SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 15, 2000
Capital Senior Living Corporation
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(Exact name of registrant as specified in its charter)
Delaware 1-17445 75-2678809
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
14160 Dallas Parkway, Suite 300, Dallas, Texas 75240
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 770-5600
(Not Applicable)
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(Former name or former address, if changed since last report)
<PAGE>
This Amendment (the "Amendment") to the Current Report on Form 8-K,
dated August 15, 2000, and filed on August 30, 2000 (the "Original Form 8-K") by
Capital Senior Living Corporation (the "Company") is submitted to provide
financial data related to the consummation of the merger of ILM Senior Living,
Inc., a Virginia finite-life corporation ("ILM"), with and into Capital Senior
Living ILM-A, Inc., a Delaware corporation and direct wholly-owned subsidiary of
the Company ("CSLI"), pursuant to the Amended and Restated Agreement and Plan of
Merger, dated as of October 19, 1999, as amended (the "Merger Agreement"), by
and among the Company, CSLI (as assignee from another wholly-owned subsidiary of
the Company) and ILM.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements of the Businesses Acquired. The following audited
consolidated financial statements of ILM and its subsidiary, ILM Lease
Corporation, a Virginia finite-life corporation ("ILM Lease Co.") are hereby
included as part of this report:
<TABLE>
<CAPTION>
<S> <C> <C>
(i) Financial Statements of ILM
Unaudited Consolidated Balance Sheets of ILM for the nine months
ended May 31, 2000....................................................................................A-1
Unaudited Consolidated Statements of Income of ILM for the nine months
ended May 31,2000.....................................................................................A-2
Unaudited Consolidated Statements of Changes in Stockholders' Equity of ILM for the
nine months ended May 31, 2000.......................................................................A-4
Unaudited Consolidated Statements of Cash Flows of ILM for the nine months
ended May 31, 2000....................................................................................A-5
Notes to Unaudited Financial Statements of ILM for the nine months
ended May 31, 2000....................................................................................A-6
Report of Independent Certified Public Accountants of ILM.............................................B-1
Consolidated Balance Sheets of ILM as of August 31, 1999 and 1998.....................................B-2
Consolidated Statements of Income of ILM for the years ended August 31,
1999, 1998 and 1997...................................................................................B-3
Consolidated Statements of Changes in Stockholders' Equity of ILM for
the years ended August 31, 1999, 1998 and 1997........................................................B-4
Consolidated Statements of Cash Flows of ILM for the years ended
August 31, 1999, 1998 and 1997........................................................................B-5
Notes to Financial Statements.........................................................................B-6
(ii) Financial Statements of ILM Lease Co.
Unaudited Consolidated Balance Sheets of ILM Lease Co. for the
nine months ended May 31, 2000........................................................................C-1
Unaudited Consolidated Statements of Income of ILM Lease Co. for
the nine months ended May 31,2000.....................................................................C-2
Unaudited Consolidated Statements of Changes in Stockholders'
Equity of ILM Lease Co. for the nine months ended May 31, 2000.......................................C-4
Unaudited Consolidated Statements of Cash Flows of ILM Lease Co.
for the nine months ended May 31, 2000................................................................C-5
Notes to Unaudited Financial Statement of ILM Lease Co. for the
nine months ended May 31, 2000........................................................................C-6
Report of Independent Certified Public Accountants of ILM Lease Co....................................D-1
Consolidated Balance Sheets of ILM Lease Co. as of August 31, 1999 and 1998...........................D-2
Consolidated Statements of Income of ILM Lease Co. for the years ended
August 31, 1999, 1998 and 1997........................................................................D-3
Consolidated Statements of Changes in Stockholders' Equity of ILM Lease Co.
for the years ended August 31, 1999, 1998 and 1997....................................................D-4
Consolidated Statements of Cash Flows of ILM Lease Co. for the years ended
August 31, 1999, 1998 and 1997........................................................................D-5
Notes to Financial Statements of ILM Lease Co.........................................................D-6
<PAGE>
(b) Pro Forma Financial Information. The pro forma financial statements of
the Company are hereby included as part of this report:
Unaudited Pro Forma Combined Financial Statements....................................................PF-1
Unaudited Pro Forma Combined Balance Sheet as of December 31, 1999...................................PF-2
Unaudited Pro Forma Combined Statement of Operations for the Six Months
Ended December 31, 1999..............................................................................PF-3
Unaudited Pro Forma Combined Statement of Operations for the year
ended June 30, 1999..................................................................................PF-4
Notes to Unaudited Pro Forma Combined Financial Statements...........................................PF-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
May 31, 2000 (Unaudited) and August 31, 1999
(Dollars in thousands, except per share data)
ASSETS
May 31, 2000 August 31, 2000
------------ ---------------
<S> <C> <C>
Operating investment properties, at cost:
Land $ 4,946 $ 4,921
Building and improvements 38,320 38,197
Furniture, fixtures and equipment 4,948 4,948
-------- --------
48,214 48,066
Less: accumulated depreciation (14,382) (13,417)
-------- --------
33,832 34,649
Mortgage placement fees 2,256 2,256
Less: accumulated amortization (2,256) (2,163)
-------- --------
Loan origination fees 272 272
Less: accumulated amortization (155) (85)
-------- --------
Cash and cash equivalents 1,097 2,615
Accounts receivable - related party 314 306
Prepaid expenses and other assets 159 100
Deferred rent receivable -- 12
-------- --------
$ 35,519 $ 37,962
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 174 $ 363
Accounts payable - related party 112 343
Construction loan payable 2,093 2,093
Preferred shareholders' minority
interest in consolidated subsidiary 141 134
--------- --------
Total liabilities 2,520 2,935
Contingencies
Shareholders' equity
Common stock, 0.01 par value,
10,000,000 shares authorized,
7,520,100 shares issues and outstanding 75 75
Additional paid-in capital 65,711 65,711
Accumulated deficit (32,787) (30,759)
--------- --------
Total shareholders' equity 32,999 35,027
--------- --------
TOTAL $ 35,519 $ 37,962
========= ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the nine months and three months
ended May 31, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
NINE MONTHS ENDED THREE MONTHS ENDED
MAY 31 MAY 31
------ ------
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---- ---- ---- ----
REVENUES
Rental and other income $ 5,693 $ 5,638 $ 1,905 $ 1,877
Interest income 52 48 12 9
------- ------- ------- -------
5,745 5,686 1,917 1,886
EXPENSES
Depreciation expense 965 965 321 322
Amortization expense 163 220 23 73
General and administrative 274 361 110 105
Professional fees 1,503 1,878 489 834
Directors' compensation 74 69 29 20
------- ------- ------- -------
2,979 3,493 972 1,354
------- ------- ------- -------
NET INCOME $ 2,766 $ 2,193 $ 945 $ 532
======= ======= ======= =======
Basic earnings per share of common stock $ 0.37 $ 0.29 $ 0.13 $ 0.07
======= ======= ======= =======
Cash dividends paid per share of common stock $ 0.64 $ 0.64 $ 0.22 $ 0.22
======= ======= ======= =======
</TABLE>
The above earnings and cash dividends paid per shares of common stock
are based upon the 7,520,100 shares of common stock outstanding during
the period.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended May 31, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
------------------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Shareholders' equity
at August 31, 1998 7,520,100 $ 75 $ 65,711 $ (27,327) $ 38,459
Cash dividends paid -- -- -- (4,795) (4,795)
Net income -- -- -- 2,193 2,193
--------- ------ ---------- ------------ --------
Shareholders' equity
at May 31, 1999 7,520,100 $ 75 $ 65,711 $ (29,929) $ 35,857
--------- ------ ---------- ------------ --------
Shareholders' equity
at August 31, 1999 7,520,100 $ 75 $ 65,711 $ (30,759) $ 35,027
Cash dividends paid -- -- -- (4,794) (4,794)
Net income -- -- -- 2,766 2,766
--------- ------ ---------- ----------- --------
Shareholders' equity
at May 31, 2000 7,520,100 $ 75 $ 65,711 $ (32,787) $ 32,999
--------- ------ ---------- ------------ --------
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2000 and 1999 (Unaudited)
(Dollars in thousands)
NINE MONTHS ENDED
MAY 31
---------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,766 $ 2,193
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 1,128 1,185
Accrued dividends on subsidiary's preferred stock 7 7
Changes in assets and liabilities:
Accounts receivable - related party (8) 40
Prepaid expenses and other assets (59) (47)
Deferred rent receivable 12 27
Accounts payable and accrued expenses (191) --
Accounts payable - related party (231) 109
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Net cash provided by operating activities 3,424 3,514
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Cash flows used in investing activities:
Additions to operating investment properties (148) (97)
------------ ------------
Net cash used in investing activities (148) (97)
------------ ------------
Cash flows used in financing activities:
Loans origination fees paid -- (168)
Cash dividends paid to shareholders (4,794) (4,795)
------------ ------------
Net cash used in financing activities (4,794) (4,963)
------------ ------------
Net decrease in cash and cash equivalents (1,518) (1,546)
Cash and cash equivalents, beginning of period 2,615 2,264
------------ ------------
Cash and cash equivalents, end of period $ 1,097 $ 718
=========== ===========
Cash paid for interest $ 105 $ --
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
ILM 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 Senior Living, Inc.'s (the "Company")
Annual Report on Form 10-K for the fiscal year ended August 31, 1999. 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 May 31, 2000 and revenues and expenses for each of the nine- and three-month
periods ended May 31, 2000 and 1999. Actual results may 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 nine-month period ended May 31,
2000, are not necessarily indicative of the results that may be expected for the
year ending August 31, 2000.
The Company was incorporated on March 6, 1989 under the laws of the
State of Virginia as a Virginia finite-life corporation, formerly PaineWebber
Independent Mortgage Fund, Inc. On June 21, 1989, the Company sold to the public
in a registered initial offering 7,520,100 shares of common stock, $.01 par
value. The Company received capital contributions of $75,201,000, of which
$201,000 represented the sale of 20,100 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 eight participating mortgage loans secured by senior housing
facilities located in seven 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 Holding, Inc. ("ILM Holding"), a majority-owned subsidiary of the
Company, now holds title to the eight 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 Holding to each of 111 charitable organizations so that ILM 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 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
Holding. Cumulative dividends accrued as of May 31, 2000 on the preferred stock
in ILM Holding totaled approximately $30,000.
As part of the fiscal 1994 settlement agreement with AHC, ILM 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 its qualification as a REIT
under the Internal Revenue Code, the Company formed a new corporation, ILM I
Lease Corporation ("Lease I"), 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 in Lease I were
distributed to the holders of record of the Company's common stock and the
Senior Housing Facilities were leased to Lease I effective September 1, 1995
(see Note 2 for a description of the Facilities Lease Agreement). Lease I 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 I. On July 29, 1996, the management
agreement with AHC was terminated and Lease I 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 I, has
also served in various management capacities at Capital Senior Living
Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as
Chief Executive Officer of Capital Senior Living Corporation. 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 Capital Senior
Living Corporation ("CSLC"), the corporate parent of Capital, and certain
affiliates of Capital. 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 $11.63 per share compared to the previous merger consideration of
$12.90 per share. The Company was advised by CSLC that, due to deteriorating
conditions in the senior living industry and consequent decline in the loan
value of the Company's properties, Capital was unable to raise sufficient
financing to fund the original purchase price. CSLC has reported to the Company
that it has obtained a signed financing commitment for substantially all of the
merger consideration. 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. Subject to the
satisfaction of certain conditions, consummation of the merger is expected to
occur on or about July 31, 2000. The agreement presently provides that it may be
terminated if the merger is not consummated by September 30, 2000. Holders of
Company common stock will have no dissenters' rights in the merger.
In connection with the merger, the Company has agreed to cause ILM
Holding to cancel and terminate the Facilities Lease Agreement with Lease I on
the date of consummation of the merger. The Facilities Lease Agreement was
extended on a month-to-month basis as of December 31, 1999, beyond its original
expiration date of December 31, 1999. 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.
2. OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT
At May 31, 2000, through its consolidated subsidiary, the Company owned
eight Senior Housing Facilities. The name, location and size of the properties
are as set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR
FACILITY RENTABLE RESIDENT
NAME LOCATION BUILT UNITS (2) CAPACITIES(2)
---- -------- ----- --------- -------------
Independence Village of East Lansing East Lansing, MI 1989 161 162
Independence Village of Winston-Salem Winston-Salem, NC 1989 159 161
Independence Village of Raleigh Raleigh, NC 1991 164 205
Independence Village of Peoria Peoria, IL 1990 166 183
Crown Pointe Apartments Omaha, NE 1984 135 163
Sedgwick Plaza Apartments Wichita, KS 1984 150 170
West Shores Hot Springs, AR 1986 136 166
Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
</TABLE>
[FN]
(1) The acquisition of Villa Santa Barbara was financed jointly by the
Company and an affiliated entity, ILM II Senior Living, Inc ("ILM II").
All amounts generated from Villa Santa Barbara are equitably
apportioned between the Company, together with its consolidated
subsidiary, and ILM II, together with its consolidated subsidiary,
generally 25% and 75%, respectively. Villa Santa Barbara is owned 25%
by ILM Holding and 75% by ILM II Holding as tenants in common. Upon the
sale of the Company or ILM II, arrangements would be made to transfer
the Santa Barbara facility to the selling joint tenant (or one of its
subsidiaries). The property was extensively renovated in 1995.
(2) 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.
