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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 FEBRUARY 28, 2001
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.
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(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) 257-3550
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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 X No
--- ---
Shares of common stock outstanding as of February 28, 2001: 5,181,236
Current Report on Form 8-K
of Registrant Dated February 8, 2001
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Page 1 of 25
ILM II SENIOR LIVING, INC
INDEX
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
February 28, 2001 (Unaudited) and August 31, 2000.............................................4
Consolidated Statements of Income
For the six months and three months ended February 28, 2001 and
February 29, 2000 (Unaudited).................................................................5
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended February 28, 2001 and February 29, 2000 (Unaudited)..................6
Consolidated Statements of Cash Flows
For the six months ended February 28, 2001 and February 29, 2000 (Unaudited)..................7
Notes to Consolidated Financial Statements (Unaudited).....................................8-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....16-23
Part II. Other Information
Item 5. Other Information...................................................................24
Item 6. Exhibits and Reports on Form 8-K....................................................24
Signatures............................................................................................25
-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
February 28, 2001 (Unaudited) and August 31, 2000
(Dollars in thousands, except per share data)
FEBRUARY 28, 2001 AUGUST 31, 2000
----------------- ---------------
ASSETS
Operating investment properties, at cost:
Land $ 4,593 $ 4,522
Building and improvements 24,241 24,190
Furniture, fixtures and equipment 3,856 3,856
---------- ---------
32,690 32,568
Less: accumulated depreciation (9,408) (8,813)
---------- ---------
23,282 23,755
Unamortized mortgage fees 1,247 1,247
Less: accumulated amortization (1,168) (1,106)
---------- ---------
79 141
Loan origination fees 144 144
Less: accumulated amortization (110) (84)
---------- ---------
34 60
Cash and cash equivalents 2,314 11,258
Accounts receivable - related party 266 376
Prepaid expenses and other assets 25 15
Deferred rent receivable - 6
---------- ---------
$ 26,000 $ 35,611
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 254 $ 121
Accounts payable-related party 636 40
Construction loan payable 570 570
Preferred shareholders' minority interest in subsidiary 147 143
---------- ---------
Total liabilities 1,607 874
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 (20,482) (10,138)
---------- ---------
Total shareholder's equity 24,393 34,737
---------- ---------
$ 26,000 $ 35,611
========== =========
See accompanying notes.
-4-
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the six months and three months ended
February 28, 2001 and February 29, 2000 (Unaudited)
(Dollars in thousands, except per share data)
SIX MONTHS ENDED THREE MONTHS ENDED
-------------------------- ---------------------------
FEBRUARY 28 FEBRUARY 29 FEBRUARY 28 FEBRUARY 29
----------- ----------- ----------- -----------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Rental income $2,293 $2,721 $1,154 $1,369
Interest income 145 25 55 11
------ ------ ------ ------
2,438 2,746 1,209 1,380
EXPENSES
Depreciation expense 595 595 298 298
Amortization expense 88 88 44 40
General and administrative 277 122 74 68
Professional fees 1,142 585 477 279
Directors' compensation 47 43 24 23
------ ------ ------ ------
2,149 1,433 917 708
------ ------ ------ ------
NET INCOME $ 289 $1,313 $ 292 $ 672
====== ======= ====== ======
Basic earnings per share of common stock $ 0.06 $ 0.25 $ 0.06 $ 0.13
===== ===== ====== ======
Cash dividends paid per share of common stock $ 2.05 $ 0.43 $ 2.05 $ 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 six months ended February 28, 2001 and February 29, 2000 (Unaudited)
(Dollars in thousands, except per share data)
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
-------------- 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 - - - (2,202) (2,202)
Net income - - - 1,313 1,313
--------- ---- ------- -------- --------
Shareholders' equity
at February 29, 2000 5,181,236 $ 52 $44,823 $(16,433) $ 28,442
========= ==== ======= ========= ========
Shareholders' equity
at August 31, 2000 5,181,236 $ 52 $44,823 $(10,138) $ 34,737
Cash dividends paid - - - (10,633) (10,633)
Net income - - - 289 289
--------- ---- ------- -------- --------
Shareholders' equity
at February 28, 2001 5,181,236 $ 52 $44,823 $(20,482) $ 24,393
========= ==== ======= ========= ========
See accompanying notes.
