- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 2000
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____to____.
Commission File Number: 0-18942
ILM II SENIOR LIVING, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 06-1293758
- ----------------------- -------------------
(State of organization) (I.R.S. Employer
Identification No.)
1750 TYSONS BOULEVARD, SUITE 1200, TYSONS CORNER, VA 22102
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 357-3550
--------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF COMMON STOCK $.01 PAR VALUE
-------------------------------------
(Title of Class)
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.
Yes ____ No__X__
Shares of common stock outstanding as of November 30, 2000: 5,181,236.
Current Report on Form 8-K
of Registrant Dated November 28, 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ILM II SENIOR LIVING, INC
INDEX
Part I. Financial Information PAGE
Item 1. Financial Statements
Consolidated Balance Sheets
November 30, 2000 (Unaudited) and August 31, 2000............................................4
Consolidated Statements of Income
For the three months ended November 30, 2000 and 1999 (Unaudited)............................5
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended November 30, 2000 and 1999 (Unaudited)............................6
Consolidated Statements of Cash Flows
For the three months ended November 30, 2000 and 1999 (Unaudited)............................7
Notes to Consolidated Financial Statements (Unaudited)....................................8-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....15-22
Part II. Other Information
Item 5. Other Information...........................................................................23
Item 6. Reports on Form 8-K.........................................................................23
Signatures....................................................................................................24
-2-
ILM II SENIOR LIVING, INC
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
(see next page)
-3-
ILM II SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
November 30, 2000 (Unaudited) and August 31, 2000
(Dollars in thousands, except per share data)
ASSETS
NOVEMBER 30, 2000 AUGUST 31, 2000
----------------- ---------------
Operating investment properties, at cost:
Land.................................. $ 4,552 $ 4,522
Building and improvements............. 24,201 24,190
Furniture, fixtures and equipment..... 3,856 3,856
--------- ---------
32,609 32,568
Less: accumulated depreciation....... (9,111) (8,813)
--------- ---------
23,498 23,755
Unamortized mortgage fees................... 1,247 1,247
Less: accumulated amortization............. (1,137) (1,106)
--------- ---------
110 141
Loan origination fees....................... 144 144
Less: accumulated amortization............. (97) (84)
--------- ---------
47 60
Cash and cash equivalents................... 12,022 11,258
Accounts receivable - related party......... 276 376
Prepaid expenses and other assets........... 33 15
Deferred rent receivable.................... - 6
--------- ---------
$ 35,986 $ 35,611
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses....... $ 174 $ 121
Accounts payable-related party.............. 364 40
Construction loan payable................... 570 570
Preferred shareholders' minority
interest in subsidiary................... 145 143
--------- ---------
Total liabilities..................... 1,253 874
Contingencies
Shareholders' equity:
Common stock, $0.01 par value,
12,500,000 shares authorized
5,181,236 shares issued and
outstanding........................... 52 52
Additional paid-in capital............... 44,823 44,823
Accumulated deficit...................... (10,142) (10,138)
--------- ---------
Total shareholder's equity............ 34,733 34,737
--------- ---------
$ 35,986 $ 35,611
--------- ---------
--------- ---------
See accompanying notes.
-4-
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months ended November 30, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
THREE MONTHS ENDED
NOVEMBER 30
2000 1999
------- -------
REVENUES:
Rental and other income........................ $1,139 $1,352
Interest income................................ 90 15
------- -------
1,229 1,367
EXPENSES:
Depreciation................................... 298 298
Amortization................................... 44 48
Professional fees.............................. 667 305
General and administrative..................... 200 55
Directors' compensation........................ 24 20
------- -------
1,233 726
------- -------
NET (LOSS) INCOME................................ $ (4) $ 641
------- -------
------- -------
Basic earnings per share of common stock......... $(0.00) $ 0.14
------- -------
------- -------
Cash dividends paid per share of common stock.... $ 0.00 $ 0.21
------- -------
------- -------
The above earnings and cash dividends paid per share of common stock are based
upon the 5,181,236 shares outstanding for each period.
See accompanying notes.
-5-
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended November 30, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
COMMON STOCK ADDITIONAL
$.01 PAR VALUE PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ---------- ----------- -------
Shareholders' equity
at August 31, 1999.... 5,181,236 $52 $44,823 $(15,544) $29,331
Cash dividends paid... - - - (1,101) (1,101)
Net income............ - - - 641 641
--------- ------ ---------- ----------- -------
Shareholders' equity
at November 30, 1999.. 5,181,236 $ 52 $44,823 $(16,004) $28,871
--------- ------ ---------- ----------- -------
--------- ------ ---------- ----------- -------
Shareholders' equity
at August 31, 2000.... 5,181,236 $ 52 $44,823 $(10,138) $34,737
Cash dividends paid... - - - - -
Net loss.............. - - - (4) (4)
--------- ------ ---------- ----------- -------
Shareholders' equity
at November 30, 2000.. 5,181,236 $ 52 $44,823 $(10,142) $34,733
--------- ------ ---------- ----------- -------
--------- ------ ---------- ----------- -------
See accompanying notes.
-6-
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended November 30, 2000 and 1999 (Unaudited)
(Dollars in thousands)
THREE MONTHS ENDED
------------------
NOVEMBER 30,
-----------------
2000 1999
------- ------
Cash flows from operating activities:
Net (loss) income........................................ $ (4) $ 641
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation and amortization expense................. 342 346
Accrued dividends on subsidiary's preferred stock..... 2 2
Changes in assets and liabilities:
Accounts receivable - related party.................. 100 (33)
Prepaid expenses and other assets.................... (18) 24
Deferred rent receivable............................. 6 8
Accounts payable and accrued expenses................ 53 (46)
Accounts payable - related party..................... 324 (273)
------- ------
Net cash provided by operating activities......... 805 669
Cash flows from investing activity:
Additions to operating investment properties......... (41) (23)
------- ------
Net cash used in investing activity............... (41) (23)
------- ------
Cash flows from financing activity:
Cash dividends paid to shareholders................. - (1,101)
------- ------
Net cash used in financing activity................ - (1,101)
------- ------
Net increase (decrease) in cash and cash equivalents...... 764 (455)
Cash and cash equivalents, beginning of period............ 11,258 1,913
------- ------
Cash and cash equivalents, end of period..................$12,022 1,458
------- ------
------- ------
Cash paid for interest....................................$ - $ 13
------- ------
------- ------
See accompanying notes.
