all indebtedness under and pursuant to the Deed of Trust (With Security Agreement, Fixture Filing and Assignment of Leases and Rents) (hereinafter called the "Deed of Trust") securing the payment of the Note, and all other instruments evidencing, governing, securing or pertaining to such indebtedness and obligations (all such indebtedness hereinafter called the "Indebtedness"); (b) performance fully and promptly when due of all of the covenants, agreements and other obligations undertaken by Debtor in respect of (1) the Note and the Deed of Trust and all other instruments evidencing, securing and/or relating to the loan evidenced by the Note, including without limitation, the Loan Agreement of even date herewith between Debtor and Creditor relating to the indebtedness evidenced by the Note (the "Loan Agreement") and (2) the Hazardous Substances Remediation and Indemnification Agreement dated of even date herewith made by Debtor in favor of Creditor (such covenants, agreements and other obligations hereinafter called the "Obligations"); and (c) payment of any and all costs, attorneys' fees and expenses incurred or expended by Creditor in collecting any of the Indebtedness or due to any default in the performance of the Obligations or in enforcing any right granted hereunder. To the extent permitted by applicable law, Guarantor expressly waives presentment for payment, demand, notice of demand and of dishonor and nonpayment of the Indebtedness, notice of intention to accelerate the maturity of the Indebtedness or any part thereof, notice of acceleration of the maturity of the Indebtedness or any part thereof, notice of disposition of collateral, the defense of impairment of collateral, the right to a commercially reasonable sale of collateral, protest and notice of protest, diligence in collecting, and the bringing of suit against any other party. Creditor shall be under no obligation to notify Guarantor of its acceptance hereof or of any advances made or credit extended on the faith hereof or the failure of Debtor to pay any of the Indebtedness as it matures or any default in the performance of any of the Obligations, or to use diligence in preserving the liability of any person on the Indebtedness or the Obligations or in bringing suit to enforce - - 1 - collection of the Indebtedness or performance of the Obligations. To the extent permitted by applicable law, Guarantor waives all defenses given to sureties or guarantors at law or in equity other than the actual payment of the Indebtedness and performance of the Obligations and all defenses based upon questions as to the validity, legality or enforceability of the Indebtedness and/or the Obligations and agrees that Guarantor shall be primarily liable hereunder. Further, Guarantor, to the extent permitted by applicable law, waives any defense based upon or arising out of a defense of Debtor or any other person to recovery by Creditor of, or the unavailability to Creditor of, a deficiency after nonjudicial sale of real or personal property, and any defense based upon or arising out of RCW 61.24.100. Creditor, without authorization from or notice to Guarantor and without impairing, modifying, changing, releasing, limiting or affecting the liability of Guarantor hereunder, may from time to time at its discretion and with or without valuable consideration, alter, compromise, accelerate, renew, extend or change the time or manner for the payment of any or all of the Indebtedness, increase or reduce the rate of interest thereon, take and surrender security, exchange security by way of substitution, or in any way it deems necessary take, accept, withdraw, subordinate; alter, amend, modify or eliminate security, add or release or discharge endorsers, guarantors, or other obligors, make changes of any sort whatever in the terms of payment of the Indebtedness, in the Obligations or in the manner of doing business with Debtor, or settle or compromise with Debtor or any other person or persons liable on the Indebtedness or the Obligations on such terms as it may see fit, and may apply all moneys received from the Debtor or others, or from any security held (whether held under a security instrument or not), in such manner upon the Indebtedness (whether then due or not) as it may determine to be in its best interest, without in any way being required to marshal securities or assets or to apply all or any part of such moneys upon any particular part of the Indebtedness. It is specifically agreed that Creditor is not required to retain, hold, protect, exercise due care with respect thereto, perfect security interests in or otherwise assure or safeguard any security for the Indebtedness; no failure by Creditor to do any of the foregoing and no exercise or nonexercise by Creditor of any other right or remedy of Creditor shall in any way affect any of Guarantor's obligations hereunder or any security furnished by Guarantor or give Guarantor any recourse against Creditor. The liability of Guarantor hereunder shall not be modified, changed, released, limited or impaired in any manner whatsoever on account of any or all of the following: (a) the incapacity, death, disability, dissolution or termination of Guarantor, Debtor, Creditor or any other person or entity; (b) the failure by Creditor to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of Debtor or any other person or entity; (c) recovery from Debtor or any other person or entity becomes barred by any statute of limitations or is otherwise prevented; (d) any defenses (except payment of the Indebtedness and performance of the Obligations), set-offs or counterclaims which may be available to Debtor or any other person or entity; (e) any transfer or transfers of any of the property covered by the Deed of Trust or any other instrument securing the payment of the Note; (f) any release of Debtor, any co-Guarantor or any other person (other than Guarantor) primarily or secondarily liable for the payment of the Indebtedness or the performance of the Obligations or any part thereof; (g) any modifications, extensions, amendments, consents, - - 2 - releases or waivers with respect to the Note, the Deed of Trust, any other instrument now or hereafter securing the payment of the Note, or this Guaranty; (h) any failure of Creditor to give any notice to Guarantor of any default under the Note, the Deed of Trust, any other instrument securing the payment of the Note, or this Guaranty (except to the extent any such notice is required pursuant to the Guaranty or is required by applicable law and cannot validly be waived by Guarantor); (i) Guarantor is or becomes liable for any indebtedness giving by Debtor to Creditor other than under this Guaranty; or (j) any impairment, modification, change, release or limitation of the liability of, or stay of actions or lien enforcement proceedings against, Debtor, its property, or its estate in bankruptcy resulting from the operation of any present or future provision o t-the Federal Bankruptcy Code (hereinafter called the "Bankruptcy Code") or other similar Federal or state statute, or from the decision of any court. Except for any requirements of applicable law that cannot validly be waived by Guarantor, Creditor shall not be required to pursue any other remedies before invoking the benefits of the guaranties contained herein, and specifically it shall not be required to make demand upon or institute suit or otherwise pursue its remedies against Debtor or any surety other than Guarantor or to proceed against or give credit for any security now or hereafter existing for the payment of any of the Indebtedness. Creditor may maintain an action on this Guaranty without joining Debtor therein and without bringing a separate action against Debtor. If for any reason whatsoever other than payment and performance (including but not limited to ultra vires, lack of authority, illegality, force majeure, act of God or impossibility) the Indebtedness or the Obligations cannot be enforced against Debtor, such unenforceability shall in no manner affect the liability of Guarantor hereunder and Guarantor shall be liable hereunder notwithstanding that Debtor may not be liable for such Indebtedness or such Obligations and to the same extent as Guarantor would have been liable if such Indebtedness or Obligations had been enforceable against Debtor. Guarantor absolutely and unconditionally covenants and agrees that in the event that Debtor does not or is unable so to pay the Indebtedness or perform the Obligations for any reason, including, without limitation, liquidation, dissolution, receivership, conservatorship, insolvency, bankruptcy, assignment for the benefit of creditors, sale of all or substantially all assets, reorganization, arrangement, composition, or readjustment of, or other similar proceedings affecting the status, composition, identity, existence, assets or obligations of Debtor, or the disaffirmance or termination of any of the Indebtedness or Obligations in or as a result of any such proceeding, Guarantor shall pay the Indebtedness and perform the Obligations and no such occurrence shall in any way affect Guarantor's obligations hereunder. Should the status of Debtor change, this Guaranty shall continue and also cover the lndebtedness and Obligations of Debtor under the nev status according to the terms hereof. - - 3 - In the event any payment by Debtor to Creditor is held to constitute a preference under the bankruptcy laws, or if for any other reason Creditor is required to refund such payment or pay the amount thereof to any other party, such payment by Debtor to Creditor shall not constitute a release of Guarantor from any liability hereunder, but Guarantor agrees to pay such amount to Creditor upon demand and this Guaranty shall continue to be effective or shall be reinstated, as the case may be, to the extent of any such payment or payments. Except for any requirements of applicable law that cannot validly be waived by Guarantor, Guarantor agrees that it shall not have (a) the right to the benefit of, or to direct the application of, any security held by Creditor (including the property covered by the Deed of Trust and any other instrument securing the payment of the Note), any right to enforce any remedy which Creditor now has or hereafter may have against Debtor, or any right to participate in any security now or hereafter held by Creditor, or (b) any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or other right or remedy of Guarantor against Debtor or against any security resulting from the exercise or election of any remedies by Creditor (including the exercise of the power of sale under the Deed of Trust), or any defense arising by reason of any disability or other defense of Debtor or by reason of the cessation, from any cause, of the liability of Debtor. The payment by Guarantor of any amount pursuant to this Guaranty shall not in any way entitle Guarantor to any right, title or interest (whether by way of subrogation or otherwise) in and to any of the Indebtedness or any proceeds thereof, or any security therefor, unless and until the full amount owing to Creditor on the Indebtedness has been fully paid, but when the same has been fully paid Guarantor shall be subrogated as to any payments made by it to the rights of Creditor as against Debtor and/or any endorsers, sureties or other guarantors. Guarantor expressly subordinates its rights to payment of any indebtedness owing from Debtor to Guarantor, whether now existing or arising at any time in the future, to the prior right of Creditor to receive or require payment in full of the Indebtedness and until payment in full of the Indebtedness (and including interest accruing on the Note after any petition under the Bankruptcy Code, which post-petition interest Guarantor agrees shall remain a claim that is prior and superior to any claim of Guarantor notwithstanding any contrary practice, custom or ruling in proceedings under the Bankruptcy Code generally), Guarantor agrees not to accept any payment or satisfaction of any kind of indebtedness of Debtor to Guarantor or any security for such indebtedness. If Guarantor should receive any such payment, satisfaction or security for any indebtedness of Debtor to Guarantor, Guarantor agrees forthwith to deliver the same to Creditor in the form received, endorsed or assigned as may be appropriate for application on account of, or as security for, the Indebtedness and until so delivered, agrees to hold the same in trust for Creditor. Notwithstanding anything to the apparent contrary contained herein, Guarantor does not herein expressly or impliedly waive or release any rights of subrogation that Guarantor may have against Debtor (except as same are expressly subordinated as provided herein), rights of contribution that Guarantor may have against any other guarantor of, or other person secondarily liable for, the - - 4 - payment of the Indebtedness or performance of the Obligations or rights of reimbursement that Guarantor may have as against Debtor (except as same may be limited herein). It is the intent of Guarantor and Creditor in the execution and acceptance of this Guaranty to contract in strict compliance with applicable usury law. In furtherance thereof, Guarantor and Creditor stipulate and agree that none of the terms and provisions contained in this Guaranty, or in any other instrument now or hereafter 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 to be charged by applicable law; Guarantor shall never be obligated or required to pay interest on the Indebtedness at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this paragraph shall control over all other provisions of this Guaranty, and any other instruments now or hereafter executed in connection herewith or any other oral or written agreement which may be in apparent conflict herewith. Creditor expressly disavows any intention to charge or collect excessive unearned interest or finance charges in the event the maturity of the Indebtedness is accelerated. If the maturity of the Note shall be accelerated for any reason or if the principal of the Note is paid prior to the end of the term of the Note, and as a result thereof the interest received from Guarantor for the actual period of existence of the loan evidenced by the Note exceeds the amount of interest at the applicable maximum lawful rate under applicable law, Creditor shall, at its option, either refund to Guarantor the amount of such excess or credit the amount of such excess against the principal balance of the Note then outstanding 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 Creditor shall contract for, char5e or receive any amount or amounts and/or any other thing of value from Guarantor which are determined to constitute interest which would increase the effective interest rate on the Indebtedness to a rate in excess of that permitted to be charged by applicable law, all such amounts determined to constitute interest in excess of the lawful rate shall, upon such determination, at the option of Creditor, be either immediately returned to Guarantor or credited against the principal balance of the Note then outstanding, 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 Guaranty, Guarantor acknowledges that Guarantor believes the Indebtedness to be non-usurious and agrees that if, at any time, Guarantor should have reason to believe that the Indebtedness is in fact usurious, Guarantor will give Creditor notice of such condition and Guarantor agrees that Creditor shall have ninety (90) days in which to make appropriate refund or other adjustment in order to correct such condition it in fact such exists. The term "applicable law" as used in this paragraph shall mean the laws of the State of Texas 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. Guarantor hereby represents, warrants and covenants to and with Creditor as follows: (a) Guarantor is solvent, is not bankrupt and has no outstanding liens, garnishments, bankruptcies or court actions which could render guarantor insolvent or bankrupt, and there has not been filed by or against Guarantor a petition in bankruptcy or a petition or answer seeking an assignment for the benefit of creditors, the appointment of a receiver, trustee, custodian or liquidator with respect to - - 5 - Guarantor or any substantial portion of Guarantor's property, reorganization, arrangement, rearrangement, composition, extension, liquidation or dissolution or similar relief under the Bankruptcy Code or any state law; (b) all reports, financial statements and other financial and other data which have been or may hereafter be furnished by Guarantor to Creditor in connection with this Guaranty are or shall be true and correct in all material respects and do not and will not omit to state any fact or circumstance necessary to make the statements contained therein not misleading and do or shall fairly represent the financial condition of Guarantor as of the dates and the results of Guarantor's operations for the periods for which the same are furnished, and no material adverse change has occurred since the dates of such reports, statements and other data in the financial condition of Guarantor; (c) the execution, delivery and performance of this Guaranty do not contravene, result in the breach of or constitute a default under any mortgage, deed of trust, lease, promissory note, loan agreement or other contract or agreement to which Guarantor is a party or by which Guarantor or any of its properties may be bound or affected and do not violate or contravene any law, order, decree, rule or regulation to which Guarantor is subject; (d) there are no judicial or administrative actions, suits or proceedings pending or, to the best of Guarantor's knowledge, threatened against or affecting Guarantor or involving the validity, enforceability or priority of this Guaranty; (e) Guarantor is duly incorporated and legally existing under the laws of the state of its incorporation; ( this Guaranty constitutes the legal, valid and binding obligation of Guarantor enforceable in accordance with its terms; and (g) the execution and delivery of, and performance under, this Guaranty are within Guarantor's powers and have been duly authorized by all requisite action and are not in contravention of the powers of Guarantor's charter, by-laws or other corporate papers. Guarantor will deliver to Creditor within ninety (90) days after the close of each fiscal year of Guarantor: (a) a statement of condition or balance sheet of Guarantor as at the end of such fiscal year; (b) an annual operating statement showing in reasonable detail all income and expenses of Guarantor for such fiscal year; (c) a cash flow statement showing in reasonable detail all cash flow of Guarantor for such fiscal year; and (d) a projected cash flow statement showing in reasonable detail all projected cash flow for the then current fiscal year. All of the foregoing shall be in scope and detail satisfactory to Creditor and any or all of the foregoing shall be furnished quarterly, in addition to annually, upon request of Creditor. The statements in (a), (b) and (c) above shall be certified as to accuracy by an independent certified public accountant or, with the consent of Creditor, by a representative of Guarantor acceptable to Creditor. The statement described in (d) above shall contain a representation or certification in form satisfactory to Creditor from a representative of Guarantor acceptable to Creditor. Where two or more persons or entities have executed this Guaranty, unless the context clearly indicates otherwise, all references herein to "Guarantor" shall mean the Guarantors hereunder or either or any of them. All of the obligations and liability of said guarantors hereunder shall be joint and several. Suit may be brought against said guarantors, jointly and severally, or against any one or more of them, less than all, without impairing the rights of Creditor against the other or others of said guarantors; and Creditor may compound with any one or more of said guarantors for such sums or sum as it may see fit and/or release such of said guarantors from all further liability to Creditor - - 6 - for such indebtedness without impairing the right of Creditor to demand and collect the balance of such indebtedness from the other or others of said guarantors not so compounded with or released; but it is agreed among said guarantors themselves, however, that such compounding and release shall in nowise impair the rights of said guarantors as among themselves. The rights of Creditor are cumulative and shall not be exhausted by its exercise of any of its rights hereunder or otherwise against Guarantor or by any number of successive actions until and unless all Indebtedness has been paid, all Obligations have been performed and each of the obligations of Guarantor hereunder has been performed. The existence of this Guaranty shall not in any way diminish or discharge the rights of Creditor under any prior or future guaranty agreement executed by Guarantor. All property of Guarantor now or hereafter in the possession or custody of or in transit to Creditor for any purpose, including safekeeping, collection or pledge, for the account of Guarantor, or as to which Guarantor may have any right or power, shall be held by Creditor subject to a lien and security interest in favor of Creditor to secure payment and performance of all obligations and liabilities of Guarantor to Creditor hereunder. The balance of every account of Guarantor with, and each claim_ of Guarantor against, Creditor existing from time to time shall be subject to a lien and subject to set-off against any and all liabilities of Guarantor to Creditor, and Creditor may, at any time and from time to time at its option and without notice, appropriate and apply toward the payment of any such liabilities the balance of each such account or claim of Guarantor against Creditor. Any notice or communication required or permitted hereunder shall be given in writing, sent by (a) personal delivery, or (b) expedited delivery service with proof of delivery, or (c) United States mail, postage prepaid, registered or certified mail, or (d) prepaid telegram, telex or telecopy, sent to the intended addressee at the address shown below, or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been given and received either at the time of personal delivery or, in the case of delivery service or mail, as of the date of first attempted delivery at the address and in the manner provided herein, or in the case of telegram, telex or telecopy, upon receipt. THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF GUARANTOR HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (VITHOUT GIVING EFFECT TO TEXAS' PRINCIPLES OF CONFLICTS OF LAW) AND THE LAW OF THE UNITED STATES APPLICABLE TO TRANSACTIONS IN SUCH STATE. GUARANTOR HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS, TEXAS OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OF THE LOAN DOCUMENTS AND GUARANTOR HEREBY AGREES AND CONSENTS THAT IN ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER - - 7 - APPLICABLE LAW ALL SERVICE OF PROCESS IN ANY SUCH SUIT ACTION OR PROCEEDING ANY TEXAS OR FEDERAL COURT SITTING IN DALLAS, TEXAS MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REOUESTED DIRECTED TO GUARANTOR AT THE ADDRESS OF GUARANTOR FOR THE GIVING OF NOTICES HEREUNDER AND SERVICE SO MADE SHALL BE CONIPLETE FIVE 5 DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED. Guarantor hereby expressly and unconditionally waives, in connection with any suit, action or proceeding brought by Creditor in connection with this Guaranty or any of the loan documents, any and every right it may have to (i) injunctive relief, (ii) a trial by jury, (iii) interpose any counterclaim therein (other than a compulsory counterclaim) and (iv) have the same consolidated with any other or separate suit, action or proceeding. Nothing herein contained shall prevent or prohibit Guarantor from instituting or maintaining a separate action against Creditor with respect to any asserted claim. This Guaranty may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All such counterparts shall be construed together and shall constitute one instrument, but in making proof hereof it shall only be necessary to produce one such counterpart. This Guaranty may only be modified, waived, altered or amended by written instrument or instruments executed by the party against which enforcement of said action is asserted. Any alleged modification, waiver, alteration or amendment which is not so documented shall not be effective as to any party. The terms, provisions, covenants and conditions hereof shall be binding upon Guarantor and the heirs, devisees, representatives, successors and assigns of Guarantor and shall inure to the benefit of Creditor and all transferees, credit participants, successors, assignees and/or endorsees of Creditor. Within this Guaranty, words of any gender shall be held and construed to include any other gender and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. A determination that any provision of this Guaranty is unenforceable or invalid shall not affect the enforceability or validity of any other provision and any determination that the application of any provision of this Guaranty to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances. 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. - - 8 - EXECUTED as of the 28th day of December,1998. EMERITUS CORPORATION, a Washington corporation By: /s/ Kelly J. Price -------------------------------- Name: Kelly J. Price Title: Vice President of Finance The address of Guarantor is: 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121 The address of Creditor is: 8333 Douglas Avenue Dallas, Texas 75225 Attention: Commercial Real Estate Lending Division - - 9 - THE STATE OF WASHINGTON COUNTY OF KING This instrument was acknowledged before me on December 28th 1998, by Kelly J. Price, Vice President of Finance of Emeritus Corporation, a Washington corporation, on behalf of said corporation. /s/ Amanda Ray - ------------------------------------ Notary Public, State of Washington Amanda Ray (printed name) My Commission Expires: 01-05-02 - -10- EX-10.66-1 10 EX-10.66.1 Exhibit 10.66.1 PURCHASE AND SALE AGREEMENT (Emeritus Owned Facilities) AL INVESTORS LLC and EMERITUS CORPORATION EMERITUS PROPERTIES VI, INC., and ESC I, L.P. Dated : December 30, 1998 PURCHASE AND SALE AGREEMENT (Emeritus Owned Facilities) THIS PURCHASE AND SALE AGREEMENT ("Agreement") is made and entered into as of this day of December, 1998, by and between AL Investors LLC, a Delaware limited liability company, and its permitted assigns ("AL Investors"), and Emeritus Corporation, a Washington corporation, Emeritus Properties VI, Inc., a Washington corporation, and ESC I, L.P., a Washington limited partnership (hereinafter referred to collectively as "Sellers" or the "Emeritus Entities"). All capitalized terms not otherwise defined herein shall have the meaning set forth in Exhibit A. AL Investors is concurrently herewith entering into a purchase and sale agreement with Meditrust Company LLC ("Meditrust") for the acquisition of twenty-two (22) assisted living facilities ("Meditrust Facilities") presently being leased by Affiliates of Sellers ("Meditrust Purchase Agreement"). AL Investors is also concurrently herewith entering into a Supplemental Agreement In Connection With Purchase of Facilities with Emeritus Corporation ("Emeritus") and its Affiliates Emeritus Properties I, Inc., Emeritus Properties VI, Inc. and ESC I, L.P. (the "Supplemental Agreement"). Sellers each own a Facility as defined in Exhibit A that is intended to be purchased concurrently with the Closing of the Meditrust Facilities. In consideration of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows. 1. SALE AND PURCHASE. Sellers agree to sell the Facilities to AL Investors on the terms and conditions contained in this Agreement and AL Investors agrees to purchase the Facilities from Sellers on the terms and conditions contained in this Agreement. 2. PURCHASE PRICE. 2.1 Purchase Price. The Purchase Price for each Facility is set forth on attached Exhibit B. The Purchase Price shall be paid by AL Investors to Sellers at Closing in good funds subject to the adjustments herein. 2.2 Adjustment. In the event that the Senior Lender or Junior Lender will not finance one or more of the Facilities, or if AL Investors should determine from its due diligence that a particular Facility is not acceptable for purchase, AL Investors may decline to purchase such Facility and the Purchase - -1- Price shall be reduced by the amount allocated to each such Facility as set forth in Exhibit B. 3. DUE DILIGENCE. 3.1 Investigations. AL Investors shall have until the Closing Date (the "Due Diligence Period") to undertake such due diligence on each Facility as it deems necessary in its sole discretion, including but not limited to review of title reports, the conduct of surveys, conducting of environmental assessments, physical inspections and testings, all as more particularly set forth in Section 4.1 of the Supplemental Agreement. 3.2 Documentation. Promptly upon request therefor, or as soon as practicable, if it has not already done so, Sellers, and each of them, shall provide to AL Investors or its designated representatives the originals and copies of the documentation for each Facility as set forth in Section 4.2 of the Supplemental Agreement. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS. Emeritus, jointly and severally, with each of the other Sellers (and each other Seller severally with respect to the Facility owned by it), represent, warrant and covenant with respect to the Facilities to each of AL Investors and the Facility Entities as of the date of this Agreement as follows: 4.1 Incorporation by Reference. Each of the warranties, representations and covenants set forth in Sections 5.1 through 5.22 of the Supplemental Agreement, which by their terms apply to the Facilities referenced in this Agreement, are ratified and confirmed and incorporated herein by reference. 4.2 Indemnification. Each of the Sellers, jointly and severally, hereby agrees to defend, protect, indemnify and hold each of AL Investors and the Facility Entities harmless from and against any and all loss, damage, liability or expense, including attorneys' fees and costs, AL Investors or any of the Facility Entities may suffer as a result of (y) any breach of or inaccuracy in the foregoing representations, warranties and covenants, and (z) any claim by any Person for personal injury or malpractice (including death) or damage to property arising out of facts and circumstances occurring (or alleged to have occurred) at the Facilities prior to the Closing. 4.3 General Provision. The liability of Sellers, and each of them, for breach of any of the warranties, representations and indemnities set forth herein shall survive Closing, shall not be diminished by, nor shall any defense to enforcement thereof arise by reason of, any investigation conducted by AL Investors or the Facility Entities or any remedy any of them may have against any - -2- other Person, and shall be cumulative with any other remedies any of them may have against any of the Sellers. 5. AL INVESTORS' REPRESENTATIONS. AL Investors warrants and represents to Sellers as follows: 5.1 Existence; Power; Qualification. AL Investors is a limited liability company duly organized, validity existing and in good standing under the laws of the State of Delaware. Each Facility Entity is, or will be prior to Closing, duly organized, validly existing, and in good standing in the State of Washington and qualified to do business in the jurisdiction in which it owns or will own a Facility. 5.2 Authority. This Agreement and all documents to be executed by AL Investors or the Facility Entities at Closing have been duly authorized, executed, and delivered by AL Investors and/or the Facility Entities and are binding on and enforceable against AL Investors and the Facility Entities in accordance with their terms. AL Investors hereby agrees to defend, protect, indemnify, and hold Sellers harmless from and against any and all loss, damage, liability or expense, including attorneys' fees and costs, Sellers may suffer as a result of any breach of or any inaccuracy in the foregoing representations and warranties. 6. RELATED AGREEMENTS. 6.1 Meditrust Purchase Agreement. AL Investors has entered into or will enter into an agreement with Meditrust to purchase the Meditrust Facilities on the terms and conditions contained in the Purchase and Sale Agreement ("Meditrust Purchase Agreement"). Unless waived in writing by AL Investors, the obligations of AL Investors under this Agreement are conditioned upon a simultaneous closing under the Meditrust Purchase Agreement and the obligations of AL Investors under the Meditrust Purchase Agreement are conditioned upon a simultaneous closing under this Agreement. 6.2 Supplemental Agreement. Concurrently with and as a condition to the Closing, Emeritus and its affiliates Emeritus Properties I, Inc., Emeritus Properties VI, Inc., and ESC I, L.P. are entering into the Supplemental Agreement providing various representations and warranties and other covenants in favor of AL Investors and the Facility Entities named therein with respect to the purchase of Meditrust Facilities and the Facilities herein. 6.3 Management A4reement with Option to Purchase. Concurrently with and as a condition to the Closing, Emeritus shall cause Emeritus Management LLC, Emeritus Management I LP, and other wholly owned Affiliates of Emeritus - -3- ("Managers"), to enter into a Management Agreement with Option to Purchase with AL Investors for itself and on behalf of each Facility Entity ("Management Agreement") more particularly described in the Supplemental Agreement. Emeritus shall unconditionally guarantee the obligations of each of the Managers under the Management Agreement and agree to fund all operating deficits of the Facilities exceeding approximately $4,500,000 in the aggregate pursuant to Guaranty of Management Agreement and Shortfall Funding Agreement ("Guaranty Agreement") more particularly described in the Supplemental Agreement. 6.4 Put Agreement. Concurrently with and as a condition to the Closing, Emeritus shall cause Daniel R. Baty to enter into the Put and Purchase Agreement ("Put Agreement") more particularly described in the Supplemental Agreement. 7. OPERATIONS OF FACILITIES PENDING CLOSING. At all times prior to the Closing or the sooner termination of this Agreement, Sellers each agree: (a) to maintain, manage and operate its Facility in accordance with applicable law and consistent with its past management practices; (b) to maintain its Facility in its current condition and state of repair and to rebuild, repair or restore any damage or destruction to the Facility by Casualty or otherwise which may occur prior to Closing; (c) to maintain the existing property and casualty insurance on the Facility; (d) to perform all of its material obligations under the Permits, Permitted Exceptions, Contracts and Leases and not to amend, modify or terminate or permit the termination of any Permit, Contract, Permitted Exception or Lease except with respect to Contracts and Leases in the ordinary course of business, without the prior written consent of AL Investors, which shall not unreasonably be withheld; fe) not to enter into any Major Lease or Major Contract for a Facility, without AL Investors' prior written consent, which shall not unreasonably be withheld; and (f) not to mortgage, encumber or otherwise place or permit any encumbrance on the Facility. 8. AL INVESTORS' CONDITIONS PRECEDENT TO CLOSING. The Closing and AL Investors' obligations hereunder are expressly contingent and conditional upon the fulfillment, compliance, satisfaction and performance of each of the following conditions, any one or more of which may be waived or deferred in whole or in part, but only in writing, by AL Investors. 8.1 Accuracy of Warranties; Compliance with Covenants. All representations and warranties by Sellers contained in and made pursuant to this Agreement shall be true and correct as of the Closing Date. In addition to the specific matters referred to in this Section 8, Sellers shall have tendered to AL Investors all of the agreements, instruments, documents, certificates, insurance policies and other materials required from Sellers on or before the Closing Date pursuant to the terms of this Agreement and Sellers shall have compiled with all of its affirmative and negative covenants set forth herein. - -4- 8.2 Financing The Initial Senior Loan and Initial Junior Loan shall close simultaneously with Closing hereunder. 8.3 Final Approval. Final approval of this transaction by each of the members of AL Investors. 8.4 Title Insurance. Title Company is ready, willing and able to issue the form of ALTA owners' extended coverage title insurance authorized to be issued in the jurisdiction in which the Facility is located insuring fee simple title to the Real Estate vested in AL Investors without exception other than the Permitted Exceptions and in the amount of the Purchase Price for that Facility. 8.5 Related Agreements. Simultaneous closing under the Supplemental Agreement and the Meditrust Purchase Agreement. 9. SELLER'S CONDITION PRECEDENT TO CLOSING. The Closing and the Seller's obligations hereunder and are expressly contingent and conditional upon the fulfillment, compliance, satisfaction and performance of each of the following conditions, any one or more of which may be waived or deferred in whole or in part, but only in writing, by Sellers. 9.1. Accuracy of Warranties; Compliance with Covenants and Title to Real Estate. All representations and warranties by AL Investors contained in and made pursuant to this Agreement shall be true and correct as of the Closing Date. In addition to the specific matters referred to in this Section 9, AL Investors shall have complied with all of its covenants hereunder and tendered to Sellers all of the agreements, instruments, documents, certificates and other materials required from AL Investors on or before the Closing Date pursuant to the terms of this Agreement. 9.2 Related Agreements. Simultaneous closing under the Supplemental Agreement and the Meditrust Purchase Agreement. 9.3 Final Approval. Final approval of the board of Emeritus. 10. RIGHTS OF TERMINATION. 10.1 Termination of Agreement. This Agreement and the transactions contemplated hereby may (at the option of the party having the right to do so) be terminated at any time on or prior to the Closing Date: (a) By Mutual Consent. By mutual written consent of AL Investors and Sellers; - -5- (b) Court Order. By AL Investors or Sellers if any court of competent jurisdiction shall have issued an order pursuant to the request of a third party restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement; - (c) Failure to Close. By AL Investors or Sellers it the transactions contemplated hereby shall not have been consummated on or before December 31, 1998, provided, however, that such right to terminate this Agreement shall not be available to any party whose failure to fulfill any obligation of this Agreement has been the cause of, or resulted in, the failure of the transactions contemplated hereby to be consummated on or before such date; (d) Termination by Sellers. By Sellers upon notice to AL Investors if (i) a condition to the performance of Sellers set forth in Section 9 hereof shall not be fulfilled at the time specified for the fulfillment thereof, (ii) a material default under or a material breach of this Agreement shall be made by AL Investors or (iii) any representation or warranty made by AL Investors set forth in this Agreement or in any instrument delivered by AL Investors pursuant hereto shall be materially false or misleading; (e) Termination by AL Investors. By AL Investors upon notice to Sellers if (i) a condition to the performance of AL Investors set forth in Section 8 hereof shall not be fulfilled at the time specified for the fulfillment thereof, (ii) a material default under or a material breach of this Agreement shall be made by Sellers it (iii) any representation or warranty made by Sellers set forth in this Agreement or in any instrument delivered by Sellers pursuant hereto shall be materially false or misleading. 10.2 Effect of Termination and Right to Proceed. If this Agreement is terminated pursuant to this Section 10, then all further obligations of AL Investors and Sellers under this Agreement shall terminate without further liability of AL Investors or any Affiliate thereof to Sellers or Sellers to AL Investors or any Affiliate thereof, except as specifically provided for in the Supplemental Agreement. 11. CLOSING. 11.1 Closing Date. The Closing under this Agreement shall take place at the offices of Title Company on the Closing Date or at such other time and place designated by AL Investors and Sellers. 11.2 Deliveries by Seller at Closing. At the closing, Sellers shall deliver to AL Investors the following: (a) Special Warranty Deed to the Real Estate, free from all liens, except for the Permitted Exceptions. The special warranty deed shall include - -6- covenants, whether by statute or expressly, that Sellers have fee title to the Real Estate; has the right to convey the same and that Sellers will defend the title to the Real Estate against all persons who may lawfully claim title by, through or under Sellers. (b) A Bill of Sale for all Personal Property with respect to the Facilities free and clear of all Liens, except for the Permitted Exceptions. (c) Duly executed Management Agreement, Guaranty Agreement, and Put Agreement. (d) Such corporate or partnership resolutions regarding due authorization and execution and such opinions of counsel regarding authorization and execution of the documents and instruments to be executed and delivered by any of the Sellers hereunder as AL Investors may reasonably require. (e) A certificate confirming that all of the warranties and representations by Sellers set forth herein are true and correct. (f) Certificate of Sellers stating that each of the Sellers is not a "foreign person," as defined in Section 1445(f) of the Code and the regulations issued thereunder, in order to comply with Section 1445(b)(2) and the regulations issued thereunder. (g) Assignment of the Leases, Permits and Contracts to AL Investors ("Assignment"). In connection with the Assignment, it shall be the sole responsibility of Sellers to obtain all necessary consents and approvals for the transfer of and vesting in the respective Facility entity for all Permits, Contracts and Leases at Closing or within ninety (90) days thereafter. (h) Such other documents and instruments as AL Investors may reasonably require to vest in the respective Facility Entity all of Seller's right, title and interest in each of the Facilities. 11.3 Deliveries of AL Investors at Closing. At Closing, A L Investors shall deliver to Sellers the following: (a) The Purchase Price in accordance with Section 2 hereof. (b) A certificate confirming that all of the warranties and representations of AL Investors are true and correct. (c) Certificates of resolutions of the members of AL Investors authorizing the transactions contemplated hereby and such opinions of counsel - -7- regarding due authorization and execution of the documents and instruments to be executed by AL Investors as Emeritus Entities may reasonably require. (d) Duly executed Management Agreement, Guaranty Agreement, and Put Agreement and a memorandum thereof appropriate for recording. 11.4 Closing Costs and Expenses. All Closing Costs shall be allocated as set forth in Section 15 of the Supplemental Agreement. 11.5 Closing Statements. All income and expense arising out of the management and operation of each Facility, including, but not limited to real property taxes and insurance, shall be prorated between Sellers and AL Investors as of the Closing. Prepaid amounts or deposits under Residency Agreements or security deposits under the Leases shall be credited to AL Investors and utility deposits or prepaid amounts under the Contracts shall be credited to Sellers. The prorations of income and expense for each Facility shall be made on the basis of a written closing statement submitted by Sellers to AL Investors prior to the Closing and approved by AL Investors. In the event any prorations or apportionments made hereunder shall prove to be incorrect for any reason, then any party shall be entitled to an adjustment to correct the same. Any item which cannot be prorated because of the unavailability of information shall be tentatively prorated on the basis of the best data then available and re-prorated between the parties when the information is available. Notwithstanding the foregoing, any adjustments or reprorations shall be made, if at all, within one hundred eighty (180) days after Closing. 11.6 Delivery Outside of Escrow. Sellers shall deliver to Buyer at Closing outside of the Closing escrow the originals of the diligence materials referenced in Section 3.2 (except for the originals of the Contracts, Leases and Permits to be held by Managers for use in managing the Facilities) and such copies of all books and records of Sellers used in the operation, maintenance arid repair of the Facilities as AL Investors may direct. 12. MISCELLANEOUS 12.1 No Broker. AL Investors represents to Sellers, and Sellers represent to AL Investors, that no agent, finder or broker has acted for it or was the producing and effective cause of this Agreement or the transactions contemplated herein, and that no commissions or finder's fees are due by it to any third parties. AL Investors agrees to indemnify and hold Sellers harmless, and Sellers agree to indemnify and hold AL Investors harmless, with respect to any and all expenses, obligations, and liabilities resulting from the claims or causes of action relating to any claims made by any person retained or used by it for any agent's - -8- broker's or finder's fees : r commissions relating to the transactions contemplated herein. 12.2 Entire Agreement. This Agreement together with the Exhibits attached hereto, the Transaction Document, the Supplemental Agreement and the Meditrust Purchase Agreement contain the entire understanding of the parties with respect to the subject matters hereof and supersedes all prior and other contemporaneous oral or written understandings and agreements between the parties hereto. 12.3 Binding Effect; Assignment. This Agreement, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, personal representatives and permitted assigns. Except as specifically provided herein, neither party may assign its rights hereunder without the written consent of the other. Notwithstanding the foregoing, AL Investors may assign this Agreement in whole or in part to any Facility Entity which holds or is intended to hold title to any Facility and such Facility Entities' successors and assigns. 12.4 Notices. Any notice, demand, offer or other writing required or permitted pursuant to this Agreement shall be in writing, furnished in duplicate and shall be transmitted by hand delivery, certified mail, return receipt requested, or Federal Express or another nationally recognized overnight courier service, postage prepaid, as follows: If to Seller: c/o Emeritus Corporation 3131 Elliot Avenue, Suite 500 Seattle, Washington 98121-1031 Attn: Mr. Kelly Price Facsimile: (206) 301-4500 Telephone: (206) 301-4507 With a copy to: Perkins Coie 1201 Third Avenue, Suite 4000 Seattle, Washington 98101 Attn : Mike Stansbury Facsimile: (206)583-8500 Telephone: (206)583-8888 If to AL Investors: AL Investors LLC c/o Bruce D. Thorn 2250 McGilchrist Street, SE, Suite 200 Salem, Oregon 97302 Facsimile: (503) 375-7644 Telephone: (503) 370-7071, ext. 7143 - -9- With a copy to: Foster Pepper & Shefelman PLLC 1111 Third Avenue, Suite 3400 Seattle, Washington 98101 Attn: Gary E. Fluhrer Facsimile: (206) 447-9700 Telephone: (206) 447-4400 Senior Housing Partners I, L.P. C/o Mr. Noah Levy Prudential Real Estate Investors Suite 1400, Two Ravinia Drive Atlanta, Georgia 30346 Facsimile: (770)399-5363 Telephone:(770)395-8606 Any party shall have the right to change the place to which such notice shall be given by similar notice sent in like manner to all other parties hereto. Any such notice, if sent by private express overnight courier service, shall be deemed delivered on the earlier of the date of actual delivery or the next business day following deposit, postage prepaid, with such private express overnight courier service and if delivered by hand delivery shall be deemed delivered on the date of the actual delivery and if sent by mail, shall be deemed delivered on the earlier of the third day following deposit with the U.S. Postal Service or actual delivery. 12.5 Captions. The captions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provisions hereof. 12.6 Joint Effort. The preparation of this Agreement has been the joint effort of the parties, and the resulting document shall not be construed more severely against one of the parties than the other. 12.7 Counterparts. This Agreement may be executed in counterparts and each executed copy shall be deemed an original which shall be binding upon all parties hereto. 12.8 Partial Invalidity. The invalidity of one or more of the phrases, sentences, clauses, sections or articles contained in this Agreement shall not affect the remaining portions so long as the material purposes of this Agreement can be determined and effectuated. 12.9 No Offer. Neither the negotiations to date nor the preparation of this Agreement shall be deemed an offer by any party to the other. No such contract shall be deemed binding on any party until such party has executed and delivered a written agreement. -10- 12.10 Amendments. This Agreement may not be amended in any respect whatsoever except by a further agreement, in writing, fully executed by each of the parties. 12.11 Exhibits. All Exhibits referred to in this Agreement shall be incorporated into this Agreement by such reference and shall be deemed a part of this Agreement as if fully set forth in this Agreement. 12.12 Governing Law and Attorneys' Fees. This Agreement including the validity thereof and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Washington without regard to its principals of conflicts of laws. AL Investors may enforce any or all of the provisions of this Agreement directly against Sellers or any of them in the State of Washington or at its option may enforce this Agreement on behalf of any Facility Entity in the state in which such Facility Entity owns a Facility. In the event any party brings an action or any other proceeding against another party to enforce or interpret any of the terms, covenants or conditions hereof, the party prevailing in any such action or proceeding shall be paid all costs and reasonable attorneys' fees by the party or parties not prevailing in such amounts as may be set by the court, at trial and on appeal. 12.13 Third Parties. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any Person other than the Facility Entities, which are intended third party beneficiaries. 12.14 Rules of Construction. References in this Agreement to "herein," "hereof" and "hereunder" shall be deemed to refer to this Agreement and shall not be limited to the particular text in which such words appear. The use of any gender shall include all genders, and the singular number shall include the plural and vice versa as the context may require. 12.15 Survival. The warranties, representations, covenants and indemnities set forth in this Agreement shall survive the Closing and shall not be merged in the Transaction Documents. 12.16 Joint and Several. The obligation of each of the Sellers shall be joint and several. - -11- IN WITNESS THEREOF, the parties hereto have hereunto set their hands and seals as of the data first above appearing. AL INVESTORS: AL INVESTORS LLC, a Delaware limited liability company By: /s/ Norman L. Brenden Name: Norman L. Brenden Its : Manager SELLERS: EMERITUS CORPORATION, a Washington corporation By: /s/ Daniel R. Baty Name: Daniel R. Baty Title: Chairman of the Board EMERITUS PROPERTIES VI, INC., a Washington corporation By: /s/ Daniel R. Baty Name: Daniel R. Baty Title: Chairman of the Board ESC I, L.P., a Washington limited partnership By: ESC G.P. I, INC., Washington corporation, its general partner By: /s/ Daniel R. Baty Name: Daniel R. Baty Title: Chairman of the Board - -12- EXHIBITS EXHIBIT A - Definitions EXHIBIT B - Purchase Price EXHIBIT C - Legal Descriptions - -13- EXHIBIT A TO PURCHASE AND SALE AGREEMENT IN CONNECTION WITH PURCHASE OF EMERITUS OWNED FACILITIES Certain Defined Terms For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, capitalized terms in the Agreement have the meanings assigned as set forth below and include the plural as well as the singular. Accreditation Body: Any person, including any Person having or claiming jurisdiction over the accreditation, certification, evaluation or operation of a Facility. Affiliate: With respect to any Person (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, five percent (5% or more of the outstanding capital stock, shares or equity interests of such Person or (iii) any officer, director, employee, general partner or trustee of such Person, or any other Person controlling, controlled by, or under common control with, such Person (excluding trustees and Persons serving in a fiduciary or similar capacity who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. Approved Equipment Leases: Leases for any of the Furnishings and Equipment which have been approved by AL Investors in writing. Award: All compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. Business Day: Any day which is not a Saturday or Sunday or a public holiday under the laws of the United States of America or the State of Washington. Casualty: The damage or destruction by act of god or otherwise ot any portion of any Facility which would cost more than 550,000 to repair or restore. A-1 Closing or Closing Date. The date upon which the purchase and sale of the twenty-two (22) Facilities being purchased from Meditrust closes as defined in the Purchase Agreement. Code: The Internal Revenue Code of 1986, as amended. Condemnation: With respect to any Facility or any interest therein or right accruing thereto or use thereof (i) the exercise of the power of condemnation, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer to any Condemnor under threat of condemnation. Condemnor: Any public or quasi-public authority, or private corporation or individual, having the power of condemnation. Consultants: Collectively, the architects, engineers, inspectors, surveyors and other consultants that have been engaged from time to time prior to Closing by the Emeritus Entities or AL Investors to perform services for any of them in connection with a Facility or this Agreement. Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary Contracts and Major Contracts. Date of Taking: The date the Condemnor has the right to possession of the property being condemned. Emeritus Owned Facilities: Facilities entitled La Villita, Madison Glen and Meadowlands Terrace as denoted under Facility Name below. Environmental Laws: Environmental Laws means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings, and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Emeritus and the Emeritus Entities or to the Land and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. Escrow Holder: First American Title Insurance Company. A-2 Facility: Each of the assisted living facilities including the Land, Improvements and Personal Property associated therewith, located in the city and state as set forth below:
Facility Name City State Units Beds Facility LLC and LP La Villita Phoenix AZ 87 110 AL Investors Phoenix Madison Glen Clearwater FL 135 200 AL Investors Clearwater Meadowlands Terrace Waco TX 71 76 AL Investors Waco
The legal description of each of the above Facilities is set forth on Exhibit C hereto. Facility Entity: Each of the Facility LLC's or LP's which owns or will own at Closing a Facility as set forth opposite the name of each Facility above. Furnishings and Equipment: All furniture, furnishings, beds, televisions, equipment, food service, equipment, apparatus, computers and other personal property used in (or if the context so dictates, required in connection with), the operation of each Facility, other than Operating Equipment, Operating Supplies and fixtures attached to and forming part of the Improvements. Governmental Authorities: Collectively, all agencies, authorities, bodies, boards, commissions, courts, instrumentalities, legislatures, and offices of any nature whatsoever of any government, quasi-government unit or political subdivision, whether with a federal, state, county, district, municipal, city or otherwise and whether now or hereinafter in existence which exercises jurisdiction over any Facility. Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials, radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on any Facility is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material, or substance now or in the future defined as a "hazardous substance," "hazardous material," hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning of any Environmental Law. Provided, however, Hazardous Substances shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used A-3 by occupants of any Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Facilities' parking areas, so long as all of :he foregoing are used, stored, handled, transported and disposed of in compliance with Environmental Laws. Improvements: The buildings, structures (surface and sub-surface) and other improvements now or hereafter located on the Land. Junior Loan: Any indebtedness incurred by Owners which is secured by a mortgage, pledge, and related security instruments against the membership interests of AL Investors in the Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and Senior Housing Partners I, L.P. dated on or about the same date hereof ("Initial Junior Loan"). Land. The parcel or parcels of land on which each of the Facilities is situated, together with all rights of ingress and egress thereto and parking associated therewith as legally described on Exhibit C. Leases: Collectively, the Ordinary Leases and Major Leases. Legal Requirements: Collectively, all statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, health code, zoning, subdivision, and other land use and assisted living licensing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any Governmental Authority, Accreditation Body or Third Party Payor affecting a Facility Entity or any Facility or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in connection with the Facility, including, without limitation, any of the foregoing which may (i) require repairs, modifications or alterations in or to the Facility, (ii) in any way affect (adversely or otherwise) the use and enjoyment of the Facility or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from the Facility. Without limiting the foregoing, the term "Legal Requirements" includes all Environmental Laws and shall also include all Permits and Contracts issued or entered into by any Governmental Authority, any Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances. Lending Group: GMAC Commercial Mortgage for itself and as agent for other participating lenders in a debt facility to AL Investors secured by the Facilities in the maximum aggregate original principal balance of $138,000,000. A-4 Lien: With respect to any real or personal property, any mortgage, mechanics' or materialmen's lien, pledge, collateral assignment, hypothecation, charge, security interest; title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property which secures or is intended to secure the payment of money, whether or not inchoate, vested or perfected. Major Contracts: Any contract for the purchase of goods or services or any other agreement which requires payments in excess of 550,000 per year for any Facility or has a noncancellable term in excess of one year or in which the provider of the goods or services is an Emeritus Entity or an Affiliate of any of them. Major Lease: Any Lease which has a noncancellable term in excess of one year or a rental payment in excess of $10,000 per year or pursuant to which an Emeritus Entity or an Affiliate of any of them is the tenant. Managed Care Plans: All health maintenance organizations, preferred provider organizations, individual practice associations, competitive medical plans, and similar arrangements. Managers: Any Person who has entered into a Management Agreement with a Facility Entity, which initially shall mean Emeritus Management LLC and Emeritus Management I LP. or any other entity approved by AL Investors. Medicaid: The medical assistance program established by Title XIX of the Social Security Act and any statute succeeding thereto. Medicare: The health insurance program for the aged and disabled established by Title XVIII of the Social Security Act and any statute succeeding thereto. Meditrust: Meditrust Acquisition Corporation I and Meditrust Company LLC. Mortgage: collectively, the terms and conditions of the Senior Loan and the Junior Loan. Operating Equipment: All dishes, glassware, bed coverings, towels, silverware, uniforms and similar items used in, or held in storage for use in (or if the context so dictates, required in connection with the operation of the Facilities. A-5 Operating Supplies: All consumable items used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Facilities, including food, medical supplies, fuel, soap, cleaning materials, and other similar consumable items. Ordinary Contracts: All agreements and contracts to purchase goods and services (excluding Major Contracts) to the extent such other agreements and contracts have been entered into by the Emeritus Entities in the ordinary course of business of construction, owning, operating or managing the Facilities, contract rights (including without limitation, warranties provided in construction contracts, subcontracts, and architects' contracts), right to proceeds or payment on account of any Award or Casualty, warranties and representations, franchises, and records and books of account benefiting, relating to or affecting the Facility or the operation of any programs or services in conjunction with the Facility and all renewals, replacement and substitutions therefor entered into by the Emeritus Entities with any Governmental Authority, Accreditation Body or Third Party Payor or entered into by any of the Emeritus Entities with any third Person, excluding, however, any agreements pursuant to which money has been or will be borrowed or advanced, the Facility Leases, the Leases, any agreements with or obligations relating to employees of a Facility, and any agreement creating or permitting any Lien, or other encumbrance on title (except for the Permitted Exceptions), and any Major Contract. Ordinary Leases: Collectively, all subleases, licenses, use agreements, equipment leases, concession agreements, tenancy at will agreements and other occupancy agreements (but excluding any Residency Agreement, Facility Lease or Major Lease), whether oral or in writing, entered into by any of the Emeritus Entities and encumbering or affecting a Facility. Permits: Collectively, all permits, licenses, approvals, qualifications, rights, variances, permissive uses, accreditation, certificates, certifications, consents, agreements, contracts, contract rights, franchises, interim licenses, permits and other authorizations of every nature whatsoever required by, or issued under, applicable Legal Requirements relating or affecting a Facility or the construction, development, maintenance, management, use or operation thereof, or the operation of any programs or services in conjunction with the Facility and all renewals, replacements and substitutions therefor, now or hereafter required or issued by any Governmental Authority, Accreditation Body or Third Party Payor, or maintained or used by any of the Emeritus Entities, or entered into by any of the Emeritus Entities with any third Person with respect to a Facility. A-6 Permitted Exceptions: The exceptions to title approved by AL Investors pursuant to the Purchase Agreement or the Emeritus Purchase and Sale Agreement, including the Approved Equipment Leases. Person: Any individual, corporation, general partnership, limited partnership, joint venture, stock company or association, company, bank, trust, trust company, land trust, business trust, unincorporated organization, unincorporated association, Governmental Authority or other entity of any kind or nature. Personal Property: All machinery, equipment, furniture, furnishings, vehicles, movable walls or partitions, computers or trade fixtures, goods, inventory, supplies, the name of the Facility, and other personal or intangible property located on or in or used in connection with a Facility including, but not limited to, all Operating Equipment, Furnishings and Equipment and Operating Supplies but excluding vans and buses. Prime Rate: The variable rate of interest per annum from time to time set forth in the Wall Street Journal as the prime rate of interest and in the event that the Wall Street Journal no longer publishes a prime rate of interest, then the Prime Rate shall be deemed to be the variable rate of interest per annum which is the prime rate of interest or base rate of interest from time to time announced by any major bank or other financial institution reasonably selected by AL Investors. Provider Agreements: All participation, provider and reimbursement agreements or arrangements, if any, in effect for the benefit of the Emeritus Entities or Meditrust in connection with the operation of the Facility relating to any right of payment or other claim arising out of or in connection with participation in any Third Party Payor Program. Real Estate: Collectively, (i) the Land, (ii) the Improvements, and (iii) all rights, rights-of-way, easements, mineral rights, privileges, options, leases, licenses, and appurtenances in any manner belonging to, or pertaining to, the Land and the Improvements. Residency Agreement: All contracts, agreements and consents executed by or on behalf of any resident or other Person seeking services at the Facility, including, without limitation, assignments of benefits and guarantees. Senior Loan: any indebtedness incurred by Owners which is secured by any mortgage, deed of trust and related security instruments against a Facility. Initially, the Senior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and GMAC Commercial Mortgage Corporation dated on or about the same date hereof ("Initial Senior Loan"). A-7 Third Party Payor Programs: Collectively, all third party payor programs in which the Emeritus Entities presently or in the future may participate, including without limitation, Medicare. N1edicaid, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance plans and employee assistance programs. Third Party Payors: Collectively, Medicare, Medicaid, Blue Cross and/or Blue Shield, private insurers and any other Person which presently or in the future maintains Third Party Payor Programs. Title Company: First American Title Insurance Company. Unavoidable Delays: Delays due to strikes, lockouts, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto. A-8 EX-10.66-2 11 EX-10.66.2 Exhibit 10.66.2 SUPPLEMENTAL PURCHASE AGREEMENT IN CONNECTION WITH PURCHASE OF FACILITIES (Emerltrust 25) 1. PARTIES. This Supplemental Purchase Agreement in Connection with Purchase of Facilities ("Agreement") is entered into as of December 30, 1998 by and among Emeritus Corporation, a Washington corporation ("Emeritus"), and its affiliates Emeritus Properties I, lnc., Emeritus Properties VI, Inc. and ESC I, L.P. (collectively "Emeritus Affiliates"), and AL Investors LLC, a Delaware limited liability company, and its permitted assigns ("AL Investors"). Emeritus and Emeritus Affiliates are sometimes collectively referred to herein as the "Emeritus Entities." All capitalized terms not otherwise defined herein shall have the meaning set forth in Exhibit A. 2. FACTS. 2.1 Acquisition of Facilities. AL Investors contemplates entering into a Purchase and Sale Agreement ("Purchase Agreement") with Meditrust Company LLC, successor by merger to Meditrust Acquisition Corporation I (collectively "Meditrust"), relating to the acquisition of twenty-two (22) of the Facilities identified on Exhibit A (excluding Facilities named La Villita, Madison Glen and Meadowlands Terrace therein) (collectively, the "Meditrust Facilities"). Emeritus Affiliates currently lease from Meditrust each of the Meditrust Facilities ("Facility Leases") and own certain personal property and leasehold improvements which AL Investors desires to purchase and the Emeritus Entities desire to sell pursuant to this Agreement. Upon the Closing under the Purchase Agreement and this Agreement, each of the Facility Leases will terminate or be amended and restated as determined by AL Investors and Emeritus except for indemnity provisions which may survive the Closing in favor of Meditrust as Meditrust may require. By separate purchase agreement, AL Investors will acquire three (3) of the Facilities identified on Exhibit A (named La Villita, Madison Glen and Meadowlands Terrace therein) directly from Emeritus and its wholly owned subsidiaries, Emeritus Properties VI, Inc. and ESC 1, L.P. (collectively, "Emeritus Owned Facilities"). AL Investors intends to create a Facility Entity for the purpose of owning each Facility. The resulting pool of twenty-five (25) Facilities, consisting of the Meditrust Facilities and the Emeritus Owned Facilities, will close simultaneously and be financed in part by a loan from the Lending Group. 2.2 Consideration. In consideration of AL Investors performing the due diligence as contemplated under the Purchase Agreement, the mutual covenants herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Emeritus Entities agree to give and perform the representations, warranties, covenants and agreements contained in this - -1- Agreement. AL Investors would not perform the due diligence on the Facilities or contemplate entering into the Purchase Agreement or the Emeritus Purchase and Sale Agreement (as defined herein) for purchase of the Emeritus Owned Facilities without this Agreement. 3. RIGHT TO PURCHASE. Emeritus entered into a letter of Intent dated as of August 27, 1998 ("Letter of Intent") with Meditrust to purchase the Meditrust Facilities. Emeritus agrees and confirms that any right of Emeritus to purchase the Meditrust Facilities under the Letter of Intent is hereby assigned to AL Investors. Provided, however, the form of the Purchase Agreement shall be subject to the review and comment of Emeritus, but the final form of the Purchase Agreement shall be determined in the sole discretion of AL Investors. 4. DUE DILIGENCE. 4.1 Investigations. Under the terms of the Purchase Agreement and under this Agreement, AL Investors has until the Closing Date (the "Due Diligence Period") to undertake such due diligence on the Facilities as it deems necessary in its sole discretion, including but not limited to the review of title reports and financial information, the conducting of surveys, environmental assessments and _ physical inspections, and the finalizing of financing commitments, and other matters deemed necessary by AL Investors. The Emeritus Entities shall provide access to the Facilities and cooperate with AL Investors and its designated representatives in conducting its due diligence activities. If AL Investors in its sole discretion has not waived or satisfied this condition prior to expiration of the Due Diligence Period, then AL Investors may terminate this Agreement by written notice to Emeritus and neither party shall have any liability to the other except as expressly set forth in Section 18. 4.2 Documentation. Promptly upon request therefor, or as soon as practicable, if it has not already done so, the Emeritus Entities shall provide to AL Investors or its designated representatives copies of the following in the possession of the Emeritus Entities for each Facility: (a) Residents. A current resident roll, occupancy report and copy of the standard form Residency Agreement. (b) Contracts and Leases. A listing of all Major Contracts and Major Leases which shall be attached to this Agreement as Exhibit B prior to expiration of the Due Diligence Period, and any correspondence with any Person relating to outstanding disputes or claims relating to the Major Contracts and Major Leases. - -2- (c) Operating Statements. Operating statements, showing all of the income and expenses related to owning and operating each Facility (with current receivables aging) for the preceding three (3) full calendar years and the most recent operating statement for the current year through September 30, 1998 reflecting operations on a year-to-date basis (collectively, the "Operating Statements "). (d) Tax Statements and Utility Bills. All real and personal property tax statements for the preceding three (3) full calendar years and utility bills for the preceding calendar year. (e) Approvals. All Permits, including any zoning variances or special use permits, if any, and any notices alleging any violations and zoning letters for each Facility. (f) Plans and Specifications. As-built plans and specifications which are in the possession of the Emeritus Entities. (g) Environmental Reports. Phase I environmental assessments and any prior studies and reports relating to Hazardous Substances in or on a Facility and all correspondence or claims from any Person alleging violations of Environmental Laws which are in the possession of the Emeritus Entities. (h) Structural and Engineering Reports. All structural, soils, or engineering reports or surveys for any Facility which are in the possession of the Emeritus Entities and a current property condition survey and seismic survey performed by Consultants approved. by AI Investors. (i) Insurance. Current property and liability insurance policies or a summary thereof and any correspondence with the insurer related to circumstances or conditions affecting the cost or continuation of any insurance. (j) Maintenance or Incident Logs. Facility maintenance and incident logs insofar as they relate to claims or notices alleging material defects in or violations of Legal Requirements relating to the Facility including any related correspondence with any Governmental Authorities. (k) Title. Title commitments and UCC searches conducted by Title Company for each Facility. (I) Survey. Survey for each Facility in form specified by AL Investors. - -3- (m) Health Surveys. Local and/or state Department of Health survey for most recent period. (n) Other Matters. Any other document or matter reasonably requested by AL Investors. The term "in the possession of the Emeritus Entities" as used above means in the possession of Emeritus, at its main corporate office in Seattle, Washington, after inquiry to the manager of each Facility for copies of pertinent documents and other records. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS. Emeritus, jointly and severally, with Emeritus Affiliates (and each of the Emeritus Affiliates severally with respect to the Facility owned by it), represent, warrant and covenant with respect to all of the Facilities to each of AL Investors and the Facility Entities, as of the date of this Agreement, as follows: 5.1 Existence; Power; Qualification. Each of the Emeritus Entities is a corporation or limited partnership respectively duly organized, validity existing and in good standing under the laws of the State of Washington. Each of the Emeritus Entities has all requisite corporate or limited partnership power and authority to own and operate each of the Emeritus Owned Facilities and to operate and lease each of the Meditrust Facilities and to carry on its business as now conducted and to enter into and carry out the terms of this Agreement. . 5.2 Valid and Binding. Each of the Emeritus Entities is duly authorized to make and enter into this Agreement and to carry out the transactions contemplated herein and is, or will be by Closing, duly authorized to make and enter into all of the other documents to which it is or will be a party under this Agreement or under the Purchase Agreement (the "Transaction Documents") and to carry out the transactions contemplated therein. This Agreement has been duly executed and delivered by each of the Emeritus Entities and is the legal, valid and binding obligation of each of the Emeritus Entities enforceable in accordance with its terms. The Transaction Documents to which each of the Emeritus Entities is or will be a party have been, or will be by the Closing, duly executed and delivered by each of the Emeritus Entities, and each is, or will be by Closing, a legal, valid and binding obligation of the respective Emeritus Entity, enforceable in accordance with its terms. 5.3 No Violation. The execution, delivery and performance of this Agreement and the Transaction Documents and the consummation of the transaction thereby contemplated shall not result in any breach of, or constitute a default under, or result in the acceleration of, or constitute an event which, with the giving of notice or the passage of time, or both, could result in default or - -4- acceleration of any obligations of the Emeritus Entities under any permit, contract, mortgage, lien, lease, agreement, instrument, franchise, license, arbitration award, judgment, decree, bank loan or credit agreement, trust indenture or other instrument to which any of the Emeritus Entities is a party or by which any of the Emeritus Entities may be bound or affected and do not violate or contravene any Legal Requirements. 5.4 Consents and Approvals. As of Closing, no consent or approval or other authorization of, or exemption by, or declaration or filing with, any person and no waiver of any right by any person is required to authorize or permit, or is otherwise required as a condition of the execution, delivery and performance of the Emeritus Entities' obligations under this Agreement or the Transaction Documents. 5.5 FIRPTA Representation. None of the Emeritus Entities is a "foreign person" as that term is defined in the Code. 5.6 Emeritus' Documents. All copies of documents furnished or to be furnished to AL Investors by the Emeritus Entities or any of them in connection with this Agreement are true and complete copies of the originals. 5.7 Nothing Omitted. No certificate, agreement, statement or other document prepared or executed by any of the Emeritus Entities and furnished to or to be furnished to AL Investors or its attorneys in connection with the transactions contemplated by this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to prevent all statements contained herein and therein from being misleading. 5.8 Litigation. There is no material claim, litigation, or proceeding pending against any of the Emeritus Entities or to the current actual knowledge of any of them threatened against any of the Emeritus Entities, which relate to the Facilities or the transactions contemplated by this Agreement except as set forth on Exhibit C. All of the matters set forth on Exhibit C, and any other such material claim, litigation or proceeding currently pending or threatened shall be defended, settled or paid at the Emeritus Entities' sole expense. None of the Emeritus Entities has filed (nor has any filing been made against any of them) any proceeding in bankruptcy or insolvency in any jurisdiction. Neither any of the Emeritus Entities nor the Facility is currently the subject of any proceeding by any Governmental Authorities, and no notice of any violation has been received from any Governmental Authorities that would, directly or indirectly, or with the passage of time: (a) Have a material adverse impact on the Facility Entities' ability to accept and/or retain residents or result in the imposition of a fine, a - -5- sanction, a lower rate certification or a lower reimbursement rate for services rendered to eligible residents; (b) Modify, limit or annul or result in the transfer, suspension, revocation or imposition of probationary use of any of the Permits; or (c) Affect the Facility Entities' continued participation in the Medicare or Medicaid programs or any other Third-Party Payors' Programs (if applicable), or any successor programs thereto, at current rate certifications. 5.9 Compliance. All Permits and other authorizations from Governmental Authorities required to own and operate each Facility for its present use as an assisted living facility and with the number of beds indicated on Exhibit A have been obtained, are in full force and effect, and are free from violation or claim of violation in all material respects of any Legal Requirement. Without limiting the generality of the foregoing, Emeritus Entities are the lawful owner of all Permits for each Facility, including, without limitation, the Certificate of Need, if applicable, which (a) are in full force and effect, (b) constitute all of the permits, licenses and certificates required for the use, operation and occupancy thereof, (c) as of the Closing Date have not been pledged as collateral for any loan or indebtedness other than the Mortgage, (d! are held free from restrictions or any encumbrance which would materially adversely affect the use or operation of the Facility, and (e) are not provisional, probationary or restricted in any way. The Emeritus Entities as well as the operation of the Facility are in compliance in al1 material respects with the applicable provisions of assisted living facility laws, rules, regulations and published interpretations to which the Facility is subject. No waivers of any laws, rules, regulations, or requirements (including, but not limited to, minimum foot requirements per bed) are required for the Facility to operate at the current licensed unit and/or bed capacity. Emeritus Entities have not granted to any third party the right to reduce the number of licensed beds in any Facility or to apply for approval to transfer the right to any and all of the licensed Facility beds to any other location. As of Closing, all such Permits and other authorizations shall have been duly and validly transferred to or reissued in the name of each Facility Entity or, if not so transferred or reissued at Closing, shall be transferred or reissued by the Emeritus Entities at their sole cost and expense within ninety (90) days after Closing. Each Facility and the operation and use thereof complies in all material respects with all applicable Legal Requirements and all covenants, easements and restrictions of record, affecting the Facility (and, without limitation, the property on which each Facility is located is zoned for the buildings and the uses conducted thereon, including but not limited to parking requirements and none of the Emeritus Entities has received any notice alleging any material non-compliance with respect to any Facility) except as set forth on Exhibit D. There are no unsatisfied requests or demands for repairs, restorations or improvements to any Facility from any Person, including, but not limited to, any Governmental Authorities pursuant to - -6- which the cost of repair, restoration or improvement would exceed S10,000 except as set forth on Exhibit D. 5.10 No Prior Options, Sales or Assignments. None of the Emeritus Entities has granted an option or obligated itself in any manner whatsoever to assign the Facility Leases or their rights under the Facility Leases or to sell the Facilities to any party other than AL Investors. 5.11 Condition of Improvements. The structural components, roofs, mechanical, electrical, plumbing, elevator and HVAC systems of the improvements comprising each Facility are in good working order and free from defects which would materially impair the use of the Facility, ordinary wear and tear excepted, except as set forth in the engineering reports prepared by Commercial Inspectors LLC and delivered to AL Investors in connection with this transaction. Construction of each Facility has been completed (except for normal punchlist items for the Facilities entitled Brookside Estates and Gardens at White Chapel which shall be completed at Emeritus Entities' sole expense). Each Facility is open for business and all work in connection with the initial construction and development of each Facility, all capital improvements made or contracted or committed during calendar year 1998, and all remodeling and refurbishment has been completed and paid for in full by the Emeritus Entities (or will be completed and paid for in full by Emeritus Entities at their sole expense) and no Party has any Lien or right to assert a Lien on account thereof. 5.12 Title. As of the Closing the Emeritus Entities have good and marketable title to each of the Emeritus Owned Facilities, including the Land, Improvements and Personal Property, subject to no lien, mortgage, pledge, encroachment, zoning violation, or encumbrance, except for the Permitted Encumbrances, and the Mortgage, which Permitted Encumbrances do not and will not materially interfere with the current use or operation of any Facility. All Improvements situated on each Facility are situated wholly within the boundaries of the Land except for minor and immaterial encroachments. 5.13 Special Assessments. The Emeritus Entities have not been notified, of any contemplated improvements to any Facility or the area closely surrounding any Facility by any Governmental Authorities which is not disclosed by the public records and shown in the title commitments for each Facility prepared by Title Company which would result in the assessment of a special improvement or similar lien in an amount exceeding S 10,000 per year against any Facility or the Land. 5.14 Utilities; Access. All water, sewer, gas, electric, telephone, drainage and other utility service lines or facilities serving each Facility or required by Legal Requirements: (i) are located within the boundaries of the land on which - -7- the Facility is located or within land dedicated to public use or within recorded easements for same, (ii) are in good working order, and (iii) are adequ.ate to serve the present use of each Facility. Each Facility has direct access to a publicly dedicated street or road or over a recorded easement for such purpose to a publicly dedicated street or road. 5.15 Existing Agreements. There are no contracts, agreements, understandings (whether written or oral), or other liabilities of any type or kind relating to any Facility which will be binding on AL Investors or a Facility Entity after Closing, except for the Permitted Exceptions, the Contracts, the Permits, and the Leases transferred to each Facility Entity at Closing and except as otherwise disclosed in writing to and approved in writing by AL Investors. There is no material default by any of the Emeritus Entities or to the current actual knowledge of any of them by any other party under any of the Permitted Exceptions, the Contracts, the Permits, or the Leases. There are no Major Contracts or Major Leases which will be binding on AL Investors or any of the Facilities Entities after Closing except as set forth on Exhibit B. 5.16 Environmental Compliance. Except as set forth in Exhibit E (which matters, if any, shall be remediated by the Emeritus Entities at their sole expense): (a) The Emeritus Entities have not at any time caused or permitted any Hazardous Substances to be placed or used in any Facility. (b) No Hazardous Substances exist or have existed on any Facility. (c) No Facility now contains any underground storage tanks, and, to the best of Emeritus Entities' knowledge after reasonable and diligent inquiry, no Facilities have contained any underground storage tanks in the past. If there is an underground storage tank located on any Facility, that tank complies with all requirements of Environmental Laws. (d) Emeritus Entities have complied with all Environmental Laws, including all requirements for notification regarding releases of Hazardous Substances. Without limiting the generality of the foregoing, the Emeritus Entities have obtained any Permits required for the operation of the Facilities in accordance with Environmental Laws now in effect and all such Permits are in full force and effect. No event has occurred with respect to any Facility that constitutes, or with the passing of time or the giving or notice would constitute noncompliance with the terms of any Permit. - -8- (e) There are no actions, suits, claims or proceedings pending or, to the best of Emeritus Entities' current actual knowledge-, threatened that involve any Facility and allege, arise out of, or relate to any violation of Environmental Laws. (f) Emeritus Entities has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Substances, or any other environmental, health or safety matters affecting any Facility which has not been remediated in accordance with Legal Requirements. 5.17 Reports. The Operating Statements and all financial information, schedules and other documents containing factual information delivered to AL Investors and prepared by any of the Emeritus Entities in connection with this Agreement or the Purchase Agreement are true and correct in all material respects. 5.18 Employees. All employees at the Facilities are the employees of the Emeritus Affiliates and neither AL Investors nor any of the Facility Entities shall have any liability or responsibility whatsoever after the Closing for any matters related to such employees occurring prior to the Closing. Emeritus Affiliates shall transfer or otherwise reassign at its expense the employment of all employees to the Managers under the Management Agreements effective as of Closing in accordance with all Legal Requirements and neither AL Investors nor any of the Facility Entities shall have any liability or responsibility in connection therewith. There are no union contracts or collective bargaining agreements with any of such employees of the Facilities. 5.19 Casualty; Condemnation. No Facility is subject to any Casualty or Condemnation. 5.20 Loan Closing Certification. All statements, warranties, and representations in the Initial Senior Loan documents and in the Initial Junior Loan documents which relate to the condition, title, fitness, and compliance with Legal Requirements and Environmental Laws of all the Facilities are true and correct. 5.21 Current Actual Knowledge. The representations and warranties herein which are based upon the current actual knowledge of the Emeritus Entities are based upon the current actual knowledge of the following employees of Emeritus: Jean Fukuda, Director of Legal Services; William Shorten, Director of Real Estate Finance; Kelly Price, Vice President of Finance, Chief Financial Officer and Secretary; Daniel R. Baty, Chairman and Chief Executive Officer; and Raymond R. Brandstrom, President and Chief Operating Officer, without any obligation to acquire any knowledge other than a review of the files and records in - -9- their possession they would in the ordinary course of their duties be responsible for having knowledge of. 5.22 Hart-Scott-Rodino Antitrust Improvements Act. The nonexempt assets within the mean of 16 C.F.R. Section 802.2 being acquired from Emeritus and its Affiliates in connection with the Meditrust Facilities and the Emeritus Owned Facilities do not equal or exceed $15,000,000 in the aggregate. 5.23 Indemnification. Each of the Emeritus Entities, jointly and severally, agrees to indemnify, defend and hold each of AL Investors and the Facility Entities harmless from and against any and all loss, damage, liability or expense, including attorneys' fees and costs, AL Investors or any of the Facility Entities may suffer as a result of (a) any breach of or inaccuracy in the foregoing representations, warranties, and covenants and (b) any claim by any Person for personal injury or malpractice (including death) or damage to property arising out of facts and circumstances occurring (or alleged to have occurred) at the Facilities on or prior to the Closing. 5.24 General Provision. The liability of the Emeritus Entities and each of them for breach of any of the warranties, representations and indemnities set forth herein shall survive Closing, shall not be diminished by, nor shall any defense to enforcement thereof arise by reason of, any investigation conducted by or knowledge of AL Investors or the Facility Entities or any remedy any of them may have against any other Person, and shall be cumulative with any other remedies any of them may have against any of the Emeritus Entities. 6. BUYER'S REPRESENTATIONS. AL Investors represents and warrants to the Emeritus Entities, as of the date of this Agreement, as follows: (a) Status. AL Investors is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware and each of the Facility Entities is, or will be prior to Closing, duly organized, validly existing and in good standing in the state of Washington and qualified to do business in the jurisdiction in which it owns or will own a Facility. (b) Authority. This Agreement and all documents to be executed by AL Investors or the Facility Entities at Closing have been duly authorized, executed and delivered by AL Investors and/or the Facility Entities and are binding on and enforceable against AL Investors and the Facility Entities in accordance with their terms. AL Investors hereby agrees to defend, protect, indemnify and hold the Emeritus Entities harmless from and against any and all loss, damage, liability or expense, including attorneys' fees and costs, the Emeritus Entities may suffer as a - -10- result of any breach of or any inaccuracy in the foregoing representations and warranties. 7. EMERlTUS PURCHASE AND SALE AGREEMENT. AL lnvestors has entered into or will enter into an agreement with Emeritus, Emeritus Properties VI, Inc. and ESC I, L.P., wholly owned affiliates of Emeritus, to purchase the Emeritus Owned Facilities on the terms and conditions contained in the respective Purchase and Sale Agreement ("Emeritus Purchase and Sale Agreement"). Unless waived in writing by AL Investors, the obligations of AL Investors under this Agreement are conditioned upon a simultaneous closing under the Emeritus Purchase and Sale Agreement and the obligations of AL Investors under the Emeritus Purchase and Sale Agreement is conditioned upon a simultaneous closing under this Agreement. 8. MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE. Concurrently with and as a condition to the Closing, Emeritus and Emeritus Management LLC and Emeritus Management I LP, and other wholly owned Affiliates of Emeritus ("Managers"), shall enter into a Management Agreement With Option To Purchase with AL Investors and each Facility Entity ("Management Agreement"), in the form to be attached as Exhibit F to this Agreement. Emeritus shall unconditionally guarantee the obligations of each of the Managers under the Management Agreements and agree to fund all operating deficits of the Facilities exceeding approximately $4,500,000 in the aggregate pursuant to Guaranty of Management Agreement and Shortfall Funding Agreement ("Guaranty Agreement") attached hereto as Exhibit G. 9. EMPLOYEE MATTERS. The Emeritus Entities acknowledge and agree that they shall be responsible for all costs, expenses and liabilities with respect to the severance, transfer, hiring or any other matters relating to the transfer or other reassignment of employees presently operating the Facilities to the Managers. The Emeritus Entities shall jointly and severally indemnify and hold each of AL Investors and the Facility Entities harmless from any claims arising out of or relating to such employees, and reassignment of employment to Managers, including but not limited to claims arising from salaries, benefits and profit-sharing plans at any of the Facilities or of the Emeritus Entities. 10. PUT AGREEMENT. Concurrently with and as a condition to the Closing, Emeritus shall cause Daniel R. Baty to enter into the Put and Purchase Agreement ("Put Agreement") attached hereto as Exhibit H. 11. FINANCING OF THE PURCHASE OF THE FACILITIES. AL Investors has negotiated the terms and conditions of the Initial Senior Loan and the Initial Junior Loan which shall be subject to the approval of Emeritus, such approval not to be unreasonably withheld. By execution hereof, Emeritus has approved the terms and conditions of the Initial Senior Loan and Initial Junior Loan. The Lending - -11- Group and/or AL Investors may require a Capital Improvements Reserve Escrow ("Capital Res-rve") to fund the correction of deficiencies in one or more of the Facilities. Funding of the Capital Reserve of Closing shall be the sole obligation of the Emeritus Entities. 