UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


______________________





FORM
10-Q


(Mark
      One)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT 1934





For the
quarterly period ended June 30, 2009





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934





Commission
file number   1-14012





EMERITUS
CORPORATION


(Exact
name of registrant as specified in its charter)





WASHINGTON
            91-1605464(State
      or other jurisdiction
            (I.R.S
      Employerof
      incorporation or organization)
            Identification
      No.)





3131
Elliott Avenue, Suite 500


Seattle,
WA 98121


(Address
of principal executive offices)





(206)
298-2909


(Registrant’s
telephone number, including area code)


____________________________





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YesþNoo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YesoNoo





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:





Large
accelerated fileroAccelerated
filerþNon-accelerated
fileroSmaller
reporting company o














Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YesoNoþ





As of
July 31, 2009, there were 39,228,624 shares of the Registrant’s Common Stock,
par value $0.0001, outstanding.




















EMERITUS
      CORPORATIONTable of ContentsPart I.  Financial
  InformationPage No.Item 1.  Financial Statements
      (unaudited):
              1Condensed Consolidated Balance Sheets as of June 30,
      2009, and December 31, 2008
              2Condensed Consolidated Statements of Operations for the
      three and six months ended June 30, 2009 and 2008
              3Condensed Consolidated Statements of Cash Flows for the
      six months ended June 30, 2009 and 2008
              4Condensed Consolidated Statement of Shareholders’
      Equity for the six months ended June 30, 2009
              6Notes to Condensed Consolidated Financial
      Statements
              7Item 2.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              18Item 3.
              Quantitative and Qualitative Disclosures About Market
      Risk
              43Item 4.
              Controls and Procedures
              43Part II.  Other
InformationNote:
              Items
      2, 3, and 5 of Part II have been omitted because they are not
      applicable.Item 1.
              Legal Proceedings
              44Item 1A.
              Risk Factors
              44Item 4.
              Submission of Matters to a Vote of Security
      Holders
              44Item 6.
              Exhibits
              45Signature
              46Index to Exhibits
              47











Table of Contents


PART I. Financial Information





Item 1.  Financial Statements (unaudited)








[The rest
of this page is intentionally left blank]











1


Table of Contents





EMERITUS CORPORATIONCONDENSED
      CONSOLIDATED BALANCE SHEETS(In
      thousands, except share data)ASSETSJune
      30, 2009
                    
                    
                    December
      31,Current
      Assets:
                    
                    (unaudited)
                    
                    
                    2008Cash
      and cash equivalents
                    
                    $
                    41,487
                    
                    
                    $
                    27,254Short-term
      investments
                    
                    
                    1,794
                    
                    
                    
                    1,802Trade
      accounts receivable, net of allowance of $961 and $549
                    
                    
                    10,832
                    
                    
                    
                    11,596Other
      receivables
                    
                    
                    5,183
                    
                    
                    
                    5,556Tax,
      insurance, and maintenance escrows
                    
                    
                    23,708
                    
                    
                    
                    21,762Prepaid
      workers' compensation
                    
                    
                    20,375
                    
                    
                    
                    19,288Other
      prepaid expenses and current assets
                    
                    
                    23,782
                    
                    
                    
                    23,720Property
      held for sale
                    
                    
                    37,987
                    
                    
                    
                    13,712Total
      current assets
                    
                    
                    165,148
                    
                    
                    
                    124,690Long-term
      investments
                    
                    
                    4,979
                    
                    
                    
                    4,192Property
      and equipment, net of accumulated depreciation of $182,179 and
      $144,441
                    
                    
                    1,688,262
                    
                    
                    
                    1,725,558Restricted
      deposits
                    
                    
                    12,790
                    
                    
                    
                    12,337Lease
      acquisition costs, net of accumulated amortization of  $1,672
      and $1,877
                    
                    
                    3,827
                    
                    
                    
                    3,867Goodwill
                    
                    
                    74,197
                    
                    
                    
                    73,704Other
      intangible assets, net of accumulated amortization of $22,702 and
      $76,368
                    
                    
                    123,082
                    
                    
                    
                    131,994Other
      assets, net
                    
                    
                    17,550
                    
                    
                    
                    18,851Total
      assets
                    
                    $
                    2,089,835
                    
                    
                    $
                    2,095,193LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      Liabilities:Current
      portion of long-term debt
                    
                    $
                    43,616
                    
                    
                    $
                    18,267Current
      portion of capital lease and financing obligations
                    
                    
                    10,583
                    
                    
                    
                    9,172Trade
      accounts payable
                    
                    
                    6,950
                    
                    
                    
                    7,474Accrued
      employee compensation and benefits
                    
                    
                    34,942
                    
                    
                    
                    32,778Accrued
      interest
                    
                    
                    7,463
                    
                    
                    
                    7,012Accrued
      real estate taxes
                    
                    
                    9,537
                    
                    
                    
                    9,791Accrued
      professional and general liability
                    
                    
                    9,131
                    
                    
                    
                    10,842Accrued
      income taxes
                    
                    
                    1,857
                    
                    
                    
                    3,715Other
      accrued expenses
                    
                    
                    12,830
                    
                    
                    
                    12,284Deferred
      revenue
                    
                    
                    12,478
                    
                    
                    
                    12,463Unearned
      rental income
                    
                    
                    16,940
                    
                    
                    
                    16,101Total
      current liabilities
                    
                    
                    166,327
                    
                    
                    
                    139,899Long-term
      debt, less current portion
                    
                    
                    1,337,928
                    
                    
                    
                    1,355,149Capital
      lease and financing obligations, less current portion
                    
                    
                    170,944
                    
                    
                    
                    180,684Deferred
      gain on sale of communities
                    
                    
                    7,732
                    
                    
                    
                    2,667Deferred
      rent
                    
                    
                    23,971
                    
                    
                    
                    14,022Other
      long-term liabilities
                    
                    
                    36,391
                    
                    
                    
                    36,744Total
      liabilities
                    
                    
                    1,743,293
                    
                    
                    
                    1,729,165Commitments
      and contingenciesShareholders'
      Equity:Preferred
      stock, $.0001 par value.  Authorized 20,000,000 shares, none
      issued
                    
                    
                    –
                    
                    
                    
                    –Common
      stock, $.0001 par value.  Authorized 100,000,000 shares; issued
      and outstanding39,158,419
      and 39,091,648 shares at June 30, 2009, and December 31, 2008,
      respectively
                    
                    
                    4
                    
                    
                    
                    4Additional
      paid-in capital
                    
                    
                    722,195
                    
                    
                    
                    719,903Accumulated
      other comprehensive income
                    
                    
                    621
                    
                    
                    
                    –Accumulated
      deficit
                    
                    
                    (382,462
                    )
                    
                    
                    (360,506
                    )Total
      Emeritus Corporation shareholders' equity
                    
                    
                    340,358
                    
                    
                    
                    359,401Noncontrolling
      interest–related party
                    
                    
                    6,184
                    
                    
                    
                    6,627Total
      shareholders' equity
                    
                    
                    346,542
                    
                    
                    
                    366,028Total
      liabilities and shareholders' equity
                    
                    $
                    2,089,835
                    
                    
                    $
                    2,095,193





See
accompanying Notes to Condensed Consolidated Financial Statements








2


Table of Contents





EMERITUS CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(In
      thousands, except per share data)Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues:Community
      revenue
                
                $
                217,631
                
                
                $
                183,677
                
                
                $
                434,149
                
                
                $
                366,287Management
      fees
                
                
                1,453
                
                
                
                1,223
                
                
                
                2,920
                
                
                
                2,382Total
      operating revenues
                
                
                219,084
                
                
                
                184,900
                
                
                
                437,069
                
                
                
                368,669Expenses:Community
      operations (exclusive of depreciation and amortizationand
      facility lease expense shown separately below)
                
                
                138,487
                
                
                
                117,860
                
                
                
                279,915
                
                
                
                237,249General
      and administrative
                
                
                15,987
                
                
                
                14,731
                
                
                
                30,967
                
                
                
                29,342Depreciation
      and amortization
                
                
                17,960
                
                
                
                29,181
                
                
                
                39,388
                
                
                
                59,816Facility
      lease expense
                
                
                29,473
                
                
                
                22,313
                
                
                
                58,669
                
                
                
                44,629Total
      operating expenses
                
                
                201,907
                
                
                
                184,085
                
                
                
                408,939
                
                
                
                371,036Operating
      income (loss) from continuing operations
                
                
                17,177
                
                
                
                815
                
                
                
                28,130
                
                
                
                (2,367
                )Other
      income (expense):Interest
      income
                
                
                189
                
                
                
                581
                
                
                
                327
                
                
                
                1,433Interest
      expense
                
                
                (25,846
                )
                
                
                (22,430
                )
                
                
                (51,479
                )
                
                
                (43,156
                )Change
      in fair value of interest rate swaps
                
                
                752
                
                
                
                972
                
                
                
                842
                
                
                
                135Equity
      gains (losses) in unconsolidated joint ventures
                
                
                560
                
                
                
                665
                
                
                
                1,184
                
                
                
                (857
                )Other,
      net
                
                
                (182
                )
                
                
                (580
                )
                
                
                (136
                )
                
                
                (176
                )Net
      other expense
                
                
                (24,527
                )
                
                
                (20,792
                )
                
                
                (49,262
                )
                
                
                (42,621
                )Loss
      from continuing operations before income taxes
                
                
                (7,350
                )
                
                
                (19,977
                )
                
                
                (21,132
                )
                
                
                (44,988
                )Provision
      for income taxes
                
                
                (270
                )
                
                
                (270
                )
                
                
                (540
                )
                
                
                (480
                )Loss
      from continuing operations
                
                
                (7,620
                )
                
                
                (20,247
                )
                
                
                (21,672
                )
                
                
                (45,468
                )Income
      (loss) from discontinued operations
                
                
                316
                
                
                
                (4,987
                )
                
                
                (727
                )
                
                
                (5,734
                )Net
      loss
                
                
                (7,304
                )
                
                
                (25,234
                )
                
                
                (22,399
                )
                
                
                (51,202
                )Less
      net loss attributable to the noncontrolling interest
                
                
                229
                
                
                
                –
                
                
                
                443
                
                
                
                –Net
      loss attributable to Emeritus Corporation common
    shareholders
                
                $
                (7,075
                )
                
                $
                (25,234
                )
                
                $
                (21,956
                )
                
                $
                (51,202
                )Basic
      and diluted loss per common share attributable toEmeritus
      Corporation common shareholders:Continuing
      operations
                
                $
                (0.19
                )
                
                $
                (0.52
                )
                
                $
                (0.54
                )
                
                $
                (1.16
                )Discontinued
      operations
                
                
                0.01
                
                
                
                (0.13
                )
                
                
                (0.02
                )
                
                
                (0.15
                )$
                (0.18
                )
                
                $
                (0.65
                )
                
                $
                (0.56
                )
                
                $
                (1.31
                )Weighted
      average common shares outstanding-basic and diluted
                
                
                39,147
                
                
                
                39,059
                
                
                
                39,132
                
                
                
                39,048








See
accompanying Notes to Condensed Consolidated Financial Statements





3


Table of Contents





EMERITUS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH
      FLOWS(unaudited)(In
      thousands)Six
      Months Ended June 30,2009
                                        
                                        
                                        2008Cash
      flows from operating activities:Net
      loss
                                        
                                        $
                                        (22,399
                                        )
                                        
                                        $
                                        (51,202
                                        )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
                                        
                                        
                                        39,388
                                        
                                        
                                        
                                        59,816Amortization
      of above/below market rents
                                        
                                        
                                        4,973
                                        
                                        
                                        
                                        5,048Amortization
      of deferred gain
                                        
                                        
                                        (148
                                        )
                                        
                                        
                                        (1,004
                                        )Impairment
      of long-lived assets and investments
                                        
                                        
                                        1,132
                                        
                                        
                                        
                                        4,277Amortization
      of loan fees
                                        
                                        
                                        1,527
                                        
                                        
                                        
                                        1,110Allowance
      for doubtful receivables
                                        
                                        
                                        1,676
                                        
                                        
                                        
                                        801Equity
      investment (gains) losses and distributions
                                        
                                        
                                        (1,184
                                        )
                                        
                                        
                                        857Stock
      based compensation
                                        
                                        
                                        2,063
                                        
                                        
                                        
                                        2,818Change
      in fair value of interest rate swaps
                                        
                                        
                                        (842
                                        )
                                        
                                        
                                        (135
                                        )Other
                                        
                                        
                                        609
                                        
                                        
                                        
                                        1,152Changes
      in operating assets and liabilitiesDeferred
      rent
                                        
                                        
                                        9,949
                                        
                                        
                                        
                                        4,792Deferred
      revenue
                                        
                                        
                                        15
                                        
                                        
                                        
                                        2,256Change
      in operating assets and liabilities - other
                                        
                                        
                                        (3,410
                                        )
                                        
                                        
                                        8,676Net
      cash provided by operating activities
                                        
                                        
                                        33,349
                                        
                                        
                                        
                                        39,262Cash
      flows from investing activities:Acquisition
      of property and equipment
                                        
                                        
                                        (16,108
                                        )
                                        
                                        
                                        (557,155
                                        )Community
      acquisition
                                        
                                        
                                        (10,579
                                        )
                                        
                                        
                                        (6,935
                                        )Acquisition
      deposits
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,995
                                        )Sale
      of property and equipment
                                        
                                        
                                        2,677
                                        
                                        
                                        
                                        6,754Lease
      and contract acquisition costs
                                        
                                        
                                        (170
                                        )
                                        
                                        
                                        (686
                                        )Payments
      from affiliates and other managed communities, net
                                        
                                        
                                        699
                                        
                                        
                                        
                                        175Distribution
      from (investment in) unconsolidated joint ventures/other
                                        
                                        
                                        1,018
                                        
                                        
                                        
                                        (2,974
                                        )Net
      cash used in investing activities
                                        
                                        
                                        (22,463
                                        )
                                        
                                        
                                        (563,816
                                        )Cash
      flows from financing activities:Proceeds
      from sale of stock
                                        
                                        
                                        257
                                        
                                        
                                        
                                        517Cash
      escrow for redemption of convertible debentures
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (10,782
                                        )(Increase)
      decrease in restricted deposits
                                        
                                        
                                        (256
                                        )
                                        
                                        
                                        1,708Debt
      issuance and other financing costs
                                        
                                        
                                        (274
                                        )
                                        
                                        
                                        (9,529
                                        )Proceeds
      from long-term borrowings and financings
                                        
                                        
                                        10,864
                                        
                                        
                                        
                                        661,544Repayment
      of long-term borrowings and financings
                                        
                                        
                                        (2,736
                                        )
                                        
                                        
                                        (140,031
                                        )Repayment
      of capital lease and financing obligations
                                        
                                        
                                        (4,508
                                        )
                                        
                                        
                                        (9,378
                                        )Net
      cash provided by financing activities
                                        
                                        
                                        3,347
                                        
                                        
                                        
                                        494,049Net
      increase (decrease) in cash and cash equivalents
                                        
                                        
                                        14,233
                                        
                                        
                                        
                                        (30,505
                                        )Cash
      and cash equivalents at the beginning of the period
                                        
                                        
                                        27,254
                                        
                                        
                                        
                                        67,710Cash
      and cash equivalents at the end of the period
                                        
                                        $
                                        41,487
                                        
                                        
                                        $
                                        37,205








4


Table of Contents











EMERITUS
      CORPORATIONCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(In
      thousands)Six
      Months Ended June 30,2009
                
                
                2008Supplemental
      disclosure of cash flow information -Cash
      paid during the period for interest
                
                $
                49,483
                
                
                $
                41,570Cash
      paid during the period for income taxes
                
                
                1,694
                
                
                
                1,405Cash
      received during the period for income tax refunds
                
                
                83
                
                
                
                2,496Non-cash
      financing and investing activities:Adjustments
      related to purchase of leased properties:Capital
      and financing lease buyouts
                
                
                -
                
                
                
                281,925Deferred
      gains and losses
                
                
                -
                
                
                
                15,462Lease
      acquisition costs in a lease buyback
                
                
                -
                
                
                
                13,570Deferred
      rent
                
                
                -
                
                
                
                562Capital
      lease and financing obligations
                
                
                295
                
                
                
                4,802Sales
      leaseback transactionIncrease
      in net PP&E
                
                
                968
                
                
                
                -Decrease
      in lease obligation
                
                
                4,115
                
                
                
                -Increase
      in deferred gain
                
                
                (5,212
                )
                
                
                -Decrease
      in deferred rent
                
                
                129
                
                
                
                -Unrealized
      gain on investment in marketable equity securities
                
                
                621
                
                
                
                62





See
accompanying Notes to Condensed Consolidated Financial Statements











5


Table of Contents





EMERITUS CORPORATIONCONDENSED
      CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY(unaudited)(In
      thousands, except share data)Emeritus
      Corporation ShareholdersAccumulatedCommon
      stock
                
                
                Additional
                
                
                other
                
                
                
                
                
                
                
                
                TotalNumber
                
                
                
                
                
                paid-in
                
                
                comprehensive
                
                
                Accumulated
                
                
                Noncontrolling
                
                
                shareholders'of
      shares
                
                
                Amount
                
                
                capital
                
                
                income
                
                
                deficit
                
                
                interest
                
                
                equityBalances
      at December 31, 2008
                
                
                39,091,648
                
                
                $
                4
                
                
                $
                719,903
                
                
                $
                -
                
                
                $
                (360,506
                )
                
                $
                6,627
                
                
                $
                366,028Options
      exercised
                
                
                66,771
                
                
                
                –
                
                
                
                229
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                229Stock
      option compensation expense
                
                
                –
                
                
                
                –
                
                
                
                2,063
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                2,063Accumulated
      other comprehensive income
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                621
                
                
                
                –
                
                
                
                –
                
                
                
                621Net
      loss
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                –
                
                
                
                (21,956
                )
                
                
                (443
                )
                
                
                (22,399
                )Balances
      at June 30, 2009
                
                
                39,158,419
                
                
                $
                4
                
                
                $
                722,195
                
                
                $
                621
                
                
                $
                (382,462
                )
                
                $
                6,184
                
                
                $
                346,542








See
accompanying Notes to Condensed Consolidated Financial Statements








6


Table of Contents





EMERITUS CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


June 30,
2009





1.
            Description
      of Business





Emeritus
Corporation (Emeritus or the Company) is an assisted living and Alzheimer’s and
dementia care service provider that operates residential style communities
located throughout 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.  As of June 30, 2009, the Company owned 165 communities
and leased 105 communities.  These 270 communities, of which five are
accounted for as discontinued operations, comprise the communities included in
the consolidated financial statements.