</FN>
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 I, 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 Holding, as owner of the properties and lessor (the "Lessor"), and Lease I
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 Holding, as the Lessor, is
responsible for all major capital improvements and structural repairs to the
Senior Housing Facilities. During the term of the Facilities Lease Agreement,
which was extended on a month-to-month basis as of December 31, 1999, beyond its
original expiration date of December 31, 1999, Lease I pays annual base rent for
the use of all of the Senior Housing Facilities in the aggregate amount of
$6,364,800 per year. Lease I also pays variable rent, on a quarterly basis, for
each facility in an amount equal to 40% of the excess of aggregate total
revenues for the Senior Housing Facilities, on an annualized basis, over
$16,996,000. Variable rent was $929,000 and $313,000 for the nine- and
three-month periods ended May 31, 2000, respectively, compared to $859,000 and
$295,000 for the nine- and three-month periods ended May 31, 1999, respectively.
3. RELATED PARTY TRANSACTIONS
Lease I 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 the 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 I, has
also served in various management capacities at Capital Senior Living
Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as
Chief Executive Officer of Capital Senior Living Corporation. As a result,
through July 28, 1998, Capital was considered a related party. For the
nine-month periods ended May 31, 2000 and 1999, Capital earned property
management fees from Lease I of $776,000, and $778,000, respectively. For the
three-month periods ended May 31, 2000 and 1999, Capital earned property
management fees from Lease I of $230,000 and $241,000, 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 I 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 I for all costs related to these potential expansions, including
fees to Capital Senior Development, Inc. During fiscal 2000 and 1999, Capital
Senior Development, Inc. earned no fees from Lease I 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 nine-month periods ended May 31, 2000 and 1999, Greenberg
Traurig earned fees from the Company of $902,000 and $1,027,000, respectively.
For the three-month periods ended May 31, 2000 and 1999, Greenberg Traurig
earned fees from the Company of $309,000 and $651,000, respectively.
Accounts receivable - related party at May 31, 2000 and August 31,
1999, represent amounts due from an affiliated company, Lease I, principally for
variable rent. Accounts payable related party at May 31, 2000 and August 31,
1999, represent accrued legal fees due to Greenberg Traurig, Counsel to the
Company and its affiliates and a related party, as described above.
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 II in the Supreme Court of the State of New York, County of New
York naming the Company, ILM II 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 II, diverting certain of their assets. The
complaint sought compensatory damages in an unspecified amount, punitive
damages, the judicial dissolution of the Company and ILM II, 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 II. As part of the settlement, Capital Senior Living
Corporation increased its proposed merger consideration payable to the Company
and ILM II shareholders and is also responsible for a total of approximately
$1.1 million in plaintiffs' attorneys fees and expenses if the proposed merger
is consummated. If the proposed merger is not consummated and if the Company and
ILM II were to consummate an extraordinary transaction with a third party, then
the Company and ILM II would be responsible for the plaintiffs' attorneys fees
and expenses.
5. CONSTRUCTION LOAN FINANCING
During 1999, the Company secured a construction loan facility with a
major bank that provides the Company with up to $24.5 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 expires on
December 31, 2000, with possible extensions through September 29, 2003.
Principal is due at expiration. Interest is payable monthly at a rate equal to
LIBOR plus 1.10% or Prime plus 0.5%. Amounts outstanding under the loan at May
31, 2000, were approximately $2.1 million. Loan origination fees of $272,000
were paid in connection with this loan facility and are being amortized over the
term of the loan. Capitalized interest at May 31, 2000, and August 31, 1999, was
$123,093 and $31,233.
6. SUBSEQUENT EVENTS
On June 2, 2000, the Company's Board of Directors unanimously agreed
not to declare any dividends on shares of the Company's common stock for the
remainder of Fiscal Year 2000. The Board cited transaction costs previously
incurred and to be incurred through closing of the pending merger with Capital
and the establishment of a reserve to fund the short-term operations of the
Company's senior living communities if the proposed merger with Capital is not
consummated. The Company also announced that, should the merger not be
consummated, its Board of Directors would reevaluate its dividend policy.
On June 2, 2000, the Company caused Holding I to notify Lease I that
the Facilities Lease Agreement would terminate on the date of consummation of
the pending merger of the Company with CSLC. Subject to the satisfaction of
certain conditions and the receipt of requisite approvals, consummation of the
merger is expected to occur on or about July 31, 2000. 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.
On June 22, 2000, at a special meeting of Shareholders, 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.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders of
ILM Senior Living, Inc.:
We have audited the accompanying consolidated balance sheets of ILM
Senior Living, Inc. and subsidiary as of August 31, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended August 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion of these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ILM Senior Living, Inc. and subsidiary at August 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
October 22, 1999,
except for Notes 5 and 1, as to which the date is
November 5 and 16, 1999, respectively
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
August 31, 1999 and 1998
(Dollars in thousands, except per share data)
ASSETS
<S> <C> <C>
1999 1998
---- ----
Operating investment properties, at cost:
Land $ 4,921 $ 4,768
Building and improvements 38,197 38,166
Furniture, fixtures and equipment 4,948 4,948
--------- --------
48,066 47,882
Less: accumulated depreciation (13,417) (12,131)
---------- --------
34,649 35,751
Mortgage placement fees 2,256 2,256
Less: accumulated amortization (2,163) (1,937)
---------- --------
93 319
Loan origination fees 272 102
Less: accumulated amortization (85) --
---------- --------
187 102
Cash and cash equivalents 2,615 2,264
Accounts receivable - related party 306 336
Prepaid expenses and other assets 100 89
Deferred rent receivable 12 49
---------- --------
$ 37,962 $ 38,910
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses 365 259
Accounts payable - related party 343 67
Construction loan payable 2,093 --
---------- --------
Preferred shareholders' minority
interest in consolidated subsidiary 134 125
---------- --------
Total liabilities 2,935 451
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 10,000 shares authorized,
7,520,100 shares issued and outstanding 75 75
Additional paid-in capital 65,711 65,711
Accumulated deficit (30,759) (27,327)
--------- --------
Total shareholders' equity $ 35,027 $ 38,459
--------- --------
TOTAL $ 37,962 $ 38,910
========= ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended August 31, 1999, 1998, and 1997
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
REVENUES:
Rental and other income $7,525 $7,222 $6,643
Interest income 72 98 162
------ ------ ------
7,597 7,320 6,805
EXPENSES:
Depreciation expense 1,286 1,287 1,282
Amortization expense 311 226 226
Management fees -- -- 70
General and administrative 559 294 866
Professional fees 2,393 674 445
Directors' compensation 87 116 82
------ ------ ------
4,636 2,597 2,971
------ ------ ------
NET INCOME $2,961 $4,723 $3,834
====== ====== ======
Earnings per share of common stock $ 0.39 $ 0.63 $ 0.51
====== ====== ======
Cash dividends paid per share of common stock $ 0.85 $ 0.79 $ 0.74
====== ====== ======
</TABLE>
The above earnings and cash dividends paid per share of common stock
are based upon the 7,520,100 shares outstanding during the year.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended August 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
COMMON STOCK ADDITIONAL
$.01 PAR VALUE PAID-IN ACCUMULATED
-------------- CAPITAL DEFICIT TOTAL
SHARES AMOUNT ------- ------- -----
------ ------
SHAREHOLDERS' EQUITY
AT AUGUST 31, 1996 $ 7,520,100 $ 75 $ 65,711 $ (24,418) $ 41,368
Cash dividends paid -- -- -- (5,544) (5,544)
Net income -- -- -- 3,834 3,834
----------- ------- -------- ---------- --------
SHAREHOLDERS' EQUITY
AT AUGUST 31, 1997 7,520,100 75 65,711 (26,128) 39,658
Cash dividends paid -- -- -- (5,922) (5,922)
Net income -- -- -- 4,723 4,723
----------- ------- -------- ---------- --------
SHAREHOLDERS' EQUITY
AT AUGUST 31, 1998 7,520,100 75 65,711 (27,327) 38,459
Cash dividends paid -- -- -- (6,393) (6,393)
Net income -- -- -- 2,961 2,961
----------- ------- -------- ---------- --------
SHAREHOLDERS' EQUITY
AT AUGUST 31, 1999 $ 7,520,100 $ 75 $ 65,711 $ (30,759) $ 35,027
=========== ======= ======== ========== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 1999, 1998, and 1997
(In thousands)
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 2,961 $ 4,723 $ 3,834
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,597 1,513 1,508
Charitable contribution of subsidiary's
preferred stock and accrued dividends 9 9 116
Changes in assets and liabilities:
Interest and other receivables -- -- 397
Accounts receivable - related party 30 (220) 232
Prepaid expenses and other assets (11) 18 (97)
Deferred rent receivable 37 37 37
Accounts payable - related party 276 (93) 71
Accounts payable and accrued expenses
106 160 105
--- --- ---
Net cash provided by operating activities 5,005 6,147 6,203
------- ------- -------
Cash flows used in investing activities:
ILM Holding acquired cash balance -- -- 400
Additions to operating investment properties (184) (995) (533)
------- ------- -------
Net cash used in investing activities (184) (995) (133)
------- ------- -------
Cash flows used in financing activities:
Loan origination fees paid (170) (102) --
Proceeds from construction loan facility 2,093 -- --
Cash dividends paid to shareholders (6,393) (5,922) (5,544)
------- ------- -------
Net cash used in financing activities (4,470) (6,024) (5,544)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 351 (872) 526
Cash and cash equivalents, beginning of year 2,264 3,136 2,610
------- ------- -------
Cash and cash equivalents, end of year $ 2,615 $ 2,264 $ 3,136
======= ======= =======
Cash paid for state income taxes $ 42 $ 13 $ --
======= ======= =======
Cash paid for interest $ 20 $ -- $ --
======= ======= =======
</TABLE>
See accompanying notes.
<PAGE>
ILM SENIOR LIVING, INC.
Notes to Consolidated Financial Statements
August 31, 1999
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION
ILM Senior Living, Inc. (the "Company"), formerly PaineWebber
Independent Living Mortgage Fund, Inc., was organized as a corporation on March
6, 1989 under the laws of the State of Virginia. On June 21, 1989, the Company
commenced a public offering of up to 10,000,000 shares of its common stock at
$10 per share, pursuant to the final prospectus, as amended, incorporated into a
Registration Statement filed on Form S-11 under the Securities Act of 1933
(Registration Statement No. 33-27653) (the "Prospectus"). The public offering
terminated on July 21, 1989 with a total of 7,520,100 shares issued. The Company
received capital contributions of $75,201,000, of which $201,000 represented the
sale of 20,100 shares to an affiliate at that time, PaineWebber Group, Inc.
("PaineWebber"). For discussion purposes, PaineWebber will refer to PaineWebber
Group, Inc. and all affiliates that provided services to the Company in the
past.
The Company has 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 (see Note 2).
The Company originally invested the net proceeds of the initial public
offering in eight participating mortgage loans secured by senior housing
facilities ("Senior Housing Facilities") located in seven states. 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").
During the quarter ended February 28, 1993, Angeles announced that it
was experiencing liquidity problems that resulted in the inability to meet its
obligations. Subsequent to such announcements, AHC defaulted on the regularly
scheduled mortgage loan payments due to the Company on March 1, 1993. Subsequent
to March 1993, payments toward the debt service owed on the Company's loans were
limited to the net cash flow of the operating investment properties. On May 3,
1993, Angeles filed for reorganization under a Chapter 11 Federal Bankruptcy
petition filed in the state of California. AHC did not file for reorganization.
The Company retained special counsel and held extensive discussions with AHC
concerning the default status of its loans. During the fourth quarter of fiscal
1993, a non-binding Settlement Agreement between the Company, AHC and Angeles
was reached whereby ownership of the Senior Housing Facilities would be
transferred from AHC to the Company or its designated affiliates. Under the
terms of the Settlement Agreement, the Company would release AHC and Angeles
from certain obligations under the loans. On April 27, 1994, each of the Senior
Housing Facilities owned by AHC and securing the loans was transferred
(collectively, "the Transfers") to newly-created special purpose corporations
affiliated with the Company (collectively, "the Property Companies"). The
Transfers had an effective date of April 1, 1994 and were made pursuant to the
Settlement Agreement entered into on February 17, 1994 ("the Settlement
Agreement") between the Company and AHC which had previously been approved by
the bankruptcy court handling the bankruptcy case of Angeles. All of the capital
stock of each Property Company was held by ILM Holding, Inc. ("ILM Holding"), a
Virginia corporation. In August 1995, each of the Property Companies merged into
ILM Holding, which is now a subsidiary of the Company. As a result, ownership of
the Senior Housing Facilities is now held by ILM Holding, and the Property
Companies no longer exist as separate legal entities.
ILM Holding now holds title to the eight 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
capital stock of ILM Holding was originally owned by the Company and
PaineWebber. ILM Holding had issued 100 shares of Series A Preferred Stock to
the Company in return for a capital contribution in the amount of $7,000. The
common stock represented approximately 99 percent of the voting power and 1
percent of the economic interest in ILM Holding, while the preferred stock
represented approximately 1 percent of the voting power and 99 percent of the
economic interest in ILM Holding.