-6-
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended February 28, 2001 and February 29, 2000 (Unaudited)
(Dollars in thousands)
SIX MONTHS ENDED
---------------------------
FEBRUARY 28, FEBRUARY 29,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 289 $ 1,313
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 683 683
Changes in assets and liabilities:
Accounts receivable - related party 110 (51)
Prepaid expenses and other assets (10) (37)
Deferred rent receivable 6 15
Accounts payable and accrued expenses 133 (122)
Accounts payable - related party 596 (397)
Preferred shareholders' minority interest 4 4
-------- --------
Net cash provided by operating activities 1,811 1,408
Cash flows from investing activity:
Additions to operating investment properties (122) (154)
-------- --------
Net cash used in investing activity (122) (154)
Cash flows from financing activity:
Cash dividends paid to shareholders (10,633) (2,202)
-------- --------
Net cash used in financing activity (10,633) (2,202)
-------- --------
Net decrease in cash and cash equivalents (8,944) (948)
Cash and cash equivalents, beginning of period 11,258 1,913
-------- --------
Cash and cash equivalents, end of period $ 2,314 $ 965
======== ========
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 February 28, 2001 and revenues and expenses for each of the three-month
periods ended February 28, 2001 and February 29, 2000. 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 six-month period ended
February 28, 2001, are not necessarily indicative of the results that may be
expected for the year ending August 31, 2001.
The Company was incorporated on Febru ary 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 February 28, 2001 on the preferred stock in ILM II Holding
totaled approximately $36,000.
-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.
TERMINATED 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, as subsequently
amended, with CSLC and certain affiliates of CSLC.
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
Agreement and Plan of Merger.
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. 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).
-9-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
1. GENERAL (CONTINUED)
On February 8, 2001, the Company received notice from CSLC terminating
the merger agreement. CSLC stated in its termination letter that it terminated
the merger agreement because of its concerns relating to the Company 's claimed
election in 1996 to defer built-in gain taxes upon conversion of ILM II Holding
from a "C" Corporation to a REIT. As previously reported in the Company's public
filings, the Company claimed this election based upon the advice of its outside
tax accountants, has operated since 1996 under the belief that such election was
validly perfected, and is pursuing administrative relief with the Internal
Revenue Service to ensure the availability of the Company's election to defer
such corporate level built-in gain taxes. The Company believes that it has a
legitimate basis to claim the election based, in part, and with reliance upon
the advice of its outside tax accountants. Ultimate resolution of this matter is
at the discretion of the Internal Revenue Service. An adverse determination by
the Internal Revenue Servic e would result in the payment of interest and
penalties due on tax payments which were deferred since 1996. The Company cannot
estimate with certainty the timing of such resolution nor can there be any
assurance as to the outcome of this matter.
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 was consummated or March 31, 2001, and on a month-to-month
basis thereafter if the merger was not consummated by that time. Because the
merger agreement was terminated, the Facilities Lease Agreement is expected to
continue on a month-to-month basis.
-10-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT
At February 28, 200 1, 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.
Because the merger was terminated prior to March 31, 2001, the Facilities Lease
Agreement will continue on a month-to-month basis until the properties are
liquidated or December 31, 2001, whichever comes first. During fiscal year 2000,
Lease II paid annual base rent for the use of all of 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 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
$523,000 and $266,000 for the six- and three-month periods ended February 28,
2001 respectively, compared to $719,000 and $368,000 for the six- and
three-month periods ended February 29, 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
six and three-month periods ended February 28, 2001, Capital earned property
management fees from Lease II of $409,000 and $201,000, respectively. For the
six- and three-month periods ended February 29, 2000, Capital earned property
management fees from Lease II of $525,516 and $272,310, respectively. In
connection with the Agreement and Plan of Merger discussed in Note 1, the
Management Agreement with Capital would have been 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 six- and three-month periods
ended February 28, 2001, and February 29, 2000, 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 six- and three-month periods ended February 28, 2001,
Greenberg Traurig earned fees from the Company of $ 566,000 and $245,000,
respectively. For the six and three-month periods ended February 29, 2000,
Greenberg Traurig earned fees from the Company of $293,150 and $219,789.