We also
provide management services to independent and related-party owners of assisted
living communities.  As of June 30, 2009, we managed 39 communities,
of which 24 are owned by joint ventures in which the Company has a financial
interest.  Management agreements typically provide for fees of from 5%
to 6% of gross revenues.





Emeritus
has one operating segment, which is assisted living and related
services.





2.
            Summary
      of Significant Accounting Policies and Use of
  Estimates





The
preparation of condensed consolidated financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On an ongoing basis, we evaluate our estimates,
including those related to resident programs and incentives such as move-in
fees, bad debts, investments, intangible assets, impairment of long-lived
assets, income taxes, long-term service contracts, contingencies, self-insured
retention, insurance deductibles, health insurance, inputs to the Black-Scholes
option pricing model, and litigation.  We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.  Actual results may differ
from these estimates under different assumptions or conditions.





We
believe that certain critical accounting policies are most significant to the
judgments and estimates used in the preparation of our condensed consolidated
financial statements.  Revisions in such estimates are charged to
income in the period in which the facts that give rise to the revision become
known.  A detailed discussion of our significant accounting policies
and the use of estimates is contained in the Company’s Annual Report on Form
10-K for the fiscal year ended December 31, 2008, which was filed with the
Securities and Exchange Commission (SEC) on March 16, 2009.  See Note
11 for additional discussion of our policy regarding goodwill impairment
tests.





Basis
of Presentation





Throughout
this Quarterly Report on Form 10-Q, unless specified otherwise, references to
“we,” “us,” and “our” refer to Emeritus.





The
unaudited condensed consolidated financial statements reflect all adjustments
that are, in the opinion of management, necessary to state fairly the financial
position, results of operations, and cash flows of Emeritus as of June 30, 2009
and for all periods presented.  Except as otherwise disclosed in these
Notes, such adjustments are of a normal, recurring nature.  The
results of operations for the period ended June 30, 2009, are not necessarily
indicative of the operating results that may be achieved for the full year ended
December 31, 2009.  Management presumes that those reading this
interim financial information have read or have access to the 2008 audited
consolidated financial statements and Management’s Discussion and Analysis of
Financial Condition and Results of Operations that are contained in the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2008, which was filed with the SEC on March 16, 2009.  Therefore, we
have omitted certain footnotes and other disclosures that are disclosed in the
Form 10-K.





7
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CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 June 30,
2009


Table of Contents


Reclassifications
and Revisions
 
 Certain
reclassifications and revisions have been made to the condensed consolidated
financial statements to conform to the current period presentation.
 
 The 2008
financial information has been recast so that the basis of presentation is
consistent with that of the 2009 financial information.  Specifically,
in 2009 our Board of Directors approved the sale of three communities and, as a
result, we reclassified the results of operations for these communities to
discontinued operations for all periods presented (see Note
9).  Additionally, we adopted Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
No. 51 (SFAS No. 160) effective January 1, 2009, and, as a result,
we have classified the “Noncontrolling interest—related party” as a separate
component of shareholders’ equity in our consolidated balance sheets as of June
30, 2009, and December 31, 2008.  We also present the amount of
consolidated net loss attributable to Emeritus and to the noncontrolling
interest on the face of the statement of operations in accordance with SFAS No.
160.
 
 The
condensed consolidated balance sheet as of December 31, 2008, has been revised
to reflect a reallocation of approximately $15.6 million of our valuation
allowance from current deferred tax assets to noncurrent deferred tax assets,
resulting in current deferred tax assets and noncurrent deferred tax liabilities
of $15.6 million in the condensed consolidated balance sheet.


Recent
Accounting Pronouncements





In June
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R)(SFAS No. 167), amending the consolidation guidance for
variable-interest entities under FIN 46(R), Consolidation of Variable Interest
Entities—an interpretation of ARB No. 51.  The amendments
include: (1) the elimination of the exemption for qualifying special purpose
entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity.  We will be
required to apply SFAS No. 167 as of January 1, 2010.  We are
reviewing the requirements of SFAS No. 167, which applies to our investments in
unconsolidated joint ventures, and have not yet made a definitive determination
as to whether this statement will require us to consolidate our equity method
investees.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events (as amended)(SFAS No. 165), which is effective for our June 30, 2009, financial
statements.  SFAS No. 165 establishes general standards for accounting
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, as defined in the
Statement.  As is required for public companies, we evaluate
subsequent events through the date that our financial statements are issued;
i.e., distributed to the public.  The adoption of SFAS No. 165 did not
change our current practice and had no impact on our consolidated financial
statements.





3.
            Stock-Based
      Compensation





We record
compensation expense based on fair value for all stock-based awards, which is
estimated using the Black-Scholes option pricing model.  We recorded
compensation expense for stock options and shares issued under our various
equity incentive plans and the Amended 1998 Employee Stock Purchase Plan (the
1998 ESP Plan) of approximately $1.1 million and $1.4 million for the three
months ended June 30, 2009 and 2008, respectively, and approximately $2.1
million and $2.8 million for the six months ended June 30, 2009 and 2008,
respectively.





During
the six months ended June 30, 2009, we granted options to purchase 11,200 shares
of common stock from the 2006 Equity Incentive Plan (the 2006 Plan) and options
to purchase 52,500 shares of common stock from the Amended and Restated Option
Plan for Non-employee Directors (the Directors Plan).





8
 EMERITUS
CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 June 30,
2009


Table of Contents





The following table summarizes our
stock option activity for the six months ended June 30,
2009:





Weighted-
                  
                  
                  AggregateAverage
                  
                  
                  IntrinsicExercise
                  
                  
                  ValueShares
                  
                  
                  Price
                  
                  
                  $(000)Outstanding
      at  beginning of period
                  
                  
                  2,840,652
                  
                  
                  $
                  16.30Granted
                  
                  
                  63,700
                  
                  
                  $
                  11.95Exercised
                  
                  
                  (66,771
                  )
                  
                  $
                  3.65
                  
                  
                  $
                  382Forfeited/expired
                  
                  
                  (203,800
                  )
                  
                  $
                  19.29Outstanding
      at end of period
                  
                  
                  2,633,781
                  
                  
                  $
                  16.28
                  
                  
                  $
                  8,387Options
      exercisable
                  
                  
                  1,275,042
                  
                  
                  $
                  14.87
                  
                  
                  $
                  4,998Weighted-average
      fair value of options granted
                  
                  
                  
                  
                  
                  $
                  7.33Options
      exercisable in the money
                  
                  
                  528,377
                  
                  
                  
                  
                  
                  
                  $
                  4,998Options
      exercisable out of the money
                  
                  
                  746,665
                  
                  
                  
                  
                  
                  
                  $
                  -





The
amount of cash received from the exercise of stock options under
the Company's various equity incentive plans and stock purchased through
the 1998 ESP Plan was $257,000 and $517,000 in the six months ended June 30,
2009 and 2008, respectively.  On March 19, 2009, our board of
directors terminated the 1998 ESP Plan after all shares reserved for issuance
under the plan had been issued.





On May 21, 2009, the Company’s
shareholders approved the 2009 Employee Stock Purchase Plan (the 2009 ESP
Plan).  Sales of Emeritus stock to eligible employees will resume
under this new plan for the offering period ended September 30, 2009 under
substantially the same terms as the 1998 ESP Plan.





As of
June 30, 2009, there were 400,000 shares available for purchase under the 2009
ESP Plan, 972,992 shares available for grant under the 2006 Plan, and 44,000
shares available for grant under the Directors Plan.





We
estimate the fair value of our options using the Black-Scholes option pricing
model.  Option valuation models require the input of various
assumptions, including the expected stock price volatility, risk-free interest
rate, dividend yield, and forfeiture rate.  We group the options into
two main categories based on expected life, which are the employee group and the
non-employee directors.  The fair value of the stock options granted
is estimated using a risk-free rate that is the five-year or seven-year U.S.
Treasury yield in effect at the time of grant.  The expected life of
the stock options granted (five or seven years) is estimated using the
historical exercise behavior of option holders.  Expected volatility
is based on historical volatility for a period equal to the stock option’s
expected life, ending on the date of grant.  Forfeitures are estimated
at the time of valuation and reduce expense ratably over the vesting
period.  The forfeiture rate, which is currently estimated at 6.5% of
the options awarded, is adjusted periodically based on the extent to which
actual forfeitures differ, or are expected to differ, from the previous
estimate.  Our options have characteristics significantly different
from those of traded options and changes in the various input assumptions can
materially affect the fair value estimates.  The fair value of the
options granted in the current year period under the 2006 Plan was estimated at
the date of grant using the following weighted average assumptions:





9
 EMERITUS
CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 June 30,
2009


Table of Contents





For
      Employees and Key ExecutivesSix
      Months Ended June 30,2009
                      
                      
                      2008Expected
      life from vest date (in years)
                      
                      
                      5
                      
                      
                      
                      5Risk-free
      interest rate
                      
                      
                      1.87-1.90
                      %
                      
                      
                      2.69
                      %Volatility
                      
                      
                      55.6-57.2
                      %
                      
                      
                      42.7
                      %








The fair
value of options granted in the current year period under the Directors Plan was
estimated at the date of grant using the following weighted average
assumptions:





For
      DirectorsSix
      Months Ended June 30,2009
                      
                      
                      2008Expected
      life from vest date (in years)
                      
                      
                      7
                      
                      
                      
                      7Risk-free
      interest rate
                      
                      
                      2.86
                      %
                      
                      
                      3.90
                      %Volatility
                      
                      
                      61.6
                      %
                      
                      
                      54.7
                      %





Beginning
in 1998, and until the termination of the 1998 ESP Plan in March 2009, we had
offered eligible employees the opportunity to purchase Emeritus common stock
through the 1998 ESP Plan at a 15% discount from the lower of the market price
on (a) the first trading date of each calendar quarter or (b) the last trading
date of each quarter.  Due to an inadvertent error in recordkeeping,
the amount of shares issued under the 1998 ESP Plan exceeded the 400,000-share
reserve.  As a result, the excess shares were not registered with the
SEC.  Under the applicable provisions of federal securities laws, plan
participants who purchased such unregistered shares have the right to require us
to repurchase the shares at the original exercise price plus interest or, if the
employee bought and sold the shares for a loss, to reimburse the employee for
the amount of the loss.  For the quarterly offering periods ended
December 31, 2007, through December 31, 2008, we sold a total of 55,031
unregistered shares to plan participants at a weighted average price of $12.56
per share.  Accordingly, the aggregate purchase price of shares
subject to rescission is approximately $650,000.  Cash paid for share
purchases, if any, will be recorded as a reduction in shareholders’
equity.  As of August 1, 2009, we have not repurchased any shares
subject to rescission.





4.
            Acquisitions
      and Other Significant Transactions





The
following is a description of various transactions that affected the
comparability of the condensed consolidated financial statements included in
this Form 10-Q.





2008
Ventas Asset Acquisition





In
December 2008, we purchased five communities from Ventas Realty, LP (Ventas)
consisting of 432 units (Ventas Purchase) for a purchase price of $64.3 million
plus transaction costs of $282,000.  Prior to this acquisition, we
operated these communities under lease agreements with affiliates of
Ventas.





Previously,
we accounted for four of the communities as operating leases, and one of the
communities as a capital lease.  In connection with the Ventas
Purchase, we borrowed $55.6 million, of which $45.6 million represents mortgage
financing and $10.0 million was borrowed from Ventas under a three-year
note.





2008
HCP Lease Agreement





In
December 2008, we executed a Master Lease and Security Agreement (the HCP
Agreement) to lease 11 communities comprised of 1,462 units/beds from affiliates
of HCP, Inc. (collectively, HCP).  The HCP Agreement





10
 EMERITUS
CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 June 30,
2009


Table of Contents


is for a
term of ten years.  Annual rents are fixed at $17.5, $21.0, $25.0,
$28.0, and $30.0 million in years one through five, respectively, and thereafter
will increase by the greater of the increase in the CPI or 3.0%.





2008
HCN Asset Acquisition





In June
2008, we entered into an asset purchase agreement (the HCN Agreement) with
Health Care REIT, Inc. (HCN) and its affiliated entities to purchase 29
communities consisting of 2,257 units located throughout the United States for a
purchase price of $299.9 million, excluding transaction costs.  The
Company formerly leased these communities from HCN.  As provided in
the HCN Agreement, the transaction closed in two phases.





In June
2008, we completed the first phase of the HCN transaction (Tranche
1).  Tranche 1 consisted of 19 communities with a capacity of 1,564
units and a purchase price of $222.7 million, plus closing costs of $1.1
million.  The Company financed Tranche 1 with mortgage debt of
approximately $163.2 million and seller-provided debt of $50.0
million.  We accounted for 18 of the 19 acquired communities in
Tranche 1 as capital leases.





In
October 2008, we completed the second phase of the HCN transaction (Tranche
2).  This closing consisted of 10 communities with a capacity of 693
units for a purchase price of $77.2 million plus transaction costs of
$190,000.  Tranche 2 was financed with $29.0 million of fixed rate
mortgage debt and $27.4 million of variable rate mortgage debt.  We
previously accounted for nine of the 10 acquired communities in Tranche 2 as
capital leases and one as an operating lease.





As part
of Tranche 2, eight of the 10 communities are included in a 50/50 joint venture
owned by Emeritus and Mr. Daniel R. Baty, the Company’s Chairman and Co-CEO, who
contributed approximately $6.8 million to the joint venture for the purchase of
the properties.  Prior to the acquisition and continuing after the
acquisition, these eight communities are subject to a cash flow sharing
agreement with Mr. Baty, which under the new agreement operates under similar
economic terms and conditions as the existing cash flow sharing
agreement.  Emeritus has the option to buy out Mr. Baty’s membership
interest in the joint venture after January 1, 2011, for a price equal to the
lesser of fair market value or a formula specified in the joint venture
operating agreement, but in no event less than the amount of Mr. Baty’s capital
contribution.  The joint venture is included in the consolidated
financial statements of Emeritus.





2008
NHP Asset Acquisition





In
April  2008, we purchased from Nationwide Health Properties, Inc.
(NHP) 24 communities consisting of 1,672 units for a purchase price of $314.0
million plus transaction costs of $856,000.  We had previously leased
these communities from NHP and accounted for them as capital
leases.  We financed the purchase through mortgage debt of
approximately $249.1 million and seller-provided debt of $30.0
million.





Other
Acquisitions





On June
17, 2009, we purchased an 85-unit assisted living community that we previously
managed for Columbia Pacific Group, Inc., whose principal owner is Mr.
Baty.  The purchase price was $10.6 million, of which $7.8 million was
financed with mortgage debt and $1.3 million was financed with an unsecured note
payable to an affiliate of Mr. Baty (the Baty Note).  Closing costs of
approximately $20,000 related to this purchase were expensed.