12. OPERATIONS OF FACILITIES PENDING CLOSING. At all times prior to the Closing or the sooner termination of this Agreement, the Emeritus Entities agree: (a) to maintain, manage and operate the Facilities in accordance with the terms and conditions of the Facility Leases; (b) to maintain the Facilities in their current condition and state of repair and to rebuild, repair or restore any damage or destruction to the Facilities by casualty or otherwise which may occur prior to Closing; (c) to maintain the existing property, casualty and other insurance required under the Facility Leases; /d) to perform all of its material obligations under the Permits, Permitted Exceptions, Contracts and Leases and not to amend, modify or terminate or permit the termination of any Permit, Contract, Permitted Exceptions or Lease, except with respect to Contracts and Leases in the ordinary course of business, without the prior written consent of AL Investors, which shall not unreasonably be withheld; (e) not to enter into any Major Lease or Major Contract for a Facility, without the prior written consent of AL Investors, which shall not unreasonably be withheld; (f) not to amend, modify, terminate, or exercise any option to purchase u-nder any of the Facility Leases; (g) not to mortgage, encumber or otherwise place or permit any encumbrance on its leasehold estate under the Facility Leases; and (h) not to enter into any contracts or agreements to sell or otherwise transfer its interest in any of the Facilities. 13. CONVEYANCE OF INTERESTS IN MEDITRUST FACILITIES. 13.1 Closing Delivery by the Emeritus Entities. On or prior to the Closing, the Emeritus Entities with respect to the Meditrust Facilities shall deposit with or cause to be deposited with Escrow Holder, the following, each in form satisfactory to AL Investors: (a) A duly executed and acknowledged Quit Claim Deed to the respective Facility Entity conveying any leasehold improvements or other Real Estate interest owned by any of the Emeritus Entities in the Meditrust Facilities ready for recordation in the jurisdiction where the Facility is located; (b) A duly executed Assignment of Leases, Permits and Contracts for the Meditrust Facilities ("Assignment") to the respective Facility Entity. In connection with the Assignment, it shall be the sole responsibility of the Emeritus Entities to obtain all necessary consents and approvals for the transfer of and vesting in the respective Facility Entity for all Permits, Contracts and Leases at Closing or within ninety (90) days thereafter; - -12- (c) FIRPTA Affidavit; (d) Bill of Sale for all Personal Property with respect to Meditrust Facilities, (including but not limited to the Tangible Personal Property as defined in the Facility Leases) vesting title free and clear of all Liens, except for the Permitted Exceptions, in the respective Facility Entity; (e) Duly executed Management Agreement, Guaranty Agreement, and Put Agreement; (f) Such corporate or partnership resolutions regarding due authorization and execution and such opinions of counsel regarding authorization and execution of the documents and instruments to be executed and delivered by any of Emeritus and the Emeritus Entities hereunder as AL Investors may reasonably require. (g) A certificate confirming that all of the warranties and representations set forth in Section 5 are true and correct as of Closing. (h) Termination agreement or if mutually agreed by AL Investors and Emeritus amendment and restatement of the Facility Leases. (i) Licensing Indemnity Agreement between AL Investors and Emeritus. (j) Such other documents as AL Investors may reasonably require to vest in the respective Facility Entity all of the Emeritus Entities' right, title and interest in each of the Facilities. 13.2 Closing Delivery by AL Investors and the Facility Entities. On or prior to the Closing, AL Investors and the Facility Entities shall caused be delivered to the Emeritus Entities the following; (a) The Purchase Price for the property interests described above are allocated among the Facilities as set forth on Exhibit I and the Facility Purchase Price set forth on Exhibit I is the good faith allocation of the aggregate purchase price among the Facilities agreed to by AL Investors and the Emeritus Entities fit being understood that the Facilities are being purchased as a group). (b) An executed counterpart of the Assignment, the Management Agreement, the Guaranty Agreement, and the Put Agreement. (c) A certificate confirming that all of the warranties and representations set forth in Section 6 are true and correct as of Closing. - -13- (d) Such limited liability company resolutions regarding due authorization and execution and such opinions of counsel regarding authorization and execution of the documents and instruments to be executed by AL Investors as Emeritus Entities may reasonably require. Closing of the Meditrust Facilities shall occur prior to the closing of the Emeritus Owned Facilities in the closing conference. 14. CONDITIONS PRECEDENT. 14.1 AL Investors: AL Investors' obligations under this Agreement are expressly conditioned on, and subject to satisfaction of, the following conditions precedent: (a) Performance by Emeritus and the Emeritus Entities. The Emeritus Entities shall each have timely performed all obligations required by this Agreement to be performed by it. (b) Closing under Purchase Agreement. Simultaneous closing under the Purchase Agreement. (c) Resentations and Warranties True. The representations and warranties of the Emeritus Entities contained herein shall be true and correct as of the Closing. (d) No Material Adverse Change. At no time prior to the Closing shall there be any material adverse change in the financial condition of any of the Emeritus Entities or in the physical condition of one or more of the Facilities due to Casualty or Condemnation. (e) Emeritus Purchase and Sale Agreement. Simultaneous closing under the Emeritus Purchase and Sale Agreement. (f) AI Investors Financing. The Initial Senior Loan and Initial Junior Loan shall close simultaneous with the closing hereunder. (g) Final Approval. Final approval of this transaction by each of the members of AL Investors. The conditions set forth in Section 14.1 above are intended solely for the benefit of AL Investors. If any of the foregoing conditions are not satisfied as of the Closing, AL Investors shall have the right at its sole election either to waive the condition in question and proceed with the purchase or, in the alternative, to - -14- terminate this Agreement, whereupon this Agreement shall terminate, and the parties shall have no further obligations hereunder except as expressly provided herein. 14.2 Emeritus Entities. The obligations of the Emeritus Entities under this Agreement are expressly conditioned on, and subject to satisfaction of, the following conditions precedent: (a) Performance by AL Investors. AL Investors and the Facility Entities shall each have timely performed all obligations required by this Agreement to be performed by it. (b) Closing under Purchase Agreement. Simultaneous closing under the Purchase Agreement. (c) Representations and Warranties True. The representations and warranties of AL Investors contained herein shall be true and correct as of the Closing. (d) Emeritus Purchase and Sale Agreement. Simultaneous closing under the Emeritus Purchase and Sale Agreement. (e) Final Approval. Final approval of the board of Emeritus. The conditions set forth in Section 14.2 above are intended solely for the benefit of the Emeritus Entities. If any of the foregoing conditions are not satisfied as of the Closing, the Emeritus Entities shall have the right at its sole election either to waive the condition in question and proceed with the purchase or, in the alternative, to terminate this Agreement, whereupon this Agreement shall terminate, and the parties shall have no further obligations hereunder except as expressly provided herein. 15. CLOSING COSTS. If this transaction closes, AL Investors shall pay the following closing costs with respect to Closing under this Agreement, the Emeritus Purchase and Sale Agreement and the Purchase Agreement, subject to the aggregate dollar limitation below: (a) The premium for owner's and lender's title insurance for each Facility and such additional title insurance as may be required by the Lending Group and any search or additional title review charges to be paid to Title Company; - -15- (b) All real estate excise taxes and other transfer taxes applicable to the transfer of a Facility to the Facility Entities including any sales tax on any Personal Property. (c) The fees incurred by the Escrow Holder in connection with the Closing. (d) All recording fees and expenses for recording of all documents and instruments. (e) All costs and expenses of AI Investors' and the Facility Entities' financing with the Lending Group (except funding of any Capital Reserve which shall be the sole obligation of Emeritus Entities). (f) Costs and expenses of due diligence investigations, studies, surveys and reports prepared for AL Investors and the Lending Group and the formation and qualification of the Facility Entities. (g) AL Investors attorneys and accounting fees, costs and expenses. (h) All other normal and customary closing costs incurred by AI Investors. To the extent the aggregate of the foregoing exceeds $3,711,821, as outlined in Exhibit J the balance of the closing costs shall be paid by the Emeritus Entities. 16. CLOSING STATEMENTS. All income and expense arising out of the management and operation of the Meditrust Facilities, including, but not limited to real property taxes and insurance, shall be prorated between the Emeritus Entities and AI Investors or each Facility Entity as of the Closing. Prepaid amounts or deposits under Residency Agreements or security deposits under the Leases shall be credited to AL Investors and utility deposits or prepaid amounts under the Contracts shall be credited to the Emeritus Entities. The prorations of income and expense for each Facility shall be made on the basis of a written closing statement submitted by the Emeritus Entities to AL Investors prior to the Closing and approved by AL Investors. In the event any prorations or apportionments made hereunder shall prove to be incorrect for any reason, then any party shall be entitled to an adjustment to correct the same. Any item which cannot be prorated because of the unavailability of information shall be tentatively prorated on the basis of the best data then available and re-prorated between the parties when the information is available. Any prepaid rents or other prepaid expenses, escrow accounts or deposits under the Facility Leases returned by Meditrust to AL - -16- Investors or the Facility Entities, or credited against the purchase price under the Purchase Agreement, shall be refunded to the Emeritus Entities. Notwithstanding the foregoing, any adjustments or reprorations shall be made, if at all, within one hundred eighty (180) days after Closing. 17. DELIVERY OUTSIDE OF ESCROW. The Emeritus Entities shall deliver to AL Investors and the Facility Entities at Closing outside of the Closing escrow the originals of the diligence materials referenced in Section 4.2 (except for the originals of the Contracts, Leases and Permits to be held by Managers for use in managing the Facilities), and such copies of all books and records used in the operation, maintenance, and repair of the Facilities as AL Investors may direct. 18. BREAK-UP EXPENSES. 18.1 Emeritus' Obligation. The Emeritus Entities acknowledge and agree that Closing under the Purchase Agreement, the Emeritus Purchase and Sale Agreement, or this Agreement may not occur due to a variety of events or circumstances beyond the control of AL Investors including but not limited to: (a) The refusal or failure of the Lending Group to provide financing for the acquisition of the Facilities; (b) The failure of Governmental Authorities or other Parties to approve the transfer of Permits, Contracts or Leases to the Facility Entities for the operation of the Facility prior to the Closing under the Purchase Agreement or this Agreement; (c) The failure to secure the consent or approval from Senior Housing Partners I, L.P., a member of AL Investors, to proceed with the transaction prior to expiration of the Due Diligence Period; (d) Casualty or Condemnation of one or more Facilities prior to the Closing under the Purchase Agreement; (e) The failure of Meditrust to perform under the terms of the Purchase Agreement or the failure of Meditrust to enter into a Purchase Agreement upon terms and conditions acceptable to AL Investors; (f) Default by any of the Emeritus Entities hereunder or under any other agreement in connection with this transaction. (g) The failure of any condition precedent to AL Investors' obligations hereunder as set forth in Section 14.1; or - -17- (h) Such other events or circumstances beyond the reasonable control of AL Investors and the Facility Entities. In the event that Closing under the Purchase Agreement, the Emeritus Purchase and Sale Agreement or this Agreement should not occur as a result of any of the foregoing, and notwithstanding termination or expiration of this Agreement, the Emeritus Entities shall pay to AL Investors all of AL Investors' out of-pocket costs and expenses incurred in connection with the due diligence and the preparation of all documentation relating to the purchase of the Facilities, including but not limited to costs of all title insurance cancellation fees, preparation of environmental reports, surveys, appraisals, structural engineering reports, amounts owing to the Lending Group for reimbursement of expenses, costs to form AL Investors and the Facility Entities, AI Investors' attorneys' fees and costs, and all other reasonable out-of-pocket expenses incurred by AL Investors in connection with this transaction (collectively "Break-up Expenses"). AL Investors shall provide to the Emeritus Entities an itemization of its Break-up Expenses within forty-five (45) days after termination of in the purchase and sale of the Facilities as contemplated by this Agreement. The Emeritus Entities shall make payment to AL Investors within ten (10) days after receipt of such itemization. The payment of the Break-up Expenses shall be the sole remedy of AL Investors and the Facility Entities against the Emeritus Entities under this Agreement or the Emeritus Purchase and Sale Agreement for failure to close under this Agreement. 18.2 Post Closing Remedies. AI Investors shall have all rights and remedies at law or in equity for enforcement of any indemnities, warranties or representations or other agreements set forth herein after Closing. 19. MISCELLANEOUS. 19.1 Entire Agreement. This Agreement together with the Exhibits attached hereto and all certificates and documents delivered in connection herewith contain the entire understanding of the parties with respect to the subject matters hereof, except as set forth in the Emeritus Purchase and Sale Agreement, and supersedes all prior and other contemporaneous oral or written understandings and agreements between the parties hereto. 19.2 Binding Effect; Assignment. This Agreement, shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, personal representatives and permitted assigns. Except as specifically provided for herein, neither party may assign its rights hereunder without the prior written consent of the other. Notwithstanding the foregoing, AL Investors may assign this Agreement in whole or part to any Facility Entity which holds or is intended to hold title to any Facility and such Facility Entity's successors and assigns. - -18- 19.3 Notices. Any notice, demand, offer or other writing required or permitted pursuant to this Agreement shall be in writing, furnished in duplicate and shall be transmitted by hand delivery, facsimile, certified mail, return receipt requested, or Federal Express or another nationally recognized overnight courier service, postage prepaid, as follows: If to AL Investors: AL Investors LLC c/o Bruce D. Thorn 2250 McGilchrist Street SE, Suite 200 Salem, Oregon 97302 Facsimile: (503)375-7644 Telephone: (503)370-7071 ext. 7143 With a copy to: Foster Pepper & Shefelman PLLC 1111 Third Avenue, Suite 3400 Seattle, Washington 981O1 Attn: Gary E. Fluhrer Facsimile: (206)447-9700 Telephone: (206)447-4400 Senior Housing Partners I, L.P. c/o Mr. Noah Levy Prudential Real Estate Investors Suite 1400, Two Ravinia Drive Atlanta, Georgia 30346 Facsimile: (770)399-5363 Telephone: (770)395-8606 If to the Emeritus Entities: Emeritus Corporation 3131 Elliot Avenue, Suite 500 Seattle, Washington 98121-1031 Attn: Mr. Kelly Price Facsimile: (206)301-4500 Telephone: (206)301-4507 With a copy to: Perkins Coie 1201 Third Avenue, Suite 4000 Seattle, Washington 98101 Attn: Mike Stansbury Facsimile: (206)583-8500 Telephone: (206)583-8888 - -19- Any party shall have the right to change the place to which such notice shall be given or add additional parties to receive notices by similar notice sent in like manner to all other parties hereto. Any notice, if sent by overnight courier service, shall be deemed delivered on the earlier of the date of actual delivery or the next business day and if delivered by hand delivery or facsimile shall be deemed delivered on the date of the actual delivery and it sent by mail, shall be deemed delivered on the earlier of the third day following deposit with the U.S. Postal Service or actual delivery. 19.4 Captions. The captions of this Agreement are for convenience and reference only, and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provisions hereof. 19.5 Joint Effort. The preparation of this Agreement has been the joint effort of the parties, and the resulting document shall not be construed more severely against one of the parties than the other. 19.6 Counterparts. This Agreement may be executed in counterparts and each executed copy shall be deemed an original which shall be binding upon all parties hereto. 19.7 Partial Invalidity. The invalidity of one or more of the phrases, sentences, clauses, sections or articles contained in this Agreement shall not affect the remaining portions so long as the material purposes of this Agreement can be determined and effectuated. 19.8 No Offer. Neither the negotiations to date nor the preparation of this Agreement shall be deemed an offer by any party to the other. No such contract shall be deemed binding on any party until each party has executed and delivered this Agreement. 19.9 Amendments. This Agreement may not be amended in any respect whatsoever except by a further agreement, in writing, fully executed by each of the parties. 19.10 Schedules and Exhibits. All Schedules and Exhibits referred to in this Agreement shall be incorporated into this Agreement by such reference and shall be deemed a part of this Agreement as if fully set forth in this Agreement. 19.11 Governing Law and Attorneys' Fees. This Agreement including the validity thereof and the rights and obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Washington without regard to its principals of conflicts of laws. AL Investors may enforce any or all of the provisions of this Agreement directly against the Emeritus Entities or - -20- any of them in the State of Washington or at its option may enforce this Agreement on behalf of any Facility Entity in the state in which such Facility Entity owns a Facility. In the event either party brings an action or any other proceeding against the other party to enforce or interpret any of the terms, covenants or conditions hereof, the party prevailing in any such action or proceeding shall be paid all costs and reasonable attorneys' fees by the other party in such amounts as shall be set by the court, at trial and on appeal. 19.12 Third Parties. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any person other than to the Facility Entities, which are intended third party beneficiaries. 19.13 Rules of Construction. References in this Agreement to "herein," "hereof" and "hereunder" shall be deemed to refer to this Agreement and shall not be limited to the particular text in which such words appear. The use of any gender shall include all genders, and the singular number shall include the plural and vice versa as the context may require. 19.14 Survival. The warranties, representations and indemnities in this Agreement shall survive Closing and the delivery of the Transaction Documents and other documents hereunder. 19.15 Joint and Several. The obligation of each of Emeritus and the Emeritus Affiliates shall be joint and several. 19.16 No Broker. AL Investors represents to Emeritus Entities and the Emeritus Entities represent to AL Investors, that no agent, finder or broker has acted for it or was the producing and effective cause of this Agreement or the transactions contemplated herein, and that no commissions or finder's fees are due by it to any third parties. AL Investors agrees to indemnify and hold Emeritus Entities harmless, and the Emeritus Entities agree to indemnify and hold AL Investors harmless, with respect to any and all expenses, obligations, and liabilities resulting from the claims or causes of action relating to any claims made by any person retained or used by it for any agent's broker's or finder's fees or commissions relating to the transactions contemplated herein. - -21- IN WITNESS WHEREOF, the parties hereto have hereunto set their hands seals as of the date first above appearing. AL INVESTORS LLC, a Delaware limited Liability company By: /s/ Norman Brenden Name: Norman L. Brenden Its: Manager EMERITUS CORPORATION, a Washington corporation By /s/ Daniel R. Baty Name Its Chairman EMERITUS PROPRERTIES I, INC., a Washington corporation By /s/ Daniel R. Baty Name Its Chairman ESC I, L.P., a Washington limited partnership By: ESC G.P. I, INC., a Washington Corporation By /s/ Daniel R. Baty Name Its Chairman - -22- EMERITUS PROPRERTIES VI, INC., a Washington corporation By /s/ Daniel R. Baty Name Its Chairman - -23- LIST OF EXHIBITS Exhibit A Certain Defined Terms Exhibit B Major Contracts and Major Leases Exhibit C Litigation,Claims and/or Proceedings Exhibit D Claims for Repairs,Restorations and/or Improvements Exhibit E Environmental Compliance Exhibit F Management Agreement Exhibit G Guaranty Agreement Exhibit H Put Agreement Exhibit I Purchase Price Allocation Exhibit J Closing Costs - -24- EXHIRIT A TO SUPPLEMENTAL PURCHASE AGREEMENT IN CONNECTION WITH PURCHASE OF FACILITIES Certain Defined Terms For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, capitalized terms in the Agreement have the meanings assigned as set forth below and include the plural as well as the singular. Accreditation Body: Any person, including any Person having or claiming jurisdiction over the accreditation, certification, evaluation or operation of a Facility. Affiliate: With respect to any Person (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of such Person or (iii) any officer, director, employee, general partner or trustee of such Person, or any other Person controlling, controlled by, or under common control with, such Person (excluding trustees and Persons serving in a fiduciary or similar capacity who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. Approved Equipment Leases: Leases for any of the Furnishings and Equipment which have been approved by AL Investors in writing. Award: All compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. Business Day: Any day which is not a Saturday or Sunday or a public holiday under the laws of the United States of America or the State of Washington. Casualty: The damage or destruction by act of god or otherwise of any portion of any Facility which would cost more than $50,000 to repair or restore. A- 1 Closing or Closing Date: The date upon which the purchase and sale of the twenty-two (22) Facilities being purchased from Meditrust closes as defined in the Purchase Agreement. Code: The Internal Revenue Code of 1986, as amended. Condemnation: With respect to any Facility or any interest therein or right accruing thereto or use thereof (i) the exercise of the power of condemnation, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer to any Condemnor under threat of condemnation. Condemnor: Any public or quasi-public authority, or private corporation or individual, having the power of condemnation. Consultants: Collectively, the architects, engineers, inspectors, surveyors and other consultants that have been engaged from time to time prior to Closing by the Emeritus Entities or AL Investors to perform services for any of them in connection with a Facility or this Agreement. Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary Contracts and Major Contracts. Date of Taking: The date the Condemnor has the right to possession of the property being condemned. Emeritus Owned Facilities: Facilities entitled La Villita, Madison Glen and Meadowlands Terrace as denoted under Facility Name below. Environmental Laws: Environmental Laws means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings, and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Emeritus and the Emeritus Entities or to the Land and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean. Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. Escrow Holder: First American Title Insurance Company. A- 2 Facility: Each of the assisted living facilities including the Land, Improvements and Personal Property associated therewith, located in the city and state as set forth below:
Facility City State Units Beds Facility LLC and LP - -------- ---- ----- ----- ---- ------------------- Name La Villita Phoenix AZ 87 110 AL Investors Phoenix LLC Laurel Place San Bernardino CA 71 87 AL Investors San Bernardino LLC The Terrace Grand Terrace CA 88 97 AL Investors Grand Terrace LLC Gardens at Whitechapel Newark DE 100 110 AL Investors Newark LLC Barrington Place Lecanto FL 79 94 AL Investors Lecanto LLC Beneva Park Club Sarasota FL 95 104 AL Investors Sarasota LLC Central Park Village Orlando FL 174 189 AL Investors Orlando LLC College Park Club Bradenton FL 85 96 AL Investors Bradenton LLC Lodge at Pinellas Mainlands Park FL 153 160 AL Investors Pinellas Park LLC Madison Glen Clearwater FL 135 200 AL Investors Clearwater LLC Springtree Sunrise FL 179 220 AL Investors Sunrise LLC Elm Grove Hutchinson KS 121 142 AL Investors Hutchinson LLC Brookside Middleburg Estates Heights OH 99 105 AL Investors Middleburg Heights LLC Bellaire Place Greenville SC 81 88 AL Investors Greenville LLC Walking Horse Meadows Clarksville TN 50 57 AL Investors Clarksville Dowlen Oaks Beaumont TX 79 87 AL Investors Beaumont LLC Eastman Estates Longview TX 70 78 AL Investors Longview LP Lakeridge Wichita Place Falls TX 79 87 AL Investors Wichita Falls LP Meadowlands Terrace Waco TX 71 76 AL Investors Waco LP Myrtlewood Estates San Angelo TX 79 88 AL Investors San Angelo LP Saddleridge Lodge Midland TX 79 88 AL Investors Midland LP Seville Estates Amarillo TX 50 55 AL Investors Amarillo LP Emeritus Estates Ogden UT 83 91 AL Investors Ogden LLC Harbour Pointe Shores Ocean Shores WA 50 55 AL Investors Ocean Shores LLC Park Place Casper WY 60 68 AL Investors Casper LLC
The legal description of each of the above Facilities (excluding La Villita, Madison Glen and Meadowlands Terrace) is set forth in the Purchase Agreement and the legal description of Madison Glen, Meadowlands Terrace and La Villita is set forth in the Emeritus Purchase and Sale Agreement. Facility Entity: Each of the Facility LLC's or LP's which owns or will own at Closing a Facility as set forth opposite the name of each Facility above. Facility Lease: Each of the leases by which a Facility has been leased by any of the Emeritus Entities from Meditrust. Furnishings and Equipment: All furniture, furnishings, beds, televisions, equipment, food service equipment, apparatus, computers and other personal property used in (or if the context so dictates, required in connection with), the operation of each Facility, other than Operating Equipment, Operating Supplies and fixtures attached to and forming part of the Improvements. A- 3 Governmental Authorities: Collectively, all agencies, authorities, bodies, boards, commissions, courts, instrumentalities, legislatures, and offices of any nature whatsoever of any government, quasi-government unit- or political subdivision, whether with a federal, state, county, district, municipal, city or otherwise and whether now or hereinafter in existence which exercises jurisdiction over any Facility. Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials, radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on any Facility is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material, or substance now or in the future defined as a "hazardous substance," "hazardous material," hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning of any Environmental Law. Provided, however, Hazardous Substances shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of any Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Facilities' parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Environmental Laws. Improvements: The buildings, structures (surface and sub-surface) and other improvements now or hereafter located on the Land. Junior Loan: Any indebtedness incurred by Owners which is secured by a mortgage, pledge, and related security instruments against the membership interests of AL Investors in the Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and Senior Housing Partners I, L.P. dated on or about the same date hereof ("Initial Junior Loan"). Land: The parcel or parcels of land on which each of the Facilities is situated, together with all rights of ingress and egress thereto and parking associated therewith as legally described in the Purchase Agreement with respect to the Meditrust Facilities and in the Emeritus Purchase and Sale Agreement with respect to the Emeritus Owned Facilities. A- 4 Leases: Collectively, the Ordinary Leases and Major Leases. Legal Requirements: Collectively, all statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, health code, zoning, subdivision, and other land use and assisted living licensing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any Governmental Authority, Accreditation Body or Third Party Payor affecting a Facility Entity or any Facility or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in connection with the Facility, including, without limitation, any of the foregoing which may (i) require repairs, modifications or alterations in or to the Facility, (ii) in any way affect (adversely or otherwise) the use and enjoyment of the Facility or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from the Facility. Without limiting the foregoing, the term "Legal Requirements" includes all Environmental Laws and shall also include all Permits and Contracts issued or entered into by any Governmental Authority, any Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances. Lending Group: GMAC Commercial Mortgage for itself and as agent for other participating lenders in a debt facility to AL Investors secured by the Facilities in the maximum aggregate original principal balance of $138,000,000. Lien: With respect to any real or personal property, any mortgage, mechanics' or materialmen's lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property which secures or is intended to secure the payment of money, whether or not inchoate, vested or perfected. Major Contracts: Any contract for the purchase of goods or services or any other agreement which requires payments in excess of $50,000 per year for any Facility or has a noncancellable term in excess of one year or in which the provider of the goods or services is an Emeritus Entity or an Affiliate of any of them. Major Lease. Any Lease which has a noncancellable term in excess of one year or a rental payment in excess of $10,000 per year or pursuant to which an Emeritus Entity or an Affiliate of any of them is the tenant. Managed Care Plans: All health maintenance organizations, preferred provider organizations, individual practice associations, competitive medical plans, and similar arrangements. A- 5 Managers: Any Person who has entered into a Management Agreement with a Facility Entity, which initially shall mean Emeritus Management LLC and Emeritus Management I LP. or any other entity approved by AL Investors. Medicaid: The medical assistance program established by Title XIX of the Social Security Act (42 USC Section Section 1396 et seq.) and any statute succeeding thereto. Medicare: The health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 USC Section Section 1395 et seq.) and any statute succeeding thereto. Meditrust: Meditrust Acquisition Corporation I and Meditrust Company LLC. Mortgage: collectively, the terms and conditions of the Senior Loan and the Junior Loan. Operating Equipment. All dishes, glassware, bed coverings, towels, silverware, uniforms and similar items used in, or held in storage for use in (or if the context so dictates, required in connection with) the operation of the Facilities. Operating Supplies. All consumable items used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Facilities, including food, medical supplies, fuel, soap, cleaning materials, and other similar consumable items. Ordinary Contracts: All agreements and contracts to purchase goods and services (excluding Major Contracts) to the extent such other agreements and contracts have been entered into by the Emeritus Entities in the ordinary course of business of construction, owning, operating or managing the Facilities, contract rights (including without limitation, warranties provided in construction contracts, subcontracts, and architects' contracts), right to proceeds or payment on account of any Award or Casualty, warranties and representations, franchises, and records and books of account benefiting, relating to or affecting the Facility or the operation of any programs or services in conjunction with the Facility and all renewals, replacement and substitutions therefor entered into by the Emeritus Entities with any Governmental Authority, Accreditation Body or Third Party Payor or entered into by any of the Emeritus Entities with any third Person, excluding, however, any agreements pursuant to which money has been or will be borrowed or advanced, the Facility Leases, the Leases, any agreements with or obligations relating to employees of a Facility, and any agreement creating or permitting any Lien, or other encumbrance on title (except for the Permitted Exceptions), and any Major Contract. A- 6 Ordinary Leases: Collectively, all subleases, licenses, use agreements, equipment leases, concession agreements, tenancy at will agreements and other occupancy agreements (but excluding any Residency Agreement, Facility Lease or Major Lease), whether oral or in writing, entered into by any of the Emeritus Entities and encumbering or affecting a Facility. Permits: Collectively, all permits, licenses, approvals, qualifications, rights, variances, permissive uses, accreditation, certificates, certifications, consents, agreements, contracts, contract rights, franchises, interim licenses, permits and other authorizations of every nature whatsoever required by, or issued under, applicable Legal Requirements relating or affecting a Facility or the construction, development, maintenance, management, use or operation thereof, or the operation of any programs or services in conjunction with the Facility and all renewals, replacements and substitutions therefor, now or hereafter required or issued by any Governmental Authority, Accreditation Body or Third Party Payor, or maintained or used by any of the Emeritus Entities, or entered into by any of the Emeritus Entities with any third Person with respect to a Facility. Permitted Exceptions: The exceptions to title approved by AL Investors pursuant to the Purchase Agreement or the Emeritus Purchase and Sale Agreement, including the Approved Equipment Leases. Person: Any individual, corporation, general partnership, limited partnership, joint venture, stock company or association, company, bank, trust, trust company, land trust, business trust, unincorporated organization, unincorporated association, Governmental Authority or other entity of any kind or nature. Personal Property: All machinery, equipment, furniture, furnishings, vehicles, movable walls or partitions, computers or trade fixtures, goods, inventory, supplies, the name of the Facility, and other personal or intangible property located on or in or used in connection with a Facility including, but -not limited to, all Operating Equipment, Furnishings and Equipment and Operating Supplies but excluding vans and buses. Prime Rate: The variable rate of interest per annum from time to time set forth in the Wallstreet Journal as the prime rate of interest and in the event that the Wallstreet Journal no longer publishes a prime rate of interest, then the Prime Rate shall be deemed to be the variable rate of interest per annum which is the prime rate of interest or base rate of interest from time to time announced by any major bank or other financial institution reasonably selected by AL Investors. Provider Agreements: All participation, provider and reimbursement agreements or arrangements, if any, in effect for the benefit of the Emeritus A- 7 Entities or Meditrust in connection with the operation of the Facility relating to any right of payment or other claim arising out of or in connection with participation in any Third Party Payor Program. Real Estate: Collectively, ii1 the Land, (ii) the Improvements, and (iii) all rights, rights-of-way, easements, mineral rights, privileges, options, leases, licenses, and appurtenances in any manner belonging to, or pertaining to, the Land and the Improvements. Residency Agreement: All contracts, agreements and consents executed by or on behalf of any resident or other Person seeking services at the Facility, including, without limitation, assignments of benefits and guarantees. Senior Loan: any indebtedness incurred by Owners which is secured by any mortgage, deed of trust and related security instruments against a Facility. Initially, the Senior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and GMAC Commercial Mortgage Corporation dated on or about the same date hereof ("Initial Senior Loan"). Third Party Payor Programs: Collectively, all third party payor programs in which the Emeritus Entities presently or in the future may participate, including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance plans and employee assistance programs. Third Party Payors: Collectively, Medicare, Medicaid, Blue Cross and/or Blue Shield, private insurers and any other Person which presently or in the future maintains Third Party Payor Programs. Title Company: First American Title Insurance Company. Unavoidable Delays: Delays due to strikes, lockouts, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto. A- 8 EXHIRIT B TO SUPPLEMENTAL PURCHASE AGREEMENT IN CONNECTION WITH PURCHASE OF FACILITIES Major Contracts and Major Leases 1. LaVallita Full Maintenance Agreement, dated January 4, 1995, by and between Assisted Living of America, Inc. and Centric Elevator Corporation (5 year term) (Agreement not executed by Centric.) 2. Laurel Place Preventive Maintenance Agreement, dated July 1986 by and between Limited Care #1 and Westinghouse Elevator Company (Successive 5 year renewal terms unless either party gives notice no later than 90 days prior to the renewal expiration date.) Addendum to the Master Agreement, dated September 18, 1996, by and between Emeritus Corporation and Edwards Company. (Term is term of Master Agreement or two years whichever is more.) Central Station Protective Signaling Service Agreement, dated September 10, 1996, by and between Emeritus Corporation and Edwards Company. (Term is term of Master Agreement or three years, whichever is more.) 3. The Terrace None 4. The Gardens at Whitechapel Cable Television Bulk Billing Agreement, dated January 10, 1998, by and between Meditrust Acquisition Corporation I, Inc. and Lentest New Castle County (6 year term) (Agreement not executed by Lenfest.) 5. Barrington Place None 6. Beneva Park Club None B-1 7. Central ParkVillage None 8. College Park Cluh None 9. The Lodge at Mainlands None 10. Madison Glen Service and Right-of-Entry Agreement, dated August 5, 1998, by and between Sunshine Plaza Associates, Ltd. and Vision Cable of Pinellas, Inc. (Term is equal to Company's local franchise or permit, plus any extensions or renewals.) 11. Springtree None 12. Elm Grove Estates None 13. Brookside Estates Access Agreement dated June 3, 1998, by and between Meditrust Company LLC and V Cable, Inc. (5 year term.) 14. Bellaire Place None 15. Walking Horse Meadows Charter Communications Apartment Agreement, dated October 31, 1997, by and between ESC I, L.P. and Charter Communications II, L.P. (3 year term.) 16. Dowlen Oaks Elevator Maintenance Agreement, dated 1998, by and between Dowlen Oaks Assisted Living Community and Dover Elevator Company (5 year term) (Agreement not signed by Dowlen Oaks.) B-2 17. Eastman Estates Cable Television Service Agreement, dated January 1, 1.998, by and between Meditrust Acquisition Corporation I and Longview Cable Television Company, Inc. (5 year term.) 18. Lakeridge Place Agreement for Elevator Service, dated July 28, 1998, by and between Personal Care Facility and Dover Elevator Company (5 year term.) Cablevision Service Agreement, dated July 9, 1997, by and between Emeritus Corporation and Vista Cablevision (4 year term.) 19. Meadowlands Terrace Right ot Entry Agreement, dated May 13, 1996, by and between Emeritus Corporation and Heartland Wireless Communications, Inc. (5 year term.) 20. Myrtlewood Estates Multiple Dwelling Unit Right-of-Entry Private Easement Agreement, dated July 28, 1997, by and between Myrtlewood Estates and TCA Management Company (3 year term, with successive 3 year renewal terms.) Maintenance Agreement dated January 13, 1998, by and between Emeritus Corporation and Otis Elevator Company (5 year term, with successive 5 year renewal terms.) 21. Saddlewood Lodge Multiple Dwelling Unit Cable Service Agreement, dated November 30, 1998, by and between Emeritus Corporation and Cox Communications West Texas, Inc. (5 year term.) 22. Seville Estates None 23. Emeritus Estates Alarm System Agreement, dated January 1, 1997 by and between Emeritus Estates and Fire Protection Service Corporation (5 year term.) B-3 24. Harbour Pointe Shores None 25. Park Place None B-4 EX-10.66-3 12 EX-10.66.3 Exhibit 10.66.3 MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE for Emeritrust 25 Facilities AMONG AL INVESTORS LLC, a Delaware limited liability company AND THE FACILITY ENTITIES SET FORTH IN EXHIBIT A AND EMERITUS MANAGEMENT I LP, a Washington limited partnership AND EMERITUS PROPERTIES I, INC., a Washington corporation AND ESC I, L.P., a Washington limited partnership AND EMERITUS MANAGEMENT LLC, a Washington limited liability company AND EMERITUS CORPORATION, a Washington corporation MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE (Emeritrust 25) This Management Agreement with Option to Purchase (the "Agreement") is entered into as of , 1998, by and among Emeritus Management LLC, a Washington limited liability company, Emeritus Management I LP, a Washington limited partnership, ESC I, L.P., a Washington limited partnership, and Emeritus Properties I, Inc., a Washington corporation (collectively "Managers" and each a "Manager"), Emeritus Corporation, a Washington Corporation ("Emeritus"), and AL Investors LLC, a Delaware limited liability company ("AL Investors") for itself and as sole managing member on behalf of each of the Facility Entities as set forth in Exhibit A (collectively "Facility Entities" and each a "Facility Entity"). (AL Investors and the respective Facility Entity which owns a Facility are sometimes collectively referred to herein as "Owner" or with respect to all Facilities "Owners"). Owners desire to engage Managers to manage the Facilities as defined in Exhibit A upon the terms and conditions set forth herein. All capitalized terms not otherwise defined herein shall have the meaning set forth in Exhibit A. 1. BACKGROUND AND GENERAL TERMS 1.1 Purchase Agreements AL Investors has entered into (a) a Purchase and Sale Agreement dated of even date herewith with Meditrust Company LLC, a Delaware limited liability company ("Meditrust"), relating to the purchase of twenty-two (22) of the Facilities currently leased by Affiliates of Emeritus from Meditrust as more particularly described therein ("Meditrust Facilities"), (b/ a Purchase and Sale Agreement dated of even date herewith with Emeritus and its Affiliates, Emeritus Properties VI Inc. and ESC I, L.P. relating to the purchase of three (3) assisted living facilities as more particularly described therein ("Emeritus Facilities"), and (c)a Supplemental Purchase Agreement in connection with the purchase of the Facilities with Emeritus, Emeritus Properties I, Inc., Emeritus Properties VI, Inc. and ESC I, L.P. relating to certain additional terms and conditions in connection with purchase of the Facilities (collectively the "Purchase Agreements"/. Closing under the Purchase Agreements will occur simultaneously and the resulting pool of twenty-five (25) Facilities will each be owned by the respective Facility Entity and managed by the Managers pursuant to this Agreement. 1.2 Master Agreement. Under the terms and conditions of this Agreement, Emeritus Management LLC will manage all of the Facilities other than those located in Texas which will be managed by Emeritus Management I LP. Pursuant to Section 3.6, Emeritus Properties I, Inc., an Affiliate of Emeritus, will be - -1- co-manager of all Facilities except those in Texas, Tennessee, and Arizona, subject to the provisions of Section 3.6. ESC I, L.P., an Affiliate of Emeritus, will be co-manager of the Facilities in Tennessee and Texas. It is intended that the terms of this Agreement shall apply to each of the Facilities as if this Agreement were a direct agreement between each Facility Entity and the respective Manager (and, if applicable, co-manager) but the operational results upon which the Management Fee (Base Management Fee and Accrued Management Fee/ and Operating Deficit and Operating Profit are determined, except as otherwise expressly provided herein, shall be based on the combined results of all the Facilities and not separately for each Facility. A default or Event of Default under this Agreement with respect to any Facility shall be a default or Event of Default as to all Facilities. 1.3 Qualifications: Owners desire to engage the Managers to manage, on behalf of the Owners and subject to their overall supervision and control, each respective Facility and Managers represent to AL Investors and the Facility Entities that they are experienced and duly qualified under all applicable Legal Requirements to manage assisted living facilities. By entering into this Agreement, Owners do not delegate or intend to delegate to Managers any powers, duties, or responsibilities which Facility Entities are prohibited by Legal Requirements from delegating. Owners also retain such other management authority as shall not have been expressly delegated to the Managers pursuant to this Agreement. 1.4 Emeritus Guaranty. Concurrently with the execution of this Agreement, Emeritus is entering into a Guaranty of Management Agreement and Shortfall Funding Agreement ("Emeritus Guaranty") in favor of the Facility Entities and Owners guaranteeing the Managers' obligations under this Agreement and agreeing to fund any Operating Deficit in excess of the Owner's Deficit Contribution as more particularly defined herein and in the Emeritus Guaranty. 1.5 Consideration. In consideration of Owners' consummating the Purchase Agreements and the mutual covenants contained herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to enter into and perform their respective obligations under this Agreement. 2. TERM 2.1 The Term. The term ("Initial Term") of this Agreement shall commence on the date hereof ("Commencement Date") and shall expire at midnight on December 31, 2001 (the "Termination Date"). If the Closing under the Purchase Agreements does not occur for any reason, this Agreement shall terminate and no party hereto shall have any liability or obligation under this - -2- Agreement. The Initial Term and Extension Term are sometimes collectively referred to herein as the "Term". 