ACCOUNTS RECEIVABLE - RELATED PARTY at February 28, 2001 and August 31,
2000, includes variable rent due from Lease II. ACCOUNTS PAYABLE-RELATED PARTY
at February 28, 2001, 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 various theories of redress and a broad range of
damages.
On October 15, 1999, the parties entered into a Stipulation of
Settlement that was filed with the Court and approved 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 (approximately 40% of
which is allocable to the Company) 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 and
on February 28, 2001, CSLC terminated the proposed merger with the Company.
Because of these events and based upon the Stipulation of Settlement, if the
Company was to consummate an extraordinary transaction with a third party, 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
-13-
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
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 in part upon advice from the Company's outside tax accountants,
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
conversion of ILM II Holding from a C-Corporation to a REIT. 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
outside tax accountants, 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 approximately
$600,000 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 this 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 February 28,
2001, and August 31, 2000, were $570,000. 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 February 28, 2001, and August
31, 2000, was $100,952 and $79,310, respectively.
On April 3, 2001, the remaining $570,000 balance on the construction
loan facility plus accrued interest was repaid, and the loan facility was
terminated.
6. SUBSEQUENT EVENT
On March 15, 2001, the Company's Board of Directors declared a
quarterly dividend for the three-month period ended February 28, 2001. On April
16, 2001, a dividend of $0.1622 per share of common stock, totaling
approximately $840,000 will be paid to Shareholders of record as of March 30,
2001.
-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, as amended. 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 was consummated
or March 31, 2001, and on a month-to-month basis thereafter if the merger was
not consummated by that time. As discussed fully under the "Agreement and Plan
of Merger with Capital Senior Living Corporation" below, the merger was
terminated by CSLC prior to March 31, 2001, and the Facilities Lease Agreement
will continue on a month-to-month basis. 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 six- and three-month periods ended February 28, 2001, was $523,000 and
$266,000, respectively, compared to $642,000 and $332,000 for the six- and
three-month periods ended February 29, 2000, respectively.
-15-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
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.
With this transfer completed, effective January 23, 1997, ILM II
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 February 28, 2001, on
the Preferred Stock in ILM II Holding totaled approximately $36,000.
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 we re 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
-16-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
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 built-in gain tax upon
conversion of ILM II Holding from a C-Corporation to a REIT. 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
outside accountants, 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.
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 February
28, 2001. 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.
TERMINATED 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, as subsequently
amended, with CSLC and certain affiliates of CSLC.
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
Agreement and Plan of Merger.
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. 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 February 8, 2001, the Company received notice from CSLC terminating
the merger agreement. CSLC stated in its termination letter that it terminated
the merger agreement because of its concerns relating to the Company's claimed
election in 1996 to defer built-in gain taxes upon conversion of ILM II Holding
from a "C" Corporation to a REIT. As previously reported in the Company's public
filings, the Company claimed this election based upon the advice of its outside
tax accountants; ha s operated since 1996 under the belief that such election
was validly perfected; and is pursuing administrative relief with the Internal
Revenue Service to ensure the availability of the Company's election to defer
such corporate level built-in gain taxes. The Company believes that it has a
legitimate basis to claim the election based, in part, and with reliance upon
the advice of its outside tax accountants. Ultimate resolution of this matter is
at the discretion of the Internal Revenue Service. An adverse determination by
the Internal Revenue Service would result in the payment of interest and
penalties due on tax payments which were deferred since 1996. The Company cannot
estimate with certainty the timing of such resolution nor can there be any
assurance as to the outcome of this matter.
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 was consummated or March 31, 2001, and
on a month-to-month basis thereafter if the merger was not consummated by that
time. In view of CSLC's termination of the merger agreement, it is anticipated
that the Facilities Lease Agreement will continue on a month-to-month basis in
full force and effect pursuant to its terms.
-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 88% and 92% for the three months ended February 28, 2001
and February 29, 2000, 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. 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 had 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 had been
temporarily suspended pending the expected merger of the Company with CSLC. As
previously reported, the merger with CSLC was terminated by CSLC on February 8,
2001. 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.