The
preliminary purchase price was allocated as follows, based on the estimated fair
value of the tangible and identified intangible assets (in
thousands):





Current
      assets
                
                $
                4Property
      and equipment
                
                
                8,800In-place
      resident contract intangible
                
                
                1,283Goodwill
                
                
                492Purchase
      price
                
                $
                10,579








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CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 June 30,
2009


Table of Contents


During
the second quarter of  2009, we purchased the California homes of Mr.
Granger Cobb, our Co-Chief Executive Officer, and Mr. Budgie Amparo, our Senior
Vice President—Quality and Risk Management, in connection with their required
relocation to Seattle following the merger with Summerville Senior Living, Inc.
(Summerville) in September 2007.  The combined purchase price was
approximately $4.3 million.  The purchase price for each was
determined based on an independent appraisal.  The homes are included
in “Property held for sale” in the condensed consolidated balance sheet at June
30, 2009.





In
January 2009, we entered into a lease for one community consisting of 83
units.  The lease term is ten years with two five-year renewal options
available.  The initial annual minimum rent is approximately $600,000
(less abatements in the first year of $300,000) with fixed annual increases of
3.0%.





In
December 2008, we entered into a lease for two communities consisting of 254
units.  The lease term is ten years with two five-year renewal options
available.  The initial annual lease payment is approximately $1.8
million with fixed increases for two years and increases thereafter at
3.0%.





In June
2008, we purchased a 54-unit community for $6.8 million plus closing costs of
$185,000, of which $6.0 million was financed through a mortgage
loan.





Sale-Leaseback





In 2003,
we sold four communities to HCN and leased them back.  The sale did
not qualify for sale-leaseback accounting because of our continuing involvement
in the form of a guarantee of the underlying mortgage debt, which was assumed by
HCN in the sale.  Therefore, we recorded the sale proceeds of $34.6
million as a financing lease obligation and continued to report the real estate
and equipment as owned assets.





We were
informed by HCN that they paid off these underlying mortgage obligations in June
2009 and so we recorded the sale-leaseback.  Each of the four leases
are now accounted for as capital leases.  As a result, we recorded a
net increase in property and equipment of $968,000, a net decrease in capital
lease and financing obligations of $4.1 million, an increase in deferred gains
of $5.2 million and a decrease in deferred rent of $129,000.





5.
            Long-Term
      Debt





In
February 2008, we entered into a credit agreement with Wells Fargo Bank, N.A.,
which provides a $25.0 million unsecured revolving line of
credit.  Interest is calculated on outstanding borrowings based on our
choice of either (a) a fluctuating rate equal to the daily one-month London
Interbank Offered Rate (LIBOR) plus 2.50% or (b) a fixed rate for a 30-day term
equal to the one-month LIBOR plus 2.25%, payable monthly.  We pay a
commitment fee of 0.25% on the average daily unused amount of the line of
credit, payable quarterly.  In addition, we are required to pay fees
equal to 1.0% of the face amount of every letter of credit issued under the line
as well as the negotiation fees on each letter.  We must maintain a
zero balance on advances for 30 consecutive days during each fiscal year, a
$20.0 million minimum balance in cash, cash equivalents and/or publicly traded
marketable securities and a fixed charge coverage ratio, as defined, of 1.1 to
1.0.  There were no outstanding borrowings under the line of credit at
June 30, 2009, or December 31, 2008.  In June 2009, the line of credit
was extended from June 30, 2009, to June 30, 2010.  Other terms and
conditions were unchanged except for the minimum annual capital expenditure
requirement, which was changed from $400 to $450.





On June
17, 2009, we entered into two debt agreements related to the purchase of an
assisted living community (see Note 4).  The $7.8 million Freddie Mac
mortgage loan has a ten-year term, with monthly payments of interest only at
6.92% through January 2011 and monthly payments of principal and interest
thereafter based on a 30-year amortization, with the unpaid principal balance
due at maturity.  The $1.3 million unsecured Baty Note has a five-year
term, with monthly payments of interest only at 6.5% and the principal balance
due at maturity.  The maturity date of the Baty Note will be
accelerated in the event that Emeritus sells, in a single offering, debt or
equity securities in the amount of $150.0 million or more.





12
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CORPORATION
 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – CONTINUED
 June 30,
2009


Table of Contents





On May 1,
2009, we entered into an agreement to extend the maturity on $11.3 million of
mortgage debt from January 1, 2010, to January 1, 2011.  The LIBOR
margin on the loan increased from 2.25% to 3.50%.  Also on May 1,
2009, we entered into an agreement to extend the maturity on $7.4 million of
mortgage debt from March 31, 2010, to October 1, 2010.  The interest
rate on the loan increased from 2.65% over LIBOR, with a floor of 5.65%, to
3.25% over LIBOR with a floor of 6.25%.





On June
30, 2009, we entered into an agreement to extend the maturity of $23.0 million
of mortgage debt from April 1, 2010, to October 1, 2010.  The interest
rate on the loan increased from 2.9% over LIBOR, with no floor, to 4.0% over
LIBOR with a floor of 6.5%.





6.
            Derivative
      Instruments





In the
normal course of business, the Company is exposed to the effect of interest rate
changes and we limit these risks by following risk management policies and
procedures, including the use of derivatives.  To address exposure to
interest rates, we use derivatives to fix the interest rate on debt that is
based on floating-rate indices and to manage the cost of borrowing
obligations.





Emeritus
is a party to two interest rate swaps with a combined notional amount of $32.0
million.  The swaps effectively convert the interest rates on the
related mortgage debt from floating rates to fixed rates, thus mitigating the
impact of interest rate changes on future interest expense.





Hedges
that are reported at fair value and presented on the balance sheet could be
characterized as either cash flow hedges or fair value hedges.  Our
interest rate swap contracts are considered cash flow hedges as they address the
risk associated with future cash flows of debt transactions.  We have
chosen not to designate our interest rate swaps as hedge instruments; therefore,
the gain or loss resulting from the change in the estimated fair value of the
derivative instruments is recognized in current earnings during the period of
change.





As of
June 30, 2009 and December 31, 2008, the combined fair value of the two interest
rate swaps was as follows (in thousands):




As
      of
                  As
      ofJune
      30, 2009
                  December
      31, 2008Balance
      Sheet
                  Fair
                  FairLocation
                  Value
                  ValueInterest
      rate swaps
                  Other
      long-term liabilities
                  $                       1,440
                  $                       2,282





7.
            Loss
      Per Share





Basic
loss per share is computed based on the weighted average number of shares
outstanding and excludes any potential dilution.  Diluted loss per
share is computed based on the weighted average number of shares outstanding
plus dilutive potential common shares, which include convertible debentures and
stock options.  Options are included using the “treasury stock method”
to the extent they are dilutive.  Certain shares issuable upon the
exercise of stock options and conversion of convertible debentures have been
excluded from the computation because the effect of their inclusion would be
antidilutive.





13


Table of Contents





The
following table summarizes those potential common shares that are excluded in
each period because they are antidilutive (in thousands):




Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June,
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Convertible
      debentures
                    
                    
                    –
                    
                    
                    
                    475
                    
                    
                    
                    –
                    
                    
                    
                    475Options
                    
                    
                    2,634
                    
                    
                    
                    2,174
                    
                    
                    
                    2,634
                    
                    
                    
                    2,1742,634
                    
                    
                    
                    2,649
                    
                    
                    
                    2,634
                    
                    
                    
                    2,649





8.
            Comprehensive
      Loss





The
following table summarizes the comprehensive loss for the periods indicated (in
thousands):





Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      loss
                
                $
                (7,304
                )
                
                $
                (25,234
                )
                
                $
                (22,399
                )
                
                $
                (51,202
                )Other
      comprehensive income (loss):Unrealized
      holding gains (losses)on
      available-for-sale investment securities
                
                
                835
                
                
                
                (202
                )
                
                
                621
                
                
                
                62Comprehensive
      loss
                
                $
                (6,469
                )
                
                $
                (25,436
                )
                
                $
                (21,778
                )
                
                $
                (51,140
                )





Amounts
attributable to Emeritus Corporation common shareholders, excluding losses
attributable to the noncontrolling interest, are as follows (in
thousands):





Three
      Months Ended
                      
                      
                      Six
      Months EndedJune
      30,
                      
                      
                      June
      30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Loss
      from continuing operations
                      
                      $
                      (7,391
                      )
                      
                      $
                      (20,247
                      )
                      
                      $
                      (21,229
                      )
                      
                      $
                      (45,468
                      )Income
      (loss) from discontinued operations
                      
                      
                      316
                      
                      
                      
                      (4,987
                      )
                      
                      
                      (727
                      )
                      
                      
                      (5,734
                      )Net
      loss attributable to Emeritus Corporationcommon
      shareholders
                      
                      $
                      (7,075
                      )
                      
                      $
                      (25,234
                      )
                      
                      $
                      (21,956
                      )
                      
                      $
                      (51,202
                      )





9.
            Discontinued
      Operations





During
the first half of 2008, we decided to discontinue operations at five of our
communities and put the assets and businesses up for sale.  We decided
to sell these communities primarily because they have consistently incurred
operating losses over a sustained period of time due to local market
conditions.  Two of the communities were sold in the second quarter of
2008, one was sold on January 1, 2009, and the remaining two are expected to be
sold during 2009.


.


During
the first quarter of 2009, we decided to sell three additional underperforming
communities, which we expect will be sold during 2009.  Financial
statements for the three and six months ended June 30, 2008, have been recast to
present the operations of these communities as discontinued
operations.





The
assets of all five properties remaining to be sold as of June 30, 2009, which
consist of property and equipment, are presented separately in “Property held
for sale” in the accompanying condensed consolidated balance sheet




14


Table of Contents





at June
30, 2009 at their estimated fair value less costs to sell (see Note
11).  We will continue to operate these communities until
sold.





The
following table shows the revenues and net income (loss) for the discontinued
operations (in thousands):




Three
      Months Ended
                  
                  
                  Six
      Months EndedJune
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Total
      revenue
                  
                  $
                  3,631
                  
                  
                  $
                  4,266
                  
                  
                  $
                  7,212
                  
                  
                  $
                  9,195Net
      income (loss)
                  
                  $
                  316
                  
                  
                  $
                  (4,987
                  )
                  
                  $
                  (727
                  )
                  
                  $
                  (5,734
                  )






10.
            Liquidity





As of
June 30, 2009, the Company has a working capital deficit of $1.2
million.  We are able to operate in the position of a working capital
deficit because revenues are collected more quickly, often in advance, than
obligations are required to be paid.  This can result in a low level
of current assets to the extent cash has been deployed in business development
opportunities or to pay down long-term liabilities.  Along those
lines, the working capital deficit includes, as part of current assets, $15.1
million of deferred tax assets and, as part of current liabilities, $29.4
million of deferred revenue and unearned rental income.  The level of
current liabilities is not expected to increase from period to period in such a
way as to require the use of significant cash, except for debt obligations of
$43.6 million scheduled to mature in the next 12 months, of which $34.4 million
is related to properties held for sale that is due in 2012 but will be payable
upon the sale of the related properties.  We intend to refinance the
remaining 2010 obligations prior to their respective due
dates.




We
reported net cash generated from operating activities in the condensed
consolidated statements of cash flows of $33.3 million and $39.3 million for the
six months ended June 30, 2009 and 2008, respectively.  While we have
reported positive cash flows from operating activities over the past three
years, the cash flows have not always been sufficient to pay all of the
Company’s long-term obligations and we have been dependent upon third-party
financing or disposition of assets to fund operations.  We cannot
guarantee that, if necessary in the future, such financing will be readily
available, or on terms attractive to us.





In fiscal
2008 and into 2009, we refinanced and extended the terms of a substantial amount
of our existing debt obligations, extending the maturities of such financings to
dates in 2010 through 2019.  Many of our debt instruments and leases
contain “cross-default” provisions pursuant to which a default under one
obligation can cause a default under one or more other obligations to the same
lender or lessor.  Such cross-default provisions affect the majority
of our properties.  Accordingly, any event of default could cause a
material adverse effect on the Company's financial condition if such debt or
leases are cross-defaulted.  For the quarter ended June 30, 2009, we
were in violation of covenants related to rent coverage ratio requirements in
leases covering four communities and a debt service coverage ratio requirement
in one debt agreement for a newly expanded and renovated
community.  We have obtained waivers from the owners/lender related to
these defaults and, as such, the Company was deemed to be in compliance as of
June 30, 2009. The lease
waivers expire on July 1, 2010.




15


Table of Contents




11.
            Fair
      Value Disclosures





The
following table presents information about the Company’s assets and liabilities
measured at fair value on a recurring basis as of June 30, 2009, and indicates
the fair value hierarchy of the valuation techniques that we utilize to
determine such fair value (in thousands):





Quoted Prices in
                
                
                SignificantActive
      Markets
                
                
                Other
                
                
                Significant
                
                
                Balance
      atfor
      Identical
                
                
                Observable
                
                
                Unobservable
                
                
                June
      30,Assets
      (Level 1)
                
                
                Inputs (Level 2)
                
                
                Inputs (Level 3)
                
                
                2009AssetsInvestment
      securities – trading
                
                $
                1,794
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,794Investment
      securities – available-for-sale
                
                
                1,855
                
                
                
                -
                
                
                
                -
                
                
                
                1,855Property
      held for sale
                
                
                -
                
                
                
                37,987
                
                
                
                -
                
                
                
                37,987LiabilitiesDerivative
      financial instruments
                
                
                -
                
                
                
                1,440
                
                
                
                -
                
                
                
                1,440





In
general, fair values determined by Level 1 inputs utilize quoted prices in
active markets for identical assets or liabilities that we have the ability to
access.  For example, the Company’s investment in available-for-sale
equity securities is valued based on the quoted market price for that
security.




Fair
values determined by Level 2 inputs utilize inputs other than quoted prices
included in Level 1 that are observable for the asset or liability, either
directly or indirectly.  Level 2 inputs include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted
prices that are observable for the asset or liability.  For example,
we use market interest rates and yield curves that are observable at commonly
quoted intervals in the valuation of our interest rate swap
contracts.  The fair value of property held for sale was determined
based on recent offers from prospective purchasers.




Level 3
inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability.  Our assessment of the significance of a particular input
to the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.





The
Company has financial instruments other than investment securities consisting of
cash and cash equivalents, trade accounts receivable, other receivables, tax and
maintenance escrows, workers’ compensation collateral accounts, short-term
borrowings, accounts payable, capital and financing lease obligations, and
long-term debt.  The fair value of the Company’s other financial
instruments at June 30, 2009 and December 31, 2008, based on their short-term
nature or current market indicators such as prevailing interest rates,
approximates their carrying value, with the exception of the following (in
thousands):





June
      30, 2009
                
                
                December
      31, 2008Carrying
                
                
                
                
                
                CarryingAmount
                
                
                Fair
      Value
                
                
                Amount
                
                
                Fair
      ValueLong-term
      debt
                
                $
                1,381,544
                
                
                $
                1,369,930
                
                
                $
                1,373,416
                
                
                $
                1,332,370





The fair
value of debt obligations was estimated using discounted cash flows based on the
Company’s assumed incremental borrowing rates of 8.0% for unsecured borrowings
and 6.5% for secured borrowings at June 30, 2009 and 8.0% for unsecured
borrowings and 6.0% for secured borrowings at December 31, 2008.





16


Table of Contents





Impairment
of Long-Lived Assets




We
recorded impairment losses of $69,000 and $4.3 million in the three months ended
June 30, 2009 and 2008, and $1.1 million and $4.3 million in the six months
ended June 30, 2009 and 2008, respectively, which are included in income (loss)
from discontinued operations (see Note 9).





Goodwill
Impairment Test





Our
policy is to estimate the fair value of the Company using a combination of the
market capitalization, discounted cash flows, and market comparable
approaches.  We use market capitalization as an initial indicator of
impairment for our annual impairment test on October 31st of each year, and as a
triggering event that may indicate possible impairment of the reporting unit’s
goodwill in interim periods.  We believe the majority shareholders
would demand a premium to the current trading price (would not sell at that
price) and that a control premium exists.  Because of this control
premium, we believe that the market capitalization represents an estimated
minimum fair value.





The
Company’s stock price declined in the first quarter of 2009 such that as of
March 31, 2009, the Company’s market price per share closed at $6.56, which was
less than net book value per share.  We therefore tested goodwill for
impairment as of March 31, 2009.  The concluded fair value estimate of
$9.80 per share at March 31, 2009, was determined using a weighted average of
the income approach (discounted cash flows) and the market comparable
approach.  The Company’s book value per share as of March 31, 2009,
was $8.83.  Because the estimated fair value exceeded book value on
that date, we concluded that no impairment existed at March 31,
2009.