-7-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. GENERAL
The accompanying consolidated financial statements, footnotes and
discussions should be read in conjunction with the consolidated
financial statements and footnotes contained in ILM II Senior Living,
Inc.'s (the "Company") Annual Report on Form 10-K for the year ended
August 31, 2000. In the opinion of management, the accompanying interim
consolidated financial statements, which have not been audited, reflect
all adjustments necessary to present fairly the results for the interim
periods. All of the accounting adjustments reflected in the
accompanying interim consolidated financial statements are of a normal
recurring nature.
The accompanying consolidated financial statements have been
prepared on the accrual basis of accounting in accordance with U.S.
generally accepted accounting principles for interim financial
information, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities as of November 30,
2000 and revenues and expenses for each of the three-month periods
ended November 30, 2000 and 1999. Actual results could differ from the
estimates and assumptions used. Certain numbers in the prior period's
financial statements have been reclassified to conform to the current
period's presentation. The results of operations for the three-month
period ended November 30, 2000, are not necessarily indicative of the
results that may be expected for the year ending August 31, 2001.
The Company was incorporated on February 5, 1990 under the laws of
the State of Virginia as a Virginia finite-life corporation, formerly
PaineWebber Independent Mortgage Inc. II. On September 12, 1990, the
Company sold to the public in a registered initial offering 5,181,236
shares of common stock, $.01 par value. The Company received capital
contributions of $51,812,356, of which $200,000 represented the sale of
20,000 shares to an affiliate at that time, PaineWebber Group, Inc.
("PaineWebber"). For discussion purposes, the term "PaineWebber" will
refer to PaineWebber Group, Inc., and all affiliates that provided
services to the Company in the past.
The Company elected to qualify and be taxed as a Real Estate
Investment Trust ("REIT") under the Internal Revenue Code of 1986, as
amended, for each taxable year of operations.
The Company originally invested the net proceeds of the initial
public offering in six participating mortgage loans secured by senior
housing facilities located in five different states ("Senior Housing
Facilities"). All of the loans made by the Company were originally to
Angeles Housing Concepts, Inc. ("AHC"), as mortgagor, a company
specializing in the development, acquisition and operation of Senior
Housing Facilities and guaranteed by AHC's corporate parent, Angeles
Corporation ("Angeles").
ILM II Holding, Inc. ("ILM II Holding"), a majority-owned
subsidiary of the Company, now holds title to the five remaining Senior
Housing Facilities which comprise the balance of the operating
investment properties on the accompanying consolidated balance sheets,
subject to certain mortgage loans payable to the Company. Such mortgage
loans and the related interest expense are eliminated in the
consolidation of the financial statements of the Company.
The Company made charitable gifts of one share of the preferred
stock in ILM II Holding to each of 111 charitable organizations so that
ILM II Holding would meet the stock ownership requirements of a REIT as
of January 30, 1997. The preferred stock has a liquidation preference
of $1,000 per share plus any accrued and unpaid dividends. Dividends on
the preferred stock accrue at a rate of 8% per annum on the original
$1,000 liquidation preference and are cumulative from the date of
issuance. Since ILM II Holding is not expected to have sufficient cash
flow in the foreseeable future to make the required dividend payments,
it is anticipated that dividends will accrue and be paid at liquidation
of ILM II Holding. Cumulative dividends accrued as of November 30, 2000
on the preferred stock in ILM II Holding totaled approximately $34,000.
-8-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
1. GENERAL (CONTINUED)
As part of the fiscal 1994 Settlement Agreement with AHC, ILM II
Holding retained AHC as the property manager for all of the Senior
Housing Facilities pursuant to the terms of a management agreement. The
management agreement with AHC was terminated in July 1996. Subsequent
to the effective date of the settlement agreement with AHC, in order to
maximize the potential returns to the Company's existing Shareholders
while maintaining the Company's qualification as a REIT under the
Internal Revenue Code, the Company formed a new corporation, ILM II
Lease Corporation ("Lease II"), for the purpose of operating the Senior
Housing Facilities under the terms of a facilities lease agreement (the
"Facilities Lease Agreement"). All of the shares of capital stock of
Lease II were distributed to the holders of record of the Company's
common stock and the Senior Housing Facilities were leased to Lease II
(see Note 2 for a description of the Facilities Lease Agreement). Lease
II is a public company subject to the reporting obligations of the
Securities and Exchange Commission. All responsibility for the
day-to-day management of the Senior Housing Facilities, including
administration of the property management agreement with AHC, was
transferred to Lease II. On July 29, 1996, the management agreement
with AHC was terminated and Lease II retained Capital Senior Management
2, Inc. ("Capital") to be the new property manager of its Senior
Housing Facilities pursuant to a management agreement (the "Management
Agreement"). Lawrence A. Cohen, who, through July 28, 1998, served as
President, Chief Executive Officer and Director of the Company and a
Director of Lease II, has also served in various management capacities
at Capital Senior Living Corporation ("CSLC"), an affiliate of Capital,
since 1996. Mr. Cohen currently serves as Chief Executive Officer of
CSLC. As a result, through July 28, 1998, Capital was considered a
related party.
AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION
On February 7, 1999, the Company entered into an agreement and
plan of merger, which was amended and restated on October 19, 1999,
with CSLC, the corporate parent of Capital, and certain affiliates of
CSLC. On April 18, 2000, the Company entered into a First Amendment to
the Amended and Restated Agreement and Plan of Merger dated October 19,
1999. As stated in the April 18th amendment, if the merger is
consummated, the Shareholders of the Company will receive all-cash
merger consideration of approximately $13.04 per share compared to the
previous merger consideration of $14.47 per share. In addition, the
amended agreement requires CSLC to agree to pay the Company increased
termination fees in certain circumstances. Further, the Company
required CSLC to agree to reduce the amount of fees and expenses it
would receive upon termination of the merger in certain circumstances.
At a special meeting of Shareholders on June 22, 2000, holders of
more than two-thirds of the outstanding shares of the Company's common
stock voted in favor of approval of the proposed Amended and Restated
Agreement and Plan of Merger dated October 19, 1999, as amended on
April 18, 2000. Holders of Company common stock will have no
dissenters' rights in the merger.
The merger was scheduled to be consummated on or prior to
September 30, 2000. In July 2000, CSLC reported to the Company that it
had not obtained sufficient financing to complete the merger by
September 30, 2000.