2.2 Extension Term. If Emeritus fails to exercise or is not entitled to exercise the Purchase Option as provided for in Section 13, Owners may extend this Agreement for a period of up to twelve (12) months beyond the Termination Date as to any or all Facilities as determined by Owner in its sole discretion ("Extension Term") by giving notice of such election (which shall include designation of the Facilities and the applicable Extension Term) to Managers at least ninety (90/ days prior to the Termination Date. In such event, the provisions of Section 13 and Section 14 of this Agreement shall not be applicable during any Extension Term. 3. GRANT OF AUTHORITY AND OBLIGATIONS OF MANAGERS 3.1 Grant to Managers. Owners hereby grant to Managers the right to supervise and direct the management and operation of the Facilities subject to the terms of this Agreement and the overall supervision and control of Owners. Managers accept such grant and agree that they will supervise and direct the management and operation of the Facilities in accordance with the terms of this Agreement and the general supervision of Owner. Managers, subject to the terms of this Agreement, shall have the general authority and responsibility to (i)determine operating policy and standards of operation, maintenance, and resident care for the Facilities except where Legal Requirements require an Owner to do so in which event Manager and such Owner shall consult with each other to allow Owner to determine policy and standards, (ii) supervise and direct all phases of advertising and marketing for the Facilities, (iii) carry out all phases of the Annual Plans and (iv) perform such other acts and things as shall be necessary to operate the Facilities in an efficient manner which is consistent with customary and commercially reasonable practice in the industry for comparable facilities. Managers acknowledge the trust and confidence placed in them pursuant to this Agreement and at all times agree to act in the best interest of Owners in managing and operating the Facilities. 3.2 Annual Plans 3.2.1 Preparation and Approval. Not later than December 1 prior to the commencement of each Operating Year, other than the initial Operating Year, the Managers shall submit to Owners a draft of an annual budget and forecast for the operation of each Facility and all Facilities in the aggregate for the forthcoming Operating Year containing projections of Total Revenues and budgets of Operating Expenses, Fixed Operating Expenses, Capital Improvements, and Operating Deficit or Operating Profit (the "Annual Plan"). Such budget and forecasts shall be in -3- reasonable detail and in such form as reasonably required by Owners. The Annual Plan shall include the assumptions upon which the forecasts and budgets were prepared, and shall include a proposed annual marketing plan and proposed resident care and services plan and such other information as may be reasonable and appropriate to fully advise Owners of all material facts and assumptions relevant to an evaluation of the Annual Plan for each Facility. Managers shall review the Annual Plan with Owners, and subject to Owners' approval of each Annual Plan (which Owners shall endeavor to give by December 31), Manager shall implement and operate the Facilities in accordance with such approved Annual Plan for the successive Operating Year. When the Annual Plan is approved by Owners, the respective Manager is authorized to incur and pay for the Operating Expenses, Fixed Operating Expenses and Capital Improvements set forth in the Annual Plan and implement the provisions of the Annual Plan. The Annual Plan shall be updated as of June 1 of each Operating Year if requested by Owner. Each Facility shall be operated in substantial accordance with the proforma operating plan for such Facility previously prepared by Emeritus and provided to Owners and the draft Annual Plan for the first Operating Year shall be provided to Owners on or before January 30, 1999, and such draft Annual Plan shall be approved or disapproved in accordance with this Section 3.2.1. 3.2.2 Disapproval of Plan. If an Owner declines to approve a specific item or items of an Annual Plan for a Facility or the Facilities, the Manager shall make appropriate revisions to the Annual Plan and resubmit the Annual Plan to the Owner for approval. Until an Annual Plan is approved for each Operating Year, the item or items in question will be replaced by an amount equal to such budget item for the Operating Year prior thereto, except for Fixed Operating Expenses over which Manager has no control and except for Capital Improvements as to which the item or items will be replaced with $250 per Operating Year per unit for each Facility. 3.2.3 Compliance with Annual Plan. Managers agree to use best efforts to operate the Facilities as provided in the Annual Plan for that Facility. Notwithstanding the foregoing, Managers shall not expend more than the aggregate budget category for each of Operating Expenses, Fixed Operating Expenses and Capital Improvements with respect to each Facility or exceed any line item in Operating Expenses or Capital Improvements for a Facility by more than ten percent (10%) without an Owner's prior approval. In the event actual Total Revenues shall be less than projected Total Revenues as set forth in the Annual Plan, Managers shall use all reasonable efforts to effect a proportionate reduction in variable Operating Expenses. 3.2.4 Group Services. Managers and their Affiliates will furnish to the Facilities the benefits of any "Group Services" which Managers and their Affiliates - -4- may have in effect from time to time, which phrase shall mean goods and services provided jointly to other assisted living facilities owned or managed by Emeritus or its Affiliates on a group or joined basis to realize maximum economy. Group Services may include (a) bulk purchases of supplies and services, (b) centralized purchasing service, and (c) centralized marketing services. Each Owner shall have the option of whether and to the extent each respective Facility shall participate in Group Services; provided that if Owner determines that a Facility shall not participate in Group Services, then to the extent such goods and services are reasonably required for the operation of such Facility, Manager shall arrange for an alternative provider of such goods and services on the most favorable terms then practicable. The costs of all Group Services shall be allocated among the Facilities and other assisted living facilities on an equitable basis in proportion to the benefits rendered to each and the costs of any Group Services provided to the Facilities shall be included in the Annual Plan if the Facilities participate in Group Services. 3. 3 Personnel. 3.3.1 General. Consistent with the Annual Plan for each Facility, the respective Manager shall hire, discharge, promote and supervise the executive staff of the Facilities and will supervise through such executive staff the hiring, discharging, promotion and work of all other operating and service employees of the Facility. All members of the staff of a Facility shall be reasonably qualified for their positions, and the Compensation payable to such persons shall be comparable to the compensation paid to the staff of other comparable assisted living facilities in the general area, taking into account the location and size and targeted residents of each Facility. Manager shall have in its employ at all times at each Facility a sufficient number of capable employees to enable it to properly, adequately, safely and efficiently manage, operate, maintain and account for the Facilities. Manager shall fully comply with all applicable Legal Requirements with respect to such employees. Manager represents that it is and will continue to be an equal opportunity employer and must advertise as such and Manager shall not engage in any form of discrimination from the employment or hiring as independent contractors of any personnel, including, without limitation, discrimination as to race, color, creed, religion, age, gender, marital status, sexual preference, national origin or disability. 3.3.2 Managers as Employer. All executive staff members and other employees at the Facilities shall be direct employees of the Managers or their Affiliates and not of Owners, and all Compensation of such employees shall be paid by the Managers as part of Operating Expenses as approved in the Annual Plan. Without limiting the foregoing, Managers shall, for purposes of such employment relationship, be acting as an independent contractor and not as an agent of Owners. Owners shall not have any liability or responsibility for the work place - -5- conditions or employees at any Facility. Managers shall ensure that all employees required to be licensed under any Legal Requirements shall be so licensed. 3.3.3 Labor Relations. The Managers will not become involved in any negotiations with any labor unions or enter into any collective bargaining agreement or labor contract resulting therefrom without the prior approval of the Owner of any affected Facility. 3.4 Additional Responsibilities of Managers. Manager shall, as agent for the respective Facility Entity, perform the following services, or cause the same to be performed, for each Facility: (a) Enter into Residency Agreements in the general form approved by Owner for each Facility and perform the services required thereunder and use diligent efforts to enforce the provisions thereof. (b) In accordance with the applicable Annual Plan, enter into such Ordinary Contracts for goods and services or furnishing of utilities, maintenance and repair as shall be reasonably necessary for the proper operation and maintenance of each Facility. Major Contracts, unless set forth in the Annual Plan, shall require the prior approval of Owner. (c) In accordance with the applicable Annual Plan, enter into such Ordinary Leases as shall be necessary or convenient for the operation of a Facility. Major Leases, unless set forth in the applicable Annual Plan, shall require the prior approval of Owner. (d) In accordance with the applicable Annual Plan, make all repairs and improvements (including Capital Improvements) to the Facility as shall be reasonably necessary for good order, condition and repair. (e) In accordance with the applicable Annual Plan, purchase such Operating Equipment and Operating Supplies as shall be reasonably necessary for the proper operation of a Facility. (f) Maintain in the name of the applicable Facility Entity all Permits required in connection with the operation and management of the Facility. In connection with all Permits, each Facility Entity agrees to execute and deliver any and all. applications and other documents as shall be reasonably required and to otherwise reasonably cooperate with the Manager in applying for, obtaining and maintaining such Permits. Provided, however, it shall be the sole responsibility of Managers to cause each Facility and Facility Entity to obtain and maintain all required Permits and to operate the Facility in compliance with such Permits. - -6- (g) Cause to be done all such acts and things in and about a Facility as shall be necessary to comply with all Insurance and Legal Requirements. Without limiting the foregoing, Manager shall, consistent with the applicable Annual Plan, provide adequate security in and about the Facility. (h) Cause each Facility to comply with all applicable covenants and provisions of any Mortgage to the extent such covenants and provisions relate to the operation, management, compliance with Legal Requirements, and condition of the Facilities, provided that Owners shall have delivered to Manager true and correct copies of any Mortgage then in effect. Without limiting the generality of the foregoing, (A) Managers acknowledge that they have been provided with a copy of and have approved the terms and conditions of (i) the Initial Senior Loan and (ii) the Initial Junior Loan and (B) Managers agree to cause the Facilities at all times to be in compliance with the provisions of Sections 4.6, 4.7, 4.10, 4.11, 4.17, 4.18, 4.20 and Section 6 of the Loan Agreement entered into in connection with the Initial Senior Loan. Managers also agree to cause the Facilities to be in compliance at all times with the provisions of the Initial Junior Loan relating to the operation, management, compliance with Legal Requirements and condition of the Facilities. Owners shall promptly forward to Managers any notices of default or noncompliance with respect to the foregoing which they may receive under the Initial Senior Loan, Initial Junior Loan or any successor Mortgage. (i) Cause each Facility and its operations to comply with the requirements of all Contracts, including but not limited to Residency Agreements, Third Party Payors and Third Party Payor Programs, and all Leases. (j) Retain legal counsel for a Facility selected by an Owner which will represent the Owner, Manager and the Facility on all legal questions as reasonably necessary relating to Legal Requirements, and will institute any and all legal actions or proceedings as shall be reasonably necessary to collect charges or other income for the Facility, prepare or review Contracts, or to resolve claims (except those arising under this Agreement); provided, however, that without the prior approval of Owner, Manager shall not institute any proceedings involving claims in excess of $5,000 or to terminate any Major Contract or Major Lease. (k) With respect to refurbishment or renovation of any Facility or other Capital Improvements approved by Owner, Managers shall negotiate contracts for the construction or acquisition of such Capital Improvements, secure all necessary Permits, and supervise the design, acquisition, and construction to assure that such Capital Improvements are completed in a good - -7- and workmanlike manner free of any Liens and in accordance with the budget approved by Owners. (l) Promptly notify Owners of any default by Emeritus or its Affiliates under the warranties, representations, covenants and indemnities in the Purchase Agreements and promptly cure any such default at its sole cost and expense (and not as an Operating Expense). (m) Cause Emeritus to comply with all reporting, net worth, and liquidity requirements of the Initial Senior Loan and the Initial Junior Loan applicable to Emeritus. (n) Cause to be done all such acts and things to maintain the Facility in good condition for the Primary Intended Use. (o) Maintain and repair in good condition all buses or vans used in connection with the operation of the Facilities, title to which shall remain in Managers or their Affiliates. (p) Prepare and, consistent with the applicable Annual Plan, implement a life safety plan for the Facility complying with all Legal Requirements to be used in the event of fire or other casualty at the Facility. 3.5 Unauthorized Acts. Notwithstanding anything to the contrary herein, Managers shall have no authority to: 3.5.1 No Borrowing. Borrow on behalf of or loan any funds of a Facility Entity; 3.5.2 No Liens or Transfer. Create or permit any Lien on all or any portion of a Facility (except for a Mortgage) or sell, convey or otherwise transfer all or any portion of a Facility without Owner's approval which may be withheld in its sole discretion except for replacement of Furnishings and Equipment and Operating Equipment in the ordinary course of business. 3.5.3 No Change of Use. Do or permit any act or omission which would impair the use of any Facility for the Primary Intended Use; 3.5.4 No Violation. Do or permit any act or omission which would violate Legal Requirements or the terms of any Permit with respect to any Facility or which would cause any such Permit to lapse or expire; - -8- 3.5.5 Violation of Agreement. Do or permit any act or omission or incur any liability which exceeds Manager's authority under this Agreement; 3.6 Licensing. If all Permits required by Governmental Authorities have not been duly and validly transferred or reissued in accordance with all Legal Requirements in the name of the applicable Facility Entity at closing under the Purchase Agreements, then Managers at their sole cost and expense shall cause all such Permits to be transferred or reissued in accordance with all Legal Requirements in the name of the applicable Facility Entity within ninety (90) days after the date of this Agreement. Until such time, ESC I, L.P. and Emeritus Properties I, Inc., as holders of the Permits, shall act as co-managers hereunder in order to ensure that each Facility has the benefit of such Permits as they may hold until transfer or reissuance of the Permits. At such time, ESC I, L.P. and Emeritus Properties I, Inc. shall cease to be Managers hereunder. 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF MANAGERS Managers hereby represent, warrant and covenant as follows: 4.1 Existence, Power, Qualification. Each of the Managers is a limited liability company or limited partnership respectively duly organized, validly existing and in good standing under the laws of the State of Washington and qualified to do business in each state in which it is managing a Facility. Each of the Managers has all requisite limited liability company or limited partnership power and authority respectively to manage each Facility pursuant to the terms of this Agreement. 4.2 Valid and Binding. Each of the Managers is duly authorized to make and enter into this Agreement and to carry out the duties contemplated herein. This Agreement has been duly executed and delivered by each of the Managers and is the legal, valid and binding obligation of each of the Managers enforceable in accordance with its terms. 4.3 Single Purpose. Managers have not engaged in and shall not during the Term engage in any business other than management and operation of the Facilities pursuant to this Agreement. 4.4 Ownership of Managers. Managers are and shall remain during the Term of this Agreement wholly owned by Emeritus and no other Person shall have any direct or indirect interest or management rights therein. - -9- 5. INSURANCE 5.1 General Insurance Requirements. During the Term of this Agreement and thereafter until Managers no longer manage one or more Facilities, Managers shall cause each Facility and the business operations conducted at the Facility insured as set forth below (the cost of which shall be an Operating Expense): 5.1.1 Types and Amounts of Insurance. The insurance on all of the Facilities shall include the following unless otherwise approved by Owners: (a) property loss and physical damage insurance on an all-risk basis (with only such exceptions as Owner may approve) covering each Facility (exclusive of Land) for its full replacement cost (without deduction for depreciation) and a deductible for each Facility not in excess of TWENTY FIVE THOUSAND DOLLARS ($25,000). Nonconforming uses shall be insured for replacement cost of existing improvements without regard to the ability to rebuild the improvements. Manager as an Operating Expense will keep in force an all risk property insurance policy covering Manager's furniture, furnishings and equipment situated at the Facilities, including but not limited to the van or bus for each Facility. (b) flood insurance (if the Facility or any portion thereof is situated in an area which is considered a flood risk area by the U.S. Department of Housing and Urban Development or any future Governmental Authority charged with flood risk analysis which may include Lakeridge Place, Lodge at Mainland, and Springtree) in limits reasonably acceptable to the Owner and subject to the availability of such flood insurance; (c) boiler and machinery insurance (including related electrical apparatus and components) under a standard comprehensive form, providing coverage against loss or damage caused by explosion of steam boilers, pressure vessels or similar vessels, now or hereafter installed at any Facility, in limits approved by Owners; (d) business interruption insurance in an amount and to the extent reasonably specified by Owners, but in no event in an amount less than Fixed Operating Expenses plus projected Operating Profit for a period of twelve (12) months, and include either an agreed amount endorsement or a waiver of any co-insurance provisions so as to prevent any insured from being a co-insurer; (e) commercial general liability insurance on an occurrence basis insuring the applicable Owner and Managers against claims for personal injury or death or property damage occurring at each Facility, including coverages with amounts not less than FIVE MILLION DOLLARS ($5,000,000) per occurrence with - -10- respect to bodily injury and death and THREE MILLION DOLLARS ($3,000,000) for property damage; (f) Employees' fidelity insurance in an amount not less than $1,000,000 protecting owner against any misappropriation of funds with respect to any Facility by Manager's employees; (g) umbrella/excess general liability insurance on an occurrence basis in an amount not less than $5,000,000; (h) professional liability insurance in an amount not less than TEN MILLION DOLLARS ($10,000,000) for each medical incident; (i) physical damage insurance on an all-risk basis (with only such exceptions as Owners in their reasonable discretion shall approve) covering tangible Personal Property for the full replacement cost thereof (without deduction for depreciation) and with a deductible not in excess of $5,000 for each Facility; (j) "Workers Compensation" and Employees Liability Insurance providing protection against all claims arising out of injuries to all employees of Managers (employed at the Facility or any portion thereof) in amounts approved by Owners; and (k) During the period of any construction at any Facility, the so-called "builder's all-risk completed value" insurance for any improvements under construction; (l) Business auto liability insurance including hired and nonowned automobile coverage in an amount not less than $1,000,000 combined single limit; and (m) such other insurance or modifications to the above insurance requirements as Owners from time to time approve and as may from time to time be required by applicable Legal Requirements and/or by any Mortgagee. Managers shall be responsible to ensure that each contractor and subcontractor working at a Facility provides evidence of general liability insurance including coverages with amounts not less than $1,000,000 per occurrence and workers' compensation insurance in the amount required by law, and which liability insurance shall cover the applicable Owner and Mortgagee as an additional insured. 5.1.2 Insurance Company Requirements. All such insurance required by this Agreement shall be issued and underwritten by insurance companies licensed to do insurance business by, and in good standing under the laws of, the - -11- state in which each Facility is located and which companies have and maintain a rating of A:X or better by A.M. Best Co. or such higher rating as may be required by any Mortgagee. 5.1.3 Policy Requirements. Every policy of insurance from time to time required under this Agreement (other than worker's compensation) shall name the respective Facility Entity and Owners as owner or loss payee and additional named insured as appropriate with respect to liability insurance. Each such policy, where applicable or appropriate, shall: (a) include mortgagee, loss payable and additional named insured endorsements reasonably acceptable to Mortgagee; (b) provide that the coverages may not be cancelled, reduced or otherwise modified except upon not less than thirty (30) days' prior written notice to Owner and to any Mortgagee; (c) be primary and noncontributing with respect to any other insurance carried by Owners and Managers, not be invalidated by any negligent act or omission of Owner or Manager or any foreclosure proceeding relating to a Facility and otherwise be in such form as shall be acceptable to Owners. 5.1.4 Notices. Certificates and Polices. Manager shall promptly provide to Owner copies of any and all notices (including notice of non-renewal), claims and demands which Manager receives from insurers with respect to a Facility. At least ten ( 10) days prior to the expiration of any insurance policy required hereunder, Manager shall deliver to Owner certificates and evidence of insurance relating to all renewals and replacements thereof, together with evidence, satisfactory to Owner, of payment of the premiums thereon. Manager shall deliver to Owner original counterparts or copies certified by the insurance company to be true and complete copies, of all insurance policies required hereunder not later than ten (10) days after receipt thereof by Manager. 5.1.5 Right to Place Insurance. If Manager shall fail to obtain any insurance policy required hereunder or shall fail to deliver the certificate and evidence of insurance relating to any such policy to Owner, or if any insurance policy required hereunder (or any part thereof) shall expire or be cancelled or become void or voidable by reason of any breach of any condition thereof, or if Owner reasonably determines that such insurance coverage is unsatisfactory by reason of the failure or impairment of the capital of any insurance company which wrote any such policy, upon demand by Owner, Manager shall promptly but in any event in not more than ten (10) days thereafter obtain new or additional insurance coverage on the Facility, as provided herein. In the event Manager fails to perform - -12- its obligations under this Section, Owner may obtain such insurance and pay the premium or premiums therefor and be reimbursed therefor as an Operating Expense, plus, at Manager's sole expense interest from the date advanced at the Overdue Rate. 5.1.6 Payment of Proceeds. All insurance policies required hereunder (except for general public liability, professional liability and workers' compensation and employers liability insurance) shall provide that in the event of loss, injury or damage, subject to the rights of any Mortgagee, all proceeds shall be paid solely to Owner. Only Owner is authorized to adjust and compromise any such loss and to collect and receive such proceeds unless Owners authorize Manager in writing to act as Owners' authorized agent. 5.1.7 Blanket Policies. Notwithstanding anything to the contrary contained herein, Managers' obligations to secure and maintain the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Managers and its Affiliates; provided, however, that any such blanket policy shall include an agreed amount endorsement with respect to each Facility and such other provisions so that the coverage afforded to Owner shall not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Agreement by reason of the use of such blanket policy of insurance. 5.2 Waiver of Liability. Notwithstanding anything to the contrary herein, neither Managers nor Owners shall assert against the other, and do hereby waive with respect to each other, any claims for any losses, damages, liability or expenses (including attorneys' fees) incurred or sustained by either of them on account of injury to persons or damage to property arising out of the ownership, operation and maintenance of the Facilities to the extent that the same are covered by the insurance carried under this Section 5. Each party shall notify their respective insurance carriers of such mutual waivers and shall cause their respective insurance companies to waive in writing, by endorsement or otherwise, subrogation against the other on account thereof and to acknowledge that such waivers do not cause any invalidation of coverage provided by such insurance companies. 6. INDEMNITY 6.1 Indemnification by Manager. Except with respect to the gross negligence or willful misconduct of the respective Owner or any of the other Indemnified Parties, as to which no indemnity is provided, each Manager and Emeritus, jointly and severally, hereby agrees to indemnify, defend and hold - -13- harmless with counsel reasonably acceptable to Owner, the respective Owner and each of the other Indemnified Parties from and against all damages, losses, liabilities, obligations, penalties, costs and expenses (including, without limitation, reasonable attorneys' fees, court costs and other expenses of litigation) suffered by, or claimed or asserted against, the respective Owner or any of the other Indemnified Parties, directly or indirectly, by any Person based on, arising out of or resulting from (a) the management of the Facility or any business conducted therein; (b) any act, fault, omission to act or misconduct by (i) any Manager, (ii) any Affiliate of a Manager, or (iii) any employee, agent, licensee, business invitee, guest, customer, contractor or submanager of any of the foregoing parties, relating to, directly or indirectly, the respective Facility; (c) any accident, claim of malpractice, injury or damage whatsoever caused to any Person; (d) any default or Event of Default under this Agreement by Manager or any liability, damage, loss, obligation, penalty, cost, and other expense incurred by Manager which exceeds Manager's authority under this Agreement; (e) following closing pursuant to the Purchase Option set forth in Section 13 or the Right of First Refusal pursuant to Section 14 any liability, damage, loss, obligation, penalty, cost, and other expense whatsoever, whether arising before or after closing thereunder from the Contracts, Leases, Legal Requirements, the Permits, or the operation of the Facility or any business conducted therein; and (f) any liability under Section 6.10 of the Loan Agreement executed in connection with the Initial Senior Loan and comparable provisions of the Initial Junior Loan except to the extent caused by the actions of Owners. All costs and expenses of Manager pursuant to this indemnity shall be at the sole expense of Manager except the cost or expense shall be an Operating Expense rather than the sole expense of Manager only under the following circumstances and only under subsections (a) and (c) above as long as Manager was not in violation or breach of this Agreement, not negligent, and such claim arose in the ordinary course of business. In all other circumstances, all costs and expenses under this Section shall be the sole cost and expense of Managers and shall not be an Operating Expense. The indemnity provided for in this Section 6.1 shall survive the expiration or sooner termination of this Agreement. 6.2 Indemnified Parties. As used in Section 6.1, the term "Indemnified Parties" shall mean Owners or any of them, the Facility Entities or any of them, any Mortgagee and their respective successors, assigns, employees, servants, agents, attorneys, officers, directors, shareholders, members, managers, partners and owners. 6.3 Indemnification by Owners. Owners, jointly and severally, agree to indemnify, defend, and hold harmless with counsel reasonably acceptable to Managers, the Managers and Emeritus from and against all damages, losses, liabilities, obligations, penalties, costs and expenses (including without limitation, reasonable attorneys' fees, court costs and other expenses of litigation) suffered - -14- by, or claimed or asserted against, the Managers or Emeritus, directly or indirectly, by any Person based on, arising out of or resulting from the gross negligence or willful misconduct of Owners under this Agreement. 7. MANAGEMENT FEES 7.1 Payment. Subject to the provisions of Section 7.2, the Facility Entities shall pay the Managers for services rendered by the Managers pursuant to this Agreement an amount equal to seven percent (7%) of the Total Revenues from all Facilities in the aggregate then subject to this Agreement during the Initial Term and any Extension Term of this Agreement ("Management Fee"), which amount shall be paid on a monthly basis, based upon the Total Revenues earned by the Facilities during the previous month, with the first payment to be made on the 4th day of the first full month after the Commencement Date, and continuing on the 4th day of each month thereafter until the expiration or sooner termination of this Agreement. During the Extension Term, the Management Fee shall be 7% of Total Revenues with no further accrual of any portion of the Management Fee. 7.2 Limitation on Fees. The Management Fees payable to the Managers shall be limited during the Initial Term to five percent (5%) of Total Revenues ("Base Management Fee") until such time that the Facilities in the aggregate are producing an Operating Profit for three (3) consecutive calendar months. The unpaid two percent (2%) of the Management Fee shall be accrued without interest until an Operating Profit is achieved for three (3) consecutive calendar months ("Accrued Management Fee"). From and after the date that the Facilities in the aggregate continue to produce an Operating Profit for not less than three (3) consecutive calendar months, the Managers shall be entitled to receive the full Management Fee and the Accrued Management Fee from prior periods to the extent Operating Profit is available therefor. If there is an Operating Deficit for three (3) consecutive calendar months, the Management Fee shall be limited to the Base Management Fee thereafter until Operating Profit is thereafter achieved for three (3) consecutive calendar months. Notwithstanding anything to the contrary contained herein, any obligation of Owners to pay any Accrued Management Fee shall terminate automatically at the expiration of the Initial Term if Emeritus does not timely exercise or at such time as it is not entitled to exercise the Purchase Option set forth in Section 13, and in any event any Accrued Management Fee shall be paid solely out of Operating Profit and neither the Facility Entities nor AL Investors shall have any liability to pay the Accrued Management Fee during the Initial Term or upon expiration or sooner termination of this Agreement from any other funds or by any Owner's Deficit Contribution pursuant to Section 8.3. - -15- 8. ACCOUNTS; OPERATING DEFICIT CONTRIBUTIONS; RECORDS AND REPORTS 8.1 Bank Accounts. Manager shall establish an Agency Account and a Reserve Account for each Facility (which may be aggregated for one or more Facilities as Owner may reasonably specify) at a banking institution or institutions selected by Owner after consultation with Manager, and such accounts shall be in Manager's name, as agent for the respective Owner (collectively the "Facility Accounts"). Manager, as agent of Owners, will deposit in the Agency Account all monies received from the operation of the Facilities as Total Revenue and, together with any interest earned thereon, will disburse the same from the Agency Account for the purposes set forth in the following Section 8.2. Revenues or funds received by Managers from the Facilities that do not constitute Total Revenues shall be immediately paid to Owner or placed in the Agency Account as directed by Owners. To the extent required under any Legal Requirement, deposits received pursuant to any Residency Agreement shall be maintained in a segregated Agency Account for such deposits, and all amounts in such segregated deposit Agency Account shall be used only to refund deposits in accordance with Residency Agreements and, if any such deposits are forfeited under the terms of a Residency Agreement, for deposit into the Agency Account. All funds derived from the deduction for the Reserve Fund described in Section 8.4 shall be placed in the Reserve Account and shall be transferred to the Agency Account for the purpose of disbursement as expenditures are made in accordance with the provisions of Section 8.4. Manager shall not commingle any funds in the Facility Accounts with Manager's or any Affiliate's other funds. Notwithstanding the foregoing as to each of the Facility Accounts, the Owner shall be designated as an additional signatory on each of the Facility Accounts entitled to withdraw all or any of the funds in said accounts in the event that Manager has filed a voluntary petition or is the subject of an involuntary petition in bankruptcy, insolvency or reorganization under the bankruptcy law or in any event if this Agreement has expired or sooner terminated. In addition, if Emeritus does not timely exercise or no longer has the right to exercise the Purchase Option, then Owner shall have the right to implement a cash management system whereby amounts in the Agency Accounts are automatically swept into accounts of the Owners on a monthly or other regular basis specified by Owners. Managers shall reasonably cooperate with Owners in implementing such cash management system. It is expressly agreed and understood that all funds standing in the Facility Accounts described herein are the sole property of the respective Owner, notwithstanding that Manager shall have the right to withdraw funds therefrom for the purposes set forth in this Agreement. 8.2 Expenditures. In accordance with the Annual Plan, except as otherwise approved by Owners, Managers as agent of the Facility Entities are hereby authorized to pay from the Agency Account for each Facility in the - -16- following order of priority such amounts and at such times as are required to pay the following expenditures: (a) The Operating Expenses; (b) The Fixed Operating Expenses (exclusive of any Base, Accrued or other Management Fee and Capital Improvements) except for such items as Owner has elected to pay directly; (c) The cost of Capital Improvements approved by Owner; (d) The Base Management Fee or if the conditions set forth in Section 7.2 have been satisfied the full Management Fee for the current period; (e) The Accrued Management Fee from prior periods if the conditions set forth in Section 7.2 have been satisfied; (f) Any Cash Available for Distribution to Owner, which shall be paid over to Owners as directed by Owners within twenty (20I days after the end of each calendar month during the Term. Funds in the Agency Account shall not be utilized for any other purpose. 8.3 Deficit Contributions. In the event that Total Revenue from the Facilities is insufficient, or is anticipated to be insufficient, to pay the Operating Expenses and Fixed Operating Expenses of the Facilities during any calendar month during the Initial Term, upon ten (10) days written notice from the Manager, Owners shall deposit or cause to be deposited funds in the Agency Account in advance on a monthly basis in an amount equal to the Operating Deficit for the upcoming calendar month up to the aggregate cumulative amount of 54,500,000 ("Owner's Deficit Contribution"). Promptly after the end of such calendar month the parties shall reconcile the payment of Owner's Deficit Contribution based upon the actual Operating Deficit for such month. All Operating Deficits during the Initial Term remaining after Owner has funded the full amount of the Owner's Deficit Contribution, i.e., $4,500,000, shall be funded absolutely and unconditionally by Emeritus into the Agency Account or otherwise as directed by Owners as and when necessary to pay, but in any event no later than ten (10) days after written notice from Owners, all Operating Deficits during any calendar month during the Initial Term ( which commences on the date hereof and expires December 31, 2001) as more particularly set forth herein and in the Emeritus Guaranty ("Emeritus Deficit Contribution"). Owners shall have no obligations whatsoever to reimburse, bear the burden of or otherwise pay Emeritus for any Emeritus Deficit Contribution. AL Investors shall provide reasonable evidence of the availability of Owner's Deficit - -17- Contribution. The obligation of Emeritus to make Emeritus Deficit Contributions pursuant to this Section 8.3 shall survive any termination of this Agreement prior to the expiration of the Initial Term; provided, however, that such obligations shall not survive any termination of this Agreement arising out of an Event of Default by Owner, and shall not survive any partial termination of this Agreement with respect to any Facility purchased by Daniel R. Baty pursuant to the Put and Purchase Agreement following closing thereunder. 8.4 Reserve Account. In the event the approved Annual Plan for any Facility provides for expenditures of less than $250 per unit in such Facility for the applicable Operating Year for replacements of Furnishings and Equipment or Capital Improvements, there shall be deducted from Total Revenue as part of Fixed Operating Expenses the difference between such expenditures and $250 per unit in such Facility for such Operating Year /or such lesser amount as Owners may approve) funded quarterly and the cash funds so created shall be deposited in the Reserve Account. Funds in the Reserve Account shall be utilized for the purpose of making replacements, substitutions, and additions to Furnishings and Equipment originally included in the Facility or Capital Improvements to the extent approved by Owners in the Annual Plan or as directed by Owners to maintain each Facility in good order and operating condition. Funds in the Reserve Account shall be invested in an interest bearing account or securities as Owners may direct and interest thereon shall be added to the Reserve Account. Funds from the Reserve Account shall not be utilized for any other purpose. 8.5 Books and Records. Under Manager's supervision, each Facility shall keep (at the Facility or at Emeritus' corporate headquarters) full and adequate books of account and such other records and information as are necessary to reflect the results of the operation of the Facility and to comply with all Legal Requirements with respect to the Facility. Managers will keep the books and records for each Facility in all material respects in accordance with generally accepted accounting principles except as otherwise approved by Owners. All such records shall be and remain the exclusive property of the Owners, subject to Manager's right to make and retain copies thereof. 8.6 Reports to Owners. Manager and Emeritus will deliver, or cause to be delivered, to Owners the following forecasts, budgets, reports and statements each in form reasonably acceptable to Owners: 8.6.1 Not later than December 1 the draft Annual Plan for the succeeding Operating Year; 8.6.2 Within thirty (30) days after the end of each calendar month, an end of the month financial report showing the results of operation of each Facility - -18- and a balance sheet for the prior month and the year to date for each Facility and all Facilities in the aggregate prepared in accordance with GAAP and certified as fairly representing the financial results in all material respects by a financial officer of Emeritus; 8.6.3 Within thirty (30) days after the end of each calendar month during the Term, a computation for all Facilities in the aggregate and for each Facility individually of Total Revenue, Operating Expenses, Fixed Operating Expenses and Operating Deficit or Operating Profit for the prior month, year to date, and for Operating Profit or Operating Deficit cumulative from the Commencement Date, in each case on a cash basis and certified as fairly representing the financial results in all material respects by a financial officer of Emeritus; 8.6.4 As soon as practicable after each Operating Year, but in any event, within seventy-five (75) days of the end of each Operating Year, an income statement and balance sheet for all Facilities in the aggregate and for each Facility individually in form reasonably acceptable to Owners as of the last day of such Operating Year, which income statement and balance sheet shall be certified as fairly representing the financial results in all material respects by a financial officer of Emeritus and if requested by Owners be audited by an independent nationally recognized accounting firm approved by Owners and such other annual end of year financial reports as may be reasonably necessary for each Owner and Owners to file its or their federal and state income tax returns; 8.6.5 The financial reports to be delivered to any Mortgagee as more particularly defined in the respective Mortgage or related loan documents; 8.6.6 Within ninety (90) days after the end of each fiscal year of Emeritus, audited financial statements of Emeritus prepared by an independent "big five" accounting firm approved by Owners, prepared in accordance with GAAP, including a balance sheet and an income statement for such fiscal year, certified as true and correct in all material respects by a financial officer of Emeritus. Emeritus shall also submit to Owners, upon its filing thereof, a copy of any Form 1 OK or Form 1 OQ as filed with the United States Securities and Exchange Commission; 8.6.7 Copies of all Medicare and/or Medicaid cost reports and any amendments thereto filed with any Governmental Authority with respect to any Facility, and all responses, audit reports and other correspondence and other documents received with respect to such cost reports. 8.6.8 Within three (3) days of receipt, copies of any notice received from any Governmental Authority or Third Party Payor that any Permit, Medicare - -19- and/or Medicaid certification or similar item with respect to a Facility is being downgraded, revoked or suspended or that any such action is pending or being considered. 8.6.9 Such other reports reasonably required by Owners or any Mortgagee. 8.7 Rights to Inspection and Review. Each Owner, its accountants, attorneys, agents and any Mortgagee shall have the right to enter upon any part of any Facility at any time during normal business hours during the Term, and on not less than eight (8) hours prior notice unless an emergency exists, for the purpose of examining or inspecting the same or examining and making extracts and copies of books and records of the Facility or for any other purpose, including audits, which the Owner of any Facility, in its discretion, shall deem necessary or advisable, but same shall be done with as little disruption to the business of the Facility as practicable. Books and records of the Facility shall be kept at the Facility and a summary thereof in such location as directed by Owners. 8.8 Deficiencies and Overpayments. If any audit or financial report discloses a deficiency in the reporting of Total Revenues, or any overpayment in Operating Expenses, Fixed Operating Expenses or Management Fees, Managers shall forthwith recalculate Operating Profit, Operating Deficit or Management Fees and pay to the Owners any overpayment or otherwise, together with interest at Manager's sole expense on the amount of deficiency or overpayment, calculated at the Overdue Rate, from the date when such overpayment was made until the date Owners receive return of such overpayment. If any audit conducted for Owners pursuant to the provisions hereof discloses that the Total Revenues for any Operating Year exceed those reported by Managers by more than five percent (5%) or that the full Management Fee or any Accrued Management Fee was overpaid by more than five percent (5%), the Managers at their sole expense (and not as an Operating Expense) shall pay the reasonable cost of such audit and examination. Otherwise, the cost of audits approved by Owners shall be an Operating Expense. 8.9 Survival. The obligations and rights of the Managers and Owners referenced in Section 8.8 shall survive the expiration or earlier termination of this Agreement for a period of three (3) years. 9. TERMINATION RIGHTS AND REMEDIES 9.1 By Managers. The Managers may terminate this Agreement, except for the provisions of Section 8.3, with respect to all (but not less than all) of the Facilities by reason of any of the following ("Event of Default"): (i) failure of Owners to fund an Operating Deficit in accordance with Section 8.3 within fifteen - -20- (15) days after written notice to the Owner that payment has not been paid when due; or (ii) the Owner otherwise breaches or fails to perform a material term of this Agreement, which breach or failure is not cured within thirty (30) days after written notice of said breach is provided to Owner. Provided, however, that Manager shall not have the right to terminate this Agreement without the prior written consent of any Mortgagee. Provided, further, Manager shall have no right to terminate this Agreement nor shall Owner be in default if such right to terminate or such default is caused by a failure by Emeritus to fund Operating Deficits or a default or an Event of Default committed or suffered hereunder by Managers or Emeritus. If Managers terminate the Agreement pursuant to this Section 9.1, such termination shall not terminate the Purchase Option or Right of First Refusal under Section 13 or Section 14 below, and the Purchase Option and Right of First Refusal shall remain in full force and effect. If Managers terminate this Agreement pursuant to this Section 9.1 and the Purchase Option is thereafter exercised, the purchaser shall be entitled to offset and deduct from the Purchase Price that portion of Owner's Deficit Contribution which Owners did not fund but were required to do so in accordance with Section 8.3 and which Managers or Emeritus funded and were not reimbursed by Owners. 