As of
June 30, 2009, the Company’s closing stock price was $13.21 compared to its book
value of $8.85 and therefore we did not perform a goodwill impairment test as of
that date.




12.           Income
Taxes





FASB
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109 (FIN 48), clarifies the accounting
and reporting for uncertainties in income tax law.  In accordance with
FIN 48, we recognize the tax benefit from an uncertain tax position only if it
is more likely than not that the tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the
position.  The tax benefits recognized in the financial statements
from such a position are measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon settlement.





Included
in our income tax accruals are liabilities for unrecognized tax benefits,
including penalties and interest, which were recorded in connection with the
purchase price allocation in the Summerville merger.  This liability,
of which $1.9 million is included in “Other long-term liabilities” and
approximately $717,000 is included in “Accrued income taxes,” is the result of
uncertainty surrounding the deductibility of certain items included in the
Summerville tax returns for periods prior to the merger.








17


Table of Contents


Item
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND


RESULTS
OF OPERATIONS





Forward-Looking
Statements





This report contains “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, as amended.  This Act provides a “safe harbor” for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected
results.  In some cases, you can identify forward-looking statements
by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,”
“expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or
“will,” or the negative of those terms, or comparable
terminology.  Some of the forward-looking statements included in this
report and documents incorporated by reference and in some of our other public
statements relate to, among other things:





·
            the
      effects of competition and economic conditions on the occupancy levels in
      our communities, including possible excess assisted living
      capacity;




·
            our
      ability under current market conditions to maintain and increase our
      resident charges without adversely affecting occupancy
    levels;




·
            our
      ability to control community operating expenses, including the management
      of costs largely beyond our control (such as insurance and utility costs)
      without adversely affecting the level of occupancy and resident
      charges;




·
            our
      ability to generate cash flow sufficient to service our debt and other
      fixed payment requirements;




·
            our
      vulnerability to defaults as a result of noncompliance with various debt
      and lease covenants, including the effects of cross-default
      provisions;




·
            uncertainties
      relating to competition, construction, licensing, environmental
      regulation, and other matters that affect acquisition, disposition, and
      development of assisted living
communities;




·
            our
      ability to find sources of financing and capital on satisfactory terms to
      meet our cash requirements to the extent that they are not met by
      operations; and




·
            uncertainties
      related to professional liability
claims.







Any or
all of our forward-looking statements in this report and in any other public
statements we make may turn out to be inaccurate.  Please carefully
review Item 1A—Risk
Factors of our 2008 Annual Report on Form 10-K for important factors that
could cause our actual results to differ materially from the forward-looking
statements included in this report and presented elsewhere by our management
from time to time.  Incorrect assumptions we might make and known or
unknown risks and uncertainties may affect the accuracy of our forward-looking
statements.  Forward-looking statements reflect our current
expectations or forecasts of future events or results and are inherently
uncertain, and accordingly, you should not place undue reliance on
forward-looking statements.





Although
we believe that the expectations and forecasts reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, performance, or
achievements.  Consequently, no forward-looking statement can be
guaranteed and future events and actual or suggested results may differ
materially.  We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events, or otherwise.  You are advised, however, to consult any
further disclosures we make in our quarterly reports on Form 10-Q and
current reports on Form 8-K.





Overview





During
the first six months of 2009, we continued to concentrate on implementing our
previously disclosed growth strategy, which focuses on increasing our revenues
and cash flows through a combination of: (i) organic growth in








18
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents





our
existing operations; (ii) selected acquisitions of additional communities; and
(iii) expansion of our existing communities.  A summary of activity in
the first six months of 2009 is as follows:





·
            Operating
      income from continuing operations was $28.1 million compared to a $2.4
      million loss in the prior year period.  Our net loss
      attributable to Emeritus Corporation common shareholders was $22.0 million
      compared to $51.2 million in the prior year
  period.


·
            Average
      occupancy was 86.4% as compared to 86.9% in the prior year
      period.


·
            Average
      rate per occupied unit increased to $3,653 as compared to $3,359 in the
      prior year period.


·
            Net
      cash provided by operating activities was $33.3 million as compared to
      $39.3 million in the prior year
period.


·
            We
      added one owned, one leased, and two managed communities to our portfolio,
      opened a new Alzheimer’s community, and opened one expansion at an
      existing community.


·
            We
      reclassified three underperforming communities to discontinued operations
      and sold one building that was held for
sale.





The
following table sets forth a summary of our property interests:





As
      of June 30,
                
                
                As
      of December 31,
                
                
                As
      of June 30,2009
                
                
                2008
                
                
                2008Buildings
                
                
                Units
                
                
                Buildings
                
                
                Units
                
                
                Buildings
                
                
                UnitsOwned
      (1)
                
                
                165
                
                
                
                13,180
                
                
                
                164
                
                
                
                13,111
                
                
                
                149
                
                
                
                11,952Leased
      (2 )
                
                
                105
                
                
                
                10,632
                
                
                
                104
                
                
                
                10,548
                
                
                
                106
                
                
                
                9,855Consolidated
      Portfolio
                
                
                270
                
                
                
                23,812
                
                
                
                268
                
                
                
                23,659
                
                
                
                255
                
                
                
                21,807Managed/Admin
      Services
                
                
                15
                
                
                
                1,604
                
                
                
                14
                
                
                
                1,479
                
                
                
                11
                
                
                
                1,265Joint
      Venture/Partnership
                
                
                24
                
                
                
                1,818
                
                
                
                24
                
                
                
                1,818
                
                
                
                23
                
                
                
                1,737Operated
      Portfolio
                
                
                309
                
                
                
                27,234
                
                
                
                306
                
                
                
                26,956
                
                
                
                289
                
                
                
                24,809Percentage
      increase  (3)
                
                
                1.0
                %
                
                
                1.0
                %
                
                
                6.6
                %
                
                
                9.2
                %
                
                
                0.7
                %
                
                
                0.5
                %





(1)   Of
      the owned communities at June 30, 2009, five are held for sale and are
      included in discontinued operations, representing 538
    units.


(2)   Of
      the 105 leased communities at June 30, 2009, 79 are accounted for as
      operating leases, in which the assets and liabilities of the communities
      are not included in our condensed consolidated balance sheet and 26 are
      accounted for as capital leases, in which a long-term asset and
      corresponding liability is established on our balance
    sheet.


(3)  The
      percentage increase indicates the change from the prior year, or, in the
      case of June 30, 2009 and 2008, from the end of the prior fiscal
      year.





The
      total consolidated portfolio of 23,812 units at June 30, 2009, consists of
      the following unit types:





Total
      UnitsIndependent
      Living
                
                
                1,361Assisted
      Living
                
                
                17,975Alzheimer's
      Care
                
                
                3,393Skilled
      Nursing Care
                
                
                252Operating
      Units
                
                
                22,981Held
      for sale (5 properties)
                
                
                538Units
      taken out of service
                
                
                293Designed
      Capacity Units
                
                
                23,812





The units
taken out of service represent rooms that have been converted for alternative
uses, such as additional office space, and are not available for immediate
occupancy; therefore, they are excluded from the calculation of the average
occupancy rate.  These units are placed into service as demand
dictates.





19
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents


Significant
Transactions





In recent
periods we entered into a number of transactions that affected the number of
communities we own, lease, and manage; our financing arrangements; and our
capital structure.  These transactions are summarized
below.  For details on significant transactions that affected the
comparability of the financial statements included in this Quarterly Report on
Form 10-Q, see Note 4, Acquisitions and Other Significant
Transactions, in Notes to Condensed Consolidated Financial
Statements.


Purchase
                
                
                AmountPrice
      (1)
                
                
                FinancedPortfolio
                Date
                
                Communities
                
                
                Units
                
                
                (in
      thousands)Individual
      community
                June
      2009
                
                
                1
                
                
                
                85
                
                
                $
                10,579
                
                
                $
                9,010
                
                
                
                (2
                )Individual
      community
                January
      2009
                
                
                1
                
                
                
                83
                
                
                
                -
                
                
                
                -
                
                
                
                (3
                )Ventas
                December
      2008
                
                
                5
                
                
                
                432
                
                
                
                64,251
                
                
                
                55,621
                
                
                
                (4
                )HCP,
      Inc.
                December
      2008
                
                
                11
                
                
                
                1,462
                
                
                
                -
                
                
                
                -
                
                
                
                (3
                )Individual
      communities
                December
      2008
                
                
                2
                
                
                
                254
                
                
                
                -
                
                
                
                -
                
                
                
                (3
                )Health
      Care REIT, Inc. (Tranche 2)
                October
      2008
                
                
                10
                
                
                
                693
                
                
                
                77,164
                
                
                
                56,398
                
                
                
                (4
                )Health
      Care REIT, Inc. (Tranche 1)
                June
      2008
                
                
                19
                
                
                
                1,564
                
                
                
                222,656
                
                
                
                213,220
                
                
                
                (4
                )Individual
      community
                June
      2008
                
                
                1
                
                
                
                54
                
                
                
                6,750
                
                
                
                6,000
                
                
                
                (2
                )Nationwide
      Health Properties, Inc.
                April
      2008
                
                
                24
                
                
                
                1,672
                
                
                
                313,954
                
                
                
                279,140
                
                
                
                (4
                )Nationwide
      Health Properties, Inc.
                January
      2008
                
                
                1
                
                
                
                38
                
                
                
                -
                
                
                
                -
                
                
                
                (5
                )Individual
      community
                January
      2008
                
                
                1
                
                
                
                104
                
                
                
                -
                
                
                
                -
                
                
                
                (3
                )76
                
                
                
                6,441(1)
      Excludes closing costs and purchase accounting
adjustments.(2)
      Purchase of community(3)
      Operating leases.(4)
      Acquisition of properties previously operated under
leases.(5)
      Leased community included in April 2008 acquisition.








20
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009








The
following table shows the changes in buildings from December 31, 2007, through
June 30, 2009, including those transactions previously described:





Month
                  
                  Owned
                  
                  
                  Leased
                  
                  
                  Consolidated
                  
                  
                  Managed
                  
                  
                  TotalDecember
      31, 2007
                  
                  
                  
                  107
                  
                  
                  
                  147
                  
                  
                  
                  254
                  
                  
                  
                  33
                  
                  
                  
                  287Courtyard
      of Loyalton - development
                  Jan-08
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1Summerville
      at Hazel Creek
                  Jan-08
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1March
      31, 2008
                  
                  
                  
                  107
                  
                  
                  
                  149
                  
                  
                  
                  256
                  
                  
                  
                  33
                  
                  
                  
                  289NHP
      Purchase
                  Apr-08
                  
                  
                  24
                  
                  
                  
                  (24
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Galleria
      Oaks - disposition
                  May-08
                  
                  
                  (1
                  )
                  
                  
                  –
                  
                  
                  
                  (1
                  )
                  
                  
                  –
                  
                  
                  
                  (1
                  )Meridian
      Oaks - disposition
                  May-08
                  
                  
                  (1
                  )
                  
                  
                  –
                  
                  
                  
                  (1
                  )
                  
                  
                  –
                  
                  
                  
                  (1
                  )Arborwood
                  Jun-08
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1Emeritus
      at Stow - development
                  Jun-08
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  1HCN
      Purchase
                  Jun-08
                  
                  
                  19
                  
                  
                  
                  (19
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –June
      30, 2008
                  
                  
                  
                  149
                  
                  
                  
                  106
                  
                  
                  
                  255
                  
                  
                  
                  34
                  
                  
                  
                  289No
      acquisitions or dispositions in the quarter
                  
                  
                  
                  -
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –September
      30, 2008
                  
                  
                  
                  149
                  
                  
                  
                  106
                  
                  
                  
                  255
                  
                  
                  
                  34
                  
                  
                  
                  289HCN
      Purchase
                  Oct-08
                  
                  
                  10
                  
                  
                  
                  (10
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –New
      management agreements
                  Nov-08
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  4
                  
                  
                  
                  4HCP
      Lease
                  Dec-08
                  
                  
                  –
                  
                  
                  
                  11
                  
                  
                  
                  11
                  
                  
                  
                  –
                  
                  
                  
                  11LTC
      Leases
                  Dec-08
                  
                  
                  –
                  
                  
                  
                  2
                  
                  
                  
                  2
                  
                  
                  
                  –
                  
                  
                  
                  2Ventas
      5
                  Dec-08
                  
                  
                  5
                  
                  
                  
                  (5
                  )
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –December
      31, 2008
                  
                  
                  
                  164
                  
                  
                  
                  104
                  
                  
                  
                  268
                  
                  
                  
                  38
                  
                  
                  
                  306Autumn
      Ridge - disposition
                  Jan-09
                  
                  
                  (1
                  )
                  
                  
                  –
                  
                  
                  
                  (1
                  )
                  
                  
                  –
                  
                  
                  
                  (1
                  )Emeritus
      at Northdale
                  Jan-09
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1Emeritus
      at Urbandale - development
                  Jan-09
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1New
      management agreements
                  Jan-09
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  2
                  
                  
                  
                  2March
      31, 2009
                  
                  
                  
                  164
                  
                  
                  
                  105
                  
                  
                  
                  269
                  
                  
                  
                  40
                  
                  
                  
                  309Emeritus
      at College Park
                  Jun-09
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1
                  
                  
                  
                  (1
                  )
                  
                  
                  –June
      30, 2009
                  
                  
                  
                  165
                  
                  
                  
                  105
                  
                  
                  
                  270
                  
                  
                  
                  39
                  
                  
                  
                  309








21
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents





Results
of Operations





Two of
the important factors affecting our financial results are the rates we charge
our residents and the occupancy levels we achieve in our
communities.  In evaluating the rate component, we generally rely on
the average monthly revenue per occupied unit, computed by dividing the total
community revenue for a particular period by the average number of occupied
units for the same period.  In evaluating the occupancy component, we
generally rely on an average occupancy rate, computed by dividing the average
units occupied during a particular period by the average number of units
available during the period.  We evaluate these and other operating
components for our consolidated portfolio, which includes the communities we own
and lease, and our operating portfolio, which also includes the communities we
manage.





The table
below shows the average monthly revenue per occupied unit and occupancy rate for
our consolidated portfolio for the three months ended June 30, 2009 and
2008.  Please refer to the completecomparison contained
herein for further analysis of these rate and occupancy statistics.





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      DAverage
      monthly revenueper
      occupied unit
                      
                      $
                      3,650
                      
                      
                      $
                      3,382
                      
                      
                      $
                      268
                      
                      
                      
                      7.9
                      %Average
      occupancy rate
                      
                      
                      86.6
                      %
                      
                      
                      86.5
                      %
                      
                      
                      
                      
                      
                      
                      .1
                      
                      ppt*





*
percentage points





We
believe that occupancy rates reflect industry-wide factors and other economic
conditions, as well as our own actions and policies, including the various
acquisitions and development projects we completed in 2008 and
2009.  We continue to evaluate the factors of rate and occupancy to
find the optimum balance in each community.





Since our
inception in 1993, we have incurred operating losses totaling approximately
$382.5 million as of June 30, 2009.  We believe that these losses have
resulted from our emphasis on expansion, financing costs arising from multiple
financing and refinancing transactions related to this expansion, administrative
and corporate expenses that we incurred in anticipation of further expansion and
increased emphasis on risk management and financial reporting controls, the
impact in the early years on many of our leases from capital and financing lease
treatments, and occupancy rates remaining lower for longer periods than we
anticipated.  Our current emphasis is on maximization of cash flows as
we work toward improvements in occupancy and average rates, selective growth,
and changes in our capital structure, such as acquisition of leased properties
and refinancing of existing debt.





22
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents





Statements
of Operations as Percentage of Revenues and Period-to-Period Percentage
Change





The
following table sets forth, for the periods indicated, certain items from our
condensed consolidated statements of operations as a percentage of total
revenues and the percentage change of the dollar amounts from period to
period.