-9-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(CONTINUED)
1. GENERAL (CONTINUED)
On August 15, 2000, the Company caused ILM II Holding to complete
the sale of its 75% co-tenancy interest in its senior living facility
located in Santa Barbara, California ("Villa Santa Barbara"), to CSLC
for $10,143,750. In consideration for the sale, the Company received
$9,543,750 in cash and CSLC contributed $600,000 toward the Company's
outstanding construction loan debt and assumed certain then current
transaction expenses of the Company in connection with the previously
announced proposed merger contemplated by the Amended and Restated
Agreement and Plan of Merger dated October 19, 1999, as amended on
April 18, 2000, by and among the Company, CSLC and CSLC's wholly-owned
acquisition subsidiary. The remaining 25% co-tenancy interest in Villa
Santa Barbara was formerly owned by ILM Holding, Inc. ("Holding I"), a
subsidiary of ILM Senior Living, Inc. ("ILM I") and was transferred to
CSLC at the time the merger between ILM I and CSLC was consummated. A
gain on the sale of approximately $6,160,000 was recognized in the
consolidated statement of income for the year ended August 31, 2000. It
is anticipated that this gain will result in a built-in gain tax which
would be reduced by available net operating loss carryforwards from the
period when the Company was a so-called "C" Corporation (prior to the
Company's conversion to a REIT for 1996).
On November 28, 2000, the Company extended until March 31, 2001
the outside termination date of its pending merger agreement with CSLC
and entered into with CSLC a technical amendment to the merger
agreement providing, among other things, that subject to the ILM II
Board's fiduciary duties to Shareholders, CSLC will have until March
31, 2001 to obtain definitive financing sufficient for CSLC to complete
the transaction.
In connection with the amendment, CSLC agreed, after March 31,
2001, to a termination of all of its rights of first and last offer it
may have with respect to the sale by the Company to a third party of
its common stock, its ownership interest in ILM II Holding and/or the
sale of the Company's senior living properties and assets, and to
reduce from $1,858,200 to $1,000,000 the amount of certain termination
fees payable by the Company to CSLC under certain limited
circumstances. All other terms of the merger agreement remain in
effect. The terms of the merger agreement require CSLC to pay the
Company $1,540,000 if the merger does not occur on or before March 31,
2001, if the failure to consummate the transaction is due to CSLC's
inability to obtain financing necessary to close the transaction.
The pending merger agreement provides for consideration of $13.04
per share of the Company's outstanding common stock. In view of the
sale in August 2000 to CSLC of the Company's interest in the Santa
Barbara, California senior living facility, subsequent to the balance
sheet date, on December 15, 2000, the Company distributed the net
proceeds of such sale on a pro rata basis in the form of a return of
invested capital, to Shareholders of record as of November 1, 2000. The
aggregate cash distribution of $9,792,000 was equivalent to the payment
of approximately $1.89 per share of the $13.04 per share of merger
consideration. The remaining approximate $11.15 per share would be
payable by CSLC to Shareholders of the Company upon completion of the
merger in accordance with the merger agreement.
There can be no assurance that CSLC will be able to obtain the
requisite financing to complete the merger or, even if obtained, that
the merger otherwise will be consummated.
In connection with the proposed merger, the Company has agreed to
cause ILM II Holding to cancel and terminate the Facilities Lease
Agreement with Lease II on the date of consummation of the merger.
On November 13, 2000, the Company's Board of Directors voted to
extend the Facilities Lease Agreement on a month-to-month basis beyond
its original expiration date of December 31, 2000. On November 28,
2000, the Facilities Lease Agreement was extended through the earlier
of the date on which the merger of the Company with CSLC is consummated
or March 31, 2001, and on a month-to-month basis thereafter if the
merger is not consummated by that time. The Facilities Lease Agreement
was originally scheduled to expire on December 31, 2000.
-10-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT
At November 30, 2000, through its consolidated subsidiary, the Company
owned five Senior Housing Facilities. The name, location and size of the
properties are as set forth below:
YEAR FACILITY RENTABLE RESIDENT
NAME LOCATION BUILT UNITS (1) CAPACITY (1)
- ---- -------- ----- --------- ------------
The Palms Fort Myers, FL 1988 205 255
Crown Villa Omaha, NE 1992 73 73
Overland Park Place Overland Park, KS 1984 141 153
Rio Las Palmas Stockton, CA 1988 164 190
The Villa at Riverwood St. Louis County, MO 1986 120 140
(1) Rentable units represent the number of apartment units and is a measure
commonly used in the real estate industry. Resident capacity equals the
number of bedrooms contained within the apartment units and corresponds to
measures commonly used in the healthcare industry.
Subsequent to the effective date of the Settlement Agreement with AHC, in order
to maximize the potential returns to the existing Shareholders while maintaining
the Company's qualification as a REIT under the Internal Revenue Code, the
Company formed a new corporation, Lease II, for the purpose of operating the
Senior Housing Facilities under the terms of a Facilities Lease Agreement dated
September 1, 1995 between the Company's consolidated affiliate, ILM II Holding,
as owner of the properties and lessor (the "Lessor"), and Lease II as lessee
(the "Lessee"). The facilities lease is a "triple-net" lease whereby the Lessee
pays all operating expenses, governmental taxes and assessments, utility charges
and insurance premiums, as well as the costs of all required maintenance,
personal property and non-structural repairs in connection with the operation of
the Senior Housing Facilities. ILM II Holding, as Lessor, is responsible for all
major capital improvements and structural repairs to the Senior Housing
Facilities. The Facilities Lease Agreement was originally scheduled to expire on
December 31, 2000, unless earlier terminated at the election of the Lessor in
connection with the sale by the Lessor of the Senior Housing Facilities to a
non-affiliated third party but on November 13, 2000, was extended beyond its
original expiration date on a month-to-month basis. On November 28, 2000, the
Facilities Lease Agreement was extended through the earlier of the date on which
the merger of the Company with CSLC is consummated or March 31, 2001, and on a
month-to-month basis thereafter if the merger is not consummated by that time.
During fiscal year 2000, Lease II paid annual base rent for the use of all of
the Facilities in the aggregate amount of $3,995,586 per year ($4,035,600 per
year in 1999). The reduction in base rent from the previous year was due to the
sale of Villa Santa Barbara on August 15, 2000. Beginning September 1, 2000,
annual base rent is $3,555,427 (excluding Villa Santa Barbara). Lease II also
pays variable rent, on a quarterly basis, for each Senior Housing Facility in an
amount equal to 40% of the excess of the aggregate total revenues for the Senior
Housing Facilities, on an annualized basis, over $13,021,000. Variable rent was
$256,000 and $350,000 for the three-month periods ended November 30, 2000,
respectively.