9.2 Owner. The Owner may terminate this Agreement with respect to any one or all of the Facilities by reason of any of the following (each an "Event of Default"): (i) Managers or Emeritus fail to fund the Emeritus Deficit Contribution under Section 8.3 within fifteen (15) days after written notice from Owner that payment has not been paid when due; (ii) Emeritus breaches or fails to perform any obligation, including but not limited to the warranties, representations and indemnities, under the Emeritus Guaranty which is not cured within the time period set forth therein; (iii) Emeritus or its Affiliates fail to perform any obligation under the Purchase Agreements which survive closing thereunder; (iv) Managers or any of them or Emeritus breaches or fails to perform a material term of this Agreement as to any or all Facilities, which breach or failure is not cured within thirty (30) days after written notice of said breach is provided to the Managers; (v) Daniel Baty fails to perform or defaults under the Put and Purchase Agreement within the time period set forth therein or fails to comply with the liquidity and reporting requirements of the Initial Senior Loan /which is not cured within any applicable cure period set forth therein); (vi) Emeritus fails to perform or defaults under the Licensing Indemnity Agreement within the time period set forth therein; or (vii) either Manager or Emeritus suffers a Bankruptcy Event. Provided, however, Owners shall have no right to terminate this Agreement nor shall Managers be in default if such right to terminate or such default is caused by a failure by Owner to fund Operating Deficits to the extent provided in Section 8.3. Any such - -21- termination pursuant to this Section 9.2 shall also constitute a termination of the Purchase Option. 9.3 Curing Defaults. Except for failure to close under the Purchase Option set forth in Section 13, or under the Right of First Refusal under Section 14, or a default under Section 9.2(v), (vi), or (vii), any default by Managers or Owner under the provisions of Section 9.1 or 9.2, except for defaults involving the payment of money which must be cured within the applicable cure period, shall not constitute an Event of Default if the nature of such default will not permit it to be cured within the cure period allotted, provided that either Managers or Owner promptly shall commence to cure such default and shall proceed to complete the same with diligence but in no event later than sixty (60) days after the written notice of default has been given. 9.4 Effect of Termination. The termination of this Agreement in whole or in part under the provisions of this Section 9 shall not affect the rights of the terminating party with respect to any damages it may have suffered as a result of any breach of this Agreement, nor shall it affect the rights of either party with respect to liability or claims accrued or arising out of events occurring prior to the date of termination. Any termination of this Agreement, whether in whole or in part, other than by reason of an Event of Default by Owner and other than as a result of a Casualty or Condemnation as to a particular Facility, shall automatically terminate the Purchase Option provided for in Section 13 and the Right of First Refusal provided by Section 14, but any termination of this Agreement by reason of an Event of Default by Owner shall not terminate the Purchase Option provided for in Section 13 and the Right of First Refusal provided by Section 14. No termination of this Agreement for any reason under any provision hereof, including without limitation, Section 9.1, whether in whole or in part, shall terminate any obligation of Emeritus to fund the Emeritus Deficit Contribution or otherwise hereunder or under the Emeritus Guaranty except only as to those Facilities terminated from this Agreement as a result of Casualty or Condemnation pursuant to Section 9.7.2. 9.5 Remedies Cumulative. The right of termination shall not be an exclusive remedy and either party shall have the right to sue for damages or seek equitable relief following an Event of Default. Neither the right of termination nor the right to sue for damages nor any other remedy available to either party hereunder shall be exclusive of any other remedy given hereunder or now or hereafter existing at law or in equity. 9.6 Transfer Upon Termination. Upon expiration or sooner termination of this Agreement in whole or in part, except for termination upon closing under the Purchase Option and the Right of First Refusal, Managers at their sole expense shall - -22- transfer or assign as directed by Owners to the respective Facility Entity all books, records, Facility Accounts, Permits, Contracts, Leases, any Personal Property owned by or in the possession of Managers, all of which shall be free and clear of all Liens (except for the Mortgage), and other matters and things utilized by Manager in the operation of the Facilities which are no longer subject to this Agreement. Any vans or buses shall be conveyed to Owners upon payment by Owners of the then book value determined in accordance with GAAP. Upon any termination of this Agreement, Manager shall assign and otherwise take all actions required to effectively transfer to the Facility Entities all Permits which are required under applicable Legal Requirements to be issued in the name of Managers. Managers shall cooperate fully in such transfer and shall not interfere with an Owner employing any and all employees of the Facility who desire to accept such Owner's offer of employment. Manager's obligations hereunder and under the Purchase Agreements and Owner's remedies for breach thereof shall survive the expiration or sooner termination of this Agreement and the transfer and assignment herein. 9.7 Termination of Agreement as to Individual Facilities. The parties acknowledge that this is a master Management Agreement with respect to all of the Facilities and this Agreement may be terminated by Owner as to a particular Facility in one or more of the following circumstances. In such event, this Agreement shall continue in full force and effect as to the remaining Facilities but the provisions of Section8.3 shall nonetheless continue as to any Facilities terminated from this Agreement except only for termination pursuant to 9.7.2 below: 9.7.1 Default. There has been an Event of Default by the Manager as to a particular Facility and Owner has terminated this Agreement as to such Facility; 9.7.2 Casualty or Condemnation. There has been an election by Owner to terminate this Agreement as to a particular Facility resulting from Casualty or Condemnation which Owner has elected not to repair as provided for in Section 11; or 9.7.3 Termination During Extension Term. If Owner has elected the option for the Extension Term, Owner may terminate this Agreement as to any Facility in its sole discretion upon not less than sixty (60) days prior notice to the Manager; 9.7.4 Termination of Put Facilities. Upon closing of the purchase of a Put Facility pursuant to the Put and Purchase Agreement, such Put Facility or Facilities shall be automatically deleted from this Agreement. - -23- 9.7.5 Termination of Failed Facilities. Upon closing of the purchase by Emeritus or its Affiliates of a Failed Facility pursuant to the Licensing Indemnity Agreement, such Failed Facility or Facilities shall be automatically deleted from this Agreement. In the event of the termination of this Agreement as to less than all of the Facilities, then in determining Operating Deficit and Operating Profit the Facilities, less only those Facilities terminated pursuant to Section 9.7.2 - 9.7.5, shall be the basis for such calculations. 10. ASSIGNMENT 10.1 Assignment by Manager. Manager shall not assign, transfer or encumber this Agreement or any right or interest herein or hereunder voluntarily or by operation of law or in any other manner without the prior written consent of Owners, which may be withheld in their sole discretion. Notwithstanding the foregoing, Managers may sublet management of Facilities entitled Meadowlands Terrace, Lakeridge Place, and Saddleridge Lodge to X.L. Management, an Affiliate of Holiday Retirement Corp; provided, however, that such sublet management arrangements shall not affect in any way Emeritus' or Managers' obligations under this Agreement or Emeritus' obligations under the Emeritus Guaranty. 10.2 Assignment by Facility Entities. Owners may assign or transfer this Agreement to any Affiliate or to any Mortgagee without the consent of Emeritus or Managers. In such event, the Owner or Owners assigning this Agreement (except as to an assignment for security purposes to any Mortgagee, but not excepting the realization by such Mortgagee of such assignment in connection with a foreclosure of the applicable Mortgage or the granting of a deed in lieu of foreclosure to such Mortgagee) shall be relieved of all liability under this Agreement accruing or arising out of facts and circumstances occurring after the date of such assignment, except for the obligation to fund the Owner's Deficit Contribution pursuant to Section 8.3 /which shall not apply to the holder of any Senior Loan). In connection with any security assignment to a Mortgagee, Managers and Emeritus shall subordinate this Agreement to the Mortgage in such form as any Mortgagee may require. 10.3 Refinancing. With the prior consent of Managers and Emeritus, which shall not unreasonably be withheld, the Facility Entities shall have the right to refinance the Mortgage initially held by the Lending Group as to one or more Facilities upon the following terms and conditions: 10.3.1 Obligations of Managers and Emeritus. If any refinancing would increase the reasonably projected amount of the Emeritus Deficit - -24- Contribution as computed under this Agreement with respect to the initial Mortgage over the remaining balance of the Initial Term, then, unless Emeritus shall approve such refinancing, Emeritus shall not be obligated to fund such increased amount of the Emeritus Deficit Contribution to the extent resulting from such refinancing. Any refinancing shall provide that upon closing of the Purchase Option or Right of First Refusal, Emeritus may assume the Mortgage resulting from such refinancing upon commercially-reasonable terms including payment of the Mortgagee's assumption expenses and an assumption fee not to exceed one-half percent (.5%) of the indebtedness secured by the Mortgage. 10.3.2 Segregation of this Agreement. In connection with a refinancing, this Agreement shall be segregated into two or more separate management agreements with the Facilities being managed pursuant to each management agreement corresponding to the Facilities subject to each Mortgage or Mortgages held by a separate Mortgagee. In such event, the terms and conditions of each separate management agreement shall be the same as this Agreement, except Total Revenues, Operating Expenses, Fixed Operating Expenses, Operating Profit and Operating Deficit shall be computed only with respect to the Facilities subject to each separate management agreement. If such segregation would increase the reasonably projected amount of the Emeritus Deficit Contribution as computed under this Agreement with respect to the initial Mortgage, than unless Emeritus shall approve such segregation, Emeritus shall not be obligated to fund such increased amount of the Emeritus Deficit Contribution to the extent resulting from such segregation. Each segregated management agreement may be assigned to the respective Mortgagee and shall be subordinate to the respective Mortgage as provided in Section 10.2 above. Upon such segregation, Emeritus shall execute a restated Emeritus Guaranty or such other confirmation of the continuing obligations under the Emeritus Guaranty. 10.3.3 Costs of Refinancing. The reasonable costs and expenses of such refinancing, including but not limited to the Mortgagee's title review and insurance, due diligence, loan fees, mortgage taxes (if any), loan document preparation, legal fees, and other customary loan closing costs, together with Owners' reasonable costs and expenses of arranging and closing such refinancing, shall be an Operating Expense unless otherwise approved or directed by Owners in their sole discretion. 10.4 Remedies. Any assignment by either party of this Agreement in violation of the provisions of this Section 10 shall be null and void. In addition to any other remedies available to the parties, the provisions of this Section 10 shall be enforceable by injunctive proceeding or by a suit for specific performance. - -25- 11. CASUALTY AND CONDEMNATION 11.1 Casualty. If a Facility shall be damaged by a Casualty such that Owner determines in its sole but good faith judgment that it is not feasible to restore the Facility, or if for any reason insurance proceeds are not available to effect such restoration, then Owner may terminate this Agreement as to that Facility upon thirty (30) days prior written notice to Manager, and neither party shall have any further obligation to the other party hereunder with respect to that Facility and this Agreement shall remain in full force and effect as to the remaining Facilities. If this Agreement shall not be terminated by Owner in the event of a Casualty to the Facility, then Owner with the cooperation of Manager, or Manager if Owner so directs, shall proceed with reasonable diligence to commence and complete the restoration of the Facility to substantially its condition and character just prior to the occurrence of such casualty to the extent permitted under Legal Requirements. The cost of restoration shall not be an Operating Expense or Fixed Operating Expense except to the extent such cost of restoration exceeds available insurance proceeds and such costs of restoration in excess of available insurance proceeds, including any deductibles under applicable insurance policies shall constitute an Operating Expense. 11.2 Condemnation. If a Facility is subject to Condemnation, or such substantial portion thereto as to make it unfeasible, in the sole but good faith judgment of Owner, to restore and continue to operate the remaining portion of the Facility following Condemnation, then upon the Date of Taking, this Agreement shall terminate as to that Facility and neither party shall have any further obligation to the other party hereunder with respect to that Facility and this Agreement shall remain in full force and effect as to the remaining Facilities. If Owner elects to restore and continue to operate the remaining portion of the Facility, then this Agreement shall not terminate as to the Facility, and Owner with the cooperation of Manager, or Manager if Owner so directs, shall proceed with reasonable diligence to repair any damage to the Facility, or to alter or modify the Facility so as to render it a complete architectural unit which can be operated as a Facility of substantially the same type and class as before. The cost of restoration shall not be an Operating Expense or Fixed Operating Expense except to the extent the cost of restoration exceeds the net amount of any Award received by any Owner. In the case of any Condemnation, whether or not this Agreement shall cease and terminate, the entire Award shall be the property of Owner, and Manager hereby assigns to Owner all its right, title and interest in and to any Award. Manager shall have the right, however, to claim and recover from the condemning authority compensation for any loss which Manager may be put for Manager's moving expenses or taking of Manager's personal property (not including any value assigned to this Agreement), provided that such damages may be claimed only if - -26- they are awarded separately in the Condemnation proceedings and not out of or as part of the Award recoverable by Owner. 12. CAPITAL IMPROVEMENTS Any program of improvements, or improvement involving an addition to a Facility or the renovation or refurbishing of the Facility, the cost of which is not or should not be charged to property operation and maintenance and which should be capitalized in accordance with generally accepted accounting principles, shall be a "Capital Improvement." Capital Improvements shall be undertaken only upon the approval of or direction by Owner in its sole discretion, which may be by separate approval or by specific inclusion in the Annual Plan. Notwithstanding anything to the contrary herein, Emeritus shall have the unconditional obligation at its sole expense (and not as an Operating Expense or Fixed Operating Expense) to complete and pay for: (a) all development, construction and furnishing of Furnishings and Equipment, Operating Equipment and Operating Supplies of Facilities entitled "Brookside Estates" and "Gardens at White Chapel", (b) all Capital Improvements made or acquired during calendar year 1998, and (c) any sales tax or other Impositions resulting from construction of any Facilities in Texas. To the extent any improvements to the Facilities are to be funded from an escrow or similar account at Closing under the Purchase Agreements ("Holdback Accounts"), such improvements shall not be deemed Capital Improvements hereunder and the cost thereof shall not be Operating Expenses or Fixed Operating Expenses. Managers shall expeditiously cause the completion of all improvements to be funded by the Holdback Accounts. 13. EMERITUS' OPTION TO PURCHASE 13.1 Conditions to Option. On the conditions precedent (which conditions Owners may waive, in their sole discretion, by notice to Emeritus at any time) that (a) at the time of exercise of the Purchase Option, there then exists no Event of Default under this Agreement by the Managers or Emeritus, and (b) Emeritus timely complies with the provisions of this Section 13, and (c) if a Put Notice has been delivered on account of Section 3.1 (d) or 3.1 (e) of the Put and Purchase Agreement, less than sixty (60) days has elapsed since delivery of such Put Notice, then Emeritus or its Affiliates shall have the option to purchase all, but not less than all, of the Meditrust Facilities then subject to this Agreement including, without limitation, any Meditrust Facilities which are the subject of a segregated Management Agreement pursuant to Section 10.3, at the price and upon the terms hereinafter set forth in this Section 13 (the "Purchase Option"/. 13.2 Exercise of Option; Deposit. The Purchase Option shall permit Emeritus to purchase the Meditrust Facilities (a) at any time during the Initial Term - -27- but not later than the last day of the Initial Term ("Purchase Option Expiration Date") provided that written notice of the exercise of the option is given by Emeritus to the Owners (the "Purchase Option Notice") at least one hundred eighty (180) days prior to the Purchase Option Expiration Date. Emeritus shall have no right to rescind the Purchase Option Notice once given. With the Purchase Option Notice, Emeritus shall deposit with the Owners the sum of 5602,540 (together with the interest earned thereon, the "Deposit") which shall constitute liquidated damages and Owners' sole remedy if Emeritus fails to consummate the purchase of the Meditrust Facilities for any reason other than Owners' default and refusal to deliver the Deeds conveying the Meditrust Facilities upon payment of the Purchase Price, but the Deposit shall be applied to the Purchase Price if the Purchase Option closes. Emeritus and the Owners acknowledge that damages that would accrue from Emeritus' failure to close the Purchase Option are difficult to determine and that the amount of liquidated damages set forth above constitutes a good faith and reasonable estimate of the damages that would otherwise have accrued. The Deposit shall be deposited in a money market or similar account with a commercial bank with all interest thereon remaining in such account and reported as income of Emeritus, and Emeritus agrees to complete a Form W-9 and such other forms as such bank may require in order to report such interest. 13.3 Conveyance. If the Purchase Option is exercised by Emeritus in accordance with the terms hereof, each Meditrust Facility shall be conveyed by a special warranty deed subject to the Permitted Exceptions, Leases, Contracts and Permits (except for the Mortgage) and all matters arising through or with the consent of Managers or Emeritus with covenants only against acts of Owners or Persons claiming by, through or under Owners during their period of ownership, a quit claim bill of sale as to all Personal Property, and a quit claim assignment of all Leases, Contracts, Permits, and funds in Facility Accounts in form satisfactory to Owners (collectively, the "Deed") running to Emeritus or to its designee. Transfer of all Permits to Emeritus or its Affiliate designee in accordance with Legal Requirements shall be the sole responsibility of Emeritus. Owners, other than an obligation to reasonably cooperate (at no material out-of-pocket cost) in such transfer, shall have no liability or responsibility for the adequacy or completeness of any transfer of the Permits. Owners shall reasonably cooperate with Emeritus and its title companies in order to provide all necessary documents, owner's affidavits (provided Owners have no liability thereunder except for their own acts during their period of ownership) and other evidence of authority to enable Emeritus to purchase title insurance covering all of the Facilities at the closing under the Purchase Option. 13.4 Calculation of Purchase Price. The price to be paid by Emeritus for the acquisition of the Meditrust Facilities pursuant to this Purchase Option shall be equal to the amount calculated as set forth on Exhibit B ("Purchase Price"). The - -28- Purchase Price shall be a net price to be received by Owners without deduction for due diligence, transfer taxes, title insurance or other closing costs, all of which shall be paid by Emeritus. Owners shall not bear any closing costs or prorations of any kind or nature, subject to any offset as provided in Section 9.1. 13.5 Payment of Purchase Price. The Purchase Price, less the Deposit, shall be paid by Emeritus at the Time of Closing in good funds. 13.6 Place and Time of Closing. If this Purchase Option is exercised, the closing shall occur and the Deed for each Meditrust Facility shall be delivered to Title Company (the "Closing") pursuant to escrow closing arrangements reasonably satisfactory to Owners and Emeritus at 12:00 o'clock noon (P.S.T.) one hundred eighty (180) days following delivery of the Purchase Option Notice but in no event later than the Purchase Option Expiration Date (such time, as the same may be extended to the next succeeding Business Day, the "Time of Closing"/. It is agreed that time is of the essence of this Purchase Option. 13.7 Condition of Facilities. The Meditrust Facilities and each of them shall be purchased by Emeritus "AS IS" and "WHERE IS" as of the Time of Closing. Without limiting the foregoing, and except as set forth in the Deed, Owners make and shall not make representations or warranties, express or implied, with respect to, and shall have no liability for: (I) the condition of the Facilities or any Improvements thereon or the suitability, habitability, merchantability or fitness of the Facilities; (ii) compliance with any Legal Requirements; (iii) the presence of any Hazardous Substances in or about the Facilities, including without limitation asbestos or urea-formaldehyde, or the presence of any Hazardous Substances on or under the Land; (iv) the accuracy or completeness of any plans and specifications, reports, or other materials provided to Emeritus; or (v) any other matter relating to the Facilities, including, without limitation, the title thereto or the condition, value or operating results or prospects thereof. Without limiting the generality of the foregoing, Owners shall have no liability to Emeritus with respect to the condition of the Facilities under common law, or under any Legal Requirements and Emeritus hereby waives any and all claims which Emeritus has or may have against Owners with respect to the condition, value or operating results or prospects of the Facilities. Emeritus assumes the responsibility and risks of all defects and conditions, including such defects and conditions, if any, that cannot be observed by inspection or examination of records. Managers and Emeritus shall indemnify, defend, and hold harmless Owners from and against all claims and liabilities arising out of or related to the Facilities as more particularly set forth in Section 6.1 and from and against any guaranties of any Mortgages, it being intended that Owners shall have no liability from and after the Time of Closing with respect to the Facilities, except as set forth in the Deed. - -29- 13.8 Use of Purchase Price to Clear Title. To enable the Facility Entities to make the conveyance as provided in this Section 13, the Facility Entities may, at the Time of Closing, use the Purchase Price or any portion thereof to clear the title of any Mortgage, provided that all instruments so procured are recorded contemporaneously with the Closing or reasonable arrangements are made for recording subsequent to the Time of Closing in accordance with customary conveyance practices. 13.9 Emeritus' Default. If Emeritus delivers the Purchase Option Notice and fails to timely consummate the purchase of the Facilities in accordance with the terms hereof for any reason other than Facility Entities' default and refusal to deliver the Deed, (a) the Purchase Option and Right of First Refusal shall be deemed terminated and Emeritus shall thereafter have no further right to purchase the Facilities pursuant to this Section 13 or Section 14 or otherwise, (b) Owners shall retain the Deposit as liquidated damages and as Owners' sole remedy in full satisfaction of any claims against Emeritus for its failure to consummate the purchase of the Facilities, but nothing herein shall relieve Emeritus from its obligations under the Emeritus Guaranty, and (c) Owners shall have the right to terminate this Agreement without further notice. 14. EMERITUS' RIGHT OF FIRST REFUSAL 14.1 Conditions of Right of First Refusal. On the conditions (which conditions Owners may waive, in their sole discretion, by notice to Emeritus at any time) that (a/ at the time of exercise of the Right of First Refusal granted herein on the First Refusal Date, there then exists no Event of Default under this Agreement by the Managers or Emeritus, and (b) Emeritus complies with the provisions of this Section 14, then Emeritus shall have a right of first refusal to purchase the Emeritus Facilities then subject to this Agreement, at the price and upon the terms hereinafter set forth in this Section 14 (the "Right of First Refusal"). 14.2 Exercise of Right, Deposit. If, at any time during the Initial Term, the Owners of the Emeritus Facilities should receive a bonafide third-party offer to purchase the Emeritus Facilities acceptable to the Owners or such Owners should exercise their rights to require Daniel R. Baty ("Baty") to purchase the Emeritus Facilities pursuant to the Put and Purchase Agreement, Emeritus shall have the right to purchase the Emeritus Facilities on the same terms and conditions as contained in such bona-fide third-party offer to purchase or on the same terms and conditions applicable to Baty with respect to the Emeritus Facilities under the Put and Purchase Agreement. Upon receipt of such bona fide third-party offer to purchase or upon the giving of the notice to Baty to purchase the Emeritus Facilities under the Put and Purchase Agreement, a copy of the applicable document shall be given within ten (10) days thereafter to Emeritus. Within thirty - -30- (30) days after the receipt of such document, Emeritus shall have the right to give notice to Owners of its exercise of the Right of First Refusal /"First Refusal Date"). 14.3 Terms of Closing. If Emeritus should timely exercise its Right of First Refusal with respect to the Emeritus Facilities, the terms (including, without limitation, any deposit) and the closing shall be governed by the provisions of such bonafide third-party offer, the provisions applicable to Baty under the Put and Purchase Agreement with respect to the Emeritus Facilities, which provisions are incorporated herein by this reference, except in any event closing shall occur on or before expiration of the Initial Term. Time is of the essence of this Right of First Refusal. 14.4 Emeritus Default. If Emeritus timely delivers notice of exercise of the Right of First Refusal and fails to timely consummate the purchase of the Facilities in accordance with the terms hereof for any reason other than the Facility Entities' default, (a) the right of First Refusal granted herein shall be deemed terminated and Emeritus shall thereafter have no further right hereunder, (b) Owners shall retain any deposit as liquidated damages and as Owners' sole remedy in satisfaction of any claims against Emeritus for its failure to consummate the purchase of the Emeritus Facilities, but nothing herein shall relieve Emeritus from its obligations under the Emeritus Guaranty, and (c) Owners shall have the right to terminate this Agreement without further notice. 15. GENERAL PROVISIONS 15.1 Purchases by Manager. In purchasing services, goods and supplies for the Facilities, Managers shall use their best efforts to obtain the benefits of volume purchasing for Owners. In addition, all direct and indirect trade discounts, rebates and refunds, and all returns from the sale of Furnishings and Equipment and Operating Equipment or other equipment shall accrue to the benefit of the Facility Entities. 15.2 Budgets and Forecasts. In preparing all budgets and forecasts to be submitted to the Facility Entities hereunder, Managers will base its estimates upon the most recent and reliable information then available, taking into account the location of each Facility and its experience in other comparable assisted living facilities. 15.3 Notices. Any notice, demand, offer, approval or other writing required or permitted pursuant to this Agreement shall be in writing, furnished in duplicate and shall be transmitted by hand delivery, facsimile, certified mail, return receipt requested, or Federal Express or another nationally recognized overnight courier service which provides evidence of delivery, postage prepaid, as follows: - -31- If to any Owner or Owners: AL Investors LLC c/o Bruce D. Thorn 2250 McGilchrist Street SE, Suite 200 Salem, Oregon 97302 Facsimile: (503)375-7644 Telephone: (503)370-7071 ext. 7143 With a copy to: Foster Pepper & Shefelman PLLC 1111 Third Avenue, Suite 3400 Seattle, Washington 98101 Attn: Gary E. Fluhrer Facsimile: (206)447-9700 Telephone: (206)447-4400 And Senior Housing Partners I, L.P. c/o Mr. Noah Levy Two Ravinia Drive, Suite 1400 Atlanta, Georgia 30346 Facsimile: (770)399-5363 Telephone: (770)395-8606 And Goodwin Procter & Hoar LLP Exchange Place 53 State Street Boston, Massachusetts 02109-2881 Attn: Minta Kay Facsimile: (617)227-8591 Telephone: (617)570-1877 If to the Managers or Emeritus: c/o Emeritus Corporation 3131 Elliot Avenue, Suite 500 Seattle, Washington 98121-1031 Attn: Mr. Kelly Price Facsimile: (206)301-4500 Telephone: (206)301-4507 - -32- With a copy to: Perkins Coie Suite 4000, 1201 Third Avenue Seattle, Washington 98101 Attn: Michael E. Stansbury Facsimile: (206)583-8500 Telephone: (206)583-8888 Any party shall have the right to change the place to which such notice shall be given or add additional parties, including any Mortgagee, to receive notices by similar notice sent in like manner to all other parties hereto. Any notice if sent by overnight courier service shall be deemed delivered on the earlier of the date of actual delivery or the next business day, if delivered by hand delivery or facsimile shall be deemed delivered on the date of the actual delivery and if sent by mail, shall be deemed delivered on the earlier of the third day following deposit with the U.S. Postal Service or actual delivery. Any notice sent by facsimile shall also be sent on the same business day by overnight courier or mail as set forth above. 15.4 No Partnership or Joint Venture. This Agreement shall not be construed to be or create a partnership or joint venture between Owners and their successors or assigns, on the one part, and Emeritus and Managers, their successors and assigns, on the other part. Managers are acting as independent contractors to the Facility Entities in performing their duties and obligations hereunder, except where this Agreement expressly provides Managers are acting as the agent of Owners. 15.5 Modification and Changes. This Agreement cannot be changed or modified except by another agreement in writing signed by the party sought to be charged therewith. 15.6 Understandings and Agreements. This Agreement constitutes all of the understandings and agreements of whatsoever nature or kind existing between the parties with respect to Managers' management of the Facilities. 15.7 Headings. Section headings contained herein are for convenience of reference only and are not intended to define, limit or describe the scope or intent of any provision of this Agreement. 15.8 Consents. Except as otherwise specified herein, each party agrees that it will not unreasonably withhold any consent or approval requested by the other party pursuant to the terms of the Agreement, and that any such consent or approval shall not be unreasonably delayed or qualified. Similarly, each party agrees that any provision of this Agreement which permits such party to make - -33- requests of the other party shall not be construed to permit the making of unreasonable requests. 15.9 Survival of Covenants. Any indemnity, agreement, covenant, term or provision of this Agreement which, in order to be effective, must survive the termination of this Agreement, shall survive any such termination. 15.10 Third Parties. None of the obligations hereunder of any party shall run to or be enforceable by any party other than the parties to this Agreement and the Facility Entities or by a party deriving rights hereunder as a result of an assignment permitted pursuant to the terms hereof. 15.11 Waivers. No failure by the Owners to enforce or insist upon the strict performances of any covenant, agreement, term or condition of this Agreement shall constitute a waiver of any such breach or any subsequent breach of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Agreement and no breach thereof shall be waived, altered or modified except by written instrument. 15.12 Applicable Law. This Agreement shall be construed and interpreted, and be governed by, the laws of the State of Washington. 15.13 Non-Discrimination. Managers shall not discriminate against any Person as provided by Legal Requirements. 15.14 Joint and Several. The obligations and liabilities of each of Managers and Emeritus hereunder shall be joint and several. The obligations of each of AL Investors and the Facility Entities hereunder shall be joint and several. 15.15 Exculpation. The liability of Owners hereunder shall be limited to their interest in the Facilities and no personal judgment or personal liability or deficiency judgment beyond their interest in the Facilities shall be asserted against Owners or any member thereof. 15.16 Status of AL Investors. AL Investors joins in this Agreement for the purpose of exercising management rights in its capacity as the sole managing member or the sole managing member of the general partner of Owners. AL Investors does not intend to be conducting business or holding title to any property in any jurisdiction. AL Investors may enforce any or all of the provisions of this Agreement directly against Managers or Emeritus in the State of Washington or at its option may enforce this Agreement on behalf of any Facility Entity in any state in which such Facility Entity owns a Facility. - -34- 15.17 Owners Right to Cure Default. If Managers or Emeritus commit or suffer any Event of Default hereunder, Owners, at their option and in their sole discretion, may cure such Event of Default and the cost thereof or funds advanced, together with interest at the Overdue Rate, shall be repaid on demand ("Default Advances"). Each of Managers and Emeritus shall be jointly and severally liable for the repayment of Default Advances. 15.18 Recording. The parties agree that simultaneously herewith they shall execute and deliver a memorandum of this Agreement and the Purchase Option or Right of First Refusal and record the memorandum in the appropriate real estate records applicable to each Facility which shall be in form satisfactory to Owners and Managers. IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement to be executed, all as of the day and year first above written. EMERITUS: EMERITUS CORPORATION, a Washington corporation By: /s/ Daniel R. Baty Its: Chairman of the Board EMERITUS PROPERTIES I, INC., a Washington corporation By: /s/ Daniel R. Baty Its: Chairman of the Board - -35- ESC I, L.P., a Washington limited partnership By: ESC G.P. I, INC., a Washington corporation By: /s/ Daniel R. Baty Its: Chairman of the Board MANAGERS: EMERITUS MANAGEMENT LLC, a Washington limited liability company By: Emeritus Corporation, a Washington corporation By: /s/ Daniel R. Baty Its: Chairman of the Board EMERITUS MANAGEMENT I LP, a Washington limited partnership By: EM I, LLC, a Washington limited liability company By: Emeritus Corporation, a Washington Corporation By: /s/ Daniel R. Baty Its: Chairman of the Board - -36- OWNER: AL INVESTORS LLC, a Delaware limited liability company, for itself and as sole managing member on behalf of each of the Facility Entities, or in cases where the Facility Entity is a limited partnership, as sole managing member on behalf of the general partner thereof By: /s/ Norman L. Brenden Its: Manager - -37- EXHIBIT A TO MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE Certain Defined Terms Affiliate: with respect to any Person (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of such Person or (iii) any officer, director, employee, general partner or trustee of such Person, or any other Person controlling, controlled by, or under common control with, such Person (excluding trustees and Persons serving in a fiduciary or similar capacity who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. Agency Account: The Agency Account to be maintained for each Facility for payment of Fixed Operating Expenses and Operating Expenses as described in Section 8.1 of the Management Agreement. Annual Plan(s): as defined in Section 4.2 of the Management Agreement. Award: all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. Base Management Fee: as defined in Section 7.1 of the Management Agreement. Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to pay debts as they become due; or applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian or makes a general assignment for the benefit of creditors, or in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed and is not discharged within sixty (60) days after such appointment; or an order for relief is entered or a petition is filed under Title 11, United States Bankruptcy Code, with respect to any of them; or any other bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, now or hereafter in effect, is commenced with respect to any of them. A-1 Business Day: any day which is not a Saturday or Sunday or a public holiday under the laws of the United States of America or the State of Washington. Capital Improvements: as defined in Section 12 of the Management Agreement. Cash Available for Distribution: on any date the amount contained in the Agency Accounts (as defined in Section 8.1 of the Management Agreement), minus an amount (to be retained in the Agency Accounts equal to any reasonably projected Operating Deficit for the succeeding 30 days, taking into account all Operating Expenses and Fixed Operating Expenses and all anticipated Total Revenues during such 30-day period. Casualty: the damage or destruction by act of God or otherwise of any portion of any Facility which Owner reasonably estimates would cost more than 550,000 to repair or restore. Change of Control: shall mean the occurrence of any one of the following events with respect to Emeritus: (a) any Person (other than Emeritus, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of Emeritus or any of its subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Act")) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of Emeritus representing a greater percentage than that then owned by Daniel R. Baty, together with all "affiliates" and "associates" of Daniel R. Baty (as defined above) of either (Ao the combined voting power of Emeritus' then outstanding securities having the right to vote in an election of Emeritus' Board of Directors ("Voting Securities") or (B) the then outstanding shares of Stock of Emeritus; or (b) Persons who, as of the date hereof, constitute Emeritus' Board of Directors (the "Incumbent Directors") cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of Emeritus subsequent to the date hereof whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors shall, for purposes of this Plan, be considered an Incumbent Director; or A-2 (c) the stockholders of Emeritus shall approve (A/ any consolidation or merger of Emeritus or any subsidiary where the shareholders of Emeritus, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing a majority of the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of Emeritus or (C) any plan or proposal for the liquidation or dissolution of Emeritus; or (d) other than by reason of death or legal disability, Daniel Baty ceases to be the chief executive officer of Emeritus. Change of Control with respect to any Manager shall mean the occurrence of any event whereby 100% of the ownership interests in such Manager are no longer owned by Emeritus. Closing: the date of closing under the Purchase Agreements. Code: the Internal Revenue Code of 1986, as amended. Commencement Date: as defined in Section2.1 of the Management Agreement. Compensation: the direct salaries and wages paid to, or accrued for the benefit of, any employee working and employed at each Facility together with all reasonably customary fringe benefits payable to, or accrued for the benefit of such employee, including employer's contribution under FICA., unemployment compensation, or other employment taxes, pension fund contributions, workmen's compensation, group life and accident and health insurance premiums, and other reasonable employee benefits customary in the industry. Condemnation: with respect to any Facility or any interest therein or right accruing thereto or use thereof (i) the exercise of the power of condemnation, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer to any Condemnor under threat of condemnation. Condemnor: any public or quasi-public authority, or private corporation or individual, having the power of condemnation. A-3 Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary Contracts and Major Contracts. CPA: The certified public accountants retained to provide necessary accounting services for the Facility or Owner, the selection of which shall be subject to approval by Owner. Date of Taking: the date the Condemnor has the right to possession of the property being condemned. Environmental Laws: means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings, and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Emeritus and the Emeritus Entities or to the Land and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. Excluded Expenses: depreciation, amortization and other non-cash expenses; items to be provided or paid for at Owner's or Managers' sole expense as provided herein; costs and expenses resulting from or required to cure any matter or defect which constitutes a breach of warranty, representation or indemnity under the Purchase Agreements, the Licensing Agreement, or the Management Agreement which cost or expense shall be the sole responsibility of the breaching party; unreasonable or excessive charges or expenses. Escrow Holder: First American Title Insurance Company. Extension Term: as defined in Section 2.2 of the Management Agreement. Facility or Facilities: Each of the assisted living facilities, including the Land, Improvements, and Personal Property associated therewith, located in the city and state as set forth below:
Facility City State Units Beds Facility LLC and LP Name La Villita Phoenix AZ 87 110 AL Investors Phoenix LLC Laurel Place San Bernardino CA 71 87 AL Investors San Bernardino LLC The Terrace Grand Terrace CA 88 97 AL Investors Grand Terrace LLC Gardens at Whitechapel Newark DE 100 110 AL Investors Newark LLC Barrington Place Lecanto FL 79 94 AL Investors Lecanto LLC
A-4
Facility City State Units Beds Facility LLC and LP Name Beneva Park Club Sarasota FL 95 104 AL Investors Sarasota LLC Central Park Village Orlando FL 174 189 AL Investors Orlando LLC College Park Club Bradenton FL 85 96 AL Investors Bradenton LLC Lodge at Pinellas Mainlands Park FL 153 160 AL Investors Pinellas Park LLC Madison Glen Clearwater FL 135 200 AL Investors Clearwater LLC Springtree Sunrise FL 179 220 AL Investors Sunrise LLC Elm Grove Hutchinson KS 121 142 AL Investors Hutchinson LLC Brookside Middleburg Estates Heights OH 99 105 AL Investors Middleburg Heights LLC Bellaire Place Greenville SC 81 88 AL Investors Greenville LLC Walking Horse Meadows Clarksville TN 50 57 AL Investors Clarksville LLC Dowlen Oaks Beaumont TX 79 87 AL Investors Beaumont LLC Eastman Estates Longview TX 70 78 AL Investors Longview LP Lakeridge Wichita Place Falls TX 79 87 AL Investors Wichita Falls LP Meadowlands Terrace Waco TX 71 76 AL Investors Waco LP Myrtlewood Estates San Angelo TX 79 88 AL Investors San Angelo LP Saddleridge Lodge Midland TX 79 88 AL Investors Midland LP Seville Estates Amarillo TX 50 55 AL Investors Amarillo LP Emeritus Estates Ogden UT 83 91 AL Investors Ogden LLC Harbour Pointe Shores Ocean Shores WA 50 55 AL Investors Ocean Shores LLC Park Place Casper WY 60 68 AL Investors Casper LLC