Period-to-PeriodPercentageChangeFav
      / (Unfav)Percentage
      of Revenues
                
                
                Three
      Months
                
                
                Six
      MonthsThree
      Months Ended
                
                
                Six
      Months Ended
                
                
                Ended
                
                
                EndedJune
      30,
                
                
                June
      30,
                
                
                June
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                
                2009-2008
                
                
                
                2009-2008Revenues:
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                18.5
                %
                
                
                18.6
                %Expenses:Community
      operations*
                
                
                63.2
                
                
                
                63.7
                
                
                
                64.1
                
                
                
                64.4
                
                
                
                (17.5
                )
                
                
                (18.0
                )General
      and administrative
                
                
                7.3
                
                
                
                8.0
                
                
                
                7.1
                
                
                
                8.0
                
                
                
                (8.5
                )
                
                
                (5.5
                )Depreciation
      and amortization
                
                
                8.2
                
                
                
                15.8
                
                
                
                9.0
                
                
                
                16.2
                
                
                
                38.5
                
                
                
                34.2Facility
      lease expense
                
                
                13.5
                
                
                
                12.1
                
                
                
                13.4
                
                
                
                12.1
                
                
                
                (32.1
                )
                
                
                (31.5
                )Total
      operating expenses
                
                
                92.2
                
                
                
                99.6
                
                
                
                93.6
                
                
                
                100.7
                
                
                
                (9.7
                )
                
                
                (10.2
                )Operating
      income (loss) from continuing operations
                
                
                7.8
                
                
                
                0.4
                
                
                
                6.4
                
                
                
                (0.7
                )
                
                
                N/A
                
                
                
                N/AOther
      income (expense)Interest
      income
                
                
                0.1
                
                
                
                0.3
                
                
                
                0.1
                
                
                
                0.4
                
                
                
                (67.5
                )
                
                
                (77.2
                )Interest
      expense
                
                
                (11.7
                )
                
                
                (12.1
                )
                
                
                (11.8
                )
                
                
                (11.7
                )
                
                
                (15.2
                )
                
                
                (19.3
                )Change
      in fair value of interest rate swaps
                
                
                0.3
                
                
                
                0.5
                
                
                
                0.2
                
                
                
                -
                
                
                
                (22.6
                )
                
                
                523.7Equity
      gains (losses) in unconsolidatedjoint
      ventures
                
                
                0.3
                
                
                
                0.4
                
                
                
                0.3
                
                
                
                (0.2
                )
                
                
                15.8
                
                
                
                (238.2
                )Other,
      net
                
                
                (0.1
                )
                
                
                (0.3
                )
                
                
                -
                
                
                
                -
                
                
                
                (68.6
                )
                
                
                (22.7
                )Net
      other expense
                
                
                (11.1
                )
                
                
                (11.2
                )
                
                
                (11.2
                )
                
                
                (11.5
                )
                
                
                (18.0
                )
                
                
                (15.6
                )Loss
      from continuing operations beforeincome
      taxes
                
                
                (3.3
                )
                
                
                (10.8
                )
                
                
                (4.8
                )
                
                
                (12.2
                )
                
                
                63.2
                
                
                
                53.0Provision
      for income taxes
                
                
                (0.1
                )
                
                
                (0.1
                )
                
                
                (0.1
                )
                
                
                (0.1
                )
                
                
                -
                
                
                
                (12.5
                )Loss
      from continuing operations
                
                
                (3.4
                )
                
                
                (10.9
                )
                
                
                (4.9
                )
                
                
                (12.3
                )
                
                
                62.4
                
                
                
                52.3Income
      (loss) from discontinued operations
                
                
                0.1
                
                
                
                (2.7
                )
                
                
                (0.2
                )
                
                
                (1.6
                )
                
                
                106.3
                
                
                
                87.3Net
      loss
                
                
                (3.3
                )
                
                
                (13.6
                )
                
                
                (5.1
                )
                
                
                (13.9
                )
                
                
                71.1
                
                
                
                56.3Less
      net loss attributable to thenoncontrolling
      interest
                
                
                0.1
                
                
                
                -
                
                
                
                0.1
                
                
                
                -
                
                
                
                N/A
                
                
                
                N/ANet
      loss attributable to EmeritusCorporation
      common shareholders
                
                
                (3.2
                %)
                
                
                (13.6
                %)
                
                
                (5.0
                %)
                
                
                (13.9
                %)
                
                
                72.0
                %
                
                
                57.1
                %





*  exclusive
of depreciation and amortization and facility lease expense shown
separately.











23
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents


Comparison of the Three
Months Ended June 30, 2009 and 2008





Net
Loss Attributable to Emeritus Corporation Common Shareholders





We
recorded a net loss of $7.1 million in the three months ended June 30, 2009,
compared to $25.2 million in the prior year period.  Our loss in the
quarter is due primarily to the fact that interest expense exceeds our operating
income from continuing operations.  As discussed under Liquidity and Capital
Resources, we have incurred significant losses since our inception, but
so far in 2009 and in each of the past three years we have generated positive
cash flow from operating activities.





The $18.1
million decrease in our net loss is due primarily to operating income from
continuing operations, which increased by $16.4 million to $17.2 million in the
current period.  The increase in operating income reflects the
acquisition of communities, improvements in operating margins, and a decrease in
amortization expense.  Interest expense (net of interest income)
increased by $3.8 million, which was offset by a decrease in impairment losses
included in discontinued operations.  The details of each of the
components of net loss are set forth below.





Total
Operating Revenues:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Community
      revenue
                      
                      $
                      217,631
                      
                      
                      $
                      183,677
                      
                      
                      $
                      33,954
                      
                      
                      
                      18.5
                      %Management
      fees
                      
                      
                      1,453
                      
                      
                      
                      1,223
                      
                      
                      
                      230
                      
                      
                      
                      18.8
                      %Total
      operating revenues
                      
                      $
                      219,084
                      
                      
                      $
                      184,900
                      
                      
                      $
                      34,184
                      
                      
                      
                      18.5
                      %





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      DAverage
      monthly revenue per occupied unit
                      
                      $
                      3,650
                      
                      
                      $
                      3,382
                      
                      
                      $
                      268
                      
                      
                      
                      7.9
                      %Average
      occupancy rate
                      
                      
                      86.6
                      %
                      
                      
                      86.5
                      %
                      
                      
                      
                      
                      
                      
                      0.1
                      
                      ppt*





*
percentage points





Of the
$34.0 million increase in community revenues for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, approximately $23.8
million was due to the addition of 17 new communities.  The remaining
increase of $10.2 million was primarily due to increases in the average monthly
revenue per occupied unit, which resulted from an average rate increase of
approximately 3.4% and the addition of new communities with average revenue per
unit that was higher than that of our existing communities.





We
continue our efforts to build our occupancy through sales and marketing
initiatives, programs that address resident mix and a focus on property
improvements and other community-level enhancements to attract additional
long-term residents and increase occupancy while maintaining growth in average
monthly revenue per unit.  In spite of the current economic downturn,
we believe that these initiatives will continue to have a positive impact on
operating performance over time.





The
management fee revenue was derived from the Blackstone joint venture (Blackstone
JV), from which we recorded $871,000 and $822,000 in the three-month periods
ended June 30, 2009 and 2008, respectively, and from the Stow joint venture
(Stow JV) and other third-party contracts.  The Blackstone JV and the
Stow JV accounted for $44,000 of the increase and the remainder was due to the
addition of six new management contracts.





24
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents


Community
Operations:





Three
      Months Ended June 30,2009
                        
                        
                        2008
                        
                        
                        $D
                        
                        
                        %
      D(in
      thousands, except percentages)Community
      operations
                        
                        $
                        138,487
                        
                        
                        $
                        117,860
                        
                        
                        $
                        20,627
                        
                        
                        
                        17.5
                        %As
      a percent of revenue
                        
                        
                        63.2
                        %
                        
                        
                        63.7
                        %
                        
                        
                        
                        
                        
                        
                        (0.3
                        )
                        ppt





Of the
$20.6 million increase in community operating expense, $17.5 million was due to
the addition of 17 new communities.  Of the remaining increase of $3.1
million, $1.8 million was primarily due to increases in labor-related
costs.  The remaining increase of $1.3 million was primarily related
to increases in supplies of $526,000, bad debts of $412,000, and repairs and
maintenance of $376,000, with the remainder consisting of a net decrease in
various other community operating expenses.  Both of the three-month
periods ended June 30, 2009 and 2008, reflect expense reductions to our
professional liability reserves in the amount of $1.7 million and $1.9 million,
respectively.





General
and Administrative:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)General
      and administrative
                      
                      $
                      15,987
                      
                      
                      $
                      14,731
                      
                      
                      $
                      1,256
                      
                      
                      
                      8.5
                      %As
      a percent of revenue
                      
                      
                      7.3
                      %
                      
                      
                      8.0
                      %
                      
                      
                      
                      
                      
                      
                      (0.7
                      )
                      ppt





The
increase in general and administrative expenses of $1.3 million reflects the
Company’s growth over the past year.  The increase is due primarily to
salaries and benefits for regional and corporate overhead positions, which
increased by $1.3 million, resulting from increases in both the number of
personnel and in average salaries.  The increase in salaries and
benefits was mitigated by a $320,000 decrease in non-cash stock compensation
expense, which amounted to $1.1 million and $1.4 million for the three months
ended June 30, 2009 and 2008, respectively.  Ongoing stock option
expense is approximately $1.1 million per quarter based on the current stock
options outstanding.





General
and administrative expense as a percentage of operating revenues for all
communities, including managed communities, may be more meaningful for
industry-wide comparisons.  General and administrative expense as a
percentage of community operating revenues for all managed and consolidated
communities decreased to 6.5% for the three months ended June 30, 2009 from 6.9%
for the three months ended June 30, 2008.





Depreciation
and Amortization:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Depreciation
      and amortization
                      
                      $
                      17,960
                      
                      
                      $
                      29,181
                      
                      
                      $
                      (11,221
                      )
                      
                      
                      (38.5
                      %)As
      a percent of revenue
                      
                      
                      8.2
                      %
                      
                      
                      15.8
                      %
                      
                      
                      
                      
                      
                      
                      (7.6
                      )
                      ppt





The
decrease in depreciation and amortization expense of $11.2 million represents a
decrease in depreciation expense of $90,000 and a decrease in amortization
expense of $11.1 million.  The decrease in depreciation expense is the
result of our purchase in 2008 of the real estate underlying 52 communities
accounted for as capital leases.  Assets under capital leases are
depreciated over the lease terms, which are generally shorter than the useful
lives.





25
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents


The
decrease in amortization expense is due primarily to the in-place resident
contract intangible asset acquired in our acquisition of Summerville in
September 2007.  This asset was fully amortized in the first quarter
of 2009 and accounted for $11.3 million of the amortization expense recorded in
the prior year period.





Facility
Lease Expense:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Operating
      lease expense
                      
                      $
                      22,062
                      
                      
                      $
                      17,435
                      
                      
                      $
                      4,627
                      
                      
                      
                      26.5
                      %Above/below
      market rent
                      
                      
                      2,457
                      
                      
                      
                      2,524
                      
                      
                      
                      (67
                      )
                      
                      
                      (2.7
                      %)Straight-line
      rent
                      
                      
                      4,954
                      
                      
                      
                      2,354
                      
                      
                      
                      2,600
                      
                      
                      
                      110.5
                      %Total
      facility lease expense
                      
                      $
                      29,473
                      
                      
                      $
                      22,313
                      
                      
                      $
                      7,160
                      
                      
                      
                      32.1
                      %As
      a percent of revenue
                      
                      
                      13.5
                      %
                      
                      
                      12.1
                      %
                      
                      
                      
                      
                      
                      
                      1.4
                      
                      ppt





The
increase in facility lease expense of $7.2 million was primarily due to the
acquisition of 14 communities operated by us under operating leases and
expansions of existing communities, which increased facility lease expense by
$8.4 million.  This increase was offset in part by purchases in 2008
of the real estate underlying leased communities.  We leased 79 and 71
communities under operating leases as of June 30, 2009 and 2008,
respectively.





Interest
Income:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Interest
      income
                      
                      $
                      189
                      
                      
                      $
                      581
                      
                      
                      $
                      (392
                      )
                      
                      
                      (67.5
                      %)As
      a percent of revenue
                      
                      
                      0.1
                      %
                      
                      
                      0.3
                      %
                      
                      
                      
                      
                      
                      
                      (0.2
                      )
                      ppt





Interest
income is primarily attributable to interest earned on invested cash balances,
interest earned on collateral paid in advance for workers’ compensation, and
interest earned on restricted deposits.  Our average balance of
interest-earning assets and related interest rates were lower in the second
quarter of 2009 as compared to the second quarter of 2008.





Interest
Expense:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Interest
      expense
                      
                      $
                      25,846
                      
                      
                      $
                      22,430
                      
                      
                      $
                      3,416
                      
                      
                      
                      15.2
                      %As
      a percent of revenue
                      
                      
                      11.7
                      %
                      
                      
                      12.1
                      %
                      
                      
                      
                      
                      
                      
                      (0.4
                      )
                      ppt





The
increase in interest expense of $3.4 million for the second quarter of 2009 as
compared to the 2008 period was primarily due to the increase in long-term debt
during 2008 related to the refinancing of certain mortgages and a net increase
in debt obligations related to the purchase of 58 previously leased communities,
of which 52 were accounted for as capital leases.





26
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents


Change in Fair Value
of Interest Rate Swaps:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Change
      in fair value of interest rate swaps
                      
                      $
                      752
                      
                      
                      $
                      972
                      
                      
                      $
                      (220
                      )
                      
                      
                      (22.6
                      %)As
      a percent of revenue
                      
                      
                      0.3
                      %
                      
                      
                      0.5
                      %
                      
                      
                      
                      
                      
                      
                      (0.2
                      )
                      ppt





For the
three months ended June 30, 2009 and 2008, we recorded unrealized gains of
$752,000 and $972,000, respectively, which represent the change in the fair
value of the interest rate swaps.  The fair value of the interest rate
swaps is estimated based on market interest rates and yield curves and therefore
fluctuates with changes in interest rates.





Equity
Gains in Unconsolidated Joint Ventures:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Equity
      gains inunconsolidated
      joint ventures
                      
                      $
                      560
                      
                      
                      $
                      665
                      
                      
                      $
                      (105
                      )
                      
                      
                      (15.8
                      %)As
      a percent of revenue
                      
                      
                      0.3
                      %
                      
                      
                      0.4
                      %
                      
                      
                      
                      
                      
                      
                      (0.1
                      )
                      ppt





The
equity gains of $568,000 from the Blackstone JV were partially offset by equity
losses from the Stow JV for the three months ended June 30, 2009.  The
equity gain of $665,000 in the three months ended June 30, 2008, includes equity
gains of $794,000 from the Blackstone JV, partially offset by equity losses from
the Stow JV.





Equity
gains and losses related to the Blackstone JV are impacted by changes in the
fair value of its interest rate swap, which are recorded in the Blackstone JV’s
earnings.  Changes in the fair value of this swap resulted in equity
earnings of $319,000 in the second quarter of 2009 and $876,000 in the 2008
period.





Other,
net:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      % D(in
      thousands, except percentages)Other,
      net
                      
                      $
                      (182
                      )
                      
                      $
                      (580
                      )
                      
                      $
                      398
                      
                      
                      
                      (68.6
                      %)As
      a percent of revenue
                      
                      
                      (0.1
                      %)
                      
                      
                      (0.3
                      %)
                      
                      
                      
                      
                      
                      
                      0.2
                      
                      ppt





Other,
net for the 2009 period includes amortization of deferred gains of
$74,000.  The prior year period includes $1.1 million of expenses
related to financing transactions, offset in part by amortization of deferred
gains of $502,000.


Income
Taxes:





Three
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Provision
      for income taxes
                      
                      $
                      (270
                      )
                      
                      $
                      (270
                      )
                      
                      $
                      –
                      
                      
                      
                      –As
      a percent of revenue
                      
                      
                      (0.1
                      %)
                      
                      
                      (0.1
                      %)
                      
                      
                      
                      
                      
                      
                      –
                      
                      ppt








27
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


Table of Contents


The
income tax provisions in 2009 and 2008 represent estimated state income and
franchise tax liabilities.





Discontinued
Operations:





For the
three months ended June 30, 2009 and 2008, our discontinued operations recorded
income of $316,000 and a loss of $5.0 million, respectively.  The 2008
loss includes an impairment charge of $4.3 million.








28
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009








Comparison of the Six Months
Ended June 30, 2009 and 2008





Net
Loss Attributable to Emeritus Corporation Common Shareholders





We
recorded a net loss of $22.0 million in the six months ended June 30, 2009,
compared to $51.2 million in the prior year period.  Our loss in the
first two quarters is due primarily to the fact that interest expense exceeds
our operating income from continuing operations.  As discussed under
Liquidity and Capital
Resources, we have incurred significant losses since our inception, but
so far in 2009 and in each of the past three years we have generated positive
cash flow from operating activities.