The Company completed its restructuring plans by converting ILM Holding
to a REIT for tax purposes effective for calendar year 1996. In connection with
these plans, on November 21, 1996, the Company requested that PaineWebber sell
all of the stock held in ILM Holding to the Company for a price equal to the
fair market value of the 1% economic interest in ILM Holding represented by the
common stock. On January 10, 1997, this transfer of the common stock of ILM
Holding was completed at an agreed upon fair value of $46,000, representing a
$39,000 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 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 a new class of
non-voting, 8% cumulative preferred stock issued to the Company (the "Preferred
Stock"). The number of authorized shares of preferred and common stock in ILM
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 Holding to each of 111 charitable organizations so that
ILM 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 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. The Company recorded the contribution of the Preferred Stock in ILM
Holding to the charitable organizations at the amount of the initial liquidation
preference of $111,000. Such amount is included in general and administrative
expense in the accompanying consolidated statement of income for the year ended
August 31, 1997. Cumulative dividends accrued as of August 31, 1999 and 1998, on
the Preferred Stock in ILM Holding totaled $23,000 and $14,000, respectively.
As part of the fiscal 1994 Settlement Agreement with AHC, ILM Holding
retained AHC as the property manager for all of the Senior Housing Facilities
pursuant to the terms of a management agreement. As discussed further in Note 5,
the management agreement with AHC was terminated in July 1996. Subsequent to the
effective date of the Settlement Agreement with AHC, management investigated and
evaluated the available options for structuring the ownership of the Senior
Housing Facilities 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 (see Note 2). As discussed further in Note 4, on September
12, 1994, the Company formed a new subsidiary, ILM I Lease Corporation ("Lease
I"), for the purpose of operating the Senior Housing Facilities. On September 1,
1995, after the Company received the required regulatory approval, the Company
distributed all of the shares of capital stock of Lease I to the holders of
record of the Company's common stock. The Senior Housing Facilities were leased
to Lease I effective September 1, 1995 (see Note 4 for a description of the
Facilities Lease Agreement). Lease I is a public company subject to the
reporting obligations of the Securities and Exchange Commission.
On February 7, 1999, the Company entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999, with Capital Senior
Living Corporation, the corporate parent of Capital, and certain affiliates of
Capital. If the merger is consummated, the Shareholders of the Company will
receive all-cash merger consideration of approximately $12.90 per share.
Consummation of this transaction will require, among other things, the
affirmative vote of the holders of not less than 66-2/3% of the Company's
outstanding common stock. While there can be no assurance, consummation of the
merger is presently anticipated in the first quarter of calendar year 2000. In
connection with the merger, the Company has agreed to cause ILM Holding to
cancel and terminate the Facilities Lease Agreement with Lease I immediately
prior to the effective time of the merger. The Facilities Lease Agreement was
extended on a month-to-month basis on November 16, 1999 beyond its original
expiration date of December 31, 1999. There can be no assurance as to whether
the merger will be consummated or, if consummated, as to the timing thereof.
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
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 August 31, 1999 and 1998 and revenues and expenses for
each of the three years in the period ended August 31, 1999. Actual results
could differ from the estimates and assumptions used.
The Company's significant accounting policies are summarized as
follows:
A. BASIS OF PRESENTATION
The operating cycle in the real estate industry is longer than one year
and the distinction between current and non-current is of little relevance.
Accordingly, the accompanying consolidated balance sheets are presented in an
unclassified format.
Effective January 10, 1997, the Company purchased the remaining common
shares held by PaineWebber of ILM Holding, which provided the Company with 100%
majority voting control, for $46,000 which is included in general and
administrative expense for the year ended August 31, 1997.
The accompanying consolidated financial statements include the
financial statements of the Company and ILM Holding. The results of operations
of ILM Holding have been included in the consolidated results of operations of
the Company since September 1, 1996. All intercompany balances and transactions
have been eliminated in consolidation.
B. INCOME TAXES
The Company has elected to qualify and to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended, for each taxable year of operations.
As a REIT, the Company is allowed a deduction for the amount of dividends paid
to its shareholders, thereby effectively subjecting the distributed net taxable
income of the Company to taxation at the shareholder level only, provided it
distributes at least 95% of its taxable income and meets certain other
requirements for qualifying as a real estate investment trust. In connection
with the Settlement Agreement described in Note 1, the Company, through ILM
Holding, obtained title to the Senior Housing Facilities securing its mortgage
loan investments. To retain REIT status, the Company must ensure that 75% of its
annual gross income is received from qualified sources. Under the original
investment structure, interest income from the Company's mortgage loans was a
qualified source. The Senior Housing Facilities that are now owned by a
subsidiary of the Company provide residents with more services, such as meals,
activities, assisted living, etc., than are customary for ordinary residential
apartment properties. As a result, a significant portion of the rents paid by
the residents includes income for the increased level of services received by
them. Consequently, the rents paid by the residents likely would not be
qualified rents for REIT qualification purposes if received directly by the
Company. Therefore, if the Company received such rents directly, it could lose
REIT status and be taxed as a regular corporation. After extensive review, the
Board of Directors determined that it would be in the best interests of the
Shareholders for the Company to retain REIT status and master lease the Senior
Housing Facilities to a shareholder-owned operating company. As discussed
further in Note 4, on September 12, 1994 the Company formed a new subsidiary,
Lease I, for the purpose of operating the Senior Housing Facilities. The Senior
Housing Facilities were leased to Lease I effective September 1, 1995 (see Note
4 for a description of the Facilities Lease Agreement).
The assumption of ownership of the Senior Housing Facilities through
ILM 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 Housing 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
Senior Housing Facilities were held by a C corporation. The Company completed
its restructuring plans by converting ILM Holding to a REIT for tax purposes
effective for calendar year 1996.
Any future appreciation in the value of the Senior Housing Facilities
subsequent to the conversion of ILM 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 Senior Housing Facilities were to be held for a period of at least 10
years from the date of the conversion of ILM Holding to a REIT. However, since
the end of the Company's original anticipated holding period is within one year,
the Senior Housing Facilities might not be held for an additional 10 years. The
Board of Directors may defer the Company's scheduled liquidation date, if in the
opinion of a majority of the Directors, the disposition of the Company's assets
at such time would result in a material under-realization of the value of such
assets; provided, however, that no such deferral may extend beyond December 31,
2014. Because the Directors believe that disposition of the Company's assets by
December 31, 1999, would result in such under-realization, and because the
merger with Capital Senior Living Corporation is presently anticipated to occur
in the first quarter of calendar year 2000, on November 16, 1999, the Company's
Board of Directors voted to extend the term of the Company on a month-to-month
basis. If the merger does not occur, the Company's Board of Directors presently
expects to extend the term of the Company until December 31, 2001. On November
16, 1999, the Company's Board of Directors also voted to cause ILM Holding to
extend the Facilities Lease Agreement with Lease I on a month-to-month basis.
Based on management's estimate of the increase in the values of the Senior
Housing Facilities which occurred between April 1994 and January 1, 1996, as
supported by independent appraisals, a sale of the Senior Housing Facilities
within ten years of the date of the conversion of ILM Holding to a REIT could
result in a built-in gain tax of as much as $2.9 million, which could be reduced
by approximately $2.45 million using available net operating loss carryforwards
of ILM Holding of approximately $7.2 million.
The Company's consolidated subsidiary, ILM Holding, has incurred losses
for tax purposes since inception. Neither the Company nor ILM Holding is likely
to be able to use these losses to offset future tax liabilities, other than the
built-in gain above. Accordingly, no income tax benefit is reflected in these
consolidated financial statements.
The Company reports on a calendar year basis for income tax purposes.
All distributions during calendar years 1999, 1998 and 1997 were ordinary
taxable dividends.
C. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
all highly liquid investments with original maturities of 90 days or less.
D. OPERATING INVESTMENT PROPERTIES
Operating investment properties are carried at the lower of cost,
reduced by accumulated depreciation, or net realizable value. The net realizable
value of a property held for long-term investment purposes is measured by the
recoverability of the owner's investment through expected future cash flows on
an undiscounted basis, which may exceed the property's current market value. The
net realizable value of a property held for sale approximates its current market
value, as determined on a discounted basis. None of the operating investment
properties were held for sale as of August 31, 1999 or 1998. Depreciation
expense is provided on a straight-line basis using an estimated useful life of 5
to 40 years for the buildings and improvements and 5 years for the furniture,
fixtures and equipment.
The Company reviews the carrying value of a long-lived asset if facts
and circumstances suggest that it may be impaired or that the amortization
period may need to be changed. The Company considers external factors relating
to the long-lived asset, including occupancy trends, local market developments,
changes in payments, and other publicly available information. If these external
factors indicate the long-lived asset will not be recoverable, based upon
undiscounted cash flows of the long-lived asset over its remaining life, the
carrying value of the long-lived asset will be reduced by the estimated
shortfall of discounted cash flows. The Company does not believe there are any
indicators that would require an adjustment to the carrying value of its
long-lived assets or their remaining useful lives as of August 31, 1999.
Mortgage placement fees through August 31, 1999 of $2,256,000 were
incurred by the Company and these fees are included in the accompanying balance
sheets. Accumulated amortization of mortgage fees at August 31, 1999 and 1998,
were $2,163,000 and $1,937,000, respectively. At August 31, 1999 and 1998, loan
origination fees of $272,000 and $102,000 relating to the construction loan
facility (see Note 6) are included on the accompanying consolidated balance
sheet. These fees are being amortized on a straight-line basis over the term of
the loan. Accumulated amortization at August 31, 1999 and 1998 was $85,000 and
$0, respectively. Capitalized interest for 1999 and 1998 was $31,000 and $0,
respectively.
E. RENTAL REVENUES
In fiscal years 1999 and 1998, rental revenues consist of payments due
from Lease I under the terms of the Facilities Lease Agreement described in Note
4. Base rental income under the Facilities Lease Agreement is recognized on a
straight-line basis over the term of the lease. Deferred rent receivable on the
balance sheet as of August 31, 1999 and 1998 represents the difference between
rental income on a straight-line basis and rental income received under the
terms of the Facilities Lease Agreement.
F. FAIR VALUE DISCLOSURES
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107"), requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. SFAS 107 excludes certain financial instruments and
all non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates its fair value due to the
short-term maturities of such instruments.
ACCOUNTS RECEIVABLE - RELATED PARTY: The carrying amount reported on
the balance sheet for accounts receivable - related party approximates its fair
value due to the short-term nature of such instrument.
3. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors,
assistance in managing the business of the Company was provided by PaineWebber.
PaineWebber resigned effective as of June 18, 1997.
PaineWebber received fees and compensation determined on a agreed-upon
basis, in consideration of various services performed in connection with the
sale of the shares, the management of the Company and the acquisition,
management and disposition of the Company's investments. The type of
compensation to be paid by the Company to PaineWebber under the terms of the
advisory agreement was as follows.
(i) Under the former advisory agreement, PaineWebber had specific
management responsibilities; to perform day-to-day operations of
the Company and to act as the investment advisor and consultant
for the Company in connection with general policy and investment
decisions. PaineWebber received an annual base fee and an
incentive fee of 0.25% and 0.25%, respectively, of the capital
contributions of the Company, as defined, as compensation for
such services. Incentive fees are subordinated to Shareholders'
receipt of distributions of net cash sufficient to provide a
return equal to 10% per annum. For the years ended August 31,
1999, 1998 and 1997, PaineWebber earned base management fees
totaling $0, $0 and $70,000, respectively. Payment of incentive
management fees was suspended effective April 15, 1993 in
conjunction with a reduction in the Company's quarterly dividend
payments.
(ii) For its services in finding and recommending investments,
PaineWebber received mortgage placement fees equal to 2% of the
capital contributions. Mortgage placement fees totaling
$1,504,000 were earned by PaineWebber during the Company's
investment acquisition period. Such fees have been capitalized
and are included in the cost of the operating investment
properties on the accompanying consolidated balance sheets.
(iii)For its administrative services with respect to all loans,
PaineWebber received loan servicing fees equal to 1% of loan
amounts. Loan servicing fees totaling $752,000 were earned by
PaineWebber during the Company's investment acquisition period.
Such fees have been capitalized and are included in the cost of
the operating investment properties on the accompanying
consolidated balance sheets.
(iv) PaineWebber was entitled to receive 1% of disposition proceeds,
as defined, until the shareholders have received dividends of net
cash equal to their adjusted capital investments, as defined,
plus a 12% non-compounded annual return on their adjusted capital
investments; all disposition proceeds thereafter until
PaineWebber received an aggregate of 5% of disposition proceeds;
and, thereafter, 5% of disposition proceeds.
PaineWebber was reimbursed for its direct expenses relating to the
offering of shares, the administration of the Company and the acquisition and
operations of the Company's real estate investments. Included in general and
administrative expenses on the accompanying statements of income for the years
ended August 31, 1999, 1998 and 1997 is $0, $0 and $155,000, respectively,
representing reimbursements to PaineWebber for providing certain financial,
accounting and investor communication services to the Company.
Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins")
provided cash management services with respect to the Company's cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc.,
an independently operated subsidiary of PaineWebber. During fiscal 1999, 1998
and 1997, Mitchell Hutchins earned $0, $0 and $9,000, (included in general and
administrative expenses) for managing the Company's cash assets, respectively.