-11-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
3. RELATED PARTY TRANSACTIONS
Lease II has retained Capital to be the property manager of the Senior
Housing Facilities and the Company has guaranteed the payment of all fees
due to Capital pursuant to a Management Agreement which commenced on July
29, 1996. Lawrence A. Cohen, who, through July 28, 1998, served as
President, Chief Executive Officer and Director of the Company and a
Director of Lease II, has also served in various management capacities at
CSLC, an affiliate of Capital, since 1996. Mr. Cohen currently serves as
Chief Executive Officer of CSLC. As a result, through July 28, 1998,
Capital was considered a related party. For the three-month periods ended
November 30, 2000 and 1999, Capital earned property management fees from
the Company of $208,000 and $253,000, respectively. In connection with the
Agreement and Plan of Merger discussed in Note 1, the Management Agreement
with Capital will be terminated upon consummation of the merger.
On September 18, 1997, Lease II entered into an agreement with Capital
Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansion of several of the Senior
Housing Facilities. Capital Senior Development, Inc. will receive a fee
equal to 7% of the total development costs of these expansions if they are
pursued. The Company will reimburse Lease II for all costs related to these
potential expansions including fees to Capital Senior Development, Inc. For
the three-month periods ended November 30, 2000 and 1999, Capital Senior
Development, Inc. earned no fees from Lease II for managing
pre-construction development activities for potential expansions of the
Senior Housing Facilities.
Jeffry R. Dwyer, Secretary and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the three-month periods ended November 30, 2000 and 1999,
Greenberg Traurig earned fees from the Company of $603,000 and $795,000,
respectively. For the three-month periods ended November 30, 2000 and 1999,
Greenberg Traurig earned fees from the Company of $321,000 and $73,000.
ACCOUNTS RECEIVABLE - RELATED PARTY at November 30, 2000 and August 31,
2000, includes variable rent due from Lease II. ACCOUNTS PAYABLE-RELATED
PARTY at November 30, 2000, includes accrued legal fees due to Greenberg
Traurig, Counsel to the Company and its affiliate and a related party, as
described above. At August 31, 2000, ACCOUNTS PAYABLE - RELATED PARTY
includes $40,000 of expense reimbursements payable to Lease II.
-12-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES
FELDMAN LITIGATION
On May 8, 1998 Andrew A. Feldman and Jeri Feldman, as Trustees for
the Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990,
commenced a purported class action on behalf of that trust and all other
shareholders of the Company and ILM I in the Supreme Court of the State of
New York, County of New York naming the Company, ILM I and their Directors
as defendants. The class action complaint alleged that the Directors engaged
in wasteful and oppressive conduct and breached fiduciary duties in
preventing the sale or liquidation of the assets of the Company and ILM I,
diverting certain of their assets. The complaint sought compensatory damages
in an unspecified amount, punitive damages, the judicial dissolution of the
Company and ILM I, an order requiring the Directors to take all steps to
maximize Shareholder value, including either an auction or liquidation, and
rescinding certain agreements, and attorney's fees.
On October 15, 1999, the parties entered into a Stipulation of
Settlement and filed it with the Court, which approved the settlement, by
order dated October 21, 1999. In issuing that order the Court entered a
final judgment dismissing the action and all non-derivative claims of the
settlement class against the defendants with prejudice. This litigation
was settled at no cost to the Company and ILM I. As part of the
settlement, CSLC increased its proposed merger consideration payable to
the Company and ILM I shareholders and was also responsible for a total
of approximately $1.1 million in plaintiffs' attorneys fees and expenses
upon consummation of the proposed merger. If the proposed merger was not
consummated and if the Company and ILM I were to consummate an
extraordinary transaction with a third party, then the Company and ILM I
would be responsible for the plaintiffs' attorneys fees and expenses.
On August 15, 2000, the merger of ILM I with CSLC was consummated. If
the proposed merger of the Company and CSLC is not consummated, and if the
Company were to consummate an extraordinary transaction with a third party,
then the Company would be responsible for the Company's share of the
plaintiff"s attorney's fees and expenses.
BUILT-IN GAIN TAX
The assumption of ownership of the Senior Housing Facilities through
ILM II Holding, which was organized as a so-called "C" corporation for tax
purposes, has resulted in a possible future tax liability which would be
payable upon the ultimate sale of the Senior Living Facilities (the
"built-in gain tax"). The amount of such tax would be calculated based on
the lesser of the total net gain realized from the sale transaction or the
portion of the net gain realized upon a final sale which is attributable to
the period during which the properties were held in a "C" corporation.
Any future appreciation in the value of the Senior Housing Facilities
subsequent to the conversion of ILM II Holding to a REIT would not be
subject to the built-in gain tax. The built-in gain tax would most likely
not be incurred if the properties were to be held for a period of at least
ten years from the date of the conversion of ILM II Holding to a REIT.
However, since the end of the Company's original anticipated holding period
as defined in the Articles of Incorporation is December 31, 2001, the
properties may not be held for an additional ten years. Based on
management's current estimate of the increase in the values of the Senior
Housing Facilities which occurred between April 1994 and January 1996, as
supported by independent appraisals, a sale of the Senior Housing Facilities
within ten years of the date of the conversion of ILM II Holding to a REIT
could result in a built-in gain tax of as much as $2.5 million, which could
be reduced by approximately $270,000, using available net operating loss
carryforwards of ILM II Holding of $780,000 that were incurred prior to its
conversion to REIT status. ILM II Holding also has net operating losses that
were incurred after its conversion to REIT status of approximately $4.2
million. The sale of the Company's interest in Villa Santa Barbara resulted
in the recognition of a built-in gain of approximately $600,000, which was
offset by pre-conversion net operating
-13-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
losses. As of August 31, 2000, the potential built-in gain tax relating to
the Senior Housing Facilities is as much as $2.3 million, which could be
further reduced by approximately $50,000, using the remaining available
pre-conversion net operating loss carryforwards of ILM II Holding of
approximately $150,000. To avoid this built-in gain tax, the Directors are
prepared at the appropriate time to recommend to the Shareholders an
amendment to the Articles of Incorporation to extend the Company's scheduled
liquidation date. 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.