Facility Accounts: as defined in Section 8.1 of the Management Agreement. Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set forth opposite the name of each Facility above and their respective successors or assigns. Fixed Operating Expenses: for any period, all fixed costs and expenses of owning, and operating the Facilities in the aggregate except where the Agreement expressly provides that Fixed Operating Expenses shall be determined for each Facility to the extent such costs and expenses are not included in Operating Expenses, including but not limited to (a) Managers' Base Management Fee (excluding the amount of any Accrued Management Fee accrued during such period); (b) all amounts to be paid into the Reserve Account and the cost of Capital Improvements approved by Owners not funded from the Reserve Account; (c) the debt service on account of any Mortgage; (d) the real and personal property ad valorem taxes and assessments; and (e) all costs and expenses of all property and casualty insurance on or in respect of the Facilities provided for herein and the amount of all self-insured losses or deductibles. Fixed Operating Expenses shall not include the Excluded Expenses. Furnishings and Equipment: all furniture, furnishings, beds, equipment, food service equipment, apparatus and other personal property used in (or if the context so dictates, required in connection with), the operation of each Facility, other than Operating Equipment, Operating Supplies and fixtures attached to and forming part of the Improvements. A-5 GAAP: means generally accepted accounting principles applied on a consistent basis. Governmental Authorities: Collectively, all agencies, authorities, bodies, boards, commissions, courts, instrumentalities, legislatures, and offices of any nature whatsoever of any government, quasi-government unit or political subdivision, whether with a federal, state, county, district, municipal, city or otherwise and whether now or hereinafter in existence which exercises jurisdiction over any Facility. Group Service: as defined in Section 3.2.4 of the Management Agreement. Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials, radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on any Facility is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material, or substance now or in the future defined as a "hazardous substance," "hazardous material," hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning of any Environmental Law. Provided, however, Hazardous Substances shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of any Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Facilities' parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Environmental Laws. Impositions: collectively, all taxes (including, without limitation, all capital stock and franchise taxes of AL Investors or any Facility Entity, all ad valorem, property, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and assessments levied by condominium associations), ground rents, water and sewer rents other than normal utility charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other charges imposed by Governmental Authorities, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in A-6 respect of the Facility (including all interest and penalties thereon due to any failure in payment by Manager), which at any time prior to, during or in respect of the Term of the Management Agreement may be assessed or imposed on or in respect of or be a Lien upon (a) Facility Entities' interest in the Facility, (b/ the Facility or any rent or income therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, sales from, or activity conducted on, or in connection with, the Facility or the leasing or use of the Facility. Notwithstanding the foregoing, "Impositions" shall not include: (1)any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on any Owners or Managers, (2) any tax imposed with respect to the sale, exchange or other disposition of a Facility or the proceeds thereof, or (3) any principal or interest on any Mortgage; provided, however, the provisos set forth in clause (1) of this sentence shall not be applicable to the extent that any real or personal property tax, assessment, tax levy or charge pursuant to the first sentence of this definition and which is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) is levied, assessed or imposed expressly in lieu thereof. Improvements: the buildings, structures (surface and sub-surface) and other improvements now or hereafter located on the Land. Initial Term: as defined in Section 2.1 of the Management Agreement. Insurance Requirements: all terms of each insurance policy required to be carried in this Agreement, or agreed to be carried by Owners and Managers, and all orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to the Facilities or the operation thereof. Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage, pledge, and related security instruments against the membership interests of AL Investors in the Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and Senior Housing Partners I, L.P. dated on or about the same date hereof ("Initial Junior Loan"/. Land: the parcel or parcels of land on which each of the Facilities is situated, together with all rights of ingress and egress thereto and parking associated therewith as legally described in the Purchase Agreements. Leases: Collectively, the Ordinary Leases and Major Leases. A-7 Legal Requirements: collectively, all statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, health code, zoning, subdivision, and other land use and assisted living licensing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any Governmental Authority, Accreditation Body or Third Party Payor affecting a Facility Entity or any Facility or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in connection with a Facility, including, without limitation, any of the foregoing which may (i) require repairs, modifications or alterations in or to any Facility, (ii) in any way affect (adversely or otherwise) the use and enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from any Facility. Without limiting the foregoing, the term "Legal Requirements" includes all Environmental Laws and shall also include all Permits and Contracts issued or entered into by any Governmental Authority, any Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances. Lending Group: GMAC Commercial Mortgage for itself and as agent for other participating lenders in a debt facility referred to herein as the Initial Senior Loan secured by the Facilities in the maximum aggregate original principal balance of $ 138,000,000. Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement between Emeritus Corporation and AL Investors dated on or about the same date hereof. Lien: with respect to any real or personal property, any mortgage, mechanics' or materialmen's lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property which secures or is intended to secure the payment of money, whether or not inchoate, vested or perfected, other than the Mortgage. Major Contracts: Any contract for the purchase of goods or services or any other agreement which requires payments in excess of $50,000 per year for any Facility or which cannot be terminated without penalty or termination fee on sixty (60) days notice or in which the provider of the goods or services is Emeritus or an Affiliate (except pursuant to Group Services approved in connection with an Annual Plan). A-8 Major Lease. Any Lease which has a noncancellable term in excess of one year or a rental payment in excess of S 10,000 per year or pursuant to which Emeritus or an Affiliate is the lessee or lessor. Managed Care Plans: all health maintenance organizations, preferred provider organizations, individual practice associations, competitive medical plans, and similar arrangements. Management Fee: an amount equal to seven percent (7%) of Total Revenue for all Facilities, subject to the provisions of Section7.2 of the Management Agreement. Medicaid: the medical assistance program established by Title XIX of the Social Security Act and any statute succeeding thereto. Medicare: the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 USC - - 1395 et seq.) and any statute succeeding thereto. Mortgage: collectively, the terms and conditions of the Senior Loan and the Junior Loan. Mortgagee: the holder or beneficiary of a Mortgage and their respective successors and assigns. Operating Deficit and Operating Profit: for any period, the amount, if any, by which Total Revenues for that period is less than or exceeds, respectively, the sum of (i) Operating Expenses and (ii) Fixed Operating Expenses for that period in each case determined on a cash basis. Operating Equipment: all dishes, glassware, bed coverings, towels, silverware, uniforms and similar items used in, or held in storage for use in (or if the context so dictates, required in connection with) the operation of the Facilities. Operating Expenses: for any period, all reasonable costs and expenses of owning and operating the Facilities in the aggregate except where the Agreement expressly provides that Operating Expenses shall be determined for each Facility (which costs and expenses do not include the Fixed Operating Expenses or the Excluded Expenses) including the following: (a) The cost of all Operating Equipment and Operating Supplies placed in use, with the exception of the Operating Equipment and Operating Supplies initially supplied by the Facility Entities. The cost of maintaining and A-9 operating the vans and buses for each Facility (but not any debt service or lease payments which shall remain the sole expense of Emeritus) plus $2,000 per Operating Year for each bus or van in monthly installments as compensation for making the buses available at the Facilities. (b) The Compensation of all employees working and employed by Managers at the Facilities. The Compensation of Managers' or Emeritus' home office or executive or other personnel not regularly employed at the Facilities shall not be included in Operating Expenses or Fixed Operating Expenses, but reasonable out-of-pocket travel expenses of Managers or Owners' executive personnel while traveling to and from a Facility on business shall be reimbursable as an Operating Expense; provided, however, that if such business travel relates to business or properties other than with respect to the Facilities, then such travel expenses shall be equitably prorated between such other business or properties and the Facilities. (c) The cost of all utilities including, without limitation, electricity, water, gas, heat and other utilities, and office supplies and equipment, and goods and services purchased under all Contracts, including leasing expenses in connection with telephone and data processing equipment and such other equipment as the parties hereto may agree upon in writing. (d) The cost of repairs to and maintenance of the Facilities whether performed by Facility employees or contracted to third parties. (e) Insurance premiums for all insurance required under this Agreement and self-insured losses and deductibles with respect to such insurance coverages (but excluding premiums and self-insured losses and deductibles on property and casualty insurance which are included in Fixed Operating Costs). Premiums on policies for more than one year will be prorated over the period of insurance coverage and premiums under blanket policies will be equitably allocated among properties covered. (f) All Impositions (except for real and Personal Property ad valorem taxes and assessments which shall be a Fixed Operating Expenses). (g) Except as otherwise provided in Section 6.1 of the Management Agreement, legal fees and fees of any CPA for services directly related to the operations of the Facilities (whether incurred by Owners or Managers). (h) The costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non A-10 recurring work on operational, functional, design or construction problems and activities whether incurred by Owner or Manager; provided, however, that if such costs end expenses have not been included in the Annual Plan, the same shall be subject to approval by Owner. (i) All expenses for marketing the Facilities and all expenses of sales promotion and public relations activities as set forth in the Annual Plan (j) The cost of Group Services, as provided in Section 3.2.4 of the Management Agreement. Facilities. (k) Bad debts or uncollectible amounts from residents of the (I) refund of deposits to residents under Residency Agreements (m) Owners' reasonable costs and expenses of administering, supervising, and managing Owners' activities in connection with this Agreement and any Mortgage, including Owners' reasonable cost and expense of preparing and filing federal, state and local income tax returns and audits. (n) All other reasonable expenses and charges incurred in the operation and management of the Facilities to the extent set forth in the Annual Plan or otherwise approved by the Owners or as otherwise set forth in the Agreement. Operating Period: the period beginning with the Commencement Date and ending upon the expiration of the Initial Term. Operating Supplies: consumable items used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Facilities, including food, medical supplies, fuel, soap, cleaning materials, and other similar consumable items. Operating Year: the Operating Years shall coincide with and be identical with the calendar years, except that the first Operating Year shall be the period beginning on the Commencement Date and ending on December 31 of the following full calendar year if the Commencement Date is before December 31, 1998, or beginning on the Commencement Date and ending on the following December 31, 1999, if the Commencement Date is after December 31, 1998 and such long or short year, as applicable, shall constitute a full Operating Year as used herein. A-11 Ordinary Contracts: All agreements and contracts to purchase goods and services (excluding Major Contracts) in the ordinary course of business of refurbishing, owning, operating or managing the Facilities, or the operation of any programs or services in conjunction with the Facility and all renewals, replacement and substitutions therefor with any Governmental Authority, Accreditation Body or Third Party Payor or entered into with any third Person, excluding, however, any agreements pursuant to which money has been or will be borrowed or advanced, the Leases, any agreement creating or permitting any Lien or other encumbrance on title (except for the Permitted Exceptions), and any Major Contract. Ordinary Leases: Collectively, all subleases, licenses, use agreements, equipment leases, concession agreements, tenancy at will agreements and other occupancy agreements /but excluding any Residency Agreement, Facility Lease or Major Lease), whether oral or in writing, entered into by Managers affecting a Facility. Overdue Rate: on any date, a rate of interest per annum equal to the greater of: (i) a variable rate of interest per annum equal to one hundred twenty percent (120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided, however, in no event shall the Overdue Rate be greater than the maximum rate then permitted under Legal Requirements. Permits: collectively, all permits, licenses, approvals, qualifications, rights, variances, permissive uses, accreditation, certificates, certifications, consents, agreements, contracts, contract rights, franchises, interim licenses, permits and other authorizations of every nature whatsoever required by, or issued under, applicable Legal Requirements relating or affecting a Facility or the construction, development, maintenance, management, use or operation thereof, or the operation of any programs or services in conjunction with the Facility and all renewals, replacements and substitutions therefor, now or hereafter required or issued by any Governmental Authority, Accreditation Body or Third Party Payor to Owners or Managers. Permitted Exceptions: (i) all encumbrances to title present at closing pursuant to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii) easements, restrictions on use, zoning laws and ordinances, rights of way and other encumbrances and minor irregularities in title, whether now existing or hereafter arising, which are approved by Owner and do not individually or in the aggregate materially impair the use of any Facility. Person: any individual, corporation, general partnership, limited partnership, joint venture, stock company or association, company, bank, trust, trust company, land trust, business trust, unincorporated organization, unincorporated association, Governmental Authority or other entity of any kind or nature. A-12 Personal Property: all machinery, equipment, furniture, furnishings, movable walls or partitions, computers or trade fixtures, goods, inventory, supplies, the name of the Facility, and other personal or intangible property used in the operation of the Facility, including, but not limited to, all Operating Equipment, Furnishings and Equipment and Operating Supplies; provided, however, that the Personal Property shall not include vans or buses, but title to all vans and buses shall remain in Emeritus or its Affiliates and be transferred to Owners as provided in Section 9.6 of the Management Agreement. Primary Intended Use: the use of the Facility as an assisted living facility and such ancillary uses as are permitted by applicable Legal Requirements and may be necessary in connection therewith or incidental thereto. Prime Rate: the variable rate of interest per annum from time to time set forth in the Wallstreet Journal as the prime rate of interest and in the event that the Wallstreet Journal no longer publishes a prime rate of interest, then the Prime Rate shall be deemed to be the variable rate of interest per annum which is the prime rate of interest or base rate of interest from time to time announced by any major bank or other financial institution reasonably selected by AL Investors. Provider Agreements: all participation, provider and reimbursement agreements or arrangements, if any, in effect for the benefit of Owners or Managers in connection with the operation of the Facility relating to any right of payment or other claim arising out of or in connection with participation in any Third Party Payor Program. Put and Purchase Agreement: that certain Put and Purchase Agreement between Daniel Baty and AL Investors dated on or about the same date hereof. Residency Agreement: all contracts, agreements and consents executed by or on behalf of any resident or other Person seeking services at the Facility, including, without limitation, assignments of benefits and guarantees. Senior Loan: any indebtedness incurred by Owners which is secured by any mortgage, deed of trust and related security instruments against a Facility. Initially, the Senior Debt is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and GMAC Commercial Mortgage Corporation dated on or about the same date hereof ("Initial Senior Loan"). Third Party Payor Programs: collectively, all third party payor programs in which the Emeritus Entities presently or in the future may participate, including A-13 without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance plans and employee assistance programs. Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue Shield, private insurers and any other Person which presently or in the future maintains Third Party Payor Programs. Title Company: First American Title Insurance Company. Total Revenues: collectively, but without duplication all revenues generated by reason of the operation of the Facilities in the aggregate, except where the Agreement expressly provides that Total Revenues shall be determined for each Facility, directly or indirectly received by any Facility Entity or Managers, including, without limitation, all resident revenues received or receivable for the use of, or otherwise by reason of, all rooms, units and other facilities provided, deposits received from residents under Residency Agreements, meals served, services performed, space or facilities leased pursuant to the Leases or goods sold on or from the Facility, all amounts from Third Party Payors, and all revenues from all ancillary services provided at or relating to any Facility; provided, however, that Total Revenues shall not include: (a) federal, state or local sales, use, gross receipts and excise taxes and any tax based upon or measured by said Total Revenues which is added to or made a part of the amount billed to the resident or other recipient of such services or goods, whether included in the billing or stated separately, which is paid to the Governmental Authority; (b) proceeds from sale of capital assets, including the sale of the Facility and proceeds therefrom other than sale of Furnishings and Equipment in the ordinary course of business,; (c) proceeds of any insurance other than business interruption insurance; (d) proceeds of any financing or capital contributions to Owners; (e) interest or earnings on the Reserve Account; (f) any Award resulting from Condemnation; (g) any other income or proceeds from any source other than in the ordinary course of business of the Facility. A-14 Except as otherwise specifically indicated, all references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "herein," "hereof", "hereunder", "hereinafter", and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof unless the context otherwise requires. A-15 EXHIBIT B TO MANAGEMENT AGREEMENT WITH OPTION TO PURCHASE Determination of Purchase Price The Purchase Price with respect to all of the Meditrust Facilities means: (a/ The amount required to repay the Senior Loan secured by all Facilities (including both the Meditrust Facilities and the Emeritus Facilities) in full, including prepayment penalties or other costs of repayment; plus (b) The amount required to repay in full the Junior Loan evidenced by that certain Series A Promissory Note dated of even date herewith, in the original principal amount of $6,000,000, including repayment of principal, Base Interest, and Contingent Interest, as such terms are defined therein, plus (c) The amount required to repay in full the Junior Loan evidenced by that certain Series B Promissory Note dated of even date herewith, in the original principal amount of $18,994,873, including repayment of principal, Base Interest, and Contingent Interest, as such terms are defined therein, plus (d) The amount required to repay in full the initial investment of $5,126,984 made by the members of AL Investors, plus an eighteen percent per annum rate of return, compounded annually (computed taking into account any distributions made by AL Investors to its members from time to time), plus an additional amount equal to $ 102,540, plus (e) The reasonable costs which AL Investors and its Subsidiaries will incur to dissolve and fully liquidate, and less (f) The Fair Market Value as defined in Exhibit B of the Put and Purchase Agreement. The foregoing Option Price is intended to equal the purchase price which would be required to be paid for the Meditrust Facilities in connection with a dissolution and liquidation of AL Investors and its Subsidiaries (assuming a simultaneous sale of the Emeritus Facilities for their Fair Market Value as defined in Exhibit B of the Put and Purchase Agreement/, to provide a net liquidating payment to the members of AL Investors, after satisfaction in full of the Senior Loan and the Junior Loan, and payment of all reasonable costs of such assumed dissolutions, Page B-1 equal to members' investment in AL Investors plus an 18% per annum return, compounded annually (computed taking into account periodic distributions), plus $102,540. The parties hereto acknowledge such intention and agree that the foregoing shall be construed accordingly. Page B-2 EX-10.66-4 13 EX-10.66.4 Exhibit 10.66.4 GUARANTY OF MANAGEMENT AGREEMENT AND SHORTFALL FUNDING AGREEMENT (Emeritrust 25) This Guaranty of Management Agreement and Shortfall Funding Agreement ("Agreement") dated as of the day of December, 1998, is entered into by Emeritus Corporation, a Washington corporation ("Emeritus"), in favor of AL Investors LLC, a Delaware limited liability company ("AL Investors"), for itself and as sole managing member on behalf of each of the Facility Entities as set forth in Exhibit A (collectively "Facility Entities" and each a "Facility Entity"). AL Investors and the respective Facility Entity which owns a Facility are sometimes collectively referred to herein as "Owner" or with respect to all Facilities "Owners". All capitalized terms not otherwise defined herein shall have the meaning set forth in Exhibit A. This Agreement is made with reference to the following facts: A. AL Investors has entered into (a) a Purchase and Sale Agreement dated of even date herewith with Meditrust Company LLC, a Delaware limited liability company ("Meditrust") relating to the purchase of twenty-two (22) of the Facilities currently leased by Emeritus or an Affiliate of Emeritus from Meditrust as more particularly described therein, (b) a Purchase and Sale Agreement dated of even date herewith with Emeritus and its Affiliates, Emeritus Properties VI Inc. and ESC I, L.P. relating to the purchase of three /3) assisted living facilities as more particularly described therein, and (c) a Supplemental Purchase Agreement dated of even date herewith with Emeritus, Emeritus Properties I, Inc., Emeritus Properties VI, Inc. and ESC I, L.P. in connection with the purchase of the Facilities (collectively the "Purchase Agreements"). Closing under the Purchase Agreements will occur simultaneously and the resulting pool of twenty-five (25) Facilities will each be owned by the respective Facility Entity and managed by Emeritus Management LLC and Emeritus Management I --P and their Affiliates (the "Managers") pursuant to a Management Agreement with Option to Purchase between Managers and Owners dated the same date of this Agreement ("Management Agreement"). Existing leases of certain of the Facilities by Emeritus or an Affiliate from Meditrust and the existing management agreements for each of the Facilities have been terminated. B. Under the terms and conditions of the Management Agreement, Managers have agreed to manage all of the Facilities and perform other obligations as set forth therein. In addition, Emeritus has agreed to fund certain Operating Deficits of the Facilities pursuant to the Management Agreement. C. Concurrently with the execution of the Management Agreement, Emeritus agreed to enter into this Agreement in favor of Owners guaranteeing the Managers' obligations under the Management Agreement and agreeing to fund any Operating Deficit in excess of the Owner's Deficit Contribution as more particularly - -1- defined herein and in the Management Agreement. Owners would not have entered into the Purchase Agreements or the Management Agreement without execution and delivery of this Agreement. In consideration of the Owners entering into the Purchase Agreement and the Management Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Emeritus agrees as follows: 1. Obligations. 1.1 Guaranteed Obligations. Emeritus hereby absolutely, unconditionally and irrevocably guarantees to each of Owners prompt payment and performance to Owners when due, whether by acceleration or otherwise, of all indebtedness, liabilities, and obligations of Managers to Owners of any kind or nature whatsoever under or arising from-the Management Agreement, or any modification, supplementation or replacement thereof, or from other dealings by which any one or. more of Owners may become a creditor of Managers including but not limited to all of the foregoing which arise or would accrue but for the filing of any bankruptcy or other insolvency proceedings by or against any Manager (the "Guaranteed Obligations"). 1.2 Shortfall Funding Obligations. The Management Agreement provides that in the event that Total Revenue from the Facilities is insufficient to pay the Operating Expenses and Fixed Operating Expenses of the Facilities during any calendar month during the Initial Term (which commences on the date hereof and expires December 31, 2001), upon ten (10) days' written notice from the Manager, Owners shall deposit or cause to be deposited funds in the Agency Account in advance on a monthly basis in an amount equal to the Operating Deficit for the upcoming calendar month up to the aggregate cumulative amount of $4,500,000 ("Owner's Deficit Contribution"). The Management Agreement further provides that all Operating Deficits in excess of Owner's Deficit Contribution shall be funded absolutely and unconditionally by Emeritus into the Agency Account or otherwise as directed by Owners as and when necessary to pay, but in any event no later than ten (10) days after written notice from Owners, all Operating Deficits which accrue or are incurred during the Initial Term as more particularly set forth herein and in the Management Agreement ("Emeritus Deficit Contribution"). In addition to the Guaranty of the Guaranteed Obligations set forth above, the purpose of this Agreement is to create the obligation of Emeritus, separate and independent from the obligation set forth in the Management Agreement, to fund the Emeritus Deficit Contribution. Emeritus hereby absolutely, unconditionally and irrevocably agrees to pay the Emeritus Deficit Contribution as and when the Emeritus Deficit Contribution is required to be funded under the Management Agreement, or if the Management Agreement has been terminated when the Emeritus Deficit Contribution would have been required to be funded as if the Management Agreement remained in full force and effect. (The obligation of Emeritus to pay the Emeritus Deficit Contribution and - -2- the Guaranteed Obligations are sometimes referred to herein collectively as the "Obligations."). 2. Consent to Modification of Obligations. Without affecting, diminishing or otherwise impairing the liability of Emeritus hereunder and without notice to or consent of Emeritus, Owners may from time to time grant renewals, extensions, indulgences, releases and discharges to Managers or any other Person liable for any of the Obligations, and may take security for payment of the Obligations, and may release any or all security or refrain from perfecting any interest in any security granted by Managers or any guarantor or other person or entity liable for any of the Obligations. Owners may amend or modify the Obligations or any document or instrument executed to evidence the Obligations and otherwise may deal with the Managers or any other Person liable for any of the Obligations, without notice to or consent of Emeritus, and without affecting, diminishing, or otherwise impairing the liability of Emeritus under this Agreement. 3. Consent to Waivers, Etc. by Owners. Owners may from time to time consent to any action or non-action of Managers under the Management Agreement or any other Person liable for any of the Obligations, which, in the absence of such consent, violates or may violate the provisions of the Management Agreement or any document or instrument otherwise executed in connection with the Obligations, and such consent may be granted by Owners, without notice to or consent of Emeritus and without in any manner affecting, diminishing, or impairing the liability of Emeritus under this Agreement. No waiver, modification, extension, forbearance, or delay on the part of the Owners with respect to the Obligations or with respect to any document, instrument or agreement evidencing the Obligations, securing repayment of the Obligations or otherwise executed in connection with the Obligations, and no act or thing which might, but for this provision of this Agreement, be deemed a legal or equitable discharge of a surety, shall operate to release the obligations of Emeritus under this Agreement, and no delay on the part of the Owners in exercising any of their options, powers, or rights under this Agreement, or any partial or single exercise thereof shall constitute a waiver of any other rights hereunder. 4. Continued Effectiveness of Agreement. This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment of all or any part of the Obligations is rescinded or otherwise must be returned by Owners upon the insolvency, bankruptcy, or reorganization of any of the Managers all as though such payment to Owners had not been made. 5. Form and Powers of Managers. No change in the name, purposes, capitalization, ownership, form or organization of Managers shall in any way affect, diminish, or otherwise impair the liability of Emeritus. Owners shall not be obligated to inquire into the powers of the Managers notwithstanding that any of the Obligations may be in excess of the powers of the Managers. - -3- 6. Guaranty of Payment and Performance. This is a guaranty of payment and performance and Owners shall not be obligated to exhaust their recourse against the Managers or any other Person, or any security they may have for performance or payment of the Obligations before being entitled to payment and performance from Emeritus of the Obligations. 7. Effect of Certain Laws. Notwithstanding the provisions of the laws of any state, this Agreement shall remain in full force and effect and no invalidity, irregularity, or unenforceability (by reason of any bankruptcy or similar law, any other law or any order of any Governmental Authorities thereof purporting to reduce, amend, or otherwise affect any liability or obligation of the Managers) and no release or discharge of the Managers, or rejection of the Management Agreement by any one or more of the Managers or any trustee, receiver or similar official on behalf of the Managers (whether pursuant to 11 U.S.C. Section 365 or otherwise), in any receivership, bankruptcy, liquidation, winding-up, reorganization or other proceedings shall affect, diminish, or otherwise impair or otherwise be a defense to this Agreement. If Owners are stayed by any bankruptcy or other proceeding with respect to Managers from declaring the Obligations immediately due and payable from Managers, it may nevertheless do so as to Emeritus. 8. No Conditions to Agreement. This Agreement is absolute and unconditional and has been delivered free of any conditions and no representations have been made to Emeritus affecting or limiting the liability of Emeritus under this Agreement. This Agreement is in addition to and not in substitution for any agreement of Emeritus in the Management Agreement, the Purchase Agreements or in any other document or instrument executed by Emeritus agreeing to perform all or any part of the Obligations. 9. Continuing Agreement. This is a continuing guaranty and agreement. No action or proceeding brought or instituted under this Agreement and no recovery in pursuance thereof shall be a bar or defense to any further action or proceeding which may be brought under this Agreement by reason of the same or any further default or defaults under this Agreement or in the performance and observance of the terms, covenants, conditions, and provisions in the Obligations, or any document, instrument or agreement evidencing the Obligations, securing repayment of the Obligations or otherwise executed in connection with the Obligations. 10. Certain Waivers by Emeritus. Emeritus hereby waives presentment, protest, notice, demand, notice of nonpayment or action on delinquency in respect to any of the Obligations and all other suretyship defenses generally. Emeritus waives acceptance of this Agreement. Emeritus agrees that no release, delay, compromise, indulgence, or other action or failure to act by Owners with respect to any other Person liable for any of the Obligations shall in any manner affect, diminish or impair the liability of Emeritus under this Agreement. - -4- 11. Survival. This Agreement shall survive expiration or sooner termination of the Management Agreement for the period prior to December 31, 2001. Without limiting the generality of the foregoing, no termination of the Management Agreement, whether in whole or in part, or whether by Managers, Owners or otherwise, shall terminate any obligation of Emeritus to fund the Emeritus Deficit Contribution accruing or arising during the period commencing on the dat2 hereof and expiring December 31, 2001, except only as to Operating Deficits with respect to a Facility terminated from the Management Agreement by reason of Casualty or Condemnation as set forth in Section 9.7.2 of the Management Agreement arising after such termination. 12. Subordination. Emeritus hereby subordinates any and all debts owed to Emeritus by Managers or any other Person liable for any of the Obligations, and any and all security for such debts, to the prior payment and performance in full of the Obligations. . 13. Joint and Several Obligation. Emeritus' obligations to Owners for payment and performance of the Obligations shall be joint and several with the obligations of Managers therefor. 14. Waiver of Subrogation. Emeritus waives all rights of subrogation to the rights of Owners, and all rights of indemnity, contribution and reimbursement against Owners, but not against Managers, but any such claim shall not be asserted by Emeritus against Managers until after expiration of the Management Agreement, payment and performance of all obligations to Owners, and in any event shall be subordinate to all claims of Owners. Owners shall have no obligation whatsoever to reimburse or otherwise pay Emeritus for any payments or performance rendered under this Agreement by Emeritus. 15. Miscellaneous. 15.1 Notices. All notices required or permitted hereunder shall be deemed given: f1) three calendar days following mailing via regular U.S. mail, return receipt requested; or (2) one business day after deposit with a commercial courier service which provides evidence of delivery for "next day" delivery; or (3) upon sending to a facsimile number set forth in this agreement or provided in a notice to the party sending the notice by the party receiving the notice in writing, provided that a copy is sent the same business day by commercial courier as set forth above; or (4) upon actual receipt of notice, whichever is earlier. The parties shall promptly give written notice to each other of any change of address or facsimile number, and notice to the addresses or facsimile numbers stated herein shall be deemed sufficient unless written notification of a change has been received. 15.2 Governing Law. This Agreement has been executed and delivered to Owners in the State of Washington. Emeritus agrees that the law of the - -5- State of Washington (exclusive of principles of conflicts of law) shall be applicable for the purpose of construing this Agreement, determining the validity hereof and enforcing the same. Emeritus hereby consents to the jurisdiction of the courts of the State of Washington or to any federal court sitting in the State of Washington. AL Investors or Owners may enforce any or all of the provisions of this Agreement directly against Emeritus in the State of Washington or any other jurisdiction in which Emeritus does business or at its option may enforce this Agreement on behalf of any Facility Entity in the state in which such Facility Entity owns a Facility. 15.3 No Waiver. No delay or omission to exercise any right, power or remedy accruing to Owners upon any breach or default of Emeritus shall impair such rights, powers or remedies of Owners, nor shall it be construed to be a waiver of any such breach or default, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. 15.4 Assignment. Owners reserve the right to transfer or assign any or all of their right, title and interest under this Agreement, including assignment to any Mortgagee, and Emeritus hereby consents to any such transfer or assignment, provided such assignee (other than any Mortgagee) assumes the Owners' obligations under the Management Agreement accruing after the date of such assignment. 15.5 Captions. Any captions applied to the sections of this Agreement are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. 15.6 Invalidity. If any term, condition or provision of this Agreement shall be held invalid for any reason, such offending term, condition or provision shall be stricken therefrom, and the remainder shall not be affected. 15.7 Entire Agreement. This Agreement constitutes the complete and final expression of the entire-agreement between the parties pertaining to the subject matter hereof, but is in addition to and not in substitution for the obligations of Emeritus under the Management Agreement. This Agreement may be amended only by a written instrument executed by Emeritus and Owners. 15.8 Binding Effect. This Agreement shall inure to the benefit of Owners, its successors and assigns, and shall be binding upon Emeritus and its successors and assigns, as the case may be. This Agreement may be terminated only by means of a written document duly executed by Owners. 15.9 Legal Expenses. In the event of any default on the Obligations, or in the event that any dispute arises relating to the interpretation, enforcement or performance of this Agreement, the prevailing party shall be entitled to collect from the other party on demand all fees and expenses incurred in connection therewith, - -6- including but not limited to fees of attorneys, accountants, appraisers, consultants, expert witnesses, arbitrators, mediators and court reporters. Without limiting the generality of the foregoing, the prevailing party shall be entitled to all such costs and expenses incurred in connection with: (a) arbitration or other alternative dispute resolution proceedings, trial court actions and appeals; (b) bankruptcy or other insolvency proceedings of Managers, Emeritus, any other party having any liability for any portion of the Obligations or any party having any interest in any security for any of the Obligations; (c) any default by Managers or Emeritus under the Management Agreement; (d) all claims, counterclaims, cross-claims and defenses asserted in any of the foregoing whether or not they arise out of or are related to this Agreement; (e) all preparation for any of the foregoing; and (f) all settlement negotiations with respect to any of the foregoing. 15.10 Jury Trial Waiver. EMERITUS AND OWNERS HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT. TO THE EXTENT APPLICABLE, EMERITUS IS HEREBY ADVISED THAT ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. DATED this day of December, 1998. EMERITUS CORPORATION, a Washington corporation By: Name: Title: Address : Facsimile:( ) - -7- EXHIBIT A TO GUARANTY OF MANAGEMENT AGREEMENT AND SHORTFALL FUNDING AGREEMENT Certain Defined Terms Affiliate: with respect to any Person Ii) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, five percent (5%) or more of the outstanding capital stock, shares or equity interests of such Person or ;iii) any officer, director, 2mployee, general partner or trustee of such Person, or any other Person controlling, controlled by, or under common control with, such Person (excluding trustees and Persons serving in a fiduciary or similar capacity who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. Agency Account: The Agency Account to be maintained for each Facility for payment of Fixed Operating Expenses and Operating Expenses as described in Section 8.1 of the Management Agreement. Annual Plan(s): as defined in Section 4.2 of the Management Agreement. Award: all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. Base Management Fee: as defined in Section 7.1 of the Management Agreement. Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to pay debts as they become due; or applies for, consents to` or acquiesces in the appointment of, a trustee, receiver or other custodian or makes a general assignment for the benefit of creditors, or in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed and is not discharged within sixty (60) days after such appointment; or an order for relief is entered or a petition is filed under Title 11 ` United States Bankruptcy Code` with respect to any of them; or any other bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law` now or hereafter in effect, is commenced with respect to any of them. A-1 Business Day: any day which is not a Saturday or Sunday or a public holiday under the laws of the United States of America or the State of Washington. Capital Improvements: as defined in Section 12 of the Management Agreement. Cash Available for Distribution: on any date the amount contained in the Agency Accounts (as defined in Section 8.1 of the Management Agreement), minus an amount (to be retained in the Agency Accounts) equal to any reasonably projected Operating Deficit for the succeeding 30 days, taking into account all Operating Expenses and Fixed Operating Expenses and all anticipated Total Revenues during such 30-day period. Casualty: the damage or destruction by act of God or otherwise of any portion of any Facility which Owner reasonably estimates would cost more than $50,000 to repair or restore. Change of Control: shall mean the occurrence of any one of the following events with respect to Emeritus: (a) any Person (other than Emeritus, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of Emeritus or any of its subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Act")) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of Emeritus representing a greater percentage than that then owned by Daniel R. Baty, together with all "affiliates" and "associates" of Daniel R. Baty (as defined above) of either (A) the combined voting power of Emeritus' then outstanding securities having the right to vote in an election of Emeritus' Board of Directors ("Voting Securities") or (B)the then outstanding shares of Stock of Emeritus; or (b) Persons who, as of the date hereof, constitute Emeritus' Board of Directors (the "Incumbent Directors") cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of Emeritus subsequent to the date hereof whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors shall, for purposes of this Plan, be considered an Incumbent Director; or (c) the stockholders of Emeritus shall approve (A) any consolidation or merger of Emeritus or any subsidiary where the shareholders of Emeritus, A-2 immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing a majority of the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), (B) any sale, lease, exchange or owner transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of Emeritus or (C) any plan or proposal for the liquidation or dissolution of Emeritus; or (d) other than by reason of death or legal disability, Daniel Baty ceases to be the chief executive officer of Emeritus. Change of Control with respect to any Manager shall mean the occurrence of any event whereby 1OO% of the ownership interests in such Manager are no longer owned by Emeritus. Closing: the date of closing under the Purchase Agreements. Code: the Internal Revenue Code of 1986, as amended. Commencement Date: as defined in Section 2.1 of the Management Agreement. Compensation: the direct salaries and wages paid to, or accrued for the benefit of, any employee working and employed at each Facility together with all reasonably customary fringe benefits payable to, or accrued for the benefit of such employee, including employer's contribution under FICA, unemployment compensation, or other employment taxes, pension fund contributions, workmen's compensation, group life and accident and health insurance premiums, and other reasonable employee benefits customary in the industry. Condemnation: with respect to any Facility or any interest therein or right accruing thereto or use thereof (i) the exercise of the power of condemnation, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer to any Condemnor under threat of condemnation. Condemnor: any public or quasi-public authority, or private corporation or individual, having the power of condemnation. Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary Contracts and Major Contracts. A-3 CPA: The certified public accountants retained to provide necessary accounting services for the Facility or Owner, the selection of which shall be subject to approval by Ower. Date of Taking: the date the Condemnor has the right to possession of the property being condemned. Environmental Laws : means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings, and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Emeritus and the Emeritus Entities or to the Land and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. Excluded Expenses: depreciation, amortization and other non-cash expenses; items to be provided or paid for at Owner's or Managers' sole expense as provided herein; costs and expenses resulting from, or required to cure any matter or defect which constitutes a breach of warranty, representation or indemnity under the Purchase Agreements, the Licensing Agreement, or the Management Agreement which cost or expense shall be the sole responsibility of the breaching party; unreasonable or excessive charges or expenses. Escrow Holder: First American Title Insurance Company. Extension Term: as defined in Section 2.2 of the Management Agreement. Facility or Facilities: Each of the assisted living facilities, including the Land, Improvements, and Personal Property associated therewith, located in the city and state as set forth below:
Facility City State Units Beds Facility LLC and LP Name La Villita Phoenix AZ 87 110 AL Investors Phoenix LLC Laurel Place San Bernardino CA 71 87 AL Investors San Bernardino LLC The Terrace Grand Terrace CA 88 97 AL Investors Grand Terrace LLC Gardens at Newark DE 100 110 AL Investors Newark LLC Whitechapel Barrington Lecanto FL 79 94 AL Investors Lecanto LLC Place Beneva Park Sarasota FL 95 104 AL Investors Sarasota Club LLC Central Park Village Orlando FL 174 189 AL Investors Orlando LLC College Park Bradenton FL 85 96 AL Investors Bradenton Club LLC Lodge at Pinellas Mainlands Park FL 153 160 AL Investors Pinellas Park LLC
A-4
Facility City State Units Beds Facility LLC and LP Name Madison Glen Clearwater FL 135 200 AL Investors Clearwater LLC Springtree Sunrise FL 179 220 AL Investors Sunrise LLC Elm Grove Hutchinson KS 121 142 AL Investors Hutchinson LLC Brookside Middleburg Estates Heights OH 99 105 AL Investors Middleburg Heights LLC Bellaire Place Greenville SC 81 88 AL Investors Greenville LLC Walking Horse Meadows Clarksville TN 50 57 AL Investors Clarksville LLC Dowlen Oaks Beaumont TX 79 87 AL Investors Beaumont LLC Eastman Estates Longview TX 70 78 AL Investors Longview LP Lakeridge Wichita Place Falls TX 79 87 AL Investors Wichita Falls LP Meadowlands Terrace Waco TX 71 76 AL Investors Waco LP Myrtlewood Estates San Angelo TX 79 88 AL Investors San Angelo LP Saddleridge Lodge Midland TX 79 88 AL Investors Midland LP Seville Estates Amarillo TX 50 55 AL Investors Amarillo LP Emeritus Estates Ogden UT 83 91 AL Investors Ogden LLC Harbour Pointe Shores Ocean Shores WA 50 55 AL Investors Ocean Shores LLC Park Place Casper WY 60 68 AL Investors Casper LLC