Lease I 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 I, has
also served in various management capacities at Capital Senior Living
Corporation since 1996. Mr. Cohen currently serves as Chief Executive Officer of
Capital Senior Living Corporation. As a result, through July 28, 1998, Capital
was considered a related party. For the years ended August 31, 1999 and 1998,
Capital earned property management fees from Lease I of $1,011,000 and $919,000,
respectively.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence Cohen,
who, through July 28, 1998 was President, Chief Executive Officer and a Director
of the Company; and others alleging that the defendants intentionally interfered
with AHC's property management agreement (the "California litigation"). The
complaint sought damages of at least $2,000,000. On March 4, 1997, the
defendants removed the case to Federal District Court in the Central District of
California. At a Board meeting on February 26, 1997, the Company's Board of
Directors concluded that since all of Mr. Cohen's actions relating to the
California litigation were taken either on behalf of the Company under the
direction of the Board or as a PaineWebber employee, the Company or its
affiliates should indemnify Mr. Cohen with respect to any expenses arising from
the California litigation, subject to any insurance recoveries for those
expenses. Legal fees paid by Lease I and Lease II on behalf of Mr. Cohen totaled
$229,000 as of August 31, 1999. The Company's Board also concluded that, subject
to certain conditions, the Company or its affiliates should pay reasonable legal
fees and expenses incurred by Capital in the California litigation. As of August
31, 1999, the amount advanced to Capital by Lease I and Lease II for legal fees
totaled approximately $563,000.
On September 18, 1997, Lease I 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 I for all costs related to these potential expansions including
fees to Capital Senior Development, Inc. For the years ended August 31, 1999 and
1998, Capital Senior Development, Inc. earned fees from the Company of $41,000
and $212,000, respectively, 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 years ended August
31, 1999 and 1998, Greenberg Traurig earned fees from the Company of $1,315,000
and $214,000, respectively.
Accounts receivable - related party at August 31, 1999 and 1998
represent amounts due from an affiliated company, Lease I, for variable rent.
Accounts payable - related party at August 31, 1999 and 1998 represent unbilled
legal fees due to Greenberg Traurig, Counsel to the Company and its affiliates
and a related party, as described above.
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT
At August 31, 1999, through its consolidated subsidiary, the Company
owned eight Senior Housing Facilities. The name, location and size of the Senior
Housing Facilities and the date that the Company made its initial investment in
such assets are as set forth below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year
Rentable Resident Facility Date of
Name Location Units (1) Capacities (3) Built Investment (1)
---- -------- --------- -------------- ----- --------------
Independence Village of
East Lansing East Lansing, MI 161 162 1989 6/29/89
Independence Village of
Winston-Salem Winston-Salem, NC 159 161 1989 6/29/89
Independence Village of
Raleigh Raleigh, NC 164 205 1991 4/29/91
Independence Village of
Peoria Peoria, IL 165 181 1990 11/30/90
Crown Pointe Apartments Omaha, NE 135 163 1984 2/14/90
Sedgwick Plaza Apartments Wichita, KS 150 170 1984 2/14/90
West Shores Hot Springs, AR 136 166 1986 12/14/90
Villa Santa Barbara (2) Santa Barbara, CA 125 125 1979 7/13/92
</TABLE>
[FN]
(1) Represents the date of the Company's original mortgage loan to Angeles
Housing Concepts, Inc. (see Note 1).
(2) The acquisition of the Santa Barbara Facility was financed jointly by the
Company and an affiliated entity, ILM II. All amounts generated from Villa
Santa Barbara are equitably apportioned between the Company, together with
its consolidated subsidiary, and ILM II, together with its consolidated
subsidiary, generally 25% and 75%, respectively. The financial position,
results of operations and cash flows include only the 25% allocable portion
of the Company's interest in the Santa Barbara Facility. Villa Santa
Barbara is owned 25% by ILM Holding and 75% by ILM II Holding, Inc. as
tenants in common.
(3) 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.
</FN>
The cost basis of the operating investment properties reflects amounts
funded under the Company's participating mortgage loans less certain guaranty
payments received from AHC in excess of the net cash flow of the Senior Housing
Facilities under the terms of the Exclusivity Agreement with the Company. The
transfer of ownership of the Senior Housing Facilities from AHC in fiscal 1994
resulted in no gain or loss recognition by the Company for financial reporting
purposes. In accordance with generally accepted accounting principles, the
Company had always accounted for its investments in acquisition and construction
loans under the equity method, as if such investments were equity interests in a
joint venture. Accordingly, the carrying values of such investments were reduced
from inception by non-cash depreciation charges and by payments from AHC, prior
to the default in fiscal 1993, in excess of the net cash flow generated by the
Senior Housing Facilities received pursuant to the guaranty agreement between
the Company and AHC. As a result of this accounting treatment, the carrying
values of the Company's investment had been reduced below management's estimate
of the fair market value of the Senior Housing Facilities as of the effective
date of the transfer of ownership. For federal income tax purposes, the
investments had always been carried at the contractually stated principal
balances of the participating mortgage loans. For tax purposes only, a loss was
recognized by the Company in 1994 in the amount by which the stated principal
balances of the loans were reduced as of the date of the transfer of ownership.
As discussed in Note 1, effective April 1, 1994 each Property Company
acquired the respective operating property subject to, and assumed the
obligations under, the mortgage loan payable to the Company, pursuant to the
Settlement Agreement with AHC. The principal balance on each loan was modified
to reflect the estimated fair value of the related operating property as of the
date of the transfer of ownership. The modified loans require interest-only
payments on a monthly basis at a rate of 9.5% from April 1, 1994 through
December 1, 1994, 11% for the period January 1 through December 31, 1995, 12.5%
for the period January 1 through December 31, 1996, 13.5% for the period January
1 through December 31, 1997, 14% for the period January 1 through December 31,
1998 and 14.5% for the period January 1, 1999 through maturity. In August 1995,
each of the Property Companies was merged into ILM Holding. As a result,
ownership of the Senior Housing Facilities, as well as the obligation under the
loans, is now held by ILM Holding, and the Property Companies no longer exist as
separate legal entities. Since ILM Holding is consolidated with the Company in
the accompanying financial statements for fiscal 1999 and 1998, the mortgage
loans and related interest expense have been eliminated in consolidation.
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 I, for the purpose of
operating the Senior Housing Facilities under the terms of a Facilities Lease
Agreement. As of August 31, 1995, Lease I, 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, after the Company received the required regulatory approval,
it distributed all of the shares of capital stock of Lease I to the holders of
record of the Company's common stock. One share of common stock of Lease I was
issued for each full share of the Company's common stock held. Prior to the
distribution, the Company capitalized Lease I with $700,000 from its existing
cash reserves, which was an amount estimated to provide Lease I with necessary
working capital.
The Facilities Lease Agreement is between the Company's consolidated
subsidiary, ILM Holding, as owner of the Senior Housing Facilities and Lessor,
and Lease I as Lessee. The Lessor has the right to terminate the Facilities
Lease Agreement as to any property sold by the Lessor as of the date of such
sale. The Facilities Lease Agreement 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 Holding, as the Lessor, is responsible for
all major capital improvements and structural repairs to the Senior Housing
Facilities. During the initial term of the Facilities Lease Agreement, which was
extended in November 1999 beyond its original expiration date of December 31,
1999, Lease I pays annual base rent for the use of all of the Facilities in the
aggregate amount of $6,364,800. Lease I also pays variable rent, on a quarterly
basis, for each facility in an amount equal to 40% of the excess of aggregate
total revenues for the Senior Housing Facilities, on an annualized basis, over
$16,996,000. Variable rental income related to fiscal years 1999 and 1998 was
$1,164,000 and $894,000, respectively.
<PAGE>
Condensed balance sheets as of August 31, 1999 and 1998, and condensed
statements of operations for the years ended August 31, 1999 and 1998 (in
thousands), of Lease I are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
ASSETS
Current assets $ 1,447 $ 2,225
Furniture, fixtures, and equipment, net 356 609
Other assets 92 364
------- -------
$ 1,895 $ 3,198
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 1,370 $ 2,756
Other liabilities 12 49
Shareholders' equity 513 393
-------- -------
$ 1,895 $ 3,198
======== =======
STATEMENT OF OPERATIONS
Revenues $19,923 $19,294
Operating expenses 19,530 19,729
Income tax expense (benefit) (273) (54)
------- -------
Net income (loss) $ 120 $ (381)
======= =======
</TABLE>
5. LEGAL PROCEEDINGS AND CONTINGENCIES
TERMINATION OF MANAGEMENT CONTRACT WITH AHC
On July 29, 1996, Lease I and ILM Holding ("the Companies") terminated
a property management agreement with AHC covering the eight Senior Housing
Facilities leased by Lease I from ILM Holding Companies. The management
agreement was terminated for cause pursuant to Sections 1.05 (a) (i), (iii) and
(iv) of the agreement. Simultaneously with the termination of the management
agreement, the Companies, together with certain affiliated entities, filed suit
against AHC in the United States District Court for the Eastern District of
Virginia for breach of contract, breach of fiduciary duty and fraud. The
Companies alleged that AHC willfully performed actions specifically in violation
of the management agreement and that such actions caused damages to the
Companies. Due to the termination of the management agreement for cause, no
termination fee was paid to AHC. Subsequent to the termination of the management
agreement, AHC filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in its domestic state of California. The filing was challenged by the Companies,
and the Bankruptcy Court dismissed AHC's case effective October 15, 1996. In
November 1996, AHC filed with the Virginia District Court an answer in response
to the litigation initiated by the Companies and a counterclaim against ILM
Holding. The counterclaim alleged that the management agreement was wrongfully
terminated for cause and requested damages which included the payment of a
termination fee in the amount of $1,250,000, payment of management fees pursuant
to the contract from August 1, 1996 through October 15, 1996, which is the
earliest date that the management agreement could have been terminated without
cause, and recovery of attorney's fees and expenses.
The aggregate amount of damages against all parties as requested in
AHC's counterclaim exceeded $2,000,000. On June 13, 1997 and July 8, 1997, the
court issued orders to enter judgment against the Company and ILM II in the
amount of $1,000,000. The orders did not contain any findings of fact or
conclusions of law. On July 10, 1997, the Company, ILM II, Lease I and Lease II
filed a notice of appeal to the United States Court of Appeals for the Fourth
Circuit from the orders.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence Cohen,
who, through July 28, 1998 was President, Chief Executive Officer and a Director
of the Company; and others alleging that the defendants intentionally interfered
with AHC's property management agreement (the "California litigation"). The
complaint sought damages of at least $2,000,000. On March 4, 1997, the
defendants removed the case to Federal District Court in the Central District of
California. At a Board meeting on February 26, 1997, the Company's Board of
Directors concluded that since all of Mr. Cohen's actions relating to the
California litigation were taken either on behalf of the Company under the
direction of the Board or as a PaineWebber employee, the Company or its
affiliates should indemnify Mr. Cohen with respect to any expenses arising from
the California litigation, subject to any insurance recoveries for those
expenses. Legal fees paid by Lease I and Lease II on behalf of Mr. Cohen totaled
$229,000 as of August 31, 1999. The Company's Board also concluded that, subject
to certain conditions, the Company or its affiliates should pay reasonable legal
fees and expenses incurred by Capital in the California litigation. As of August
31, 1999, the amount advanced to Capital by Lease I and Lease II for legal fees
totaled approximately $563,000.
On August 18, 1998, the Company and its affiliates along with Capital
and its affiliates entered into a Settlement Agreement with AHC. Lease I and
Lease II agreed to pay $1,625,000 and Capital and its affiliates agreed to pay
$625,000 to AHC in settlement of all claims including those related to the
Virginia litigation and the California litigation. The Company and its
affiliates also entered into an agreement with Capital and its affiliates to
mutually release each other from all claims that any such parties may have
against each other, other than any claims under the property management
agreements. On September 4, 1998, the full settlement amounts were paid to AHC
and its affiliates with Lease I paying $975,000 and Lease II paying $650,000.
OTHER 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 II in the Supreme Court of the State of New York, County of New
York naming the Company, ILM II 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 II, diverting certain of their assets. The
complaint sought compensatory damages in an unspecified amount, punitive
damages, the judicial dissolution of the Company and ILM II, 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 July 8, 1998, the Company and its co-defendants moved to dismiss the
complaint on all counts. On December 8, 1998, the Court granted the Company's
dismissal motion in part but afforded the plaintiffs leave to amend their
complaint. In doing so, the Court accepted the Company's position that all
claims relating to the derivative actions were filed improperly. In addition,
the Court dismissed common law claims for punitive damages, but allowed
plaintiffs to amend their claims to assert claims alleging that the defendants
injured shareholders without injuring the Company as a whole.
On January 22, 1999, the Feldman plaintiffs filed an amended complaint,
again purporting to commence a class action, and adding claims under Section
10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Even before the Company and the Board of Directors
responded to that amended complaint, the Feldman plaintiffs moved for leave to
file a second amended complaint to add claims directed at enjoining the
announced potential merger with Capital Senior Living Corporation and,
alternatively, for compensatory and punitive damages. At a hearing held on March
4, 1999 relating to the motion for leave to file that second amended complaint
and to expedite discovery, the Court granted leave to amend and set a schedule
for discovery leading to a trial (if necessary) in the summer of 1999. On March
9, 1999, the Feldman plaintiffs filed a second amended complaint, which included
claims for injunctive relief and, in the alternative, damages in an unspecified
amount. In response to the Company's motion to dismiss the second amended
complaint, on June 7, 1999 the Court issued an order dismissing the plaintiffs'
federal security claims but denying the motion to dismiss plaintiffs' claims for
breach of fiduciary duty and judicial dissolution, which motion was addressed to
the pleadings and not to the merits of the action.
On June 21, 1999, the Company and its co-defendants answered the second
amended complaint and denied any and all liability and moved for reconsideration
of the portion of the Court's June 7, 1999 order denying their motion to
dismiss. In response to discovery requests, the Company, ILM II and others
produced documents to the plaintiffs and depositions of current and former
directors and others were taken. Discovery was completed as of July 1, 1999.