5. CONSTRUCTION LOAN FINANCING
During 1999 the Company secured a construction loan facility with a
major bank that provides the Company with up to $8.8 million to fund the
capital costs of potential expansion programs. The construction loan
facility is secured by a first mortgage of the Senior Housing Facilities
and collateral assignment of the Company's leases of such properties. The
loan was scheduled to expire on December 31, 2000, with possible extensions
through September 29, 2003. Principal is due at expiration. Interest was
payable monthly at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%.
On June 7, 1999, the Company borrowed approximately $1.2 million under
the construction loan facility to fund the pre-construction capital costs
incurred through April 1999, of the potential expansions of the Senior
Housing Facilities. On August 16, 2000, the Company repaid $570,000 of
principal on the construction loan facility in connection with the sale of
Villa Santa Barbara and the lender sold the remaining loan to CSLC. As part
of the transaction, the Company agreed that the term of the loan would not
be extended beyond December 31, 2000. On November 28, 2000, the Company and
CSLC agreed that the maturity date of the loan would be extended until the
date on which the merger of the Company with CSLC is consummated or the
date on which the merger agreement is terminated, whichever occurs first.
Amounts outstanding under the loan at November 30, 2000, and August 31,
2000, were $570,000, and $8.2 million of the construction loan facility is
unused and available. Loan origination fees of $144,000 were paid in
connection with this loan facility and are being amortized over the life of
the loan. Capitalized interest at November 30, 2000, and August 31, 2000,
was $90,494 and $79,310, respectively.
6. DIVIDENDS
On November 13, 2000, the Company's Board of Directors voted to
reinstate the payment of regular quarterly dividends to Shareholders with
the dividend for the quarter ending November 30, 2000, which is scheduled
to be paid on January 15, 2001.
On November 13, 2000, the Company's Board of Directors also voted to
distribute to Shareholders the net proceeds of approximately $9.8 million
or $1.89 per share from the sale of the Company's 75% interest in Villa
Santa Barbara.
On December 15, 2000, the Company's Board of Directors declared a
quarterly dividend to distribute the net proceeds from the sale of the
Company's investment in Villa Santa Barbara. A dividend of $1.89 per share
of common stock, totaling approximately $9,792,000, was paid as of December
15, 2000, to Shareholders of record as of November 1, 2000.
Also on December 15, 2000, the Company's Board of Directors
declared a quarterly dividend of $0.1622 per share of common stock for the
three-month period ended November 30, 2000. On January 15, 2001, the
dividend totaling approximately $840,000 was paid to Shareholders of record
at the close of business on December 15, 2000.
-14-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company offered shares of its common stock to the public from September
12, 1990 to May 10, 1991 pursuant to a Registration Statement filed under the
Securities Act of 1933. Capital contributions of $51,812,356 were received by
the Company (including $200,000 contributed by PaineWebber) and, after deducting
selling expenses and offering costs and allowing for adequate cash reserves,
approximately $42.9 million was available to be invested in participating first
mortgage loans secured by Senior Housing Facilities. The Company originally
invested the net proceeds of the initial public offering in six participating
mortgage loans secured by Senior Housing Facilities located in five different
states. All of the loans made by the Company were originally with AHC. As
previously reported, AHC defaulted on the scheduled mortgage loan payments due
to the Company on March 1, 1993. Its parent company, Angeles, subsequently filed
for bankruptcy. In fiscal 1994, a Settlement Agreement was executed whereby
ownership of the properties was transferred from AHC to certain designated
affiliates of the Company which were majority owned by the Company.
Subsequently, these affiliates were merged into ILM II Holding, which is
majority owned by the Company. ILM II Holding holds title to the five remaining
Senior Housing Facilities which comprise the balance of operating investment
properties in the accompanying consolidated balance sheets, subject to certain
mortgage loans payable to the Company. As part of the fiscal 1994 Settlement
Agreement with AHC, ILM II Holding retained AHC as the property manager for all
of the Senior Housing Facilities pursuant to the terms of the Agreement. As
discussed further below, the Agreement with AHC was terminated in July 1996.
Subsequent to the effective date of the Settlement Agreement with AHC, in
order to maximize the potential returns to the Company's existing Shareholders
while maintaining its qualification as a REIT under the Internal Revenue Code,
the Company formed a new corporation, Lease II, for the purpose of operating the
Senior Housing Facilities under the terms of a Facilities Lease Agreement. As of
August 31, 1995, Lease II, which is taxable as a so-called "C" corporation and
not as a REIT, was a wholly owned subsidiary of the Company. On September 1,
1995 the Company, after receiving the required regulatory approval, distributed
all of the shares of capital stock of Lease II to the holders of record of the
Company's common stock.
The Facilities Lease Agreement is between the Company's consolidated
affiliate, ILM II Holding, as owner of the Senior Housing Facilities and Lessor,
and Lease II as Lessee. The facilities lease is a "triple-net" lease whereby the
Lessee pays all operating expenses, governmental taxes and assessments, utility
charges and insurance premiums, as well as the costs of all required
maintenance, personal property and non-structural repairs in connection with the
operation of the Senior Housing Facilities. ILM II Holding, as the Lessor, is
responsible for all major capital improvements and structural repairs to the
Senior Housing Facilities. The Facilities Lease Agreement was originally
scheduled to expire on December 31, 2000, unless earlier terminated at the
election of the Lessor in connection with the sale by the Lessor of the Senior
Housing Facilities to a non-affiliated third party but on November 13, 2000, was
extended beyond its original expiration date on a month-to-month basis. On
November 28, 2000, the Facilities Lease Agreement was extended though the
earlier of the date on which the merger of the Company with CSLC is consummated
or March 31, 2001, and on a month-to-month basis thereafter if the merger is not
consummated by that time. During fiscal year 2000, Lease II paid annual base
rent for the use of all the Senior Housing Facilities in the aggregate amount of
$3,995,586 per year ($4,035,600 per year in 1999). The reduction in base rent
from the previous year is due to the sale of Villa Santa Barbara on August 15,
2000. Beginning on September 1, 2000, annual base rent is $3,555,427 (excluding
Villa Santa Barbara). Lease II also paid variable rent, on a quarterly basis,
for each Senior Housing Facility in an amount equal to 40% of the excess, if
any, of the aggregate total revenues for the Senior Housing Facilities, on an
annualized basis, over $13,021,000. Variable rental income for the three-month
periods ended November 30, 2000 and 1999 was $256,000 and $350,000,
respectively.
