EXHIBIT 99.1
[Jenkens & Gilchrist Letterhead]
Winston W. Walp II
(214) 855-4354
wwalp@jenkens.com
February 8, 2001
ILM II Senior Living, Inc. VIA FAX
28 State Street, Suite 1100
Boston, Massachusetts 02109
Attention: J. William Sharman
Chairman and Chief Executive Officer
Re: ILM II/Capital Merger
Gentlemen:
We are writing this letter on behalf of Capital Senior Living Corporation
and Capital Senior Living Acquisition, LLC (collectively, "Capital") in
connection with the Amended and Restated Agreement and Plan of Merger among
Capital and ILM II Senior Living, Inc. ("ILM II"), as amended by First Amendment
thereto dated April 18, 2000 and Second Amendment thereto dated November 28,
2000 (as amended, the "Merger Agreement").
Representatives of ILM II have recently orally informed Capital about an
issue relating to the so-called "built-in gain tax" to which ILM II is subject.
This issue is described in the Form 10-K Annual Report of ILM II filed with the
Securities and Exchange Commission on January 31, 2001. Footnote 2 to the
audited financial statement of ILM II filed as part of its Form 10-K states in
pertinent part as follows:
"Based upon advice from the Company's financial advisors,
commencing in 1996, the Company has acted as though it had
made an election in its 1996 tax return to allow the Company
to avoid a corporate level tax upon its conversion from a
C-Corporation to a Real Estate Investment Trust. Because proof
of a formal election has not been obtained, the Company is
pursuing administrative relief with the Internal Revenue
Service to ensure the availability of the benefits of this
election. Although the Company believes that it had a
legitimate basis to make this election, in part, based upon
the advice of its financial advisors, ultimate resolution of
this matter is at the discretion of the Internal Revenue
Service. If unsuccessful, the Company could be liable for up
to $2.7 million of additional penalties and interest."
Jenkens & Gilchrist
A PROFESSIONAL CORPORATION
ILM II Senior Living, Inc.
February 8, 2001
Page 2
The referenced $2.7 million of additional penalties and interest are in addition
to the built in gain tax of "as such $2.3 million" as stated in ILM II's Form
10-K. Furthermore, if the IRS does not grant the relief sought, in the merger
with ILM II, Capital would be unable to offset the built in gain tax with
approximately $4.2 million of net operating losses that were incurred after the
conversion of ILM II Holding, Inc. to REIT status.
Under Section 7.1(d) of the Merger Agreement, ILM II may terminate the
Merger Agreement if the Merger has not been consummated by March 31, 2001. ILM
II has on several occasions indicated that it would not extend this March 31,
2001 date. Capital has been actively working on financing to complete the Merger
by March 31, 2001 and has obtained a commitment for this financing. Capital has
already expended significant funds relating to this financing and is now at a
point where Capital must commit to even more significant expenditures in order
to complete the financing by March 31, 2001. In addition to these significant
expenditures about to be incurred, Capital will be placed at significant risk of
liability to parties involved in the financing if the financing is not completed
by March 31, 2001.
Capital is extremely concerned with the tax issue which has now been
revealed in ILM II's Form 10-K. As stated in the Form 10-K, successful
resolution of this tax issue is subject to the discretion of the Internal
Revenue Service ("IRS"). If the IRS does not grant the relief sought, the
additional tax liability and inability by Capital to use the net operating
losses as an offset would represent a material adverse change which would have a
Material Adverse Effect (as defined in the Merger Agreement). In ordinary
circumstances, Capital would put its financing on hold and would await the
resolution from the IRS of this issue. Capital has been told by the accountants
for ILM II that the IRS resolution of this issue may take anywhere from 2 to 4
weeks to 3 months or longer after formal submission to the IRS, which formal
submission has not yet been made by ILM II. However, awaiting the IRS resolution
would certainly make completion by Capital of its financing by March 31, 2001
impossible. Thus Capital has been put in an untenable position by this tax issue
to which ILM II is subject.
In light of the above circumstances, Capital believes that it has no other
choice than to terminate the Merger Agreement. Therefore, Capital hereby
notifies ILM II that Capital hereby terminates the Merger Agreement pursuant to
Section 7.l(i)(i) of the Merger Agreement as a result of the occurrence and
existence of events, changes, set of circumstances or conditions having or which
reasonably could be likely to have a Material Adverse Effect.
Sincerely,
/s/ Winston W. Walp II
-----------------------
Winston W. Walp II
Jenkens & Gilchrist
A PROFESSIONAL CORPORATION
ILM II Senior Living, Inc.
February 8, 2001
Page 3
cc: Greenberg Traurig (via fax)
The Met Life Building
200 Park Avenue, 15th Floor
New York, New York 10166
Attention: Clifford E. Neimeth, Esq.
Mr. Jeffry R. Dwyer (via fax)
Mr. James A. Stroud (via fax)
Mr. Lawrence A. Cohen (via fax)
David R. Brickman, Esq. (via fax)