On July 2, 1999, the parties to this action came to an
agreement-in-principle to settle the action. On August 3, 1999, the parties
entered into a Stipulation of Settlement and on August 11, 1999, the Court
signed an order preliminarily approving the Stipulation and providing for notice
of the Stipulation to the proposed settlement class.
On September 30, 1999, the Court conducted a hearing and on October 4,
1999 issued an order certifying a settlement class and approving the proposed
settlement as fair, reasonable and adequate, subject to the condition that
certain modifications be made to the Stipulation of Settlement and any related
documents filed with the Court on or before October 15, 1999.
On October 15, 1999, the parties entered into a revised 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. In its October 4th order, the Court also
denied the application by plaintiffs' counsel for payment of attorneys' fees and
expenses, without prejudice to renewal within 14 days upon reapplication
therefor. On or about October 14, 1999, plaintiffs' counsel reapplied to the
Court for fees and expenses. A hearing was held November 5, 1999, in which the
Court granted the application for attorney's fees in the amount of $950,000 and
costs in the amount of $182,000. Under the Stipulation, if the proposed merger
is consummated, Capital Senior Living Corporation is responsible for payment of
such attorney's fees and expenses sought under this application, and if the
proposed merger is not consummated and if the Company and ILM II enter into a
transaction having similar effect to the merger with a third party, then the
company and ILM II are responsible for such fees and expenses.
6. CONSTRUCTION LOAN FINANCING
During 1999, the Company secured a construction loan facility with a
major bank that provides the Company with up to $24.5 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 properties. The loan
expires December 31, 2000, with possible extensions through September 29, 2003.
Principal is due at expiration. Interest is payable monthly at a rate equal to
LIBOR plus 1.10% or Prime plus 0.5%. Amounts outstanding under the loan at
August 31, 1999, were approximately $2.1 million. Loan origination fees of
$272,000 were paid in connection with this loan facility and are being amortized
over the term of the loan.
7. SUBSEQUENT EVENT
On September 15, 1999, the Company's Board of Directors declared a
quarterly dividend for the quarter ended August 31, 1999. On October 15, 1999, a
dividend of $0.2125 per share of common stock, totaling $1,598,000, was paid to
the Shareholders of record as of September 30, 1999.
<PAGE>
Schedule III - Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
ILM SENIOR LIVING, INC.
CONSOLIDATED SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1999
(Amounts in thousands)
Costs
Initial Cost of Capitalized Gross Amount at Which Carried
ILM (2) (Removed to At End of Year
Subsequent
to)
Acquisition
of Buildings & Unamor Accu-
Buildings & Building & Buildings & tized mulated
Encum- Improve- Improve- Improve- Mortgage Deprecia-
Description brances(1) Land ments ments(3) Land ments(5) Fees(5) Total tion(5)
----------- ---------- ---- ----- -------- ---- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONGREGATE CARE FACILITIES:
East Lansing,
Michigan $ 8,950 $ 422 $ 9,251 $ (2,881) $ 558 $ 6,138 $ 345 $7,041 $ (2,042)
Winston-Salem,
North Carolina 5,750 520 8,883 (3,881) 337 4,855 336 5,528 (1,938)
Raleigh,
North Carolina 8,350 1,021 10,992 (3,414) 1,378 7,455 429 9,262 (2,210)
Peoria,
Illinois 8,350 524 10,867 (2,831) 492 7,736 408 8,636 (2,173)
Omaha,
Nebraska 8,200 430 8,092 521 1,029 8,315 305 9,649 (2,136)
Wichita,
Kansas 8,350 388 5,381 174 367 5,379 207 5,953 (1,716)
Hot Springs,
Arkansas 5,350 290 3,187 (736) 361 2,339 125 2,825 (781)
Santa Barbara,
California 1,698 387 1,086 (63) 399 928 101 1,428 (421)
------- ------ ------- --------- ------ ------- ------ ------- ---------
$54,998 $3,982 $57,739 $(13,111) $4,921 $43,145 $2,256 $50,322 $(13,417)
======= ====== ======= ========= ====== ======= ====== ======= =========
</TABLE>
<TABLE>
<CAPTION>
Life on Which
Depreciation
in Latest
Income
Accumulated Date of Date Statement
Amortization (5) Construction Acquired is Computer
<S> <C> <C> <C> <C>
East Lansing,
Michigan $ (350) 1989 6/29/89 5-40 yrs.
Winston-Salem, North
Carolina (339) 1989 6/29/89 5-40 yrs.
Raleigh, North
Carolina (412) 1991 4/29/91 5-40 yrs.
Peoria, Illinois (389) 1990 11/30/90 5-40 yrs.
Omaha, Nebraska (292) 1985 2/14/90 5-40 yrs.
Wichita, Kansas (198) 1985 2/14/90 5-40 yrs.
Hot Springs, Arkansas (111) 1987 12/14/90 5-40 yrs.
Santa Barbara,
California (72) 1979 7/13/92 5-40 yrs.
-------
$(2,163)
========
</TABLE>
[FN]
(1) Encumbrances represent first mortgage loans between ILM Holding as
mortgagor and the Company as mortgagee. Such loans are eliminated in
consolidation in the accompanying Consolidated Financial Statements (see
Note 4).
(2) Initial cost to the Company represents the aggregate advances made by the
Company on the loans secured by the Facilities which were made to AHC prior
to the default and foreclosure actions described in Notes 1 and 4 to the
Consolidated Financial Statements and costs incurred relating to
capitalized interest.
(3) Costs removed subsequent to acquisition reflect the guaranty payments
received by the Company from AHC under the terms on the Exclusivity
Agreement as discussed further in Notes 1 and 4 to the Consolidated
Financial Statements.
(4) The aggregate cost of real estate owned at August 31, 1999 for Federal
income tax purposes is approximately $57,621,000.
(5) Certain numbers have been reclassified to conform to the current year's
presentation.
</FN>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
(5) Reconciliation of real estate owned:
Balance at beginning of period $50,138 $49,143 $48,610
Acquisitions and improvements - year ended 8/31/99 184 -- --
Acquisitions and improvements - year ended 8/31/98 -- 995 --
Acquisitions and improvements - year ended 8/31/97 -- -- 533
------- ------- -------
Balance at end of period $50,322 $50,138 $49,143
======= ======= =======
(6) Reconciliation of accumulated depreciation and amortization:
Balance at beginning of period $14,069 $12,556 $11,048
Depreciation and amortization expense - year ended 8/31/99 1,511 -- --
Depreciation and amortization expense - year ended 8/31/98 -- 1,513 --
Depreciation and amortization expense - year ended 8/31/97 -- -- 1,508
------- -------- -------
Balance at end of period $15,580 $14,069 $12,556
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
BALANCE SHEETS
May 31, 2000 (Unaudited) and August 31, 1999
(Dollars in thousands, except per share data)
ASSETS
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,632 $1,066
Accounts receivable, net 245 102
Tax refund receivable 1 1
Prepaid expenses and other assets 266 278
------- ------
Total current assets 2,144 1,447
Furniture, fixtures and equipment 1,548 1,299
Less: accumulated depreciation (1,522) (943)
------- ------
26 356
Deferred tax asset, net 92 92
------- -------
$ 2,262 $ 1,895
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 1,051 $ 862
Real estate taxes payable 489 190
Accounts payable - related party 318 311
Security deposits 8 7
------- -------
Total current liabilities 1,866 1,370
Deferred rent payable -- 12
------- -------
Total liabilities 1,866 1,382
Contingencies
Shareholders' equity:
Common stock, $0.01 par value,
20,000,00 shares authorized
7,519,430 issued and outstanding 75 75
Additional paid-in capital 625 625
Accumulated deficit (304) (187)
------- -------
Total shareholders' equity 396 513
$ 2,262 $ 1,895
======= =======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
STATEMENTS OF OPERATIONS
For the nine and three months ended May
31, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
NINE MONTHS THREE MONTHS
ENDED ENDED
MAY 31 MAY 31
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental and other income $ 15,069 $ 14,895 $ 5,033 $4,987
Interest income 12 12 5 4
-------- -------- ------ ------
5,081 14,907 5,038 4,991
EXPENSES
Master lease rent expense 5,690 5,605 1,905 1,877
Dietary and food service salaries, wages and expenses 2,799 2,743 930 937
Administrative salaries, wages and expenses 1,195 1,042 428 372
Marketing salaries, wages and expenses 720 682 238 225
Utilities 612 607 198 194
Repairs and maintenance 511 520 178 169
Real estate taxes 632 623 210 210
Property management fees 776 778 230 241
Other property operating expenses 1,145 1,131 385 380
General and administrative 262 228 75 87
Directors compensation 46 39 14 12
Professional fees 231 291 37 116
Depreciation expense 579 320 97 114
-------- -------- ------ ------
15,198 14,609 4,925 4,934
-------- -------- ------ ------
Income (loss) before taxes (117) 298 113 57
Income tax expense (benefit):
Current -- -- -- --
Deferred -- 120 -- 24
-------- -------- ------ ------
-- 120 -- 24
-------- -------- ------ ------
NET (LOSS) INCOME $ (117) $ 178 $ 113 $ 33
======== ======== ======= ======
Basic (loss) earnings per share of common stock $ (0.02) $ 0.02 $(0.02) $ 0.00
======== ======== ======= ======
</TABLE>
The above (loss) earnings per share of common stock is based upon the
7,519,430 shares outstanding for each period.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For nine months ended May 31, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
COMMON STOCK ADDITIONAL RETAINED
$.01 PAR VALUE PAID-IN EARNINGS
-------------- CAPITAL (DEFICIT) TOTAL
SHARES AMOUNT ------- -------- -----
------ ------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1998 7,519,430 $ 75 $ 625 $ (307) $ 393
Net income -- -- -- 178 178
--------- ------- --------- ---------- -------
Balance at May 31, 1999 7,519,430 $ 75 $ 625 $ (129) $ 571
========= ======= ========= ========== =======
Balance at August 31, 1999 7,519,430 $ 75 $ 625 $ (187) $ 513
Net loss -- -- -- (117) (117)
--------- ------- --------- ---------- -------
Balance at May 31, 2000 7,519,430 $ 75 $ 625 $ (304) $ 396
========= ======= ========= ========== =======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2000 and 1999 (Unaudited)
(Dollars in thousands)
NINE MONTHS ENDED
MAY 31
------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (117) $ 178
Adjustments to reconcile net (loss) income to net cash
Provided by (used in) operating activities:
Depreciation expense 579 320
Deferred tax expense (benefit), net -- 120
Changes in assets and liabilities:
Accounts receivable, net (143) (74)
Tax refund receivable -- 144
Prepaid expenses and other assets 12 (7)
Accounts payable and accrued expenses 189 (222)
Accounts payable - related party 7 (41)
Termination fee payable -- (975)
Real estate taxes payable 299 143
Deferred rent payable (12) (27)
Security deposits 1 (1)
------- -------
Net cash provided by (used in) operating activities 815 (442)
------- -------
Cash flows from investing activities:
Additions to operating investment properties (249) (198)
------- -------
Net cash used in investing activities (249) (198)
------- -------
Net increase (decrease) in cash and cash equivalents 566 (640)
Cash and cash equivalents, beginning of period
1,066 1,897
------- -------
Cash and cash equivalents, end of period $ 1,632 $ 1,257
======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for state income taxes $ 13 $ 4
======= =======
</TABLE>
See accompanying notes.
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
1. GENERAL
The accompanying financial statements, footnotes and discussions should
be read in conjunction with the financial statements and footnotes contained in
ILM I Lease Corporation's (the "Company") Annual Report on Form 10-K for the
year ended August 31, 1999. In the opinion of management, the accompanying
interim 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 financial
statements are of a normal recurring nature.
The accompanying 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 May 31,
2000, and revenues and expenses for each of the nine- and three-month periods
ended May 31, 2000 and 1999. Actual results may 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 nine- and three-month periods ended May 31, 2000,
are not necessarily indicative of the results to be expected for the year ending
August 31, 2000.
The Company was incorporated on September 12, 1994 under the laws of
the State of Virginia by ILM Senior Living, Inc., a Virginia finite-life
corporation ("ILM I"), formerly PaineWebber Independent Living Mortgage Fund,
Inc., to operate eight rental housing projects that provide independent-living
and assisted-living services for independent senior citizens ("the Senior
Housing Facilities") under a facilities lease agreement dated September 1, 1995
(the "Facilities Lease Agreement"), between the Company, as lessee, and ILM
Holding, Inc. ("ILM Holding"), as lessor, and a direct subsidiary of ILM I. The
Company's sole business is the operation of the Senior Housing Facilities.
ILM I made mortgage loans to Angeles Housing Concepts, Inc. ("AHC")
secured by the Senior Housing Facilities between June 1989 and July 1992. In
March 1993, AHC defaulted under the terms of such mortgage loans and in
connection with the settlement of such default, title to the Senior Housing
Facilities was transferred, effective April 1, 1994, to certain indirect
subsidiaries of ILM I, subject to the mortgage loans. Subsequently, these
property-owning subsidiaries were merged into ILM Holding. As part of the fiscal
1994 settlement agreement with AHC, AHC was retained as the property manager for
all of the Senior Housing Facilities pursuant to the terms of a management
agreement, which was assigned to the Company as of September 1, 1995 and
subsequently terminated in July 1996. ILM I is a public company subject to the
reporting obligations of the Securities and Exchange Commission.