The $29.2
million decrease in our net loss is due primarily to improvements in operating
income from continuing operations, which amounted to $28.1 million in the 2009
period compared to an operating loss of $2.4 million in the prior year
period.  The increase in operating income reflects the acquisition of
communities, improvements in operating margins, and a decrease in amortization
expense.  Interest expense (net of interest income) increased by $9.4
million, which was offset by increases in equity gains and other income and a
decrease in losses from discontinued operations.  The details of each
of the components of net loss are set forth below.





Total
Operating Revenues:





Six
      Months Ended June 30,2009
                    
                    
                    2008
                    
                    
                    $D
                    
                    
                    %
      D(in
      thousands, except percentages)Community
      revenue
                    
                    $
                    434,149
                    
                    
                    $
                    366,287
                    
                    
                    $
                    67,862
                    
                    
                    
                    18.5
                    %Management
      fees
                    
                    
                    2,920
                    
                    
                    
                    2,382
                    
                    
                    
                    538
                    
                    
                    
                    22.6
                    %Total
      operating revenues
                    
                    $
                    437,069
                    
                    
                    $
                    368,669
                    
                    
                    $
                    68,400
                    
                    
                    
                    18.6
                    %








Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      DAverage
      monthly revenue per occupied unit
                      
                      $
                      3,653
                      
                      
                      $
                      3,359
                      
                      
                      $
                      294
                      
                      
                      
                      8.7
                      %Average
      occupancy rate
                      
                      
                      86.4
                      %
                      
                      
                      86.9
                      %
                      
                      
                      
                      
                      
                      
                      (0.5
                      )
                      ppt*





Of the
$67.9 million increase in community revenues for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, approximately $48.3
million was due to the addition of 19 new communities.  The remaining
increase of $19.6 million was primarily due to increases in the average monthly
revenue per occupied unit, which resulted from an average rate increase of
approximately 3.8% and the addition of new communities with average revenue per
unit that was higher than that of our existing communities.





Although
the table above reflects a decrease in the occupancy rate from the prior year
period, the same community occupancy rate increased 50 basis points to 87.5% for
the six months ended June 30, 2009, from 87.0% in the prior year
period.  The overall decline in occupancy rate is due to acquisition,
expansion, and development activities.  We continue our efforts to
build our occupancy through increased sales and marketing initiatives, programs
that address resident mix and a focus on property improvements and other
community-level enhancements to attract additional long-term residents and
increase occupancy while maintaining growth in average monthly revenue per
unit.  We believe that these initiatives will continue to have a
positive impact on operating performance over time.





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The
increase in management fee revenue was primarily due to the Blackstone JV, from
which we recognized $1.7 million and $1.6 million in the six-month periods ended
June 30, 2009 and 2008, respectively, and the addition of six new management
contracts during the past year.





Community
Operations:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Community
      operations
                      
                      $
                      279,915
                      
                      
                      $
                      237,249
                      
                      
                      $
                      42,666
                      
                      
                      
                      18.0
                      %As
      a percent of revenue
                      
                      
                      64.1
                      %
                      
                      
                      64.4
                      %
                      
                      
                      
                      
                      
                      
                      (0.3
                      )
                      ppt





Of the
$42.7 million increase in community operating expense, $35.7 million was due to
the addition of 19 new communities.  Of the remaining increase of $7.0
million, $3.5 million was primarily due to increases in labor-related
costs.  The remaining increase of $3.5 million was primarily related
to increases in repairs and maintenance of $929,000, supplies of $862,000,
property taxes of $787,000, bad debts of $617,000, marketing of $437,000, and
travel of $304,000, with the remainder consisting of a net decrease in various
other community operating expenses. Both of the
six-month periods ended June 30, 2009 and 2008, reflect expense reductions to
our professional liability reserves in the amount of $1.7 million and $1.9
million, respectively.





General
and Administrative:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)General
      and administrative
                      
                      $
                      30,967
                      
                      
                      $
                      29,342
                      
                      
                      $
                      1,625
                      
                      
                      
                      5.5
                      %As
      a percent of revenue
                      
                      
                      7.1
                      %
                      
                      
                      8.0
                      %
                      
                      
                      
                      
                      
                      
                      (0.9
                      )
                      ppt





The
increase in general and administrative expenses of $1.6 million reflects the
Company’s growth over the past year.  Salaries and benefits for
regional and corporate overhead positions increased by $1.8 million, resulting
from increases in both the number of personnel and in average
salaries.  The increase in salaries and benefits was mitigated by a
$755,000 decrease in non-cash stock compensation expense, which amounted to $2.1
million and $2.8 million for the six months ended June 30, 2009 and 2008,
respectively.  The remaining net decrease is due to various other
general and administrative expenses.





General
and administrative expense as a percentage of operating revenues for all
communities, including managed communities, may be more meaningful for
industry-wide comparisons.  General and administrative expense as a
percentage of community operating revenues for all managed and consolidated
communities decreased to 6.3% for the six months ended June 30, 2009 from 6.9%
for the six months ended June 30, 2008.





Depreciation
and Amortization:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Depreciation
      and amortization
                      
                      $
                      39,388
                      
                      
                      $
                      59,816
                      
                      
                      $
                      (20,428
                      )
                      
                      
                      (34.2
                      %)As
      a percent of revenue
                      
                      
                      9.0
                      %
                      
                      
                      16.2
                      %
                      
                      
                      
                      
                      
                      
                      (7.2
                      )
                      ppt





The
decrease in depreciation and amortization expense of $20.4 million represents a
decrease in depreciation expense of $1.7 million and a decrease in amortization
expense of $18.7 million.  The decrease in depreciation





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2009


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expense
is the result of our purchase in 2008 of the real estate underlying 52
communities accounted for as capital leases.  Assets under capital
leases are depreciated over the lease terms, which are generally shorter than
the useful lives.





The
decrease in amortization expense is due primarily to the in-place resident
contract intangible asset acquired in our acquisition of Summerville in
September 2007.  This asset was fully amortized in the first quarter
of 2009, accounting for $18.8 million of the decrease in amortization expense
from the prior year period.





Facility
Lease Expense:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Operating
      lease expense
                      
                      $
                      43,747
                      
                      
                      $
                      34,789
                      
                      
                      $
                      8,958
                      
                      
                      
                      25.7
                      %Above/below
      market rent
                      
                      
                      4,973
                      
                      
                      
                      5,048
                      
                      
                      
                      (75
                      )
                      
                      
                      (1.5
                      %)Straight-line
      rent
                      
                      
                      9,949
                      
                      
                      
                      4,792
                      
                      
                      
                      5,157
                      
                      
                      
                      107.6
                      %Total
      facility lease expense
                      
                      $
                      58,669
                      
                      
                      $
                      44,629
                      
                      
                      $
                      14,040
                      
                      
                      
                      31.5
                      %As
      a percent of revenue
                      
                      
                      13.4
                      %
                      
                      
                      12.1
                      %
                      
                      
                      
                      
                      
                      
                      1.3
                      
                      ppt





The
increase in facility lease expense of $14.0 million was primarily due to the
acquisition of 14 communities operated by us under operating leases and
expansions of existing communities, which increased facility lease expense by
$16.5 million.  This increase was offset in part by purchases in 2008
of the real estate underlying leased communities.  We leased 79 and 71
communities under operating leases as of June 30, 2009 and 2008,
respectively.





Interest
Income:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Interest
      income
                      
                      $
                      327
                      
                      
                      $
                      1,433
                      
                      
                      $
                      (1,106
                      )
                      
                      
                      (77.2
                      %)As
      a percent of revenue
                      
                      
                      0.1
                      %
                      
                      
                      0.4
                      %
                      
                      
                      
                      
                      
                      
                      (0.3
                      )
                      ppt





Interest
income is primarily attributable to interest earned on invested cash balances,
interest earned on collateral paid in advance for workers’ compensation, and
interest earned on restricted deposits.  Our average balance of
interest-earning assets and related interest rates were lower in the first six
months of 2009 as compared to the first six months of 2008.





Interest
Expense:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Interest
      expense
                      
                      $
                      51,479
                      
                      
                      $
                      43,156
                      
                      
                      $
                      8,323
                      
                      
                      
                      19.3
                      %As
      a percent of revenue
                      
                      
                      11.8
                      %
                      
                      
                      11.7
                      %
                      
                      
                      
                      
                      
                      
                      0.1
                      
                      ppt





The
increase in interest expense of $8.3 million for the first six months of 2009 as
compared to the 2008 period was primarily due to the increase in long-term debt
during 2008 related to the refinancing of certain mortgages and a net increase
in debt obligations related to the purchase of 58 previously leased communities,
of which 52 were accounted for as capital leases.





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2009


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Change
      in fair value of interest rate
swaps:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Change
      in fair value of interest rate swaps
                      
                      $
                      842
                      
                      
                      $
                      135
                      
                      
                      $
                      707
                      
                      
                      
                      N/AAs
      a percent of revenue
                      
                      
                      0.2
                      %
                      
                      
                      –
                      
                      
                      
                      
                      
                      
                      
                      (0.2
                      )
                      ppt





For the
six months ended June 30, 2009 and 2008, we recorded unrealized gains of
$842,000 and $135,000, respectively, which represent the change in the fair
value of the interest rate swaps.  The fair value of the interest rate
swaps is estimated based on market interest rates and yield curves and therefore
fluctuates with changes in interest rates.





Equity
Gains (Losses) in Unconsolidated Joint Ventures:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Equity
      gains (losses) inunconsolidated
      joint ventures
                      
                      $
                      1,184
                      
                      
                      $
                      (857
                      )
                      
                      $
                      2,041
                      
                      
                      
                      (238.2
                      %)As
      a percent of revenue
                      
                      
                      0.3
                      %
                      
                      
                      (0.2
                      %)
                      
                      
                      
                      
                      
                      
                      0.5
                      
                      ppt





The
equity gains for the six months ended June 30, 2009, were comprised of equity
earnings of $1.3 million from the Blackstone JV, partially offset by equity
losses from the Stow JV.  The equity losses for the six months ended
June 30, 2008, were comprised of equity losses of $705,000 from the Blackstone
JV and $152,000 from the Stow JV, respectively.





Equity
gains and losses related to the Blackstone JV are impacted by changes in the
fair value of its interest rate swap, which are recorded in the Blackstone JV’s
earnings.  Changes in the fair value of this swap resulted in equity
earnings of $799,000 for the six months ended June 30, 2009 and $85,000 in the
2008 period.





Other,
net:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Other,
      net
                      
                      $
                      (136
                      )
                      
                      $
                      (176
                      )
                      
                      $
                      40
                      
                      
                      
                      N/AAs
      a percent of revenue
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      
                      
                      
                      
                      –
                      
                      ppt





Other,
net in 2009 includes the amortization of deferred gains of
$148,000.  Other, net in 2008 primarily reflects $1.1 million of
expenses related to refinancing transactions, partially offset by the
amortization of deferred gains of $1.0 million.





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 MANAGEMENT’S
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2009


Table of Contents





Income
Taxes:





Six
      Months Ended June 30,2009
                      
                      
                      2008
                      
                      
                      $D
                      
                      
                      %
      D(in
      thousands, except percentages)Provision
      for income taxes
                      
                      $
                      (540
                      )
                      
                      $
                      (480
                      )
                      
                      $
                      (60
                      )
                      
                      
                      N/AAs
      a percent of revenue
                      
                      
                      (0.1
                      %)
                      
                      
                      (0.1
                      %)
                      
                      
                      
                      
                      
                      
                      –
                      
                      ppt





The
income tax provisions in 2009 and 2008 represent estimated state income and
franchise tax liabilities.





Discontinued
Operations:





The loss
from discontinued operations was $727,000 and $5.7 million for the six months
ended June 30, 2009 and 2008, respectively.  The 2009 and 2008 losses
include an impairment charge of $1.1 million and $4.3 million,
respectively.








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 MANAGEMENT’S
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2009


Table of Contents





Same
Community Comparison





Of the
270 communities included in our consolidated portfolio at June 30, 2009, we
include 241 communities in our “same communities” definition.  For
purposes of comparing the three months ended June 30, 2009 and 2008, same
communities are defined as those communities continuously operated since January
1, 2008, less any properties where new expansion projects were opened during the
comparable periods, and less communities accounted for as discontinued
operations.  In addition, the analysis below excludes general and
administrative expenses.





Three
      Months Ended June 30,(In
      thousands)$D
                    
                    
                    %
      D2009
                    
                    
                    2008
                    
                    
                    Fav
      / (Unfav)
                    
                    
                    Fav
      / (Unfav)Revenue
                    
                    $
                    189,397
                    
                    
                    $
                    180,828
                    
                    
                    $
                    8,569
                    
                    
                    
                    4.7
                    %Community
      operations *
                    
                    
                    (118,977
                    )
                    
                    
                    (117,200
                    )
                    
                    
                    (1,777
                    )
                    
                    
                    (1.5
                    )Community
      operating income
                    
                    
                    70,420
                    
                    
                    
                    63,628
                    
                    
                    
                    6,792
                    
                    
                    
                    10.7Depreciation
      and amortization
                    
                    
                    (13,775
                    )
                    
                    
                    (11,420
                    )
                    
                    
                    (2,355
                    )
                    
                    
                    (20.6
                    )Facility
      lease expense
                    
                    
                    (21,824
                    )
                    
                    
                    (26,520
                    )
                    
                    
                    4,696
                    
                    
                    
                    17.7Operating
      income
                    
                    
                    34,821
                    
                    
                    
                    25,688
                    
                    
                    
                    9,133
                    
                    
                    
                    35.6Interest
      expense, net
                    
                    
                    (19,835
                    )
                    
                    
                    (15,455
                    )
                    
                    
                    (4,380
                    )
                    
                    
                    (28.3
                    )Operating
      income after interest expense
                    
                    $
                    14,986
                    
                    
                    $
                    10,233
                    
                    
                    $
                    4,753
                    
                    
                    
                    46.4
                    %* exclusive
      of depreciation and amortization and facility lease expense shown
      separately





These
same communities represented $189.4 million or 87.0% of our total community
revenue of $217.6 million for the second quarter of 2009.  Of the $8.6
million increase in same community revenues, $6.1 million was due to
improvements in average revenue per occupied unit and $2.5 million was due to
the increase in the average occupancy rate.





Three
      Months Ended June 30,2009
                        
                        
                        2008
                        
                        
                        $D
                        
                        
                        %
      DAverage
      monthly revenue per occupied unit
                        
                        $
                        3,512
                        
                        
                        $
                        3,398
                        
                        
                        $
                        114
                        
                        
                        
                        3.4
                        %Average
      occupancy rate
                        
                        
                        87.7
                        %
                        
                        
                        86.5
                        %
                        
                        
                        
                        
                        
                        
                        1.2
                        
                        ppt





The
increase of $1.8 million in community operations expenses for our same
communities was primarily related to increases in employee-related expenses of
$757,000, including salaries and workers’ compensation expense.  The
remainder was primarily related to increases in utilities, supplies, bad debt
expense, repairs and maintenance, and various other community operating
expenses.





Property-related
expenses (depreciation and amortization, facility lease expense, and interest
expense, net of interest income) for our same communities increased by
approximately $2.0 million, which primarily reflects the effect of purchasing
the real estate underlying communities that we had previously operated under
lease agreements.





Operating
income after interest expense for our same communities increased by $4.8 million
to $15.0 million, primarily as a result of an increase in operating income net
of the property-related expenses discussed above.  We will continue
our efforts to build our occupancy through increased marketing initiatives,
programs that address resident mix and a focus on property improvements and
other community-level enhancements to attract additional long-term residents and
increase occupancy while maintaining growth in average monthly revenue per
unit.  We believe that these initiatives will have a positive impact
on operating performance over time.





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 MANAGEMENT’S
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2009


Table of Contents


Liquidity
and Capital Resources





The
United States economy experienced a significant decline in the housing market
and a related weakness in the availability and affordability of credit during
2007 that continued through 2008 and into 2009.  We believe that the
slowdown in the housing market and the constriction of credit are likely to
continue throughout 2009.  Moreover, leading economic indicators such
as employment levels and income growth indicate that the nation is in a
recession.  However, we believe the need-driven demand for our
services continues to grow and remains resilient, in spite of the overall
housing and economic concerns, as evidenced by the relative stability in
occupancy, improvements in cash flows, and our ability to finance the
acquisition of 15 previously leased properties during the fourth quarter
of  2008.





At June
30, 2009, we had cash and equivalents on hand of $41.5 million compared to $27.3
million at December 31, 2008.  We had working capital deficits of $1.2
million and $15.2 million at June 30, 2009 and December 31, 2008,
respectively.