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 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 was 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 repaid approximately $600,000 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 both February 28, 2001, and August 31,
2000, were $570,000.
On March 31, 2001, the remaining $570,000 balance on the construction
loan facility plus accrued interest was repaid, and the loan facility was
terminated.
-19-
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At February 28, 2001, the Company had cash and cash equivalents of
$2,314,000 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 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 SIX MONTHS ENDED FEBRUARY 28, 2001 VERSUS THE SIX MONTHS ENDED FEBRUARY
29, 2000
Net income decreased $1,024,000 or 78.0% from income of $1,313,000 for
the six-month period ended February 29, 2000 compared to income of $ 289,000 for
the six-month period ended February 28, 2001. Total revenue was $2,438,000
representing a decrease of $308,000, or 11.2%, compared to the same period of
the prior year. Rental and other income decreased $428,000 or 15.7%, to
$2,293,000 for the six-month period ended February 28, 2001, compared to
$2,721,000 for the six-month period ended February 28, 2001, due to decreased
rental income earned pursuant to the terms of the Facilities Lease Agreement and
primarily as a result of the sale of Villa Santa Barbara. Total expenses
increased $716,000, or 50.0%, to $2,149,000 for the six-month period ended
February 28, 2001, compared to $1,433,000 for the six-month period ended
February 29, 2000. This overall increase in expenses is primarily attributable
to a $557,000 or 95.2% 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 $ 155,000 or 127.0% increase in general and
administrative expenses to $277,000 for the six-month period ended February 28,
2001, from $122,000 for the same period last year, is due to a variety of
factors including increased Director and Officer insurance costs of $160,000 or
269.8%; offset by a $23,000 or 75.5% decrease in postage and mailing costs and
minor increases and decreases in other costs.
FOR THE THREE MONTHS ENDED FEBRUARY 28, 2001, VERSUS THE THREE MONTHS ENDED
FEBRUARY 29,2000
Net income decreased $380,000 or 56.5% to $292,000 for the second
quarter ended February 28, 2001, compared to $672,000 for the second quarter
ended February 29, 2000. Total revenue was $1,209,000 representing a decrease of
$171,000 or 12.4%, compared to the same period of the prior year. Rental and
other income decreased $215,000 or 15.7%, to $1,154,000 for the quarter ended
February 28, 2001, compared to $1,369,000 for the quarter ended February 29,
2000, due to decreased rental income earned subsequent to the sale of Villa
Santa Barbara and pursuant to the terms of the Facilities Lease Agreement. Total
expenses increased $209,000, or 29.5%, to $917,000 for the three-month period
ended February 28, 2001, compared to $708,000 for the three-month period ended
February 29, 2000. This increase in expenses is primarily attributable to a
$198,000 or 71.0% increase in professional fees due to increased use of
financial and advisory professionals who were engaged to assist the Company with
the agreement and plan of merger with CSLC (as discussed in Note 1 to the
financial statements) as well as the sale of Villa Santa Barbara. This increase
in expenses was accompanied by minor increases in other expenses as well.
-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 4. NONE
ITEM 5. OTHER INFORMATION
The Company's Board of Directors and management are working diligently with
outside legal counsel and financial advisors to identify, formulate and pursue
all strategic alternatives to maximize Shareholder value , including, without
limitation, putting the company up for sale as a going concern and liquidating
the Company's senior living properties by means of public auction, privately
negotiated sale or otherwise. The Company has contacted, and intends to continue
to contact prospective purchasers for purposes of requesting their submission of
bona fide offers to acquire the company's stock or assets upon terms and
conditions that are in the best interests of the Company's Shareholders. In
tandem with the above, the Board of Directors is considering recommending to the
Shareholders an amendment to the Company 's Articles of Incorporation for
purposes of extending the Company's existing corporate finite-life. Such an
extension could avoid the built-in gain tax discussed above, which may occur
upon any sale of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated February 14, 2001,
announcing that on February 8, 2001, the Company received notice from CSLC
terminating the Amended and Restated Agreement and Plan of Merger dated October
19, 1999, as amended, between the Company and CSLC.
-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: April 12, 2001
----------------------
-24-