The Company completed its restructuring plans by qualifying ILM II Holding
as a REIT for Federal tax purposes. In connection with these plans, on November
21, 1996, the Company requested that PaineWebber sell all of its stock in ILM II
Holding to the Company for a price equal to the fair market value of the 1%
economic interest in ILM II Holding represented by the common stock. On January
10, 1997, this transfer of the common stock of ILM II Holding was completed at
an agreed upon fair value of $40,000, representing a $35,000 increase in fair
value. This increase in fair value is based on the increase in values of the
Senior Housing Facilities which occurred between April 1994 and January 1996, as
supported by independent appraisals.
-15-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
With this transfer completed, effective January 23, 1997, ILM Holding
recapitalized its common stock and preferred stock by replacing the outstanding
shares with 50,000 shares of new common stock and 275 shares of non-voting, 8%
cumulative preferred stock issued to the Company. The number of authorized
shares of preferred stock and common stock in ILM II Holding were also increased
as part of the recapitalization. Following the recapitalization, the Company
made charitable gifts of one share of the Preferred Stock in ILM II Holding to
each of 111 charitable organizations so that ILM II Holding would meet the stock
ownership requirements of a REIT as of January 30, 1997. The Preferred Stock has
a liquidation preference of $1,000 per share plus any accrued and unpaid
dividends. Dividends on the Preferred Stock accrue at a rate of 8% per annum on
the original $1,000 liquidation preference and are cumulative from the date of
issuance. It is anticipated that dividends will accrue and be paid at
liquidation. Cumulative dividends in arrears as of November 30, 2000 on the
Preferred Stock in ILM II Holding totaled approximately $34,000.
The assumption of ownership of the Senior Housing Facilities through ILM II
Holding, which was organized as a so-called "C" corporation for tax purposes,
has resulted in a possible future tax liability which would be payable upon the
ultimate sale of the Senior Living Facilities (the "built-in gain tax"). The
amount of such tax would be calculated based on the lesser of the total net gain
realized from the sale transaction or the portion of the net gain realized upon
a final sale which is attributable to the period during which the properties
were held in a "C" corporation.
Any future appreciation in the value of the Senior Housing Facilities
subsequent to the conversion of ILM II Holding to a REIT would not be subject to
the built-in gain tax. The built-in gain tax would most likely not be incurred
if the properties were to be held for a period of at least ten years from the
date of the conversion of ILM II Holding to a REIT. However, since the end of
the Company's original anticipated holding period as defined in the Articles of
Incorporation is December 31, 2001, the properties may not be held for an
additional ten years. Based on management's current estimate of the increase in
the values of the Senior Housing Facilities which occurred between April 1994
and January 1996, as supported by independent appraisals, a sale of the Senior
Housing Facilities within ten years of the date of the conversion of ILM II
Holding to a REIT could result in a built-in gain tax of as much as $2.5
million, which could be reduced by approximately $270,000, using available net
operating loss carryforwards of ILM II Holding of $780,000 that were incurred
prior to its conversion to REIT status. ILM II Holding also has net operating
losses that were incurred after its conversion to REIT status of approximately
$4.2 million. The sale of the Company's interest in Villa Santa Barbara resulted
in the recognition of a built-in gain of approximately $600,000, which was
offset by pre-conversion net operating losses. As of August 31, 2000, the
potential built-in gain tax relating to the Senior Housing Facilities is as much
as $2.3 million, which could be further reduced by approximately $50,000, using
the remaining available pre-conversion net operating loss carryforwards of ILM
II Holding of approximately $150,000.To avoid this built-in gain tax, the
Directors are prepared at the appropriate time to recommend to the Shareholders
an amendment to the Articles of Incorporation to extend the Company's scheduled
liquidation date. 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.
-16-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
Because the ownership of the assets of ILM II Holding was expected to be
transferred to the Company or its wholly-owned subsidiary, ILM II Holding was
capitalized with funds to provide it with working capital only for a limited
period of time. At the present time, ILM II Holding is not expected to have
sufficient cash flow during fiscal year 2001 to (i) meet its obligations to make
the debt service payments due under the loans, and (ii) pay for capital
improvements and structural repairs in accordance with the terms of the
Facilities Lease Agreement. Although ILM II Holding is not expected to fully
fund its scheduled debt service payments to the Company, the estimated current
values of the Senior Housing Facilities are well in excess of the mortgage
principal amounts plus accrued interest at November 30, 2000. As a result, the
Company is expected to recover the full amount that would be due under the loans
upon sale of the Senior Housing Facilities.
AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION
On February 7, 1999, the Company entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999, with CSLC, the
corporate parent of Capital, and certain affiliates of CSLC. On April 18, 2000,
the Company entered into a First Amendment to the Amended and Restated Agreement
and Plan of Merger dated October 19, 1999. As stated in the April 18th
amendment, if the merger is consummated, the Shareholders of the Company will
receive all-cash merger consideration of approximately $13.04 per share compared
to the previous merger consideration of $14.47 per share. In addition, the
amended agreement requires CSLC to agree to pay the Company increased
termination fees in certain circumstances. Further, the Company required CSLC to
agree to reduce the amount of fees and expenses it would receive upon
termination of the merger in certain circumstances.
At a special meeting of Shareholders on June 22, 2000, holders of more than
two-thirds of the outstanding shares of the Company's common stock voted in
favor of approval of the proposed Amended and Restated Agreement and Plan of
Merger dated October 19, 1999, as amended on April 18, 2000. Holders of Company
common stock will have no dissenters' rights in the merger.
The merger was scheduled to be consummated on or prior to September 30,
2000. In July 2000, CSLC reported to the Company that it had not obtained
sufficient financing to complete the merger by September 30, 2000.
On August 15, 2000, the Company caused ILM II Holding to complete the sale
of its 75% co-tenancy interest in its senior living facility located in Santa
Barbara, California ("Villa Santa Barbara"), to CSLC for $10,143,750. In
consideration for the sale, the Company received $9,543,750 in cash and CSLC
contributed $600,000 toward the Company's outstanding construction loan debt and
assumed certain then current transaction expenses of the Company in connection
with the previously announced proposed merger contemplated by the Amended and
Restated Agreement and Plan of Merger dated October 19, 1999, as amended on
April 18, 2000, by and among the Company, CSLC and CSLC's wholly-owned
acquisition subsidiary. The remaining 25% co-tenancy interest in Villa Santa
Barbara was formerly owned by ILM Holding, Inc. ("Holding I"), a subsidiary of
ILM Senior Living, Inc. ("ILM I") and was transferred to CSLC at the time the
merger between ILM I and CSLC was consummated. A gain on the sale of
approximately $6,160,000 has been recognized in the accompanying consolidated
statement of income for the year ended August 31, 2000. It is anticipated that
this gain will result in a built-in gain tax which would be reduced by available
net operating loss carryforwards from the period when the Company was a
so-called "C" Corporation (prior to the Company's conversion to a REIT for
1996).