We have
incurred significant operating losses since our inception.  Due to the
nature of our business, it is not unusual to operate in the position of a
working capital deficit because revenues are collected more quickly, often in
advance, than obligations are required to be paid.  The result is a
very low level of current assets to the extent cash has been deployed in
business development opportunities or to pay down long-term
liabilities.  Along those lines, the working capital deficit as of
June 30, 2009, includes, as part of current assets, $15.1 million of deferred
tax assets and, as part of current liabilities, $29.4 million of deferred
revenue and unearned rental income.  The level of current liabilities
is not expected to increase from year to year in such a way as to require the
use of significant cash, except for debt obligations of $43.6 million scheduled
to mature in the next 12 months, of which $34.4 million is related to properties
held for sale that is due in 2012 but will be payable upon the sale of the
related properties.  We intend to refinance the remaining current debt
obligations prior to their respective due dates.  Given the unprecedented instability in worldwide credit
markets, there can be no assurance that we
will be able to obtain such refinancing




While we
have reported positive cash flows from operating activities over the past three
years, our cash flows have not always been sufficient to pay all of our
long-term obligations and we have been dependent upon third-party financing or
disposition of assets to fund operations.  We cannot guarantee that,
if necessary in the future, such transactions will be readily available to us,
or on terms attractive to us, but we believe that we will be able to sustain
positive operating cash flow or have adequate cash reserves and sources of
capital for all necessary investing and financing activities including required
debt service and capital expenditures through at least the next 12
months.  We have a $25.0 million unsecured revolving line of credit as
described below.





Sources
and Uses of Cash





The
following is a summary of cash flow information for the periods indicated (in
thousands):





Six
      Months Ended June 30,2009
                
                
                2008Cash
      provided by operating activities
                
                $
                33,349
                
                
                $
                39,262Cash
      used in investing activities
                
                
                (22,463
                )
                
                
                (563,816
                )Cash
      provided by financing activities
                
                
                3,347
                
                
                
                494,049Net
      increase (decrease) in cash and cash equivalents
                
                
                14,233
                
                
                
                (30,505
                )Cash
      and cash equivalents at the beginning of the period
                
                
                27,254
                
                
                
                67,710Cash
      and cash equivalents at the end of the period
                
                $
                41,487
                
                
                $
                37,205





In the
first six months of 2009 and in each of the previous three years, we reported
positive net cash from operating activities in our consolidated statements of
cash flows.  Both the 2009 and 2008 periods were positively impacted
by purchasing the real estate underlying leased facilities, whereby we replaced
lease payments with lower levels of debt service and also avoided future
scheduled lease escalators.  The decrease from 2008 to 2009 in cash
provided by operating activities was due to fluctuations in current assets and
liabilities resulting from the timing of cash receipts and
payments.





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 MANAGEMENT’S
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2009


Table of Contents





The
decrease in net cash used in investing activities was primarily due to the
number of current year acquisitions as compared to the prior
period.  In the first six months of 2008, we purchased 43 communities
that we previously operated under lease agreements and purchased one additional
community.  As a result, cash paid for acquisitions of property and
equipment, including new communities, was $26.7 million in the current period
compared to $564.1 million in the 2008 period.  Cash expenditures in
the current period were offset in part by proceeds from the sale of a community
($2.7 million) and payments from affiliates ($1.7 million).  In the
2008 period, we received cash proceeds of $6.8 million from the sale of a
community and used cash for earnest money deposits ($3.0 million) and
investments in marketable equity securities ($3.0 million).





The
decrease in net cash provided by financing activities was related to the
decrease in acquisition activity described in the previous
paragraph.  As a result, proceeds from long-term borrowings, net of
debt issue costs and repayments (including capital lease obligations), amounted
to $3.3 million in the current period compared to $502.6 million in the prior
year period.  In the 2008 period, we also placed $10.8 million of cash
in escrow for the redemption of convertible debentures.





At June
30, 2009, we had payment obligations for long-term debt and capital and
financing leases due in the next 12 months totaling approximately $54.2
million.  In addition, for the year ending December 31, 2009, we
anticipate that we will make investments of approximately $20.0 to $23.0
million for capital expenditures, comprised of approximately $18.0 million to
$20.0 million of net recurring capital expenditures (including corporate capital
expenditures) and approximately $2.0 million to $3.0 million of net capital
expenditures for community expansions.





On
February 8, 2008, we entered into a credit agreement with Wells Fargo Bank,
N.A., which provides a $25.0 million unsecured revolving line of credit (see
Note 5, Long-Term Debt,
for further details).  The credit agreement requires that we maintain
a $20.0 million minimum balance in cash, cash equivalents and/or publicly traded
marketable securities and a fixed charge coverage ratio of 1.1 to
1.0.  In June 2009, the line of credit was extended to June 30,
2010.  There were no outstanding borrowings under the line of credit
as of June 30, 2009.




Payment
Commitments





The
following table summarizes our contractual obligations at June 30, 2009, (in
thousands):





Principal
      and Lease Payments Due by PeriodAfter
      5Contractual Obligations
                  
                  Total
                  
                  
                  1 year
                  
                  
                  2-3 years
                  
                  
                  4-5 years
                  
                  
                  yearsLong-term
      debt, including current portion
                  
                  $
                  1,381,544
                  
                  
                  $
                  43,616
                  
                  
                  $
                  373,639
                  
                  
                  $
                  40,499
                  
                  
                  $
                  923,790Capital
      lease including current portion
                  
                  
                  181,528
                  
                  
                  
                  10,583
                  
                  
                  
                  24,816
                  
                  
                  
                  30,850
                  
                  
                  
                  115,279Operating
      leases
                  
                  
                  1,028,766
                  
                  
                  
                  90,422
                  
                  
                  
                  196,266
                  
                  
                  
                  204,791
                  
                  
                  
                  537,287Liability
      related to unrecognized tax benefits (1)
                  
                  
                  2,618
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  2,594,456
                  
                  
                  $
                  144,621
                  
                  
                  $
                  594,721
                  
                  
                  $
                  276,140
                  
                  
                  $
                  1,576,356





(1)
            We
      have recognized total liabilities related to unrecognized tax benefits of
      $2.6 million as of June 30, 2009.  The timing of payments
      related to these obligations is
uncertain.





The
following table summarizes interest on our contractual obligations at June 30,
2009, (in thousands):





Interest
      Due by PeriodAfter
      5Contractual Obligations
                  
                  Total
                  
                  
                  1 year
                  
                  
                  2-3 years
                  
                  
                  4-5 years
                  
                  
                  yearsLong-term
      debt
                  
                  $
                  573,565
                  
                  
                  $
                  87,751
                  
                  
                  $
                  159,931
                  
                  
                  $
                  120,404
                  
                  
                  $
                  205,479Capital
      lease and financing obligations
                  
                  
                  118,315
                  
                  
                  
                  14,128
                  
                  
                  
                  27,190
                  
                  
                  
                  25,258
                  
                  
                  
                  51,739$
                  691,880
                  
                  
                  $
                  101,879
                  
                  
                  $
                  187,121
                  
                  
                  $
                  145,662
                  
                  
                  $
                  257,218





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CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009
 Table of Contents


Financial
Covenants and Cross Defaults





Many of
our debt instruments, leases and corporate guarantees contain financial
covenants that require that we maintain certain financial criteria as of the end
of each reporting period.  These financial covenants are generally
operating performance metrics such as debt or lease coverage ratios, operating
income yields, fixed-charge coverage ratios and/or minimum occupancy
requirements.  Others are based on financial position metrics such as
minimum cash or net worth balances.  Remedies available to the
counterparties to these arrangements in the event of default of these financial
covenants vary, but include the requirement to post a security deposit in
specified amounts, acceleration of debt or lease payments, and/or the
termination of related lease agreements.





In
addition, many of the lease and debt instruments contain cross-default
provisions whereby a default under one obligation can cause a default under one
or more other obligations.  Accordingly, an event of default could
have a material adverse effect on our financial condition if a lender or
landlord exercised its rights under an event of default.





As of
June 30, 2009, we have approximately $1.4 billion of mortgage debt and notes
payable outstanding comprised of the following:





·
            Mortgage
      debt financed through Freddie Mac and Fannie Mae of approximately $953.1
      million, or approximately 69% of our total debt
      outstanding.  These obligations were incurred to facilitate
      community acquisitions over the past few years, were issued to single
      purpose entities (SPE) and are secured by the assets of the SPE, which
      consists of the real and personal property and intangible assets of a
      single community.  The debt is generally nonrecourse debt to the
      Company in that only the assets or common stock of the SPE are available
      to the lender in the event of default, with some limited
      exceptions.  These debt obligations do not contain provisions
      requiring ongoing maintenance of specific financial covenants, but do
      contain typical events of default such as nonpayment of monetary
      obligations, failure to maintain insurance coverage, fraud and/or
      misrepresentation of facts, unauthorized sale or transfer of assets, and
      the institution of legal proceedings under bankruptcy.  These
      debt instruments typically contain cross default provisions,
      which are limited to other related loans provided by the specific
      lender.  Remedies under an event of default include the
      acceleration of payment of the related
  obligations.




·
            Mortgage
      debt financed through traditional financial lending institutions of
      approximately $298.7 million, or approximately 22% of our total debt
      outstanding.  These obligations were incurred to facilitate
      community acquisitions over the past few years, were typically issued to
      SPEs and are secured by the assets of the SPE, which consists of the real
      and personal property and intangible assets of a single
      community.  The debt is generally recourse debt to the Company
      in that not only are the assets or common stock of the SPE available to
      the lender in the event of default, but the Company has guaranteed
      performance of the SPE’s obligations under the mortgage.  These
      debt obligations generally contain provisions requiring ongoing
      maintenance of specific financial covenants, such as debt service coverage
      ratios, operating income yields, occupancy requirements, and/or net
      operating income thresholds.  The Company guarantees generally
      contain requirements to maintain minimum cash and/or net worth
      balances.  In addition, the mortgages contain other typical
      events of default such as nonpayment of monetary obligations, failure to
      maintain insurance coverage, fraud and/or misrepresentation of facts,
      unauthorized sale or transfer of assets, and the institution of legal
      proceedings under bankruptcy.  These debt instruments may
      contain cross default provisions, but are limited to other loans provided
      by the specific lender.  Remedies under an event of default
      include the acceleration of payment of the related
      obligations.





·
            Mezzanine
      debt financing in the amount of $124.1 million provided by real estate
      investment trusts (REITs) to facilitate community acquisitions, or
      approximately 9% of our total debt outstanding.  These
      obligations are generally secured by mortgages on leasehold interests on
      community lease agreements between the specific REIT and the Company, and
      performance under the debt obligations are guaranteed by the
      Company.  The Company guaranty generally contains a requirement
      to maintain minimum cash and/or net worth balances.  Typical
      events of default under these obligations include nonpayment of monetary
      obligations, events of default under related lease agreements, and the
      institution of legal proceedings under bankruptcy.  Remedies
      under an event of default include the acceleration of payments of the
      related obligations.


37
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009


As of
June 30, 2009, we operated 105 communities under long-term lease arrangements,
of which 77 were leased from publicly traded REITs.  Of the 105 leased
properties, 34 contain provisions requiring ongoing maintenance of specific
financial covenants, such as rent coverage ratios.  Other typical
events of default under these leases include nonpayment of rents or other
monetary obligations, events of default under related lease agreements, and the
institution of legal proceedings under bankruptcy.  Remedies in these
events of default vary, but generally include the requirement to post a security
deposit in specified amounts, acceleration of lease payments, and/or the
termination of the related lease agreements.





For the
quarter ended June 30, 2009, we were not in compliance with financial covenants
on four leased communities and one community mortgage.  We have
obtained waivers from the owners/lender related to these defaults and, as such,
the Company was deemed to be in compliance as of June 30, 2009.  The lease
waivers expire on July 1, 2010.





Significant
Accounting Policies and Use of Estimates





Goodwill
Impairment Test





Our
policy is to estimate the fair value of the Company using a combination of the
market capitalization, discounted cash flows and market comparable
approaches.  We use market capitalization as an initial indicator of
impairment for our annual impairment test on October 31st of each year, and as a
triggering event that may indicate possible impairment of the reporting unit’s
goodwill in interim periods.  We believe the majority shareholders
would demand a premium to the current trading price (would not sell at that
price) and that a control premium exists.  Because of this control
premium, we believe that the market capitalization represents an estimated
minimum fair value.





The
Company’s stock price declined in the first quarter of 2009 such that as of
March 31, 2009, the Company’s market price per share closed at $6.56, which was
less than net book value per share.  We therefore tested goodwill for
impairment as of March 31, 2009.  The concluded fair value estimate of
$9.80 per share at March 31, 2009, was determined
using a weighted average of the income approach (discounted cash flows) and the
market comparable approach.  The Company’s book value per share as of
March 31, 2009, was $8.83.  Because the estimated fair value exceeded
book value on that date, we concluded that no goodwill impairment existed at
March 31, 2009.





As of
June 30, 2009, the Company’s closing stock price was $13.21 compared to its book
value of $8.85 and therefore we did not perform a goodwill impairment test as of
that date.





For a
description of our other significant accounting policies and estimates, see our
Annual Report on Form 10-K for the year ended December 31, 2008.





Impact of Inflation





To date,
inflation has not had a significant impact on us.  Inflation could,
however, affect our cost of doing business, and consequently, our operating
income due to limitations on our ability to increase monthly rates because of
our dependence on the senior resident population, most of whom rely on
relatively fixed incomes to pay for our services.  The monthly charges
for the resident's unit and assisted living services are influenced by the
location of the community and local competition.  Our ability to
increase revenues in proportion to increased operating expenses may be
limited.  We typically do not rely to a significant extent on
governmental reimbursement programs, which accounted for approximately 9.4% of
revenues for the six months ended June 30, 2009.  In pricing our
services, we attempt to anticipate inflation levels, but there can be no
assurance that we will be able to respond to inflationary pressures in the
future.  The near-term negative economic outlook in the United States
may impact our ability to raise our prices.


38
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009
 Table of Contents


Non-GAAP
Measures





A
non-GAAP financial measure is generally defined as one that purports to measure
historical or future financial performance, financial position, or cash flows,
but excludes or includes amounts that would not be included in most GAAP
measures.  In this report, we define and use the non-GAAP financial
measure of Adjusted EBITDA/EBITDAR, as set forth below:





Definition of Adjusted
EBITDA/EBITDAR:





We define
Adjusted EBITDA as net loss adjusted for:





·
            gains
      or losses, net of tax, in discontinued
  operations,


·
            provision
      or benefit for income taxes,


·
            equity
      earnings or losses in unconsolidated joint
  ventures,


·
            gains
      or losses on sale of assets, termination of leases, or
      investments,


·
            write-off
      of terminated development projects
costs,


·
            depreciation
      and amortization,


·
            straight-line
      rent and above/below market rent
amortization,


·
            deferred
      move-in fee revenues,


·
            impairment
      losses,


·
            amortization
      of deferred gains,


·
            non-cash
      stock-based compensation expense,


·
            interest
      expense,


·
            change
      in fair value of interest rate
swaps,


·
            loan
      prepayment fees and debt refinancing
costs,


·
            interest
      income, and


·
            other
      non-cash unusual adjustments





We define
Adjusted EBITDAR as Adjusted EBITDA adjusted for facility lease
expense.




Management's Use of Adjusted
EBITDA/EBITDAR:





We use
Adjusted EBITDA/EBITDAR to assess our overall financial and operating
performance.  We believe these non-GAAP measures, as we have defined
them, are useful in identifying trends in our day-to-day performance because
they exclude items that have little or no significance to our day-to-day
operations.  These measures provide an assessment of controllable
expenses and afford management the ability to make decisions that are expected
to facilitate meeting current financial goals, as well as achieve optimal
financial performance.  These measures also provide indicators for
management to determine if adjustments to current spending levels are
needed.





Adjusted
EBITDA/EBITDAR provide us with measures of financial performance, independent of
items that are beyond the control of management in the short-term, such as
depreciation and amortization, taxation, interest expense, and lease expense
associated with our capital structure.  These metrics measure our
financial performance based on operational factors that management can influence
in the short-term, namely the cost structure or expenses of the
organization.  Adjusted EBITDA/EBITDAR are some of the metrics used by
senior management to review the financial performance of the business on a
monthly basis and to determine levels of executive compensation.  They
are also used by research analysts and investors to evaluate the performance and
value of the companies in our industry.




39
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009
 Table of Contents


Limitations of Adjusted
EBITDA/EBITDAR:





Adjusted
EBITDA/EBITDAR have limitations as analytical tools.  Material
limitations in making the adjustments to our losses to calculate Adjusted
EBITDA/EBITDAR and using this non-GAAP financial measure as compared to GAAP net
loss include:





·
            The
      items excluded from the calculation of Adjusted EBITDA/EBITDAR generally
      represent income or expense items that may have a significant effect on
      our financial results,


·
            Items
      determined to be non-recurring in nature could, nevertheless, re-occur in
      the future, and


·
            Depreciation
      and amortization, while not directly affecting our current cash position,
      does represent wear and tear and/or reduction in value of our
      properties.  If the cost to maintain our properties exceeds our
      expected routine capital expenditures, then this could affect our ability
      to attract and retain long-term residents at our
    communities.