In July 1996, following termination of the property management
agreement with AHC, the Company entered into a property management agreement
(the "Management Agreement") with Capital Senior Management 2, Inc. ("Capital")
to handle the day-to-day operations of the Senior Housing Facilities. Lawrence
A. Cohen, who served through July 28, 1998 as a Director of the Company and
President, Chief Executive Officer and Director of ILM I, has also served in
various management capacities at Capital Senior Living Corporation, an affiliate
of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of
Capital Senior Living Corporation. As a result, the Management Agreement with
Capital was considered a related party transaction (see Note 3) through July 28,
1998.
AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION
On February 7, 1999, ILM I entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999, with Capital Senior
Living Corporation ("CSLC"), the corporate parent of Capital, and certain
affiliates of Capital. On April 18, 2000, ILM I entered into a First Amendment
to the Amended and Restated Agreement and Plan of Merger dated October 19, 1999.
At a special meeting of Shareholders on June 22, 2000, holders of more
than two-thirds of the outstanding shares of ILM'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. Subject to the
satisfaction of certain conditions, consummation of the merger is expected to
occur on or about July 31, 2000. The agreement presently provides that it may be
terminated if the merger is not consummated by September 30, 2000.
The Facilities Lease Agreement was extended on a month-to-month basis
as of December 31, 1999, beyond its original expiration date of December 31,
1999, and may be terminated at the election of ILM Holding upon sale of ILM
Holding's senior living communities to a non-affiliated third party.
In connection with the merger, on June 2, 2000, the Company received
notice from ILM Holding indicating that the Facilities Lease Agreement would
terminate on the date of consummation of the pending merger of ILM I and
Capital. Subject to the satisfaction of certain conditions and the receipt of
requisite approvals, consummation of the merger is expected to occur on or about
July 31, 2000. There can be no assurance as to whether the merger will be
consummated or, if consummated, as to the timing thereof.
If the merger is consummated, the Company's operations would not be
expected to continue beyond the termination of the Facilities Lease Agreement.
Additionally, upon such termination, it is currently expected that the Company
would have nominal value after payment of expenses and other costs, and the
Board accordingly would review the Company's status and continued existence. The
Company plans to adopt a liquidation basis of accounting if the Facilities Lease
Agreement is terminated. At present, it is expected that liquidation would be
completed by the end of Calendar Year 2000. 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.
2. THE FACILITIES LEASE AGREEMENT
ILM Holding (the "Lessor") leases the Senior Housing Facilities to the
Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such lease
was extended on a month-to-month basis as of December 31, 1999, beyond its
original expiration date of December 31, 1999. Accordingly, it is terminable
upon 30 days' notice to the Company. As noted above, ILM I has entered into an
agreement and plan of merger with Capital Senior Living Corporation and certain
affiliates of Capital, and has agreed to cause ILM Holding to cancel and
terminate the Facilities Lease Agreement on the date of consummation of the
pending merger of ILM I and Capital. The lease is accounted for as an operating
lease in the Company's financial statements.
Descriptions of the properties covered by the Facilities Lease
Agreement between the Company and ILM Holding are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR
FACILITY RENTABLE RESIDENT
NAME LOCATION BUILT UNITS (2) CAPACITIES (2)
---- -------- ----- --------- --------------
Independence Village of East
Lansing East Lansing, MI 1989 161 162
Independence Village of
Winston-Salem Winston-Salem, NC 1989 159 161
Independence Village of
Raleigh Raleigh, NC 1991 164 205
Independence Village of
Peoria Peoria, IL 1990 166 183
Crown Point Apartments Omaha, NE 1984 135 163
Sedgwick Plaza Apartments Wichita, KS 1984 150 170
West Shores Hot Springs, AR 1986 136 166
Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
</TABLE>
[FN]
(1) The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM II Lease Corporation ("Lease II"). The
Company has entered into an agreement with Lease II regarding such joint
tenancy. Lease II was formed for similar purposes as the Company by an
affiliated company, ILM II Senior Living, Inc. ("ILM II"), a subsidiary of
which owns a portion of the Villa Santa Barbara property. The portion of
the Senior Housing Facility leased by the Company represents 25% of the
total project. Villa Santa Barbara is 25% owned by ILM Holding and 75% by
ILM II Holding, Inc., a direct subsidiary of ILM II, as tenants in common.
Upon the sale of ILM I or ILM II, arrangements would be made to transfer
the Santa Barbara facility to the selling joint tenant (or one of its
subsidiaries). The property was extensively renovated in 1995.
(2) 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.
</FN>
Pursuant to the Facilities Lease Agreement, the Company pays annual
base rent for the use of the Senior Housing Facilities in the aggregate amount
of $6,364,800. 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 Holding, as Lessor, is responsible for all
major capital improvements and structural repairs to the Senior Housing
Facilities. Also, any fixed assets of the Company at a Senior Housing Facility
would remain with the Senior Housing Facility at the termination of the lease.
The Company also pays variable rent, on a quarterly basis, for each facility in
an amount equal to 40% of the excess of aggregate total revenues for the Senior
Housing Facilities, on an annualized basis, over $16,996,000. Variable rent was
$929,000 and $313,000 for the nine- and three-month periods ended May 31, 2000,
respectively, compared to $859,000 and $295,000 for the nine- and three- month
periods ended May 31, 1999, respectively.
The Company's use of the properties is limited to use as Senior Housing
Facilities. The Company has responsibility to obtain and maintain all licenses,
certificates and consents needed to use and operate each Senior Housing
Facility, and to use and maintain each Senior Housing Facility in compliance
with all local board of health and other applicable governmental and insurance
regulations. The Senior Housing Facilities located in Arkansas, California and
Kansas are licensed by such states to provide assisted living services. In
addition, various health and safety regulations and standards, which are
enforced by state and local authorities, apply to the operation of all the
Senior Housing Facilities. Violations of such health and safety standards could
result in fines, penalties, closure of a Senior Housing Facility, or other
sanctions.
3. RELATED PARTY TRANSACTIONS
The Company retained Capital to be the property manager of the Senior
Housing Facilities pursuant to the Management Agreement which commenced on July
29, 1996. Lawrence A. Cohen, who served through July 28, 1998 as a Director of
the Company and President, Chief Executive Officer and Director of ILM I, has
also served in various management capacities at Capital Senior Living
Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as
Chief Executive Officer of Capital Senior Living Corporation. The Management
Agreement is co-terminous with the Facilities Lease Agreement. Because the
Facilities Lease Agreement was extended beyond December 31, 1999 on a
month-to-month basis, the scheduled expiration date of the Management Agreement
has been extended on a month-to-month basis as well, but not beyond July 29,
2001. 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. Under the terms of the Management Agreement, Capital earns a base
management fee equal to 4% of the gross operating revenues of the Senior Housing
Facilities, as defined. Capital also earns an incentive management fee equal to
25% of the amount by which the "net cash flow" of the Senior Housing Facilities,
as defined, exceeds a specified base amount. Each August 31, the base amount is
increased based on the percentage increase in the Consumer Price Index as well
as 15% of Senior Housing Facility expansion costs. ILM I has guaranteed the
payment of all fees due to Capital under the terms of the Management Agreement.
For the nine- and three-month periods ended May 31, 2000, Capital earned
property management fees from the Company of $776,000 and $230,000,
respectively, compared to $778,000 and $241,000 for the nine- and three-month
periods ended May 31, 1999, respectively.
On September 18, 1997, the Company entered into an agreement with
Capital Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansions of several of the Senior
Housing Facilities. Capital Senior Development, Inc. would receive a fee equal
to 7% of the total development costs of these expansions if they are pursued.
ILM Holding would also reimburse the Company for all costs related to these
potential expansions including fees to Capital Senior Development, Inc. For the
nine- and three-month periods ended May 31, 2000 and 1999, Capital Senior
Development, Inc. earned no fees from the Company for managing pre-construction
development activities for potential expansions of the Senior Housing
Facilities.
Jeffry R. Dwyer, Secretary, President and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the nine- and three-month periods ended May 31, 2000 Greenberg
Traurig earned fees from the Company of $22,000 and $2,000, respectively. For
the nine- and three-month periods ended May 31, 1999, Greenberg Traurig earned
fees from the Company of $32,000 and $0, respectively.
Accounts payable - related party at May 31, 2000 includes $313,000 for
variable rent payable to ILM Holding; $4,000 in minor reimbursements due to
related parties and $1,000 for accrued legal fees due to Greenberg Traurig,
Counsel to the Company and a related party. Accounts payable - related party at
August 31, 1999 includes $305,000 for variable rent payable to ILM Holding and
$6,000 for accrued legal fees due to Greenberg Traurig, Counsel to the Company
and its affiliates and a related party.
4. LEGAL PROCEEDINGS AND CONTINGENCIES
The Company has pending claims incurred in the normal course of
business which, in the opinion of the Company's Board of Directors, will not
have a material effect on the financial statements of the Company.
5. CONSTRUCTION LOAN FINANCING
ILM I and the Company have secured a construction loan facility with a
major bank that will provide ILM I with up to $24.5 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 properties. The loan has a three-year
term with interest accruing at a rate equal to LIBOR plus 1.10% or prime plus
0.5%. The loan term can be extended for an additional two years beyond its
maturity date with monthly payments of principal and interest on a 25-year
amortization schedule. Loan origination costs in connection with this loan
facility are being amortized by ILM I over the life of the loan.
On June 7, 1999, ILM I borrowed $2,093,000 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, leaving
approximately $22.4 million unused and available. The Company is a co-borrower
on the construction loan.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts Payable and Accrued Expenses at May 31, 2000, includes the
following:
Accounts Payable $ 714
Accrued Expenses 337
-------
Total $1,051
======
7. SUBSEQUENT EVENT
On June 2, 2000, ILM I caused Holding I to notify the Company that the
Facilities Lease Agreement would terminate on the date of consummation of the
pending merger of the Company with CSLC. Subject to the satisfaction of certain
conditions and the receipt of requisite approvals, consummation of the merger is
expected to occur on or about July 30, 2000. 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.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders of
ILM I Lease Corporation:
We have audited the accompanying balance sheets of ILM I Lease
Corporation as of August 31, 1999 and 1998, and the related statements of
operations, changes in shareholders' equity, and cash flows for each of the
three years in the period ended August 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ILM I Lease
Corporation at August 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended August 31, 1999,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
October 22, 1999
except for Note 1, as to which the date is
November 16, 1999
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
BALANCE SHEETS
August 31, 1999 and 1998
(Dollars in thousands, except per share data)
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $1,066 $1,897
Accounts receivable, net 102 56
Tax refunds receivable 1 145
Prepaid expenses and other assets 278 127
------ ------
Total current assets 1,447 2,225
Furniture, fixtures and equipment 1,29 999
Less: accumulated depreciation (943) (390)
------ ------
356 609
Deferred tax asset, net 92 364
------ ------
$1,895 $3,198
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 868 $1,123
Termination fee payable - 975
Real estate taxes payable 190 213
Accounts payable - related party 305 438
Security deposits 7 7
- -
Total current liabilities 1,370 2,756
Deferred rent payable 12 49
------ ------
Total liabilities 1,382 2,805
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,519,430 shares issued and outstanding 75 75
Additional paid-in capital 625 625
Accumulated deficit (187) (307)
------ ------
Total shareholders' equity 513 393
------ ------
$1,895 $3,198
====== ======
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
STATEMENTS OF OPERATIONS
For the years ended August 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
REVENUES:
Rental and other income $19,907 $19,232 $18,049
Interest income 16 62 72
------- ------- -------
19,923 19,294 18,121
EXPENSES:
Facilities lease rent expense 7,492 7,222 6,643
Dietary and food service salaries, wages and expenses 3,664 3,566 3,431
Administrative salaries, wages and expenses 1,420 1,218 1,277
Marketing salaries, wages and expenses 931 856 883
Utilities 839 834 850
Repairs and maintenance 732 661 666
Real estate taxes 836 827 816
Property management fees 1,008 919 841
Other property operating expenses 1,507 1,486 1,574
General and administrative 222 264 66
Directors compensation 52 81 31
Professional fees 273 1,123 778
Termination fee expense -- 375 600
Advisory fees -- -- 70
Depreciation expense 553 297 74
------ ------ ------
19,530 19,729 18,600
------ ------ ------
Income (loss) before income taxes 393 (435) (479)
Income tax expense (benefit):
Current -- -- 92
Deferred 273 (54) (284)
------ ------ ------
273 (54) (192)
------ ------ ------
NET INCOME (LOSS) $ 120 $ (381) $ (287)
====== ======= =======
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ 0.01 $(0.05) $(0.04)
====== ======= =======
</TABLE>
The above net income (loss) per share of common stock is based upon the
weighted average number of shares outstanding for the years ended August
31, 1999, 1998 and 1997 of 7,519,430.