Facility Accounts: as defined in Section 8.1 of the Management Agreement. Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set forth opposite the name of each Facility above and their respective successors or assigns. Fixed Operating Expenses: for any period, all fixed costs and expenses of owning, and operating the Facilities in the aggregate except where the Agreement expressly provides that Fixed Operating Expenses shall be determined for each Facility to the extent such costs and expenses are not included in Operating Expenses, including but not limited to (a) Managers' Base Management Fee (excluding the amount of any Accrued Management Fee accrued during such period); (b) all amounts to be paid into the Reserve Account and the cost of Capital Improvements approved by Owners not funded from the Reserve Account; (c) the debt service on account of any Mortgage; (d) the real and personal property ad valorem taxes and assessments; and (e) all costs and expenses of all property and casualty insurance on or in respect of the Facilities provided for herein and the amount of all self-insured losses or deductibles. Fixed Operating Expenses shall not include the Excluded Expenses. Furnishings and Equipment: all furniture, furnishings, beds, equipment, food service equipment, apparatus and other personal property used in /or if the context so dictates, required in connection with), the operation of each Facility, other than Operating Equipment, Operating Supplies and fixtures attached to and forming part of the Improvements. GAAP: means generally accepted accounting principles applied on a consistent basis. A-5 Governmental Authorities: Collectively, all agencies, authorities bodies, boards, commissions, courts, instrumentalities, legislatures, and offices of any nature whatsoever of any government, quasi-government unit or political subdivision, whether with a federal, state, county, district, municipal, city or otherwise and whether now or hereinafter in existence which exercises jurisdiction over any Facility. Group Service: as defined in Section 3.2.4 of the Management Agreement. Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials, radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on any Facility is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material, or substance now or in the future defined as a "hazardous substance","hazardous material, " hazardous waste, " "toxic substance, " "toxic pollutant", "contaminant," or "Pollutant" within the meaning of any Environmental Law. Provided, however, Hazardous Substances shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of any Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Facilities' parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Environmental Laws. Impositions: collectively, all taxes (including, without limitation, all capital stock and franchise taxes of AL Investors or any Facility Entity, all ad valorem, property, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and assessments levied by condominium associations), ground rents, water and sewer rents other than normal utility charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other charges imposed by Governmental Authorities, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Facility (including all interest and penalties thereon due to any failure in payment by Manager), which at any time prior to, during or in respect of the Term of the Management Agreement may be assessed or imposed on or in respect of or be a A-6 Lien upon (a) Facility Entities' interest in the Facility, (b) the Facility or any rent or income therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, sales from, or activity conducted on, or in connection with, the Facility or the leasing or use of the Facility. Notwithstanding the foregoing, "Impositions" shall not include: (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on any Owners or Managers, (2) any tax imposed with respect to the sale, exchange or other disposition of a Facility or the proceeds thereof, or (3) any principal or interest on any Mortgage; provided, however, the provisos set forth in clause (1) of this sentence shall not be applicable to the extent that any real or personal property tax, assessment, tax levy or charge pursuant to the first sentence of this definition and which is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) is levied, assessed or imposed expressly in lieu thereof. Improvements: the buildings, structures (surface and sub-surface) and other improvements now or hereafter located on the Land. Initial Term: as defined in Section 2.1 of the Management Agreement. Insurance Requirements: all terms of each insurance policy required to be carried in this Agreement, or agreed to be carried by Owners and Managers, and all orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to the Facilities or the operation thereof. Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage, pledge, and related security instruments against the membership interests of AL Investors in the Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and Senior Housing Partners I, L.P. dated on or about the same date hereof ("Initial Junior Loan"). Land: the parcel or parcels of land on which each of the Facilities is situated, together with all rights of ingress and egress thereto and parking associated therewith as legally described in the Purchase Agreements. - Leases: Collectively, the Ordinary Leases and Major Leases. Legal Requirements: collectively, all statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, health code, zoning, subdivision, and other land use and assisted living licensing statutes, ordinances, by-laws, codes, rules and A-7 regulations), whether now or hereafter enacted, promulgated or issued by any Governmental Authority, Accreditation Body or Third Party Payor affecting a Facility Entity or any Facility or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in connection with a Facility, including; without limitation, any of the foregoing which may (i) require repairs, modifications or alterations in or to any Facility, (ii) in any way affect (adversely or otherwise) the use and enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from any Facility. Without limiting the foregoing, the term "Legal Requirements" includes all Environmental Laws and shall also include all Permits and Contracts issued or entered into by any Governmental Authority, any Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances. Lending Group: GMAC Commercial Mortgage for itself and as agent for other participating lenders in a debt facility referred to herein as the Initial Senior Loan secured by the Facilities in the maximum aggregate original principal balance of $138,000,000. Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement between Emeritus Corporation and AL Investors dated on or about the same date hereof. Lien: with respect to any real or personal property, any mortgage, mechanics' or materialmen's lien, pledge, collateral assignment, hypothecation,charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property which secures or is intended to secure the payment of money, whether or not inchoate, vested or perfected, other than the Mortgage. Major Contracts: Any contract for the purchase of goods or services or any other agreement which requires payments in excess of $50,000 per year for any Facility or which cannot be terminated without penalty or termination fee on sixty (60) days notice or in which the provider of the goods or services is Emeritus or an Affiliate (except pursuant to Group Services approved in connection with an Annual Plan). Major Lease. Any Lease which has a noncancellable term in excess of one year or a rental payment in excess of $10,000 per year or pursuant to which Emeritus or an Affiliate is the lessee or lessor. A-8 Managed Care Plans: all health maintenance organizations, preferred provider organizations, individual practice associations, competitive medical plans, and similar arrangements. Management Fee: an amount equal to percent (7%) of Total Revenues for all Facilities, subject to the provisions of Section 7.2 of the Management Agreement. Medicaid: the medical assistance program established by Title XIX of the Social Security Act (42 USC 1396 et seq.) and any statute succeeding thereto. Medicare: the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 USC 1395 et seq.) and any statute succeeding thereto. Mortgage: collectively, the terms and conditions of the Senior Loan and the Junior Loan. Mortgagee: the holder or beneficiary of a Mortgage and their respective successors and assigns. Operating Deficit and Operating Profit: for any period, the amount, if any, by which Total Revenues for that period is less than or exceeds, respectively, the sum of (i) Operating Expenses and (ii) Fixed Operating Expenses for that period in each case determined on a cash basis. Operating Equipment: all dishes, glassware, bed coverings, towels, silverware, uniforms and similar items used in, or held in storage for use in (or if the context so dictates, required in connection with) the operation of the Facilities. Operating Expenses: for any period, all reasonable costs and expenses of owning and operating the Facilities in the aggregate except where the Agreement expressly provides that Operating Expenses shall be determined for each Facility (which costs and expenses do not include the Fixed Operating Expenses or the Excluded Expenses) including the following: A-9 (a) The cost of all Operating Equipment and Operating Supplies placed in use, with the exception of the Operating Equipment and Operating Supplies initially supplied by the Facility Entities. The cost of maintaining and operating the vans and buses for each Facility (but not any debt service or lease payments which shall remain the sole expense of Emeritus) plus $2,000 per Operating Year for each bus or van in monthly installments as compensation for making the buses available at the Facilities. (b) The Compensation of all employees working and employed by Managers at the Facilities. The Compensation of Managers' or Emeritus' home office or executive or other personnel not regularly employed at the Facilities shall not be included in Operating Expenses or Fixed Operating Expenses, but reasonable out-of-pocket travel expenses of Managers or Owners' executive personnel while traveling to and from a Facility on business shall be reimbursable as an Operating Expense; provided, however, that if such business travel relates to business or properties other than with respect to the Facilities, then such travel expenses shall be equitably prorated between such other business or properties and the Facilities. A-10 (c) The cost of all utilities including, without limitation, electricity, water, gas, heat and other utilities, and office supplies and equipment, and goods and services purchased under all Contracts, including leasing expenses in connection with telephone and data processing equipment and such other equipment as the parties hereto may agree upon in writing. (d) The cost of repairs to and maintenance of the Facilities whether performed by Facility employees or contracted to third parties. (e) Insurance premiums for all insurance required under this Agreement and self-insured losses and deductibles with respect to such insurance coverages (but excluding premiums and self-insured losses and deductibles on property and casualty insurance which are included in Fixed Operating Costs). Premiums on policies for more than one year will be prorated over the period of insurance coverage and premiums under blanket policies will be equitably allocated among properties covered. (f) All Impositions (except for real and Personal Property ad valorem taxes and assessments which shall be a Fixed Operating Expenses). (g) Except as otherwise provided in Section 6.1 of the Management Agreement, legal fees and fees of any CPA for services directly related to the operations of the Facilities (whether incurred by Owners or Managers). (h) The costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non-recurring work on operational, functional, design or construction problems and activities whether incurred by Owner or Manager; provided, however, that if such costs end expenses have not been included in the Annual Plan, the same shall be subject to approval by Owner. (i) All expenses for marketing the Facilities and all expenses of sales promotion and public relations activities as set forth in the Annual Plan (j) The cost of Group Services, as provided in Section 3.2.4 of the Management Agreement. (k) Bad debts or uncollectible amounts from residents of the Facilities. (l) refund of deposits to residents under Residency Agreements (m) Owners' reasonable costs and expenses of administering, supervising, and managing Owners' activities in connection with this Agreement and any A-11 Mortgage, including Owners' reasonable cost and expense of preparing and filing federal, state and local income tax returns and audits. (n) All other reasonable expenses and charges incurred in the operation and management of the Facilities to the extent set forth in the Annual Plan or otherwise approved by the Owners or as otherwise set forth in the Agreement. Operating Period: the period beginning with the Commencement Date and ending upon the expiration of the Initial Term. Operating Supplies: consumable items used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Facilities, including food, medical supplies, fuel, soap, cleaning materials, and other similar consumable items. Operating Year: the Operating Years shall coincide with and be identical with the calendar years, except that the first Operating Year shall be the period beginning on the Commencement Date and ending on December 31 of the following full calendar year if the Commencement Date is before December 31, 1998, or beginning on the Commencement Date and ending on the following December 31, 1999, if the Commencement Date is after December 31, 1998 and such long or short year, as applicable, shall constitute a full Operating Year as used herein. Ordinary Contracts: All agreements and contracts to purchase goods and services (excluding Major Contracts) in the ordinary course of business of refurbishing, owning, operating or managing the Facilities, or the operation of any programs or services in conjunction with the Facility and all renewals, replacement and substitutions therefor with any Governmental Authority, Accreditation Body or Third Party Payor or entered into with any third Person, excluding, however, any agreements pursuant to which money has been or will be borrowed or advanced, the Leases, any agreement creating or permitting any Lien or other encumbrance on title (except for the Permitted Exceptions, and any Major Contract. Ordinary Leases: Collectively, all subleases, licenses, use agreements, equipment leases, concession agreements, tenancy at will agreements and other occupancy agreements (but excluding any Residency Agreement, Facility Lease or Major Lease), whether oral or in writing, entered into by Managers affecting a Facility. Overdue Rate: on any date, a rate of interest per annum equal to the greater of: (i) a variable rate of interest per annum equal to one hundred twenty percent (120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided, A-12 however, in no event shall the Overdue Rate be greater than the maximum rate then permitted under Legal Requirements. Permits: collectively, all permits, licenses, approvals, qualifications, rights, variances, permissive uses, accreditation, certificates, certifications, consents, agreements, contracts, contract rights, franchises, interim licenses, permits and other authorizations of every nature whatsoever required by, or issued under, applicable Legal Requirements relating or affecting a Facility or the construction, development, maintenance, management, use or operation thereof, or the operation of any programs or services in conjunction with the Facility and all renewals, replacements and substitutions therefor, now or hereafter required or issued by any Governmental Authority, Accreditation Body or Third Party Payor to Owners or Managers. Permitted Exceptions: (i) all encumbrances to title present at closing pursuant to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii) easements, restrictions on use, zoning laws and ordinances, rights of way and other encumbrances and minor irregularities in title, whether now existing or hereafter arising, which are approved by Owner and do not individually or in the aggregate materially impair the use of any Facility. Person: any individual, corporation, general partnership, limited partnership, joint venture, stock company or association, company, bank, trust, trust company, land trust, business trust, unincorporated organization, unincorporated association, Governmental Authority or other entity of any kind or nature. Personal Property: all machinery, equipment, furniture, furnishings, movable walls or partitions, computers or trade fixtures, goods, inventory, supplies, the name of the Facility, and other personal or intangible property used in the operation of the Facility, including, but not limited to, all Operating Equipment, Furnishings and Equipment and Operating Supplies; provided, however, that the Personal Property shall not include vans or buses, but title to all vans and buses shall remain in Emeritus or its Affiliates and be transferred to Owners as provided in Section 9.6 of the Management Agreement. Primary Intended Use: the use of the Facility as an assisted living facility and such ancillary uses as are permitted by applicable Legal Requirements and may be necessary in connection therewith or incidental thereto. Prime Rate: the variable rate of interest per annum from time to time set forth in the Wallstreet Journal as the prime rate of interest and in the event that the Wallstreet Journal no longer publishes a prime rate of interest, then the Prime Rate shall be deemed to be the variable rate of interest per annum which is the prime rate A-13 of interest or base rate of interest from time to time announced by any major bank or other financial institution reasonably selected by AL Investors. Provider Agreements: all participation, provider and reimbursement agreements or arrangements, if any, in effect for the benefit of Owners or Managers in connection with the operation of the Facility relating to any right of payment or other claim arising out of or in connection with participation in any Third Party Payor Program. Put and Purchase Agreement: that certain Put and Purchase Agreement between Daniel Baty and AL Investors dated on or about the same date hereof. Residency Agreement: all contracts, agreements and consents executed by or on behalf of any resident or other Person seeking services at the Facility, including, without limitation, assignments of benefits and guarantees. Senior Loan: any indebtedness incurred by Owners which is secured by any mortgage, deed of trust and related security instruments against a Facility. Initially, the Senior Debt is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and GMAC Commercial Mortgage Corporation dated on or about the same date hereof ("Initial Senior Loan"). Third Party Payor Programs: collectively, all third party payor programs in which the Emeritus Entities presently or in the future may participate, including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance plans and employee assistance programs. Third Party Payors: collectively, Medicare, Medicaid, Blue Cross andlor Blue Shield, private insurers and any other Person which presently or in the tuture maintains Third Party Payor Programs. Title Company: First American Title Insurance Company. Total Revenues: collectively, but without duplication all revenues generated by reason of the operation of the Facilities in the aggregate, except where the Agreement expressly provides that Total Revenues shall be determined for each Facility, directly or indirectly received by any Facility Entity or Managers, including, without limitation, all resident revenues received or receivable for the use of, or otherwise by reason of, all rooms, units and other facilities provided, deposits received from residents under Residency Agreements, meals served, services performed, space or facilities leased pursuant to the Leases or goods sold on or from the Facility, all amounts from Third Party Payors, and all revenues from all ancillary A-14 services provided at or relating to any Facility; provided, however, that Total Revenues shall not include: (a) federal, state or local sales, use, gross receipts and excise taxes and any tax based upon or measured by said Total Revenues which is added to or made a part of the amount billed to the resident or other recipient of such services or goods, whether included in the billing or stated separately, which is paid to the Governmental Authority; (b) proceeds from sale of capital assets, including the sale of the Facility and proceeds therefrom other than sale of Furnishings and Equipment in the ordinary course of business,; (c) proceeds of any insurance other than business interruption insurance; (d) proceeds of any financing or capital contributions to Owners; (e) interest or earnings on the Reserve Account; (f) any Award resulting from Condemnation; (g) any other income or proceeds from any source other than in the ordinary course of business of the Facility. Except as otherwise specifically indicated, all references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "herein", "hereof", "hereunder", "hereinafter", and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof unless the context otherwise requires. A-15 EX-10.66-5 14 EX-10.66.5 PUT AND PURCHASE AGREEMENT 1. PARTIES. This Put and Purchase Agreement ("Agreement"2 is entered into as of December 30, 1998 by and between Daniel R. Baty, individually and on behalf of his marital community ("Obligor") and AL Investors LLC, a Delaware limited liability company ("AL Investors") for itself and as sole managing member on behalf of each of the Facility Entities or in cases where the Facility Entity is a limited partnership, as sole managing member on behalf of the general partner thereof, as set forth on Exhibit A ("Facility Entities" and each a "Facility Entity"). All capitalized terms not otherwise defined herein shall have the meaning set forth in Exhibit A. 2. FACTS 2.1 Acquisition of Facilities. Concurrently herewith, AL Investors and/or its Affiliates are entering into the following agreements: (a) Purchase and Sale Agreement ("Meditrust Purchase Agreement") with Meditrust Company LLC, successor by merger to Meditrust Acquisition Corporation (collectively "Meditrust") relating to the acquisition of the Facilities identified on Exhibit A, excluding Facilities named La Villita, Madison Glen and Meadowlands Terrace therein (collectively, the `Meditrust Facilities"). (b) Supplemental Purchase Agreement ("Supplemental Agreement") with Emeritus Corporation ("Emeritus") and certain of its Affiliates relating to certain additional terms and conditions in connection with the purchase of the Facilities. (c) Purchase and Sale Agreement ("Emeritus Purchase Agreement") with Emeritus and certain of its Affiliates relating to the acquisition of Facilities entitled La Villita, Madison Glen and Meadowlands Terrace on Exhibit A (the "Emeritus Facilities"). The Emeritus Facilities and Meditrust Facilities are collectively referred herein as the "Facilities." (d) Management Agreement with Option to Purchase with Emeritus, Emeritus Management I LP, Emeritus Management LLC and certain other Emeritus Affiliates (collectively "Managers") ("Management Agreement") pursuant to which the Managers will manage the Facilities and fund certain Operating Deficits of the Facilities and pursuant to which Emeritus has the option to purchase the Meditrust Facilities ("Purchase Option") and has a right of first refusal to purchase ("Right of first Refusal") as to the Emeritus Facilities, as more particularly set forth therein. - -1- (e) Guaranty of Management Agreement and Shortfall Funding Agreement ("Guaranty Agreement") with Emeritus pursuant to which Emeritus guarantees the obligations of Managers under the Management Agreement and agrees to fund certain Operating Deficits of the Faciliti.es as more particularly set forth therein. (f) Licensing Indemnity Agreement. Collectively, the above-referenced agreements are referenced herein as the "Related Agreements" and the Meditrust Purchase Agreement, the Supplemental Agreement and the Emeritus Purchase Agreement are collectively referred to herein as the "Purchase Agreements." 2.2 Financinq of the Facilities. In connection with the Purchase Agreements, AL Investors has created a Facility Entity for the purpose of taking title to each Facility pursuant to the Purchase Agreements. The twenty-five (25) Facilities to be purchased by the Facility Entities pursuant to the Purchase Agreements will close simultaneously and be financed in part by the Initial Senior Loan and the Initial Junior Loan. 2.3 Consideration. Obligor acknowledges that he is an officer and major shareholder of Emeritus and as such he is directly and materially benefited by _ AL Investors and its Affiliates entering into the Related Agreements. Obligor acknowledges that Emeritus is the parent company of the Affiliates of Emeritus that previously leased the Facilities from Meditrust and owned the Emeritus Facilities and is the parent company of the Managers that will manage the Facilities, and as such, Emeritus is directly and materially benefited by AL Investors and the Facility Entities entering into the Related Agreements. In consideration of AL Investors and the Facility Entities entering into the Related Agreements, the mutual covenants herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Obligor has entered into this Agreement. Obligor acknowledges and agrees that AL Investors and its Affiliates would not have entered into the Related Agreements without Obligor having executed and delivered this Agreement. 3. PUT OF FACILITIES 3.1 Exercise of Put. AL Investors and the applicable Facility Entities shall have the right to require Obligor to purchase certain of the Facilities specified by AL Investors and the applicable Facility Entities as provided below and upon the terms and conditions of this Agreement upon the occurrence of any of the following events ("Triggering Events" and each a "Triggering Event"): (a) If Emeritus has not exercised its Purchase Option (as defined in the Management Agreement) to purchase the Meditrust Facilities on or - -2- before one hundred eighty (180) days prior to expiration of the Initial Term of the Management Agreement as provided for in Section 13 of the Management Agreement. (b) If Emeritus timely exercises its Purchase Option (as defined in the Management Agreement) to purchase the Meditrust Facilities but thereafter fails to close such purchase in accordance with the terms of the Management Agreement, time being of the essence with respect to such purchase. (c) If there should be an Event of Default under the terms of the Management Agreement by Emeritus or Managers. (d) If Obligor has failed to satisfy the requirements of Section 3.11 below. (e) If there has been a Change in Control not approved in writing by AL Investors and the Initial Junior Lender, which approval may be given or withheld in their sole discretion. Obligor shall give written notice of the occurrence of any Triggering Event to AL Investors, but failure to give such notice shall not affect Obligor's obligations under this Agreement. Upon occurrence of any one or more of the Triggering Events, AL Investors may require Obligor to purchase six (6) of the Facilities with respect to Triggering Events (a), (b), (c) and (d) and eight (8) of the Facilities with respect to Triggering Event (e), all of the terms and conditions of this Agreement. The designation of which six (6) or eight (8) Facilities Obligor shall be obligated to purchase shall be in AL Investors' sole, absolute and unfettered discretion. Obligor acknowledges that such designations are likely to include those Facilities that are least desirable or of the lowest relative value. AL Investors shall provide written notification to Obligator ("Put Notice") specifying the Facilities Obligor is required to purchase ("Put Facilities" and each a "Put Facility"), the purchase price for each Put Facility calculated in accordance with Section 3.4, and the amount of the Deposit required by Section 3.5. AL Investors may give the Put Notice to Obligor at any time after the Triggering Event but in any event prior to sixty (60) days after the later of: (a) AL Investors has acquired actual knowledge that a Triggering Event has occurred, pursuant to written notice from Obligor or otherwise, or (b) one hundred eighty (180) days prior to the expiration of Initial Term of the Management Agreement. The closing on this purchase by Obligor on the Put Facilities shall occur within ninety (90) days after the delivery of the Put Notice to Obligor ("Put Purchase Date"). Obligor shall be absolutely and unconditionally obligated to purchase the Put Facilities in accordance with the Put Notice on the Put Purchase Date. 3.2 Option in Favor of Obligor. If AL Investors has delivered the Put Notice to Obligor, Obligor shall also be deemed to have an option to purchase from - -3- AL Investors and the Facility Entities all, but not less than all, of the Facilities then owned by AL Investors and the Facility Entities on the same terms, conditions and purchase price set as set forth in Section 13 of the Management Agreement, adjusted to include the simultaneous purchase by Obligor of the Emeritus Facilities in accordance with Section 4 below ("Obligor's Option"), provided that Obligor exercises Obligor's Option by written notice and deposit given to AL Investors not later than twenty (20) days after receipt of the Put Notice pursuant to Section 3.1 (a) or 3.1 (b), and not later than sixty (60) days after receipt of the Put Notice pursuant to Section 3.1 (c), 3.1 (d) or 3.1 (e). Upon exercise of Obligor's Option pursuant to this Section, Obligor shall nonetheless remain obligated to deliver the full amount of the deposit set forth in Section 3.5 below, and shall additionally be obligated to deposit the amount set forth in Section 13.2 of the Management Agreement. Failure to give such notice and deposit within such twenty (20) day or sixty (60) day period shall automatically terminate Obligor's Option. Notwithstanding the Obligor's Option, the Put Notice shall remain effective until such time that Obligor exercises the Obligor's Option to purchase all the Facilities then owned by the AL Investors and the Facility Entities and closes such purchase pursuant to Obligor's Option, except that the time period to close the purchase of the Put Facilities shall be extended until ten (10) days after the date on which Obligor's Option is required to close. The terms and conditions for such purchase and the closing thereof shall be pursuant to the provisions of Section 13 of the Management Agreement, which are incorporated herein by this reference, adjusted to include the simultaneous purchase by Obligor of the Emeritus Facilities in accordance with Section 4 below. If Obligor fails to close the purchase pursuant to Obligor's Option, then Obligor shall forfeit its deposit made pursuant to Section 13.2 of the Management Agreement, and such amount shall not be credited against Obligor's continuing obligation to purchase the Put Facilities. Obligor's Option under this Section 3.2 following a Put Notice shall be subordinate to the rights of Emeritus under the Emeritus Purchase Option pursuant to Section 13 of the Management Agreement if Emeritus timely exercises and closes such purchase. 3.3 Title. If a Put Notice is provided to Obligor in accordance with the terms hereof, each Put Facility shall be conveyed on the Put Purchase Date, or the next Business Day thereafter, by a quit claim deed ("Deed") subject to all Permitted Exceptions and other Liens, easements or matters of record (except only for any Mortgage) and all matters arising through or with the consent of Managers or Emeritus, a quit claim bill of sale and assignment as to all Personal Property and a quit claim assignment of all Leases, Contracts and Permits. The form of all such quit claim deeds and assignments shall be as specified by AL Investors or Facility Entities and consistent with Legal Requirements for conveyances in the jurisdiction in which each Put Facility is located. Transfer of all Permits to Obligor or his designee in accordance with Legal Requirements for each Put Facility shall be the sole responsibility and cost of Obligor. Other than an obligation to reasonably cooperate (at no material out-of-pocket cost) in such transfer, AL Investors or the - -4- Facility Entities shall have no liability or responsibility for the adequacy or completeness of any transfer of the Permits. No delay in transferring the Permits shall delay the closing of the purchase of the Put Facilities by Obligor, except only for such necessary time required with all due diligence to obtain reissuance or transfer of the Permits, but not beyond sixty (60) days. If such Permits have not been reissued or transferred by such date, then Obligor shall be deemed to be in default of his obligation to purchase the Put Facilities and shall be liable for damages as set forth in Section 3.10. 3.4 Calculation of Purchase Price. The price to be paid by Obligor for the acquisition of each Put Facility shall mean the amount calculated in accordance with Exhibit C (the "Purchase Price"). AL Investors' calculation of the Purchase Price shall be final, absent bad faith. The Purchase Price shall be a net Purchase Price to be received by AL Investors for each Facility without deduction for due diligence, transfer taxes, -title insurance or other closing costs, all of which shall be paid by Obligor. Neither AL Investors nor the Facility Entities shall bear any closing costs or prorations of any kind or nature including, without limitation, with respect to real property taxes, water sewer charges, utilities or other operating expenses or income. 3.5 Deposit. Within seven (7) days after delivery of the Put Notice to Obligor, Obligor shall deliver a cash deposit to AL Investors in an amount equal to five percent (5%) of the aggregate Purchase Price for the Put Facilities (together with all interest earned thereon, the "Deposit"). The Deposit shall be deposited in a money market or similar interest-bearing account with a commercial bank selected by AL Investors. The Deposit shall be credited against the Purchase Price. Obligor expressly acknowledges that the Deposit is not the limit of Obligor's liability and does not otherwise constitute liquidated damages in the event of a default by Obligor in the purchase of the Put Facilities as more fully set forth in Section 3.10 below. 3.6 Payment of Purchase Price. The Purchase Price for each Put Facility shall be paid by Obligor at the Time of Closing in good funds. 3.7 Place and Time of Closing. If the Put Notice is given to Obligor, the closing shall occur and the Deed for each Put Facility shall be delivered to Title Company at 12:00 o'clock noon (P.S.T.) on the Put Purchase Date ("Time of Closing"). It is agreed that time is of the essence with respect to all matters relating to the purchase of the Put Facilities by Obligor pursuant to a Put Notice. AL Investors, the Facility Entities and Obligor shall execute such escrow instructions and other documents as may be customary and reasonably requested by the Title Company in order to close the purchase of the Put Facilities in accordance with this Agreement. - -5- 3.8 Condition of Put Facilities. The Put Facilities and each of them shall be purchased by Obligor "AS IS" and "WHERE IS" as of the Time of Closing. Without limiting the generality of the foregoing, neither AL Investors nor the Facility Entities make and shall not make any representations or warranties, express or implied, with respect to, and shall have no liability for: (i) the condition of the Put Facilities or any Improvements thereon or the suitability, habitability, merchantability or fitness of the Put Facilities; (ii) compliance with any Legal Requirements; (iii) the presence of any Hazardous Substances in or about the Put Facilities, including without limitation asbestos or urea-formaldehyde, or the presence of any Hazardous Substances on or under the Land associated with any Put Facility; (iv) the accuracy or completeness of any plans and specifications, reports, or other materials provided to Obligor; or (v) any other matter relating to the Put Facilities, including, without limitation, the title thereto or the condition, value or operating results or prospects thereof. Without limiting the generality of the foregoing, neither AL Investors nor the Facility Entities shall have any liability to Obligor with respect to the condition, value or operating results or prospects of the Put Facilities under common law, or under any Legal Requirements and Obligor hereby waives any and all claims which Obligor have or may have against AL Investors and/or Facility Entities with respect to the condition of the Put Facilities. Obligor assumes the responsibility and risks of all defects and conditions, including such defects and conditions, if any, that cannot be observed by inspection or examination of records. Obligor shall indemnify, defend, and hold harmless AL Investors and/or Facility Entities from and against all claims and liabilities of any type or kind arising out of or related to the Put Facilities, from and after the Time of Closing, it being intended that AL Investors or Facility Entities shall have no liability from and after the Time of Closing with respect to the Put Facilities. 3.9 Use of Purchase Price to Clear Title. To enable the respective Facility Entities to make the conveyance as provided in this Section 3, AL Investors and the Facility Entities may, at the Time of Closing, use the Purchase Price or any portion thereof to clear the title of any Mortgage, provided that all instruments so procured are recorded contemporaneously with the Closing or reasonable arrangements are made for recording subsequent to the Time of Closing in accordance with customary conveyancing practices. 3.10 Obligor's Default. If AL Investors delivers the Put Notice to Obligor and Obligor fails to consummate the purchase of the Put Facilities in accordance with the terms hereof for any reason other than the Facility Entities' willful and unexcused refusal to deliver the Deed and other assignments provided for herein, AL Investors or Facility Entities shall have the option to either (a) sue for specific performance compelling Obligor to purchase the Put Facilities as required by this Agreement or (b) to sue for damages which shall be measured by the difference between the aggregate Purchase Price for the Put Facilities and the then fair market value of the Put Facilities, less the transaction costs (including seller's share of any adjustments and prorations) anticipated to be incurred by AL Investors - -6- or the Facility Entities in connection with the sale of the Put Facilities to a third party, all as determined by AL Investors. AL Investors determination of the fair market value shall be final, absent bad faith or an unreasonable determination. 3.11 Net Worth Covenants of Obligor. Prior to the execution of this Agreement, Obligor has delivered to AL Investors his signed statement of personal net worth ("Net Worth Statement") dated as of June 30, 1998. Obligor agrees to update this Net Worth Statement semi-annually and to deliver to AL Investors each updated Net Worth Statement promptly following its preparation, together with a signed letter from Obligor certifying its accuracy. In the event that (a) the net worth of the Obligor shown on his Net Worth Statement falls below Fifty Million Dollars ($50,000,000), or (b) Obligor fails to deliver his Net Worth Statement as set forth above, then within thirty (30) days Obligor shall deliver to AL Investors a letter of credit in the amount of Three Million Dollars ($3,000,000), in form and substance and from a financial institution meeting AL Investors' reasonable satisfaction and drawable solely upon AL Investors' statement that a default under this Agreement has occurred (the "Letter of Credit"), to secure the timely performance of Obligor under this Agreement. In no event shall the Letter of Credit constitute liquidated damages or otherwise limit Obligor's liability hereunder. Failure to satisfy the terms of this Section 3.11 shall be a Triggering Event as set forth in Section 3.1 (d) above. 4. PURCHASE OF EMERITUS FACILITIES IN CONNECTION WITH EMERITUS EXERCISE OF PURCHASE OPTION UNDER MANAGEMENT AGRFEMENT 4.1 Purchase Price. In the event that Emeritus timely exercises its Purchase Option to purchase the Meditrust Facilities under the terms of the Management Agreement, AL Investors shall have the right within thirty (30) days of such exercise by Emeritus to give written notice to Obligor ("Purchase Notice") requiring Obligor to purchase the Emeritus Facilities still owned by a Facility Entity at their appraised Fair Market Value as defined in Exhibit B ("Purchase Price"). 4.2 Other Provisions. The provisions of Sections 3.3, 3.6, 3.7 (except the Time of Closing shall be the Time of Closing under Section 13 of the Management Agreement), 3.8, 3.9 and 3.10 of this Agreement shall be equally applicable to the Emeritus Facilities required to be purchased by Obligor, pursuant to this Section 4. 4.3 Termination of Purchase Notice. The Purchase Notice will be deemed withdrawn only if Emeritus should exercise its Right of First Refusal with respect to and thereafter closes the purchase of the Emeritus Facilities as provided for in Section 14 of the Management Agreement or if Emeritus fails to timely close the Purchase Option set forth in Section 13 of the Management Agreement (which failure shall constitute a Triggering Event). - -7- 5. CONSENTS AND WAIVERS 5.1 Consent to Modification of Obligations. Without affecting, diminishing or otherwise impairing the liability of Obligor hereunder and without notice to or consent of Obligor, AL Investors and the Facility Entities may from time to time grant renewals, extensions, indulgences, releases and discharges to any Person liable for any obligations under the Related Agreements (collectively, the "Obligations") and may take security for payment or performance of such Obligations, and may release any or all security or refrain from perfecting any interest in any security granted by any guarantor or other Person liable for any of the Obligations. AL Investors may amend or modify the Obligations or any document or instrument executed to evidence the Obligations and otherwise may deal with any Person liable for any of the Obligations, without notice to or consent of Obligor, and without affecting, diminishing, or otherwise impairing the liability of Obligor under this Agreement. 5.2 Consent to Waivers. AL Investors or Facility Entities may from time to time consent to any action or non-action of any Person liable for any of the Obligations, which, in the absence of such consent, violates or may violate the provisions of the Related Agreement or any other instrument otherwise executed in connection with the Obligations, and such consent may be granted by AL Investors or Facility Entities, without notice to or consent of Obligor and without in any manner affecting, diminishing, or impairing the liability of Obligor under this Agreement. No waiver, modification, extension, forbearance, or delay on the part of AL Investors or Facility Entities with respect to the Obligations or with respect to any document, instrument or agreement evidencing such Obligations, securing repayment of such Obligations or otherwise executed in connection with the Obligations, and no act or thing which might, but for this provision of this Agreement, be deemed a legal or equitable discharge of a surety, shall operate to release the obligations of Obligor under this Agreement, and no delay on the part of AL Investors or Facility Entities in exercising any of its options, powers, or rights under this Agreement, or any partial or single exercise thereof shall constitute a waiver of any other rights hereunder. 5.3 Continued Effectiveness of Agreement. This Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment of all or any part of the Obligations is rescinded or otherwise must be returned by AL Investors or Facility Entities upon the insolvency, bankruptcy, or reorganization of the Managers, Emeritus, Obligor or any other Person all as though such payment to AL Investors or Facility Entities had not been made. 5.4 Change in Form and Powers. No change in the name, purposes, capitalization, ownership, form or organization of Managers, Emeritus, any Affiliate of Emeritus, or any other Person shall in any way affect, diminish, or otherwise impair the liability of Obligor under this Agreement. AL Investors or Facilities - -8- Entities shall not be obligated to inquire into the powers of the Managers, Emeritus, any Affiliate of Emeritus, or any other Person notwithstanding that any of the Obligations may be in excess of the powers of the Managers, Emeritus, any Affiliate of Emeritus, or any other Person. 5.5 Effect of Certain Laws. Notwithstanding the provisions of the laws of any state, this Agreement shall remain in full force and effect and no invalidity, irregularity, or unenforceability (by reason of any bankruptcy or similar law, any other law or any order of any Governmental Authorities thereof purporting to reduce, amend, or otherwise affect any liability or obligation of the Managers or Emeritus or any Affiliate of Emeritus) and no release or discharge of the Managers, Emeritus, any Affiliate of Emeritus, or rejection of any of the Related Agreements by any of the parties thereto other than AL Investors, or Facility Entities, or any trustee, receiver or similar official on behalf of such parties (whether pursuant to 11 U.S.C. Section 365 or otherwise), in any receivership, bankruptcy, liquidation, winding-up, reorganization or other proceedings shall affect, diminish, or otherwise impair or otherwise be a defense to this Agreement. If Emeritus or any Emeritus Affiliate is stayed by any bankruptcy or other proceeding with respect to exercising its option to purchase the Facilities under the Management Agreement, it shall not prevent AL Investors or Facility Entities from delivering a Put Notice to Obligor as a result of the occurrence of any Triggering Event, or if the Triggering Event would have occurred, but for the effect of the stay created by the bankruptcy or other proceeding, and enforcing the obligations of Obligor to purchase the Put Facilities pursuant to such Put Notice. 5.6 No Conditions to Agreement. This Agreement is absolute and unconditional and has been delivered free of any conditions and no representations have been made to Obligor affecting or limiting the liability of Obligor under this Agreement. This Agreement is in addition to and not in substitution for any agreement of Obligor, in the Related Agreements or in any other document or instrument executed by Obligor agreeing to perform all or any part of the Obligations. 5.7 Certain Waivers by Obligor. Obligor agrees that no release, delay, compromise, indulgence, or other action or failure to act by AL Investors or Facility Entities with respect to any other Person liable for any of the Obligations shall in any manner affect, diminish or impair the liability of Obligor under this Agreement. 5.8 Survival. This Agreement shall survive expiration or sooner termination of any of the Related Agreements. Without limiting the generality of the foregoing, no termination of any of the Related Agreements, whether in whole or in part, or whether by any of the parties thereto, shall terminate any obligation of Obligor to purchase the Put Facilities pursuant to a Put Notice or the Emeritus Facilities pursuant to the Purchase Notice and the terms of this Agreement. - -9- 6. ARBITRATION At the sole election of AL Investors, any claim or dispute between the parties, under this Agreement or otherwise, shall be determined by arbitration in Portland, Oregon under the American Arbitration Association (AAA) Commercial Arbitration rules with Expedited Procedures in effect on the date hereof, as modified by this Agreement. There shall be one arbitrator selected by the parties within seven (7) days of the arbitration demand or if not, then pursuant to the AAA rules, who shall be an attorney licensed to practice law in the State of Washington but residing in Portland with at least fifteen (151 years commercial law experience. Any issue about whether a claim is covered by this Agreement shall be determined by the arbitrator. At the request of either party made not later than thirty (30) days after the arbitration demand, the parties agree to submit the dispute to nonbinding mediation which shall not delay the arbitration hearing date. There shall be no substantive motions or discovery, except the arbitrator shall authorize such discovery as may be necessary to insure a fair hearing, which shall be held within sixty (60) days of the demand; and concluded within two (2) days. These time limits are not jurisdictional. The arbitrator shall apply substantive law and may award injunctive relief or any other remedy available from a judge including attorney fees and costs to the prevailing party, but shall not have the power to award punitive damages. 