An
investor or potential investor may find this important in evaluating our
performance and results of operations.  We use these non-GAAP measures
to provide a more complete understanding of the factors and trends affecting our
business.





Adjusted
EBITDA/EBITDAR are not alternatives to net loss, loss from continuing
operations, or cash flows provided by or used in operating activities as
calculated and presented in accordance with GAAP.  You should not rely
on Adjusted EBITDA/EBITDAR as substitutes for any such GAAP financial
measure.  We strongly urge you to review the reconciliation of GAAP
net loss to Adjusted EBITDA/EBITDAR and Adjusted EBITDAR to net cash provided by
operating activities presented below, along with our condensed consolidated
balance sheets, statements of operations, and cash flows.  In
addition, because Adjusted EBITDA/EBITDAR are not measures of financial
performance under GAAP and are susceptible to varying calculations, this measure
as presented may differ from and may not be comparable to similarly titled
measures used by other companies.




The table
below shows the reconciliation of net loss to Adjusted EBITDA/EBITDAR for the
periods indicated (in thousands):





Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      loss
                
                $
                (7,304
                )
                
                $
                (25,234
                )
                
                $
                (22,399
                )
                
                $
                (51,202
                )Provision
      for income taxes
                
                
                270
                
                
                
                270
                
                
                
                540
                
                
                
                480Equity
      losses (gains) in unconsolidated joint ventures
                
                
                (560
                )
                
                
                (665
                )
                
                
                (1,184
                )
                
                
                857Depreciation
      and amortization
                
                
                17,960
                
                
                
                29,181
                
                
                
                39,388
                
                
                
                59,816Amortization
      of deferred gains
                
                
                (74
                )
                
                
                (502
                )
                
                
                (148
                )
                
                
                (1,004
                )Non-cash
      stock option compensation expenses
                
                
                1,116
                
                
                
                1,436
                
                
                
                2,063
                
                
                
                2,818Interest
      expense
                
                
                25,846
                
                
                
                22,430
                
                
                
                51,479
                
                
                
                43,156Straight-line
      rent expense
                
                
                4,954
                
                
                
                2,354
                
                
                
                9,949
                
                
                
                4,792Above/below
      market rent amortization
                
                
                2,457
                
                
                
                2,524
                
                
                
                4,973
                
                
                
                5,048Development
      and transaction costs written off
                
                
                351
                
                
                
                -
                
                
                
                464
                
                
                
                -Deferred
      revenues
                
                
                (57
                )
                
                
                660
                
                
                
                15
                
                
                
                2,256Change
      in fair value of interest rate swaps
                
                
                (752
                )
                
                
                (972
                )
                
                
                (842
                )
                
                
                (135
                )Interest
      income
                
                
                (189
                )
                
                
                (581
                )
                
                
                (327
                )
                
                
                (1,433
                )Discontinued
      operations
                
                
                (316
                )
                
                
                4,987
                
                
                
                727
                
                
                
                5,734Professional
      and workers' compensation liability adjustments
                
                
                (1,726
                )
                
                
                (1,854
                )
                
                
                (1,726
                )
                
                
                (1,854
                )Adjusted
      EBITDA
                
                
                41,976
                
                
                
                34,034
                
                
                
                82,972
                
                
                
                69,329Facility
      lease expense
                
                
                22,062
                
                
                
                17,435
                
                
                
                43,747
                
                
                
                34,789Adjusted
      EBITDAR
                
                $
                64,038
                
                
                $
                51,469
                
                
                $
                126,719
                
                
                $
                104,118






40
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009
 Table of Contents


The table
below shows the reconciliation of Adjusted EBITDA/EBITDAR to cash provided by
operating activities for the periods indicated (in thousands):





Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Adjusted
      EBITDAR
                
                $
                64,038
                
                
                $
                51,469
                
                
                $
                126,719
                
                
                $
                104,118Provision
      for income taxes
                
                
                (270
                )
                
                
                (270
                )
                
                
                (540
                )
                
                
                (480
                )Interest
      expense
                
                
                (25,846
                )
                
                
                (22,430
                )
                
                
                (51,479
                )
                
                
                (43,156
                )Interest
      income
                
                
                189
                
                
                
                581
                
                
                
                327
                
                
                
                1,433Discontinued
      operations--cash component
                
                
                389
                
                
                
                (233
                )
                
                
                687
                
                
                
                (363
                )Professional
      and workers' compensation liability adjustments
                
                
                1,726
                
                
                
                1,854
                
                
                
                1,726
                
                
                
                1,854Facility
      lease expense
                
                
                (22,062
                )
                
                
                (17,435
                )
                
                
                (43,747
                )
                
                
                (34,789
                )Development
      and transaction costs written off
                
                
                (351
                )
                
                
                -
                
                
                
                (464
                )
                
                
                -Amortization
      of loan fees
                
                
                772
                
                
                
                599
                
                
                
                1,527
                
                
                
                1,110Allowance
      for doubtful receivables
                
                
                922
                
                
                
                310
                
                
                
                1,676
                
                
                
                801Changes
      in operating assets and liabilities, net
                
                
                (7,613
                )
                
                
                4,529
                
                
                
                (3,410
                )
                
                
                8,676Other
                
                
                265
                
                
                
                34
                
                
                
                327
                
                
                
                58Net
      cash provided by operating activities
                
                $
                12,159
                
                
                $
                19,008
                
                
                $
                33,349
                
                
                $
                39,262




Cash
From Facility Operations





We define
Cash From Facility Operations (CFFO) as net cash provided by operating
activities adjusted for:





·
            changes
      in operating assets and
liabilities,


·
            principal
      amortization of capital lease obligations,
and


·
            recurring
      routine capital expenditures.





Recurring
routine capital expenditures include expenditures capitalized in accordance with
GAAP that are funded from CFFO.  Amounts excluded from recurring
routine capital expenditures consist primarily of community purchases and/or
major projects or renovations that are funded using financing
proceeds.





Management’s Use of Cash
From Facility Operations





We use
CFFO to assess our overall liquidity.  This measure provides an
assessment of controllable expenses and affords management the ability to make
decisions that are expected to facilitate meeting current financial and
liquidity goals as well as to achieve optimal financial
performance.  It provides an indicator for management to determine if
adjustments to current spending decisions are needed.





This
metric measures our liquidity based on operational factors that management can
impact in the short-term, namely the cost structure or expenses of the
organization.  CFFO is one of the metrics used by our senior
management and board of directors (i) to review our ability to service our
outstanding indebtedness (including our credit facilities and long-term leases),
(ii) our ability to make regular recurring routine capital expenditures to
maintain and improve our communities on a period-to-period basis, (iii) for
planning purposes, including preparation of our annual budget and (iv) in
setting various covenants in our credit agreements.  These agreements
generally require us to escrow or spend a minimum of between $250 and $450 per
unit/bed per year.  Historically, we have spent in excess of these per
unit/bed amounts; however, there is no assurance that we will have funds
available to escrow or spend these per unit/bed amounts in the
future.  If we do not escrow or spend the required minimum annual
amounts, we will be in default of the applicable debt or lease agreement, which
could trigger cross-default provisions in our outstanding debt and lease
arrangements.




41
 EMERITUS
CORPORATION
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS –
CONTINUED
 June 30,
2009
 Table of Contents


Limitations of Cash From
Facility Operations





CFFO has
limitations as an analytical tool.  It should not be viewed in
isolation or as a substitute for GAAP measures of cash flow from
operations.  CFFO does not represent cash available for discretionary
expenditures, since we may have mandatory debt service requirements or other
non-discretionary expenditures not reflected in the measure.





We
believe CFFO is useful to investors because it assists in their ability to
meaningfully evaluate (1) our ability to service our outstanding indebtedness,
including our credit facilities and capital and financing leases, and (2) our
ability to make regular recurring routine capital expenditures to maintain and
improve our communities.





CFFO is
not an alternative to cash flows provided by or used in operations as calculated
and presented in accordance with GAAP.  You should not rely on CFFO as
a substitute for any such GAAP financial measure.  We strongly urge
you to review the reconciliation of CFFO to GAAP net cash provided by operating
activities, along with our consolidated financial statements included
herein.  We also strongly urge you to not rely on any single financial
measure to evaluate our business.  In addition, because CFFO is not a
measure of financial performance under GAAP and is susceptible to varying
calculations, the CFFO measure, as presented in this report, may differ from and
may not be comparable to similarly titled measures used by other
companies.




The
following table shows cash flows from facility operations (in
thousands):





Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      cash provided by operating activities
                
                $
                12,159
                
                
                $
                19,008
                
                
                $
                33,349
                
                
                $
                39,262Adjust
      for changes in operating assets and liabilities
                
                
                7,613
                
                
                
                (4,529
                )
                
                
                3,410
                
                
                
                (8,676
                )Recurring
      capital expenditures, net
                
                
                (4,236
                )
                
                
                (3,995
                )
                
                
                (8,246
                )
                
                
                (7,464
                )Repayment
      of capital lease and financing obligations
                
                
                (2,274
                )
                
                
                (3,688
                )
                
                
                (4,508
                )
                
                
                (9,378
                )Cash
      From Facility Operations
                
                $
                13,262
                
                
                $
                6,796
                
                
                $
                24,005
                
                
                $
                13,744








42


Table of Contents





Item 3.  Quantitative and Qualitative Disclosures About
Market Risk





Our
earnings are affected by changes in interest rates as a result of our short-term
and long-term borrowings.  At June 30, 2009, we had approximately
$169.3 million of variable rate borrowings based on monthly LIBOR.  Of
the total variable rate debt of $169.3 million, $41.7 million varies with
monthly LIBOR with no LIBOR floors or ceilings.  For every 1% change
in the monthly LIBOR on this $41.7 million in variable rate debt, interest
expense will either increase or decrease by $417,000.  As of June 30,
2009, the weighted average variable rate is 2.71% in excess of the monthly LIBOR
on $41.7 million of the variable rate debt, and the monthly LIBOR rate was
0.30875%.  In addition, we have variable rate debt of $127.5 million
that has LIBOR floors at a weighted average floor of 2.58% and a weighted
average spread of 3.89%, for a total weighted average rate of
6.47%.  The LIBOR floors effectively make this debt fixed rate debt as
long as the monthly LIBOR rate is less than the 2.58% weighted average
floor.  Increases or decreases to the monthly LIBOR rate do not change
interest expense on this variable rate debt until the monthly LIBOR rate rises
above the floor, and conversely, interest expense does not decrease when the
monthly LIBOR rates falls below the floor.  This analysis does not
consider changes in the actual level of borrowings or operating lease
obligations that may occur subsequent to June 30, 2009.  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 actions
that management might be able to take with respect to our financial structure to
mitigate the exposure to such a change.





We
currently have two interest rate swap contracts with a combined notional amount
of $32.0 million.  A 100-basis point increase in interest rates would
increase the fair value of these swaps by approximately $645,000 and a 100-basis
point decrease in interest rates would decrease the fair value of these swap
contracts by approximately $657,000.





The
downturn in the United States housing market in 2007 and 2008 triggered a
constriction in the availability of credit that continues in
2009.  This could impact our ability to borrow money or refinance
existing obligations at acceptable rates of interest.  Thus far, we
have experienced no significant barriers to obtaining credit.  See
Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Liquidity and Capital
Resources.





Item 4.  Controls and Procedures





(a)  Evaluation
of disclosure controls and procedures.





Our
co-chief executive officers and our chief financial officer, after evaluating
the effectiveness of our “disclosure controls and procedures” (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) as of the end of the period covered by this
quarterly report, have concluded that, as of that date, our disclosure controls
and procedures were effective to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.





(b)
            Changes in internal
      controls





Management
has evaluated the effectiveness of the Company's internal controls through June
30, 2009.  Through our ongoing evaluation process to determine whether
any changes occurred in internal control procedures in the second quarter of
2009, management has concluded that there were no such changes that materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.






43


Table of Contents


PART II.  OTHER INFORMATION





Items
2, 3, and 5 are not applicable.





Item 1.  Legal Proceedings





From time
to time, we are subject to lawsuits and other matters in the normal course of
business, including claims related to general and professional
liability.  Accruals for these claims are based upon actuarial and/or
estimated exposure, taking into account self-insured retention or deductibles,
as applicable.  While we cannot predict the results with certainty, we
do not believe that any liability from any such lawsuits or other matters will
have a material effect on our financial position, results of operations, or
liquidity.





Item 1A.  Risk Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A., Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial condition or future results.  The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company.  Additional risks and uncertainties not currently known to us
or that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.





Item 4.  Submission of Matters to a Vote of Security
Holders





(a)
            Our
      Annual Meeting of Shareholders was held on May 21,
  2009.





(b)
            Not
      applicable.





(c)
            The
      following matters voted upon at the meeting received the number of votes
      set forth below:





·
            Election
      of Class I and Class II directors


·
            Approval
      of the 2009 Employee Stock Purchase
Plan


·
            Ratification
      of appointment of independent registered public accounting
      firm







Election of Directors:Abstain
      orName
                
                For
                
                Withhold
                
                Broker
      Non-voteStewart
      Koenig
                
                36,562,591
                
                375,476
                
                2,200,335Robert
      E. Marks
                
                36,564,331
                
                373,736
                
                2,200,335David
      W. Niemiec
                
                36,410,966
                
                527,101
                
                2,200,335Richard
      W. Macedonia
                
                36,564,652
                
                373,415
                
                2,200,335Approval of the 2009 Employee Stock Purchase
      PlanFor
                
                Against
                
                Abstain
                
                Broker
      Non-vote33,332,414
                
                106,772
                
                4,850
                
                5,694,366Ratification of Independent Public
      Accountants:For
                
                Against
                
                Abstain
                
                Broker
      Non-vote36,742,627
                
                129,918
                
                65,522
                
                2,200,335






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Table of
Contents




(d)
            Not
      applicable.





Item 6.  Exhibits





See
      Index to Exhibits, which is incorporated by
  reference.





45


Table of Contents








SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.








Dated:  August
      6, 2009
            EMERITUS
      CORPORATION(Registrant)/s/
      Raymond R. BrandstromRaymond
      R. Brandstrom, Executive Vice President—Finance, Chief Financial Officer,
      and Secretary





46


Table of Contents


Index to Exhibits





FootnoteNumber
              
              Description
              
              Number10.6
              
              Noncompetition
      Agreements between Registrant and Executive Officers.10.6.5
              Noncompetition Agreement dated April 10,
      2009 between Registrant
              
              (1)and
      Granger Cobb.10.6.6
              Noncompetition Agreement dated May 21,
      2009 between Registrant
              
              (1)and
      Budgie Amparo10.69
              
              Documents
      Relating to the Credit Agreement with Wells Fargo Bank, National
      Association Dated 200910.69.04
              Revolving Line of Credit Promissory Note
      dated June 30, 2009 in the principal
              
              (1)amount
      of $25 million payable to Wells Fargo Bank, National
      Association10.69.05
              Second Amendment to Credit
      Agreement dated March 4, 2009  by and
              
              (1)between
      Emeritus Corporation and Wells Fargo Bank, National
      Association10.69.06
              Third Amendment to Credit Agreement
      dated March 4, 2009  by and
              
              (1)between
      Emeritus Corporation and Wells Fargo Bank, National
      Association31.1
              
              Certification
      of Periodic Reports31.1.1
              Certification Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 302
              
              (1)of
      the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated August 6,
      2009.31.1.2
              Certification Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 302
              
              (1)of
      the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated August 6,
      2009.31.1.3
              Certification Pursuant to 18 U.S.C. Section
      1350, as Adopted Pursuant to Section 302
              
              (1)of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated August 6,
      2009.32.1
              
              Certification
      of Periodic Reports32.1.1
              Certification Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906
              
              (1)of
      the Sarbanes-Oxley Act of 2002 for Daniel R. Baty dated August 6,
      2009.32.1.2
              Certification Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906
              
              (1)of
      the Sarbanes-Oxley Act of 2002 for L. Granger Cobb dated August 6,
      2009.32.1.3
              Certification Pursuant to 18 U.S.C. Section
      1350, as Adopted Pursuant to Section 906
              
              (1)of
      the Sarbanes-Oxley Act of 2002 for Raymond R. Brandstrom dated August 6,
      2009.





Footnotes:(1)
            Filed
      herewith.





47