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended August 31, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
COMMON STOCK ADDITIONAL RETAINED
$.01 PAR VALUE PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1996 $7,519,430 $ 75 $ 625 $ 361 $ 1,061
Net loss
-- -- -- (287) (287)
---------- ------ -------- -------- --------
BALANCE AT AUGUST 31, 1997 7,519,430 75 625 74 774
Net loss
-- -- -- (381) (381)
---------- ------ -------- -------- --------
BALANCE AT AUGUST 31, 1998 7,519,430 75 625 (307) 393
Net income
-- -- -- 120 120
--------- ------ -------- -------- --------
BALANCE AT AUGUST 31, 1999 7,519,430 $ 75 $ 625 $ (187) $ 513
========= ====== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 120 $(381) $(287)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation expense 553 297 74
Deferred tax benefit, net 272 (54) (284)
Changes in assets and liabilities:
Accounts receivable - related party -- 93 --
Accounts receivable, net (46) (56) 77
Tax refund receivable 144 (145) --
Prepaid expenses and other assets (151) 132 8
Accounts payable and accrued expenses (255) 241 19
Accounts payable - related party (133) 322 (422)
Termination fee payable (975) 375 600
Real estate taxes payable (23) 43 (130)
Security deposits -- 2 --
Deferred rent payable (37) (37) (37)
------ ------ ------
Net cash (used in) provided by operating activities (531) 832 (382)
------ ------ ------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (300) (408) (330)
------ ------ ------
Net cash used in investing activities (300) (408) (330)
Net (decrease) increase in cash and cash equivalents (831) 424 (712)
Cash and cash equivalents, beginning of period 1,897 1,473 2,185
------ ------- -------
Cash and cash equivalents, end of period $1,066 $ 1,897 $ 1,473
====== ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for income taxes $ 126 $ 201 $ 181
====== ======= =======
</TABLE>
See accompanying notes.
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements
1. ORGANIZATION, RESTRUCTURING, AND NATURE OF OPERATIONS
ILM I Lease Corporation ("the Company") was organized as a corporation
on September 12, 1994 under the laws of the state of Virginia. Through August
31, 1995, the Company had no significant operations. The Company was formed by
ILM Senior Living, Inc. ("ILM I"), formerly PaineWebber Independent Mortgage
Fund, Inc., to operate eight rental housing projects that provide independent
living and assisted living services for independent senior citizens ("the Senior
Housing Facilities") under a Facilities Lease Agreement. ILM I initially made
mortgage loans to Angeles Housing Concepts, Inc. ("AHC") secured by the Senior
Housing Facilities between June 1989 and July 1992. In March 1993, AHC defaulted
under the terms of such mortgage loans and in connection with the settlement of
such default, title to the Senior Housing Facilities was transferred, effective
April 1, 1994, to certain majority-owned, indirect subsidiaries of ILM I,
subject to the mortgage loans. Subsequently, the indirect subsidiaries of LM I
were merged into ILM Holding, Inc. ("ILM Holding"). As part of the fiscal 1994
Settlement Agreement with AHC, AHC was retained as the property manager for all
of the Senior Housing Facilities pursuant to the terms of a management agreement
which was assigned to the Company as of September 1, 1995. As discussed further
in Note 6, the management agreement with AHC was terminated in July 1996.
ILM I has elected to qualify and be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986, as amended ("the Code"),
for each taxable year of operations. In order to maintain its status as a REIT,
75% of ILM I's annual gross income must be Qualified Rental Income as defined by
the Code. The rent paid by the residents of the Senior Housing Facilities likely
would not be deemed to be Qualified Rental Income because of the extent of
services provided to residents. Consequently, the operation of the Senior
Housing Facilities by ILM I or its subsidiaries over an extended period of time
could adversely affect ILM I's status as a REIT. Therefore, ILM I formed the
Company to operate the Senior Housing Facilities, and by means of a
distribution, transferred the ownership of the common stock of the Company to
the holders of ILM I common stock on September 1, 1995 (see Note 4). Because the
Company, which is taxed as a so-called "C" corporation, is no longer a
subsidiary of ILM I, it can receive service-related income without endangering
the REIT status of ILM I.
The Company's sole business is the operations of the Senior Housing
Facilities. The Company leases the Senior Housing Facilities from ILM Holding,
which is now a subsidiary of ILM I that holds title to the Senior Housing
Facilities, pursuant to a Facilities Lease Agreement. Such lease was extended on
a month-to-month basis on November 16, 1999 beyond its original expiration date
of December 31, 1999. ILM I has entered into an agreement and plan of merger
with Capital Senior Living Corporation and certain affiliates of Capital, and
has agreed to cause ILM Holding to cancel and terminate the Facilities Lease
Agreement immediately prior to the effective time of the merger. While there can
be no assurance, consummation of the merger is presently anticipated in the
first quarter of calendar year 2000. The lease is accounted for as an operating
lease in the Company's financial statements.
In July 1996, following the termination of the property management
agreement with AHC, the Company entered into a property management agreement
(the "Management Agreement") with Capital Senior Management 2, Inc. ("Capital")
to handle the day-to-day operations of the Senior Housing Facilities. Lawrence
A. Cohen, who served through July 28, 1998 as a Director of the Company and
President, Chief Executive Officer and Director of ILM I, has also served in
various management capacities at Capital Senior Living Corporation, an affiliate
of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer
and Acting Chief Financial Officer of Capital Senior Living Corporation. As a
result, the Management Agreement with Capital was considered a related party
transaction through July 28, 1998 (see Note 3.).
On February 7, 1999, ILM I entered into an agreement and plan of merger
with Capital Senior Living Corporation, the corporate parent of Capital, and
certain affiliates of Capital. Although there can be no assurance as to whether
the merger will be consummated or, if consummated, as to the timing thereof, the
Company's operations would not be expected to continue beyond the effective time
of the merger.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1999 and 1998 and revenues and expenses for the
years ended August 31, 1999, 1998 and 1997. Actual results could differ from the
estimates and assumptions used. Certain amounts reported in 1998 have been
reclassified to conform to the 1999 presentation.
Furniture, fixtures and equipment are carried at the lower of cost,
reduced by accumulated depreciation, or fair value in accordance with FAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets To Be Disposed Of." Depreciation expense was provided on a straight-line
basis using an estimated useful life of 3 to 5 years. In 1998, the Company
changed the estimated useful lives of its assets the lease termination date of
December 31, 1999, as such assets are not subject to repurchase by ILM Holding.
For the fiscal year ended August 31, 1998, this increased depreciation expense
by $136,000.
Units at the Senior Housing Facilities are generally rented for terms
of twelve months or less. The base rent charged varies depending on the unit
size, with added fees collected for more than one occupant per unit and for
assisted living services. Included in the amount of base rent charged are
certain meals, housekeeping, medical and social services provided to the
residents of each Senior Housing Facility. The Company rents the Senior Housing
Facilities from ILM Holding pursuant to a multi-year operating lease. Rent
expense is recognized on a straight-line basis over the term of the lease
agreement. Deferred rent payable represents the difference between rent expense
recognized on a straight-line basis and cash paid for rent pursuant to the terms
of the lease agreement.
The Company's policy is to expense all advertising costs as incurred.
For the years ended August 31, 1999, 1998 and 1997, advertising expenses were
$931,000, $856,000 and $883,000, respectively.
The cash and cash equivalents, receivables, accounts payable and
accrued liabilities appearing on the accompanying balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments." The
carrying amount of these assets and liabilities approximates their fair value as
of August 31, 1999 due to the short-term nature of these instruments.
Income tax expense is provided for using the liability method as
prescribed by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The Company has provided a valuation allowance to recognize
the effect that the lease termination date may have on the estimated net
realizable value of the deferred tax asset as explained more fully in Note 7 to
the accompanying financial statements. At August 31, 1999 and 1998, a valuation
allowance for deferred taxes of $235,000 and $120,000, respectively, is included
in deferred taxes, net, on the accompanying balance sheet.
For purposes of reporting cash flows, cash and cash equivalents include
all highly liquid investments with original maturities of 90 days or less.
2. RELATED PARTY TRANSACTIONS
The Company entered into an advisory agreement (the "Advisory
Agreement") with PaineWebber Lease Advisor, L.P. For discussion purposes,
PaineWebber Lease Advisor, L.P. and all affiliates of PaineWebber will be
collectively referred to as PaineWebber ("PaineWebber"). PaineWebber served in
this capacity through June 18, 1997. Subject to the supervision of and pursuant
to the general policies set by the Company's Board of Directors, assistance in
the managing of the business of the Company was provided by PaineWebber. Under
the Advisory Agreement, the Company engaged PaineWebber and PaineWebber agreed
to use its best efforts to manage the day-to-day affairs and operations of the
Company and to provide administrative services and facilities appropriate for
such management. The specific duties of PaineWebber under the Advisory Agreement
included recommending selections of providers of professional and specialized
services and handling other managerial functions with respect to the Senior
Housing Facilities. PaineWebber was also obligated to provide office and
clerical facilities adequate for the Company's operations and to provide, or
obtain others to provide, accounting, custodial, funds collection and payment,
stockholder communications, legal and other services necessary in connection
with the Company's operations. The Advisory Agreement also obligated PaineWebber
to handle or arrange for the handling of the Company's financial and other
records.
PaineWebber received a base fee in an amount equal to 0.5% of the gross
operating revenues of the Senior Housing Facilities operated by the Company as
compensation for its services. For the years ended August 31, 1999, 1998 and
1997, this fee amounted to $0, $0 and $70,000, respectively. In addition,
PaineWebber was entitled to reimbursement for expenses incurred in providing
certain financial, accounting and investor communication services to the
Company. Included in general and administrative expenses for the year ended
August 31, 1998, 1997 and 1996 was $0, $0 and $80,000, respectively,
representing reimbursements to PaineWebber for providing such services to the
Company. In performing its services under the Advisory Agreement, PaineWebber
was required to pay certain employment expenses of its personnel, certain
expenses of employees and agents of PaineWebber and of Directors, officers and
employees of the Company who are also employees of PaineWebber, and certain of
its overhead and miscellaneous administrative expenses relating to performance
of its functions under the Advisory Agreement. The Company was responsible for
reimbursing out-of-pocket expenses of Directors, Officers and employees of the
Company incurred by them exclusively in such capacity and for all other costs of
its operations.
The Company retained Capital to be the property manager of the Senior
Housing Facilities pursuant to a Management Agreement which commenced on July
29, 1996. As discussed in Note 1, Lawrence A. Cohen, who served through July 28,
1998 as a Director of the Company and President, Chief Executive Officer and
Director of ILM I, has also served in various management capacities at Capital
Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen
currently serves as Chief Executive Officer of Capital Senior Living
Corporation. Under the Management Agreement, Capital generally is required to
perform all operational functions necessary to operate the Senior Housing
Facilities other than certain administrative functions. The functions performed
by Capital include periodic reporting to and coordination with the Company,
leasing the individual units in the Senior Housing Facilities, maintaining bank
accounts, maintaining books and records, advertising and marketing the Senior
Housing Facilities, hiring and supervising on-site personnel, and performing
maintenance. Under the terms of the Management Agreement, Capital earns a base
management fee equal to 4% of the gross operating revenues of the Senior Housing
Facilities, as defined. Capital also earns an incentive management fee equal to
25% of the amount by which the net cash flow of the Senior Housing Facilities,
as defined, exceeds a specified base amount. Each August 31, beginning on August
31, 1997, the base amount is increased based on the percentage increase in the
Consumer Price Index as well as 15% of Facility expansion costs. ILM I has
guaranteed the payment of all fees due to the terms of the Management Agreement.
For the years ended August 31, 1999 and 1998, Capital earned property management
fees from the Company of $1,008,000 and $919,000, respectively.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence A.
Cohen, who, through July 28, 1998 was a Director of the Company and President,
Chief Executive Officer and Director of ILM I, and others alleging that the
defendants intentionally interfered with AHC's property management agreement
(the "California litigation"). The complaint sought damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to Federal
District Court in the Central District of California. At a Board meeting on
February 26, 1997, the Company's Board of Directors concluded that since all of
Mr. Cohen's actions relating to the California litigation were taken either on
behalf of the Company under the direction of the Board or as a PaineWebber
employee, the Company or its affiliates should indemnify Mr. Cohen with respect
to any expenses arising from the California litigation, subject to any insurance
recoveries for those expenses. Legal fees paid by the Company and Lease II on
behalf of Mr. Cohen totaled $229,000 as of August 31, 1999. The Company's Board
also concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by Capital in
the California litigation. At August 31, 1999, the amount advanced to Capital by
the Company and Lease II for Capital's California litigation costs totaled
approximately $563,000.
On September 18, 1997, the Company 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. ILM Holding
will reimburse the Company for all costs related to these potential expansions
including fees to Capital Senior Development, Inc. For the years ended August
31, 1999 and 1998, Capital Senior Development, Inc. earned fees from the Company
of $41,000 and $212,000, respectively, for managing pre-construction development
activities for potential expansions of the Senior Housing Facilities.
Jeffry R. Dwyer, President, Secretary and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the years ended August 31, 1999 and 1998, Greenberg Traurig
earned fees from the Company of $64,000 and $168,000, respectively.
Accounts payable - related party at August 31, 1999 and 1998 includes
variable rent payable to ILM Holding of $305,000 and $243,000, respectively, and
expense reimbursements payable to Lease II in the amounts of $0 and $102,000,
respectively.
3. CAPITAL STOCK
Prior to September 1, 1995, the Company was a wholly-owned subsidiary
of ILM I. Pursuant to a reorganization and distribution agreement, ILM I
capitalized the Company with $700,000, an amount estimated to provide the
Company with necessary working capital. On September 1, 1995, MAVRICC Management
Systems, Inc., as the distribution agent, caused to be issued on the stock
records of the Company the distributed Common Stock of the Company, in
uncertificated form, to the holders of record of ILM I Common Stock at the close
of business on July 14, 1995. One share of the Company's Common Stock was
distributed for each outstanding share of ILM I Common Stock. No certificates or
scrip representing fractional shares of the Company's Common Stock were issued
to holders of ILM I Common Stock as part of the distribution. In lieu of
receiving fractional shares, each holder of ILM I Common Stock who would
otherwise have been entitled to receive a fractional share of the Company's
Common Stock received a cash payment equivalent to $0.15 per share for such
fractional interest.