-17-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL (CONTINUED)
On November 28, 2000, the Company extended until March 31, 2001, the
outside termination date of its pending merger agreement with CSLC and entered
into with CSLC a technical amendment to the merger agreement providing, among
other things, that subject to the ILM II Board's fiduciary duties to
Shareholders, CSLC will have until March 31, 2001 to obtain definitive financing
sufficient for CSLC to complete the transaction.
In connection with the amendment, CSLC agreed, after March 31, 2001 to a
termination of all of its rights of first and last offer it may have with
respect to the sale by the Company to a third party of its common stock, its
ownership interest in ILM II Holding and/or the sale of the Company's senior
living properties and assets, and to reduce from $1,858,200 to $1,000,000 the
amount of certain termination fees payable by the Company to CSLC under certain
limited circumstances. All other terms of the merger agreement remain in effect.
The terms of the merger agreement require CSLC to pay the Company $1,540,000 if
the merger does not occur on or before March 31, 2001 if the failure to
consummate the transaction is due to CSLC's inability to obtain financing
necessary to close the transaction.
The pending merger agreement provides for consideration of $13.04 per share
of the Company's outstanding common stock. In view of the sale in August 2000 to
CSLC of the Company's interest in the Santa Barbara, California senior living
facility, on December 15, 2000, the Company distributed the net proceeds of the
sale on a pro rata basis in the form of a return of invested capital, to
Shareholders of record as of November 1, 2000. The aggregate cash distribution
of $9,792,000 was equivalent to the payment of $1.89 per share of the $13.04 per
share of merger consideration. The remaining approximate $11.15 per share would
be payable by CSLC to Shareholders of the Company upon completion of the merger
in accordance with the merger agreement.
There can be no assurance that CSLC will be able to obtain the
requisite financing to complete the merger or, even if obtained, that the merger
otherwise will be consummated.
In connection with the merger, the Company has agreed to cause ILM II
Holding to cancel and terminate the Facilities Lease Agreement with Lease II on
the date of consummation of the merger. As noted above, the Facilities Lease
Agreement, which was scheduled to expire on December 31, 2000, was extended
through the earlier of the date on which the merger of the Company with CSLC is
consummated or March 31, 2001, and on a month-to-month basis thereafter if the
merger is not consummated by that time. If the merger is not consummated, it is
anticipated that the Facilities Lease Agreement will remain in full force and
effect pursuant to its terms. There can be no assurance as to whether the merger
will be consummated or, if consummated, as to the timing thereof.
-18-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the five remaining properties in which the Company has
invested averaged 89% and 92% for the three months ended November 30, 2000 and
1999, respectively. The Company's net operating cash flow is expected to be
relatively stable and predictable due to the structure of the Facilities Lease
Agreement. Beginning September 1, 2000, the annual base rental payments owed to
ILM II Holding (excluding Villa Santa Barbara) are $3,555,427 and will remain at
that level for the remainder of the lease term, including any month-to-month
extensions of the lease. In addition, the Senior Housing Facilities are
currently generating gross revenues which are in excess of the specified
threshold in the variable rent calculation, as discussed further above, which
became effective in January 1997.
The Company has been pursuing the potential for future expansion of several
of the Senior Housing Facilities which are located in areas that have
particularly strong markets for senior housing to increase cash flow and
shareholder value. Potential expansion candidates include the facilities located
in Omaha, Nebraska; St. Louis County, Missouri; and Fort Myers, Florida. As part
of this expansion program, during fiscal year 1999, approximately one acre of
land located adjacent to the Omaha facility was acquired for approximately
$135,000. The Fort Myers facility includes a vacant parcel of approximately one
and one-half acres which could accommodate an expansion of the existing facility
or the construction of a new free-standing facility. Preliminary feasibility
evaluations have been completed for all of these potential expansions and
pre-construction design and construction-cost evaluations have been completed
for expansions of the facilities located in Omaha and Fort Myers.
To date, no construction has been started and expansion plans have been
temporarily suspended pending the expected merger of the Company with CSLC. The
Company will carefully evaluate the costs and benefits before proceeding with
the construction of any of these expansions. Depending on the extent of any
expansions deemed appropriate, such plans would result in the need for
substantial capital.
The Company secured a construction loan facility with a major bank that
provides the Company with up to $8.8 million to fund the capital costs of the
potential expansion programs. The construction loan facility is secured by a
first mortgage of the Senior Housing Facilities and collateral assignment of the
Company's leases of such Senior Housing Facilities. The loan was scheduled to
expire on December 31, 2000, with possible extensions through September 29,
2003. Principal is due at expiration. Interest is payable at a rate equal to
LIBOR plus 1.10% or Prime plus 0.5%. Loan origination costs in connection with
this loan facility are being amortized over the life of the loan.
On June 7, 1999, the Company borrowed approximately $1.2 million under the
construction loan facility to fund the pre-construction capital costs incurred
through April 1999, of the potential expansions of the Senior Housing
Facilities. On August 16, 2000, the Company $570,000 of principal on the
construction loan facility and the lender sold the loan to CSLC. As part of the
transaction, the Company agreed that the term of the loan would not be extended
beyond December 31, 2000. On November 28, 2000, the Company and CSLC agreed that
the maturity date of the loan would be extended until the date on which the
merger of the Company with CSLC is consummated or the date on which the merger
agreement is terminated, whichever occurs first. Amounts outstanding under the
loan at November 30, 2000 and August 31, 2000, were $570,000, and $8.2 million
of the construction loan facility is unused and available.