7. MISCELLANEOUS 7.1 Notices. Any notice, demand, offer, approval or other writing required or permitted pursuant to this Agreement shall be in writing, furnished in duplicate and shall be transmitted by hand delivery, facsimile, certified mail, return receipt requested, or Federal Express or another nationally recognized overnight courier service which provides evidence of delivery, postage prepaid, as follows: If to AL Investors or Facility Entities: AL Investors LLC c/o Bruce D. Thorn 2250 McGilchrist Street SE, Suite 200 Salem, Oregon 97302 Facsimile: (503)375-7644 Telephone: (503)370-7071 ext. 7143 - -10- With copies to: Foster Pepper & Shefelman PLLC 1111 Third Avenue, Suite 3400 Seattle, Washington 98101 Attn: Gary E. Fluhrer Facsimile: (206)447-9700 Telephone: (206)447-4400 Senior Housing Partners I, L.P. c/o Mr. Noah Levy Two Ravinia Drive, Suite 1400 Atlanta, Georgia 30346 Facsimile: (770) 399-5363 Telephone: (770) 395-8606 Goodwin Proctor & Hoar LLP Exchange Place 53 State Street Boston, Massachusetts 02109-2881 Attn : Minta Kay Facsimile: (617) 227-8591 Telephone: (617) 570-1877 If to Obligor: c/o Emeritus Corporation 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121-1031 Attn: Mr. Daniel Baty Facsimile: (206)301-4500 Telephone : (206) 301-4507 With copies to: Emeritus Corporation 3131 Elliott Avenue, Suite 500 Seattle, Washington 98121-1031 Attn: President Facsimile: (206)301-4500 Telephone: (206)298-2909 Any party shall have the right to change the place to which such notice shall be given or add additional parties to receive notices by similar notice sent in like manner to all other parties hereto. Any notice, if sent by overnight courier service, shall be deemed delivered on the earlier of the date of actual delivery or the next business day and if delivered by hand delivery or facsimile shall be deemed delivered on the date of the actual delivery and if sent by mail, shall be deemed delivered on the earlier of the third day following deposit with the U.S. Postal Service or actual delivery. Any notice sent by facsimile shall also be sent on the same business day by overnight courier or mail as set forth above. - -11- 7.2 Governing Law. This Agreement has been executed and delivered to AL Investors or Facility Entities in the State of Washington. Obligor agrees that the law of the State of Washington (exclusive of principles of conflicts of law) shall be applicable for the purpose of construing this Agreement, determining the validity hereof and enforcing the same. Obligor hereby consents to the jurisdiction of the courts of the State of Washington or to any federal court sitting in the State of Washington. AL Investors may enforce any or all of the provisions of this Agreement directly against Obligor and Obligor's marital community in the State of Washington or any other jurisdiction in which Obligor does business or at its option may enforce this Agreement on behalf of any Facility Entity in the state in which such Put Facility is located. 7.3 No Waiver. No delay or omission to exercise any right, power or remedy accruing to AL Investors upon any breach or default of Obligor shall impair such rights, powers or remedies of AL Investors or Facility Entities, nor shall it be construed to be a waiver of any such breach or default, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. 7.4 Assignment. AL Investors reserves the right to transfer or assign any or all of their right, title and interest under this Agreement, including assignment to any Mortgagee. Obligor shall not assign this Agreement in whole or in part to any Person without AL Investors or Facility Entity's prior written consent, which may be withheld in AL Investor's sole, absolute and unfettered discretion. 7.5 Captions. Any captions applied to the sections of this Agreement are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. 7.6 Invalidity. If any term, condition or provision of this Agreement shall be held invalid for any reason, such offending term, condition or provision shall be stricken therefrom, and the remainder shall not be affected. 7.7 Entire Agreement. . This Agreement constitutes the complete and final expression of the entire agreement between the parties pertaining to the subject matter hereof. This Agreement may be amended only by a written instrument executed by Obligor and AL Investors. 7.8 Binding Effect. This Agreement shall inure to the benefit of AL Investors the Facility Entities, their respective successors and assigns, and shall be binding upon Obligor and its respective permitted successors and assigns, as the case may be. This Agreement may be terminated only by means of a written - -12- document duly executed by Obligor and AL Investors. The parties agree that the Facility Entities are intended third party beneficiaries of this Agreement. 7.9 Legal Expenses. In the event of any default, or in the event that any dispute arises relating to the interpretation, enforcement or performance of this Agreement, the prevailing party shall be entitled to all reasonable fees and expenses incurred in connection therewith, including but not limited to fees of attorneys, accountants, appraisers, consultants, expert witnesses, arbitrators, mediators and court reporters. Without limiting the generality of the foregoing, the prevailing party shall pay all such costs and expenses incurred in connection with: (a) arbitration or other alternative dispute resolution proceedings, trial court actions and appeals; (b) bankruptcy or other insolvency proceedings of Obligor, (c) all claims, counterclaims, cross-claims and defenses asserted in any of the foregoing whether or not they arise out of or are related to this Agreement; (d) all preparation for any of the foregoing; and (e) all settlement negotiations with respect to any of the foregoing. 7.10 Jury Trial Waiver. OBLIGOR, AL INVESTORS AND FACILITY ENTITIES HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM, WHETHER IN CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT. DATED this 31st day of December, 1998 OWNER: AL INVESTORS LLC, a Delaware limited liability company, for itself and as sole managing member on behalf of each of the Facility Entities, or in cases where the Facility Entity is a limited partnership, as sole managing member on behalf of the general partner of such Facility Entity BY /s/ Norman L. Brenden Name: Norman L. Brenden Its: Manager OBLIGOR: /s/ Daniel R. Baty Daniel R. Baty, individually and on behalf of his marital community - -13- EXHIBIT A TO PUT AND PURCHASE AGREEMENT Certain Defined Terms Affiliate: with respect to any Person (i) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (ii) any other Person that owns, beneficially, directly or indirectly, five percent f5%) or more of the outstanding capital stock, shares or equity interests of such Person or (iii) a-y officer, director, employee, general partner or trustee of such Person, or any other Person controlling, controlled by, or under common control with, such Person (excluding trustees and Persons serving in a fiduciary or similar capacity who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests. Agency Account: The Agency Account to be maintained for each Facility for payment of Fixed Operating Expenses and Operating Expenses as described in Section 8.1 of the Management Agreement. Annual Plants): as defined in Section 4.2 of the Management Agreement. Award: all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation. Base Management Fee: as defined in Section 7.1 of the Management Agreement. Bankruptcy Event: Any of Emeritus or Managers admit in writing its inability to pay debts as they become due; or applies for, consents to, or acquiesces in the appointment of, a trustee, receiver or other custodian or makes a general assignment for the benefit of creditors, or in the absence of such application, consent or acquiescence, a trustee, receiver or other custodian is appointed and is not discharged within sixty (60) days after such appointment; or an order for relief is entered or a petition is filed under Title 11, United States Bankruptcy Code, with respect to any of them; or any other bankruptcy, reorganization, debt arrangement, or other case or proceeding under any bankruptcy or insolvency law, now or hereafter in effect, is commenced with respect to any of them. Business Day: any day which is not a Saturday or Sunday or a public holiday under the laws of the United States of America or the State of Washington. A-1 Capital Improvements: as defined in Section 12 of the Management Agreement. Cash Available for Distribution: on any date the amount contained in the Agency Accounts (as defined in Section 8.1 of the Management Agreement), minus an amount (to be retained in the Agency Accounts) equal to any reasonably projected Operating Deficit for the succeeding 30 days, taking into account all Operating Expenses and Fixed Operating Expenses and all anticipated Total Revenues during such 30-day period. Casualty: the damage or destruction by act of God or otherwise of any portion of any Facility which Owner reasonably estimates would cost more than $50,000 to repair or restore. Change of Control: shall mean the occurrence of any one of the following events with respect to Emeritus: (a) any Person (other than Emeritus, any of its subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of Emeritus or any of its subsidiaries), together with all "affiliates". and "associates" (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Act")) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of Emeritus representing a greater percentage than that then owned by Daniel R. Baty, together with all "affiliates" and "associates" of Daniel R. Baty (as defined above) of either (A) the combined voting power of Emeritus' then outstanding securities having the right to vote in an election of Emeritus' Board of Directors ("Voting Securities") or (B) the then outstanding shares of Stock of Emeritus; or (b) Persons who, as of the date hereof, constitute Emeritus' Board of Directors (the "Incumbent Directors") cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of Emeritus subsequent to the date hereof whose election or nomination for election was approved by a vote of at least a majority of the Incumbent Directors shall, for purposes of this Plan, be considered an Incumbent Director; or (c) the stockholders of Emeritus shall approve (A) any consolidation or merger of Emeritus or any subsidiary where the shareholders of Emeritus, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing a majority of A-2 the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of Emeritus or (C) any plan or proposal for the liquidation or dissolution of Emeritus; or (d) other than by reason of death or legal disability, Daniel Baty ceases to be the chief executive officer of Emeritus. Change of Control with respect to any Manager shall mean the occurrence of any event whereby 1 OO% of the ownership interests in such Manager are no longer owned by Emeritus. Closing: the date of closing under the Purchase Agreements. Code: the Internal Revenue Code of 1986, as amended. Commencement Date: as defined in Section 2.1 of the Management Agreement. Compensation: the direct salaries and wages paid to, or accrued for the benefit of, any employee working and employed at each Facility together with all reasonably customary fringe benefits payable to, or accrued for the benefit of such employee, including employer's contribution under FICA., unemployment compensation, or other employment taxes, pension fund contributions, workmen's compensation, group life and accident and health insurance premiums, and other reasonable employee benefits customary in the industry. Condemnation: with respect to any Facility or any interest therein or right accruing thereto or use thereof (i) the exercise of the power of condemnation, whether by legal proceedings or otherwise, by a Condemnor or (ii) a voluntary sale or transfer to any Condemnor under threat of condemnation. Condemnor: any public or quasi-public authority, or private corporation or individual, having the power of condemnation. Contracts: Collectively, all Provider Agreements, Residency Agreements, Ordinary Contracts and Major Contracts. CPA: The certified public accountants retained to provide necessary accounting services for the Facility or Owner, the selection of which shall be subject to approval by Owner. A-3 Date of Taking: the date the Condemnor has the right to possession of the property being condemned. Environmental Laws : means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings, and court judgments and decrees in effect now or in the future and including all amendments, that relate to Hazardous Materials and apply to Emeritus and the Emeritus Entities or to the Land and/or the Improvements. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq., the Clean Water Act, 33 U.S.C. Section 1251, et seq., and the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, and their state analogs. Excluded Expenses: depreciation, amortization and other non-cash expenses; items to be provided or paid for at Owner's or Managers' sole expense as provided herein; costs and expenses resulting from or required to cure any matter or defect which constitutes a breach of warranty, representation or indemnity under the Purchase Agreements, the Licensing Agreement, or the Management Agreement which cost or expense shall be the sole responsibility of the breaching party; unreasonable or excessive charges or expenses. Escrow Holder: First American Title Insurance Company. Extension Term: as defined in Section 2.2 of the Management Agreement. Facility or Facilities: Each of the assisted living facilities, including the Land, Improvements, and Personal Property associated therewith, located in the city and state as set forth below:
Facility City State Units Beds Facility LLC and LP Name La Villita Phoenix AZ 87 110 AL Investors Phoenix LLC Laurel Place San CA 71 87 AL Investors San Bernardino Bernardino LLC The Terrace Grand CA 88 97 AL Investors Grand Terrace Terrace LLC Gardens at Newark DE 100 110 AL Investors Newark LLC Whitechapel Barrington Lecanto FL 79 94 AL Investors Lecanto LLC Place Beneva Park Sarasota FL 95 104 AL Investors Sarasota Club LLC Central Park Orlando FL 174 189 AL Investors Orlando LLC Village College Park Bradenton FL 85 96 AL Investors Bradenton Club LLC Lodge at Pinellas FL 153 160 AL Investors Pinellas Mainlands Park Park LLC Madison Glen Clearwater FL 135 200 AL Investors Clearwater LLC Springtree Sunrise FL 179 220 AL Investors Sunrise LLC Elm Grove Hutchinson KS 121 142 AL Investors Hutchinson LLC Brookside Middleburg OH 99 105 AL Investors Middleburg Estates Heights Heights LLC Bellaire Greenville SC 81 88 AL Investors Greenville Place LLC Walking Clarksville TN 50 57 AL Investors Clarksville Horse Meadows LLC
A-4 Facility City State Units Beds Facility LLC and LP Name Dowlen Oaks Beaumont TX 79 87 AL Investors Beaumont LLC Eastman Longview TX 70 78 AL Investors Longview LP Estates Lakeridge Wichita TX 79 87 AL Investors Wichita Place Falls Falls LP Meadowlands Waco TX 71 76 AL Investors Waco LP Terrace Myrtlewood San Angelo TX 79 88 AL Investors San Angelo Estates LP Saddleridge Midland TX 79 88 AL Investors Midland LP Lodge Seville Amarillo TX 50 55 AL Investors Amarillo LP Estates Emeritus Ogden UT 83 91 AL Investors Ogden LLC Estates Harbour Ocean Shores WA 50 55 AL Investors Ocean Pointe Shores Shores LLC Park Place Casper WY 60 68 AL Investors Casper LLC
Facility Accounts: as defined in Section 8.1 of the Management Agreement. Facility Entity: each of the Facility LLC's or LP's which owns a Facility as set forth opposite the name of each Facility above and their respective successors or assigns. Fixed Operating Expenses: for any period, all fixed costs and expenses of owning, and operating the Facilities in the aggregate except where the Agreement expressly provides that Fixed Operating Expenses shall be determined for each Facility to the extent such costs and expenses are not included in Operating Expenses, including but not limited to (a) Managers' Base Management Fee (excluding the amount of any Accrued Management Fee accrued during such period); (b) all amounts to be paid into the Reserve Account and the cost of Capital Improvements approved by Owners not funded from the Reserve Account; (c) the debt service on account of any Mortgage; (d) the real and personal property ad valorem taxes and assessments; and (e) all costs and expenses of all property and casualty insurance on or in respect of the Facilities provided for herein and the amount of all self-insured losses or deductibles. Fixed Operating Expenses shall not include the Excluded Expenses. Furnishings and Equipment: all furniture, furnishings, beds, equipment, food service equipment, apparatus and other personal property used in (or if the context so dictates, required in connection with), the operation of each Facility, other than Operating Equipment, Operating Supplies and fixtures attached to and forming part of the Improvements. GAAP: means generally accepted accounting principles applied on a consistent basis. Governmental Authorities: Collectively, all agencies, authorities, bodies, boards, commissions, courts, instrumentalities, legislatures, and offices of any nature whatsoever of any government, quasi-government unit or political subdivision, whether with a federal, state, county, district, municipal, city or otherwise and whether now or hereinafter in existence which exercises jurisdiction over any Facility. A-5 Group Service: as defined in Section 3.2.4 of the Management Agreement. Hazardous Substances: "Hazardous Substances" shall mean petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials, radioactive materials; polychlorinated biphenyls ("PCBs") and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become fr iable; underground storage tanks, whether empty or containing any substance; any substance the presence of which on any Facility is prohibited by any federal, state or local authority; any substance that requires special handling; and any other material, or substance now or in the future defined as a "hazardous substance ", "hazardous material," hazardous waste," "toxic substance," "toxic pollutant," "contaminant," or "Pollutant" within the meaning of any Environmental Law. Provided, however, Hazardous Substances shall not include the safe and lawful use and storage of quantities of (i) pre-packaged supplies, medical waste, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable Facilities, (ii) cleaning materials, personal grooming items and other items sold in pre-packaged containers for consumer use and used by occupants of any Facility; and (iii) petroleum products used in the operation and maintenance of motor vehicles from time to time located on the Facilities' parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Environmental Laws. Impositions: collectively, all taxes (including, without limitation, all capital stock and franchise taxes of AL Investors or any Facility Entity, all ad valorem, property, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes), assessments (including, without limitation, all assessments for public improvements or benefits, whether or not commenced or completed prior to the date hereof and assessments levied by condominium associations), ground rents, water and sewer rents other than normal utility charges, excises, tax levies, fees (including, without limitation, license, permit, inspection, authorization and similar fees), and all other charges imposed by Governmental Authorities, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Facility (including all interest and penalties thereon due to any failure in payment by Manager), which at any time prior to, during or in respect of the Term of the Management Agreement may be assessed or imposed on or in respect of or be a Lien upon (a) Facility Entities' interest in the Facility, (b) the Facility or any rent or income therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, sales from, or activity conducted on, or in connection with, the Facility or the leasing or use of the Facility. Notwithstanding the foregoing, "Impositions" shall not include: (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on any Owners or Managers, (2) any tax imposed with respect to the sale, exchange or other disposition of a Facility or the proceeds thereof, or (3) any principal or interest on any Mortgage; provided, however, the provisos set forth in clause (1) of this sentence shall not be A-6 applicable to the extent that any real or personal property tax, assessment, tax levy or charge pursuant to the first sentence of this definition and which is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) is levied, assessed or imposed expressly in lieu thereof. Improvements: the buildings, structures (surface and sub-surface) and other improvements now or hereafter located on the Land. Initial Term: as defined in Section 2.1 of the Management Agreement. Insurance Requirements: all terms of each insurance policy required to be carried in this Agreement, or agreed to be carried by Owners and Managers, and all orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to the Facilities or the operation thereof. Junior Loan: any indebtedness incurred by Owners which is secured by a mortgage, pledge, and related security instruments against the membership interests of AL Investors in the Facility Entities. Initially, the Junior Loan is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and Senior Housing Partners I, L.P. dated on or about the same date hereof ("Initial Junior Loan"). Land: the parcel or parcels of land on which each of the Facilities is situated, together with all rights of ingress and egress thereto and parking associated therewith as legally described in the Purchase Agreements. Leases: Collectively, the Ordinary Leases and Major Leases. Legal Requirements: collectively, all statutes, ordinances, by-laws, codes, rules, regulations, restrictions, orders, judgments, decrees and injunctions (including, without limitation, all applicable building, health code, zoning, subdivision, and other land use and assisted living licensing statutes, ordinances, by-laws, codes, rules and regulations), whether now or hereafter enacted, promulgated or issued by any Governmental Authority, Accreditation Body or Third Party Payor affecting a Facility Entity or any Facility or the ownership, construction, development, maintenance, management, repair, use, occupancy, possession or operation thereof or the operation of any programs or services in connection with a Facility, including, without limitation, any of the foregoing which may (i) require repairs, modifications or alterations in or to any Facility, (ii) in any way affect (adversely or otherwise) the use and enjoyment of any Facility or (iii) require the assessment, monitoring, clean-up, containment, removal, remediation or other treatment of any Hazardous Substances on, under or from any Facility. Without limiting the foregoing, the term "Legal Requirements" includes all Environmental Laws and shall also include all Permits and A-7 Contracts issued or entered into by any Governmental Authority, any Accreditation Body and/or any Third Party Payor and all Permitted Encumbrances. Lending Group: GMAC Commercial Mortgage for itself and as agent for other participating lenders in a debt facility referred to herein as the Initial Senior Loan secured by the Facilities in the maximum aggregate original principal balance of $138,000,000. Licensing Indemnity Agreement: that certain Licensing Indemnity Agreement between Emeritus Corporation and AL Investors dated on or about the same date hereof. Lien: with respect to any real or personal property, any mortgage, mechanics' or materialmen's lien, pledge, collateral assignment, hypothecation, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment or other encumbrance of any kind in respect of such property which secures or is intended to secure the payment of money, whether or not inchoate, vested or perfected, other than the Mortgage. Major Contracts: Any contract for the purchase of goods or services or any other agreement which requires payments in excess of 550,000 per year for any Facility or which cannot be terminated without penalty or termination fee on sixty (60) days notice or in which the provider of the goods or services is Emeritus or an Affiliate (except pursuant to Group Services approved in connection with an Annual Plan). Major Lease. Any Lease which has a noncancellable term in excess of one year or a rental payment in excess of $10,000 per year or pursuant to which Emeritus or an Affiliate is the lessee or lessor. Managed Care Plans: all health maintenance organizations, preferred provider organizations, individual practice associations, competitive medical plans, and similar arrangements. Management Fee: an amount equal to seven percent (7%) of Total Revenue for all Facilities, subject to the provisions of Section 7.2 of the Management Agreement. Medicaid: the medical assistance program established by Title XIX of the Social Security Act (42 USC 1396 et seq.) and any statute succeeding thereto. Medicare: the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 USC 1395 et seq.) and any statute succeeding thereto. A-8 Mortgage: collectively, the terms and conditions of the Senior Loan and the Junior Loan. Mortgagee: the holder or beneficiary of a Mortgage and their respective successors and assigns. Operating Deficit and Operating Profit: for any period, the amount, if any, by which Total Revenues for that period is less than or exceeds, respectively, the sum of (i) Operating Expenses and (ii) Fixed Operating Expenses for that period in each case determined on a cash basis. Operating Equipment: all dishes, glassware, bed coverings, towels, silverware, uniforms and similar items used in, or held in storage for use in (or if the context so dictates, required in connection with) the operation of the Facilities. Operating Expenses: for any period, all reasonable costs and expenses of owning and operating the Facilities in the aggregate except where the Agreement expressly provides that Operating Expenses shall be determined for each Facility (which costs and expenses do not include the Fixed Operating Expenses or the Excluded Expenses) including the following: (a) The cost of all Operating Equipment and Operating Supplies placed in use, with the exception of the Operating Equipment and Operating Supplies initially supplied by the Facility Entities. The cost of maintaining and operating the vans and buses for each Facility (but not any debt service or lease payments which shall remain the sole expense of Emeritus) plus $2,000 per Operating Year for each bus or van in monthly installments as compensation for making the buses available at the Facilities. (b) The Compensation of all employees working and employed by Managers at the Facilities. The Compensation of Managers' or Emeritus' home office or executive or other personnel not regularly employed at the Facilities shall not be included in Operating Expenses or Fixed Operating Expenses, but reasonable out-of-pocket travel expenses of Managers or Owners' executive personnel while traveling to and from a Facility on business shall be reimbursable as an Operating Expense; provided, however, that if such business travel relates to business or properties other than with respect to the Facilities, then such travel expenses shall be equitably prorated between such other business or properties and the Facilities. (c) The cost of all utilities including, without limitation, electricity, water, gas, heat and other utilities, and office supplies and equipment, and goods and services purchased under all Contracts, including leasing expenses in connection with telephone and data processing equipment and such other equipment as the parties hereto may agree upon in writing. A-9 (d) The cost of repairs to and maintenance of the Facilities whether performed by Facility employees or contracted to third parties. (e) insurance premiums for all insurance required under this Agreement and self-insured losses and deductibles with respect to such insurance coverages (but excluding premiums and self-insured losses and deductibles on property and casualty insurance which are included in Fixed Operating Costs). Premiums on policies for more than one year will be prorated over the period of insurance coverage and premiums under blanket policies will be equitably allocated among properties covered. (f) All Impositions (except for real and Personal Property ad valorem taxes and assessments which shall be a Fixed Operating Expenses). (g) Except as otherwise provided in Section 6.1 of the Management Agreement, legal fees and fees of any CPA for services directly related to the operations of the Facilities (whether incurred by Owners or Managers). (h) The costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non-recurring work on operational, functional, design or construction problems and activities wh2ther incurred by Owner or Manager; provided, however, that if such costs end expenses have not been included in the Annual Plan, the same shall be subject to approval by Owner. (i) All expenses for marketing the Facilities and all expenses of sales promotion and public relations activities as set forth in the Annual Plan (j) The cost of Group Services, as provided in Section 3.2.4 of the Management Agreement. (k) Bad debts or uncollectible amounts from residents of the Facilities. (l) refund of deposits to residents under Residency Agreements (m) Owners' reasonable costs and expenses of administering, supervising, and managing Owners' activities in connection with this Agreement and any Mortgage, including Owners' reasonable cost and expense of preparing and filing federal, state and local income tax returns and audits. A-10 (n) All other reasonable expenses and charges incurred in the operations and management of the Facilities to the extent set forth in the Annual Plan or otherwise approved by the Owners or as otherwise set forth in the Agreement. Operating Period: the period beginning with the Commencement Date and ending upon the expiration of the Initial Term. Operating Supplies: consumable items used in, or held in storage for use in (or if the context so dictates, required in connection with), the operation of the Facilities, including food, medical supplies, fuel, soap, cleaning materials, and other similar consumable items. Operating Year: the Operating Years shall coincide with and be identical with the calendar years, except that the first Operating Year shall be the period beginning on the Commencement Date and ending on December 31 of the following full calendar year if the Commencement Date is before December 31,1998, or beginning on the Commencement Date and ending on the following December 31, 1999, if the Commencement Date is after December 31, 1998 and such long or short year, as applicable, shall constitute a full Operating Year as used herein. Ordinary Contracts: All agreements and contracts to purchase goods and services (excluding Major Contracts) in the ordinary course of business of refurbishing, owning, operating or managing the Facilities, or the operation of any programs or services in conjunction with the Facility and all renewals, replacement and substitutions therefor with any Governmental Authority, Accreditation Body or Third Party Payor or entered into with any third Person, excluding, however, any agreements pursuant to which money has been or will be borrowed or advanced, the Leases, any agreement creating or permitting any Lien or other encumbrance on title (except for the Permitted Exceptions), and any Major Contract. Ordinary Leases: Collectively, all subleases, licenses, use agreements, equipment leases, concession agreements, tenancy at will agreements and other occupancy agreements (but excluding any Residency Agreement; Facility Lease or Major Lease), whether oral or in writing, entered into by Managers affecting a Facility. Overdue Rate: on any date, a rate of interest per annum equal to the greater of: (i) a variable rate of interest per annum equal to one hundred twenty percent (120%) of the Prime Rate, or (ii) twelve percent (12%) per annum; provided, however, in no event shall the Overdue Rate be greater than the maximum rate then permitted under Legal Requirements. Permits: collectively, all permits, licenses, approvals, qualifications, rights, variances, permissive uses, accreditation, certificates, certifications, consents, A-11 agreements, contracts, contract rights, franchises, interim licenses, permits and other authorizations of every nature whatsoever required by, or issued under, applicable Legal Requirements relating or affecting a Facility or the construction, development, maintenance, management, use or operation thereof, or the operation of any programs or services in conjunction with the Facility and all renewals, replacements and substitutions therefor, now or hereafter required or issued by any Governmental Authority, Accreditation Body or Third Party Payor to Owners or Managers. Permitted Exceptions: (i) all encumbrances to title present at closing pursuant to the Purchase Agreements; (ii) liens for Impositions not delinquent; (iii) easements, restrictions on use, zoning laws and ordinances, rights of way and other encumbrances and minor irregularities in title, whether now existing or hereafter arising, which are approved by Owner and do not individually or in the aggregate materially impair the use of any Facility. Person: any individual, corporation, general partnership, limited partnership, joint venture, stock company or association, company, bank, trust, trust company, land trust, business trust, unincorporated organization, unincorporated association, Governmental Authority or other entity of any kind or nature. Personal Property: all machinery, equipment, furniture, furnishings, movable walls or partitions, computers or trade fixtures, goods, inventory, supplies, the name of the Facility, and other personal or intangible property used in the operation of the Facility, including, but not limited to; all Operating Equipment, Furnishings and Equipment and Operating Supplies; provided, however, that the Personal Property shall not include vans or buses, but title to all vans and buses shall remain in Emeritus or its Affiliates and be transferred to Owners as provided in Section 9.6 of the Management Agreement. Primary Intended Use: the use of the Facility as an assisted living facility and such ancillary uses as are permitted by applicable Legal Requirements and may be necessary in connection therewith or incidental thereto. Prime Rate: the variable rate of interest per annum from time to time set forth in the WALLSTREET JOURNAL AS the prime rate of interest and in the event that the WALLSTREET JOURNAL NO longer publishes a prime rate of interest, then the Prime Rate shall be deemed to be the variable rate of interest per annum which is the prime rate of interest or base rate of interest from time to time announced by any major bank or other financial institution reasonably selected by AL Investors. Provider Agreements: all participation, provider and reimbursement agreements or arrangements, if any, in effect for the benefit of Owners or Managers in connection with the operation of the Facility relating to any right of payment or other claim arising out of or in connection with participation in any Third Party Payor Program. A-12 Put and Purchase Agreement: that certain Put and Purchase Agreement between Daniel Baty and AL Investors dated on or about the same date hereof. Residency Agreement: all contracts, agreements and consents executed by or on behalf of any resident or other Person seeking services at the Facility, including, without limitation, assignments of benefits and guarantees. Senior Loan: any indebtedness incurred by Owners which is secured by any mortgage, deed of trust and related security instruments against a Facility. Initially, the Senior Debt is evidenced by that certain Loan Agreement between AL Investors (and the Facility Entities) and GMAC Commercial Mortgage Corporation dated on or about the same date hereof ("Initial Senior Loan"). Third Party Payor Programs: collectively, all third party payor programs in which the Emeritus Entities presently or in the future may participate, including without limitation, Medicare, Medicaid, Blue Cross and/or Blue Shield, Managed Care Plans, other private insurance plans and employee assistance programs. Third Party Payors: collectively, Medicare, Medicaid, Blue Cross and/or Blue Shield, private insurers and any other Person which presently or in the future maintains Third Party Payor Programs. Title Company: First American Title Insurance Company. Total Revenues: collectively, but without duplication all revenues generated by reason of the operation of the Facilities in the aggregate, except where the Agreement expressly provides that Total Revenues shall be determined for each Facility, directly or indirectly received by any Facility Entity or Managers, including, without limitation, all resident revenues received or receivable for the use of, or otherwise by reason of, all rooms, units and other facilities provided, deposits received from residents under Residency Agreements, meals served, services performed, space or facilities leased pursuant to the Leases or goods sold on or from the Facility, all amounts from Third Party Payors, and all revenues from all ancillary services provided at or relating to any Facility; provided, however, that Total Revenues shall not include: (a) federal, state or local sales, use, gross receipts and excise taxes and any tax based upon or measured by said Total Revenues which is added to or made a part of the amount billed to the resident or other recipient of such services or goods, whether included in the billing or stated separately, which is paid to the Governmental Authority; A-13 (b) proceeds from sale of capital assets, including the sale of the Facility and proceeds therefrom other than sale of Furnishings and Equipment in the ordinary course of business,; (c) proceeds of any insurance other than business interruption insurance; (d) proceeds of any financing or capital contributions to Owners; (e) interest or earnings in the Reserve account; (f) any Award resulting from Condemnation; (g) any other income or proceeds from any source other than in the ordinary course of business of the Facility. Except as otherwise specifically indicated, all references to Section and Subsection numbers refer to Sections and Subsections of this Agreement, and all references to Exhibits refer to the Exhibits attached hereto. The words "herein ", "hereof", "hereunder", "hereinafter", and words of similar import refer to this Agreement as a whole and not to any particular Section or Subsection hereof unless the context otherwise requires. A-14 EXHIBIT B TO PUT AND PURCHASE AGREEMENT 1. Exercise of Option by Emeritus. Immediately following the exercise by Emeritus of the Option contained in Section 13 of the Management Agreement, Emeritus, Obligor and AL Investors shall seek to agree on an aggregate fair market value for the three Emeritus Facilities (the "Fair Market Value"). If Emeritus, Obligor and AL Investors fail to agree on the Fair Market Value within ten (10) Business Days after such exercise of the Option, the Fair Market Value shall be determined by a single appraiser satisfactory to Emeritus, Obligor and AL Investors, if they were able to agree to such an appraiser within ten fl 0) Business Days after such exercise of the Option. If no single appraiser is so selected, Emeritus, Obligor and AL Investors shall each appoint an independent appraiser (a) who is a member of the Appraisal Institute with at least five (5) years experience appraising assisted living facilities on a national basis, (b) who agrees to render a determination of the Fair Market Value of the three Emeritus Facilities within the time periods specified below, and (c) who is not then employed, anticipated to be employed, nor during the last three (3) years has been employed, by the party selecting the appraiser. If only one appraiser is appointed, its judgment as to the Fair Market Value of the three Emeritus Facilities shall be conclusive. If two, but not three appraisers are appointed, then the two appraisers so appointed shall thereafter appoint a third appraiser within ten (10) Business Days of their appointment who meets the same qualifications. If they fail to dc so, either of the parties appointing an appraiser may request that the head of the State of Washington Chapter of the American Institute of Real Estate Appraisers (or any other recognized professional association of real estate appraisers) designate a third appraiser with such qualifications. The three appraisers so appointed shall within thirty (30) days thereafter render their judgment as to the fair market value of the Emeritus Facilities. The Fair Market Value shall be the numerical average of the two closest appraisals or the one, if any, which is the numerical average of the other two. All costs of the appraisers selected shall be borne by the Obligor. 2. Exercise of Option by Obligor. Immediately following the exercise by Obligor of the Option contained in Section 3.2 of this Agreement, Obligor and AL Investors shall seek to agree on an aggregate fair market value for the three Emeritus Facilities (the "Fair Market Value"), so that Emeritus may decide whether to exercise its Right of First Refusal with respect to the Emeritus Facilities as provided for in Section 14 of the Management Agreement. (In the event Emeritus waives its Right of First Refusal, then no Fair Market Value determination shall be required because the Fair Market Value amount which is to be paid for the Emeritus Facilities is deducted in the formula for the Option Purchase Price for the Meditrust Facilities.) If Obligor and AL Investors fail to agree on the Fair Market Value within ten (10) Business Days after such exercise of the Option, the Fair Market Value shall be determined by a single appraiser satisfactory to Emeritus, Obligor and AL B-1 Investors, if they were able to agree to such an appraiser within ten (10) Business Days after such exercise of the Option. It no single appraiser is so selected, Obligor and AL Investors shall each appoint an independent appraiser (a) who is a member of the Appraisal Institute with at least five (5) years experience appraising assisted living facilities on a national basis, (b) who agrees to render a determination of the Fair Market Value of the three Emeritus Facilities within the time periods specified below, and (c) who is not then employed, anticipated to be employed, nor during the last three years has been employed, by the party selecting the appraiser. If only one appraiser is appointed, its judgment as to the Fair Market Value of the three Emeritus Facilities shall be conclusive. The two appraisers so appointed shall thereafter appoint a third appraiser within ten (10) Business Days of their appointment who meets the same qualifications. If they fail to do so, either Obligor or AL Investors may request that the head of the State of Washington Chapter of the American Institute of Real Estate Appraisers (or any other recognized professional association of real estate appraisers designate a third .appraiser with such qualifications. The three appraisers so appointed shall within thirty (30) days thereafter render their judgment as to the Fair Market Value of the Emeritus Entities. The Fair Market Value shall be the numerical average of the two closest appraisals or the one, if any, which is the numerical average of the other two. All costs of the appraisers selected shall be borne by the Obligor. B-2 EXHIBIT C TO PUT AND PURCHASE AGREEMENT Determination of Purchase Price "Cash Account" means an account maintained with respect to each Facility with an initial balance as set forth as the Owner's Deficit Contribution on Exhibit D hereto, which shall be decreased from time to time by the Operating Deficits of such Facility and which shall be increased from time to time by any net proceeds from refinancing such Facility after repayment of its allocable Senior Loan, and deduction of refinancing costs and reserves, but which shall not be less than zero. In the event Emeritus makes an Emeritus Deficit Contribution pursuant to Section 8.3 of the Management Agreement, such contribution shall be deemed for purposes of the preceding sentence to reduce the Operating Deficits of those Facilities producing Operating Deficits in proportion to their relative amounts. The "Investment Account" for a Facility shall initially equal the sum of the allocated Equity and Owner's Deficit Contribution for such Facility, as shown on Exhibit D. The Investment Account shall be increased from time to time by (a) additional amounts contributed by AL Investors with respect to such Facility to pay for Operating Deficits after the Cash Account balance for such Facility has been reduced to zero, (b) amounts contributed by AL Investors to the Facility Entity to reduce the Senior Loan allocated to such Facility, (c) any proceeds of AL Investors or other Facility Entities applied by the Senior Lender to reduce the Senior Loan allocated to such Facility, and (d) as January 1 of each year, the Investment Return as defined below accrued during the prior calendar year with respect to such Facility. The "Investment Return" means an eighteen percent (18%) per annum rate of return which shall accrue on a daily basis on the balance of the Investment Account, as adjusted from time to time as set forth above. The "Purchase Price" for a Put Facility shall equal the amount, determined as of the Put Purchase Date, that is required to repay in full the Senior Loan allocated to such Facility (including all prepayment penalties and other charges incurred on such repayment) plus the Investment Account of such Facility, plus the Investment Return accrued on the Investment Account for such Facility for the current year through the Put Purchase Date, plus an amount equal to two percent (2%) of the initial Investment Account for such Facility, less the Cash Account balance for such Facility. The Purchase Price for all Put Facilities shall equal the sum of the Purchase Prices for each Put Facility calculated as set forth above. C-1 EX-21.1 15 EX-21.1 Exhibit 21.1 SUBSIDIARIES OF EMERITUS CORPORATION Acorn Service Corporation, Washington corporation ALAI, L.L.C., Arizona corporation EM I, L.L.C., Washington limited liability company 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 Management, L.L.C., Washington limited liability company Emeritus Management I, L.P., Washington limited partnership 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 VII, Inc., Washington corporation Emeritus Properties VIII, Inc., Washington corporation Emeritus Properties IX, L.L.C., Washington limited liability company Emeritus Properties X, L.L.C., Washington limited liability company Emeritus Properties XI, L.L.C., Washington limited liability company Emeritus Properties of Illinois, Inc., Washington corporation 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 III, L.P., 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 Painted Post Properties, Inc., Washington corporation TDC/Emeritus Paso Robles Associates, Washington partnership EX-23.1 16 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. 333-60323 and 333-05965) on Form S-8 and (No. 333-20805) on Form S-3 of Emeritus Corporation of our report dated February 26, 1999, except as to note 20, which is as of March 29, 1999, relating to the consolidated balance sheets of Emeritus Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, comprehensive operations, shareholders' equity (deficit), and cash flows and the related schedule for each of the years in the three-year period ended December 31, 1998, which reports appear in the December 31, 1998 annual report on Form 10-K of Emeritus Corporation. Our report on the consolidated financial statements refers to a change in method of accounting for start-up costs and organization costs. /s/ KPMG LLP Seattle, Washington March 29, 1999 EX-27.1 17 EX-27.1
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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US$ YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 11,442 4,491 2,773 538 378 35,652 138,158 9,499 192,870 36,629 159,265 25,000 0 1 (45,965) 192,870 0 151,820 0 171,405 (4,998) 695 14,192 (28,779) 0 (28,779) 0 937 1,320 (31,036) (3.17) (3.17)
-----END PRIVACY-ENHANCED MESSAGE-----