At November 30, 2000, the Company had cash and cash equivalents of
$12,022,000 compared to $11,258,000 at August 31, 2000. Remaining cash amounts
will be used for the working capital requirements of the Company, along with the
possible investment in the properties owned by ILM II Holding for certain
capital improvements, and for dividends to the Shareholders. (On December 15,
2000, dividends of $1.89 per share were paid to Shareholders of record as of
November 1, 2000, distributing net proceeds from the sale of the Company's
investment in Villa Santa Barbara. Also on December 15, 2000, the Company paid a
quarterly dividend of $0.1622 per share to Shareholders of record as of December
15, 2000.) Future capital improvements could be financed from operations or
through
-19-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
borrowings, depending on the magnitude of the improvements, the availability of
financing and the Company's incremental borrowing rate. The source of future
liquidity and dividends to the Shareholders is expected to be through facilities
lease payments from Lease II, interest income earned on invested cash reserves
and proceeds from the future sales of the underlying operating investment
properties. Such sources of liquidity are expected to be adequate to meet the
Company's operating requirements on both a short-term and long-term basis. The
Company generally will be obligated to distribute annually at least 95% of its
taxable income to its Shareholders in order to continue to qualify as a REIT
under the Internal Revenue Code.
While the Company has potential liabilities pending due to ongoing
litigation against the Company, the eventual outcome of this litigation cannot
presently be determined. The Company will vigorously defend against all claims
made against it and, at this time, it is not certain that the Company will have
ultimate responsibility for any such claims.
MARKET RISK
The Company believes its market risk is immaterial.
-20-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2000 VERSUS THE THREE MONTHS ENDED
NOVEMBER 30, 1999
Net income decreased $645,000 or 100.6% to a loss of $4,000 for the
three-month period ended November 30, 2000 compared to income of $641,000 for
the three-month period ended November 30, 1999. Total revenue was $1,229,000
representing a decrease of $138,000, or 10.1%, compared to the same period of
the prior year. Rental and other income decreased $213,000 or 15.8%, to
$1,139,000 for the three-month period ended November 30, 2000, compared to
$1,352,000 for the three-month period ended November 30, 1999 due to decreased
rental income earned pursuant to the terms of the Facilities Lease Agreement and
subsequent to the sale of Villa Santa Barbara. Total expenses increased
$507,000, or 69.8%, to $1,233,000 for the three-month period ended November 30,
2000, compared to $726,000 for the three-month period ended November 30, 1999.
This overall increase in expenses is primarily attributable to a $362,000 or
118.7% increase in professional fees due to increased legal fees associated with
the agreement and plan of merger with CSLC (as discussed in Note 1 to the
financial statements). The $145,000 or 268.0% increase in general and
administrative expenses to $200,000 for the three-month period ended November
30, 2000, from $55,000 for the same period last year, is due to a variety of
factors including increased Director and Officer insurance costs of $160,000 or
680.1%; offset by a $16,000 or 89.2% decrease in postage and mailing costs and
minor decreases in other costs.
-21-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE
STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD," "MAY," "SHOULD,"
"ENABLE," "LIKELY," "PROSPECTS," "SEEK," "PREDICTS," "POSSIBLE," "FORECASTS,"
"PROJECTS," "ANTICIPATES," "EXPECTS" AND WORDS OF ANALOGOUS IMPORT AND
CORRELATIVE EXPRESSIONS THEREOF, AS WELL AS STATEMENTS PRECEDED OR OTHERWISE
QUALIFIED BY: "THERE CAN BE NO ASSURANCE" OR "NO ASSURANCE CAN BE GIVEN."
SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES,
STRATEGIES OR GOALS ALSO ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS MAY
ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING, AMONG OTHER THINGS, THE
COMPANY'S CASH FLOWS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION; THE
CONSUMMATION OF ACQUISITION AND FINANCING TRANSACTIONS AND THE EFFECT THEREOF ON
THE COMPANY'S BUSINESS, ANTICIPATED CAPITAL EXPENDITURES, PROPOSED OPERATING
BUDGETS AND ACCOUNTING RESERVES; LITIGATION; PROPERTY EXPANSION AND DEVELOPMENT
PROGRAMS OR PLANS; REGULATORY MATTERS; AND THE COMPANY'S PLANS, GOALS,
STRATEGIES AND OBJECTIVES FOR FUTURE OPERATIONS AND PERFORMANCE. ANY SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
IN SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO A NUMBER OF ASSUMPTIONS REGARDING, AMONG OTHER THINGS, GENERAL ECONOMIC,
COMPETITIVE AND MARKET CONDITIONS. SUCH ASSUMPTIONS NECESSARILY ARE BASED ON
FACTS AND CONDITIONS AS THEY EXIST AT THE TIME SUCH STATEMENTS ARE MADE, THE
PREDICTION OR ASSESSMENT OF WHICH MAY BE DIFFICULT OR IMPOSSIBLE AND, IN ANY
CASE, BEYOND THE COMPANY'S CONTROL. FURTHER, THE COMPANY'S BUSINESS IS SUBJECT
TO A NUMBER OF RISKS THAT MAY AFFECT ANY SUCH FORWARD-LOOKING STATEMENTS AND
ALSO COULD CAUSE ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE
PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS PARAGRAPH. MOREOVER, THE COMPANY
DOES NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT
ANY CHANGES IN GENERAL ECONOMIC, COMPETITIVE OR MARKET CONDITIONS AND
DEVELOPMENTS BEYOND ITS CONTROL.
READERS OF THIS QUARTERLY REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THAT ACTUAL FUTURE
RESULTS MAY DIFFER.
-22-
ILM II SENIOR LIVING, INC.
PART II-OTHER INFORMATION
ITEM 1. THROUGH 5. NONE
ITEM 6. REPORTS ON FORM 8-K
(a) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated November 28, 2000,
announcing that the Company extended until March 31, 2001, the outside
termination date of its previously announced pending merger agreement with CSLC
because CSLC was unable to obtain sufficient financing to complete the merger by
September 30, 2000. The Company further announced its intention to resume paying
quarterly cash dividends to holders of its common stock beginning in January
2001 and to distribute proceeds form the sale of the Company's co-tenancy
interest in Villa Santa Barbara on December 15, 2000.
During the quarter ended November 30, 2000, the Company amended and restated its
Current Report on Form 8-K originally filed with the Securities and Exchange
Commission on August 30, 2000, and dated August 15, 2000, to clarify the
transaction costs assumed by CSLC in connection with the previously announced
proposed merger between the Company and CSLC and to file pro forma financial
statements showing the effect of the sale of the Company's 75% co-tenancy
interest in Villa Santa Barbara.
-23-
ILM II SENIOR LIVING, INC.
SIGNATURES
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.
BY: ILM II SENIOR LIVING, INC.
By: /S/ J. WILLIAM SHARMAN, JR.
----------------------------
J. William Sharman, Jr.
President and Director
Dated: JANUARY 31, 2001
-24-