4. THE FACILITIES LEASE AGREEMENT
ILM Holding (the "Lessor"), a majority-owned subsidiary of ILM I,
leases the Senior Housing Facilities to the Company (the "Lessee"), pursuant to
a Facilities Lease Agreement. Such lease was extended on a month-to-month basis
on November 16, 1999 beyond its original expiration date of December 31, 1999.
ILM I has entered into an agreement and plan of merger with Capital Senior
Living Corporation and certain affiliates of Capital, and has agreed to cause
ILM Holding to cancel and terminate the Facilities Lease Agreement immediately
prior to the effective time of the merger. While there can be no assurance,
consummation of the merger is presently anticipated in the first quarter of
calendar year 2000. The lease is accounted for as an operating lease in the
Company's financial statements.
Descriptions of the properties covered by the Facilities Lease
Agreement between the Company and ILM Holding are summarized as follows:
<TABLE>
<CAPTION>
YEAR
FACILITY RENTABLE RESIDENT
NAME LOCATION BUILT UNITS (2) CAPACITY (2)
---- -------- ----- --------- ------------
<S> <C> <C> <C> <C>
Independence Village of East Lansing, MI 1989 161 162
East Lansing
Independence Village of Winston-Salem, NC 1989 159 161
Winston-Salem
Independence Village of Raleigh, NC 1991 164 205
Raleigh
Independence Village of Peoria, IL 1990 165 181
Peoria
Crown Pointe Apartments Omaha, NE 1984 135 163
Sedgwick Plaza Apartments Wichita, KS 1984 150 170
West Shores Hot Springs, AR 1986 136 166
Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
</TABLE>
[FN]
(1) The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM II Lease Corporation ("Lease II"). The
Company has entered into an agreement with Lease II regarding such
joint tenancy. Lease II was formed for similar purposes as the Company
by an affiliated company, ILM II Senior Living, Inc. ("ILM II"), a
subsidiary of which owns a portion of the Villa Santa Barbara property.
The portion of the Senior Housing Facility leased by the Company
represents 25% of the total project. Villa Santa Barbara is 25% owned
by ILM Holding and 75% by ILM II Holding, Inc., a direct subsidiary of
ILM II, as tenants in common. Upon the sale of ILM I or ILM II,
arrangements would be made to transfer the Santa Barbara facility to
the non-selling joint tenant (or one of its subsidiaries). The property
was extensively renovated in 1995.
(2) 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.
</FN>
Pursuant to the Facilities Lease Agreement, the Company pays annual
base rent for the use of the Senior Housing Facilities in the aggregate amount
of $6,364,800. 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 Holding, as the Lessor, is responsible for
all major capital improvements and structural repairs to the Senior Housing
Facilities. Also, any fixed assets of the Company at a Senior Housing Facility
would remain with the Senior Housing Facility at the termination of the lease.
The Company also pays variable rent, on a quarterly basis, for each Senior
Housing Facility in an amount equal to 40% of the excess of aggregate total
revenues for the Senior Housing Facilities, on an annualized basis, over
$16,996,000. For the fiscal years ended August 31, 1999 and 1998, variable rent
expense was $1,164,000 and $894,000, respectively. The Company's use of the
properties is limited to use as Senior Housing Facilities. The Company has
responsibility to obtain and maintain all licenses, certificates and consents
needed to use and operate each Senior Housing Facility, and to use and maintain
each Senior Housing Facility in compliance with all local board of health and
other applicable governmental and insurance regulations. The Senior Housing
Facilities located in Arkansas, California and Kansas are licensed by such
states to provide assisted living services. In addition, various health and
safety regulations and standards, which are enforced by state and local
authorities, apply to the operation of all the Senior Housing Facilities.
Violations of such health and safety standards could result in fines, penalties,
closure of a Senior Housing Facility, or other sanctions.
5. LEGAL PROCEEDINGS AND CONTINGENCIES
A management agreement between ILM Holding and AHC which covered the
management of all eight Senior Housing Facilities was assigned to the Company
effective September 1, 1995. On July 29, 1996, Lease I and ILM Holding
(collectively for this Item 3, the "Companies") terminated a property management
agreement with AHC covering the eight Senior Housing Facilities leased by Lease
I from ILM Holding. The management agreement with AHC was terminated for "cause"
pursuant to the contract. Simultaneously, with the termination of the management
agreement, the Companies, together with certain affiliated entities, filed suit
against AHC in the United States District Court for the Eastern District of
Virginia for breach of contract, breach of fiduciary duty and fraud. The
Companies alleged, among other things, that AHC willfully performed actions
specifically in violation of the management agreement and that such actions
caused damages to the Companies.
Due to the termination of the management agreement for cause, no
termination fee was paid to AHC. Subsequent to the termination of the management
agreement, AHC filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in its domestic State of California. The filing was challenged by the Companies,
and the Bankruptcy Court dismissed AHC's case effective October 15, 1996. In
November 1996, AHC filed with the Virginia District Court an answer in response
to the litigation initiated by the Companies and a counterclaim against ILM
Holding. The counterclaim alleged that the management agreement was wrongfully
terminated for cause and requested damages which included the payment of the
termination fee in the amount of $1,250,000, payment of management fees pursuant
to the contract from August 1, 1996 through October 15, 1996, which is the
earliest date that the management agreement could have been terminated without
cause, and recovery of attorneys' fees and expenses.
The aggregate amount of damages against all parties as requested in
AHC's counterclaim exceeded $2,000,000. On June 13, 1997 and July 8, 1997, the
court issued orders to enter judgment against ILM I and ILM II in the amount of
$1,000,000. The orders do not contain any findings of fact or conclusions of
law. On July 10, 1997, the Company, ILM I, ILM II and Lease II filed a notice of
appeal to the United States Court of Appeals for the Fourth Circuit from the
orders.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence A.
Cohen, who, through July 28, 1998 was a Director of the Company and President,
Chief Executive Officer and Director of ILM I, and others alleging that the
defendants intentionally interfered with AHC's property management agreement
(the "California litigation"). The complaint sought damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to Federal
District Court in the Central District of California. At a Board meeting on
February 26, 1997, the Company's Board of Directors concluded that since all of
Mr. Cohen's actions relating to the California litigation were taken either on
behalf of the Company under the direction of the Board or as a PaineWebber
employee, the Company or its affiliates should indemnify Mr. Cohen with respect
to any expenses arising from the California litigation, subject to any insurance
recoveries for those expenses. Legal fees paid by the Company and Lease II on
behalf of Mr. Cohen totaled $229,000 as of August 31, 1999. The Company's Board
also concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by Capital in
the California litigation. At August 31, 1999, the amount advanced to Capital by
the Company and Lease II for Capital's California litigation costs totaled
approximately $563,000. On August 18, 1998, the Company and its affiliates along
with Capital and its affiliates entered into a Settlement Agreement with AHC.
The Company and Lease II agreed to pay $1,625,000 and Capital and its affiliates
agreed to pay $625,000 to AHC in settlement of all claims including those
related to the Virginia litigation and the California litigation. The Company
and its affiliates also entered into an agreement with Capital and its
affiliates to mutually release each other from all claims that any such parties
may have against each other, other than any claims under the property management
agreements. On September 4, 1998, the full settlement amounts were paid to AHC
and its affiliates with the Company paying $975,000 and Lease II paying
$650,000.
The Company has pending claims incurred in the normal course of
business which, in the opinion of the Company's management, will not have a
material effect on the financial statements of the Company.
6. FEDERAL INCOME TAXES
The Company is taxable as a so-called `C" corporation and, therefore,
its income is subject to tax at the federal and state levels. The Company
reports on a calendar year for tax purposes. Income taxes at the appropriate
statutory rates have been provided for in the accompanying financial statements.
Deferred income tax benefit reflects the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company's
deferred tax assets and liabilities as of August 31, 1999 and 1998, are
comprised of the following amounts (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
---- ----
Deferred tax asset - straight-line rent expense $ 5 $ 19
Deferred tax asset - book over tax depreciation 236 54
Deferred tax asset - book over tax amortization 23 45
Net operating loss carryforward 63 366
----- -----
Gross deferred tax asset 327 484
Valuation allowance for deferred tax asset (235) (120)
----- -----
Net deferred tax asset $ 92 $ 364
===== =====
</TABLE>
The Company has provided a valuation allowance to consider the effects
that the lease termination date might have on historical taxable income and the
fact that cumulative tax over book depreciation might not be recoverable against
future taxable income if and when the lease is terminated. The net operating
loss carryforward will expire in 2013.
<PAGE>
The components of income tax expense (benefit) for fiscal 1999, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Current:
Federal $ -- $ -- $ 78
State -- -- 14
Total current -- -- 92
------ ------ ------
Deferred:
Federal 238 (47) (241)
State 35 (7) (43)
------ ------ ------
Total deferred 273 (54) (284)
------ ------ ------
$ 273 $ (54) $(192)
====== ====== ======
</TABLE>
The reconciliation of income tax computed for fiscal 1999, 1998 and
1997, at U.S. federal statutory rates to income tax expense (benefit) is as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ 134 34% $(148) (34%) $(163) (34%)
State income taxes, net
of federal tax benefit 24 6% (26) (6) (29) (6)
Valuation allowance 115 29% 120 33 -- --
----- --- ------ ----- ------ -----
$ 273 (69%) $ (54) (7%) $(192) (40%)
</TABLE>
<PAGE>
INTRODUCTION TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The Pro Forma Consolidated Balance Sheet as of June 30, 2000 and the Pro Forma
Consolidated Statements of Income for the year ended December 31, 1999, and for
the six months ended June 30, 2000, represent the financial position and results
of operations of Capital Senior Living Corporation ("Capital") for such periods
after giving effect to the transactions described in the accompanying notes,
relating to the merger of ILM Senior Living, Inc. ("ILM") and the acquisition of
ILM II Senior Living, Inc.'s ("ILM II") interest in Santa Barbara ("Santa
Barbara") on August 16, 2000, as if they had occurred as of June 30, 2000 for
the Pro Forma Consolidated Balance Sheet, and as of January 1, 1999 for the Pro
Forma Consolidated Statements of Income.
The financial data for ILM and Santa Barbara reflects the use of their unaudited
balance sheet as of May 31, 2000, unaudited statements of income for the twelve
months ended November 30, 1999, as derived from their audited financial
statements for the year ended August 31, 1999 and the unaudited statements of
income for the three months ended November 30, 1999 and 1998, and unaudited
statements of income for the six months ended May 31, 2000, as derived from the
unaudited statements of income for the nine months ended May 31, 2000 and the
three months ended November 30, 1999. The pro forma adjustments in the unaudited
statements of income for the operating properties owned by ILM for the twelve
months ended November 30, 1999, are derived from the financial statements of ILM
Lease Corporation ("Lease I") and ILM II Lease Corporation for its interest in
Santa Barbara ("Lease II"), using the audited statements of income for the year
ended August 31, 1999 and unaudited statements of income for the three months
ended November 30, 1999 and 1998, and the unaudited statements of income for the
six months ended May 31, 2000. The pro forma adjustments in the unaudited
statements of income for the six months ended June 30, 2000 for the operating
properties owned by ILM and Santa Barbara are derived from the unaudited
statements of income for the six months ended May 31, 2000, as derived from the
unaudited statements of income for the nine months ended May 31, 2000 and the
three months ended November 30, 1999. The balance sheets of Lease I and Lease II
are not considered in the above pro forma balance sheets as these companies are
not being acquired by Capital.
The pro forma financial statements reflect the merger of ILM and the acquisition
of ILM II's interest in Santa Barbara for cash consideration of $97.6 million
and assumption of liabilities.
The Pro Forma Consolidated Balance Sheet and Pro Forma Consolidated Statements
of Income are presented for informational purposes only and do not necessarily
reflect the financial position or results of operations of Capital which would
have actually resulted with ILM and Santa Barbara if the mergers occurred as of
the dates indicated, or the future results of operations of Capital. The Pro
Forma Consolidated Balance Sheet and Pro Forma Consolidated Statements of Income
and the accompanying notes should be read in conjunction with the historical
consolidated financial statements and the notes thereto of Capital, ILM I, and
Lease I contained elsewhere in this document.
ILM, ILM II, Lease I and Lease II are subject to are subject to the reporting
requirements of the Securities and Exchange Commission.
<PAGE>
<TABLE>
<CAPTION>
CAPITAL AND ILM
PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 2000
(in thousands)
<S> <C> <C> <C> <C>
Capital
Capital ILM Pro Forma
June 30, 2000 May 31, 2000 Adjustments June 30, 2000
------------- ------------ ----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 30,976 $ 1,097 [1A] $ 121,943 $ 27,122
[1D] (3,544)
[1E] (25,787)
[2B] (97,603)
[2C] (2,093)
[3A] (141)
[4A] 2,274
Restricted cash 2,274 -- [4B] (2,274) --
Accounts receivable, net 3,121 -- -- 3,121
Accounts receivable from affiliates 4,846 314 -- 5,160
Interest receivable 1,002 -- -- 1,002
Federal and state income tax receivable 4,647 -- -- 4,647
Deferred taxes 910 -- -- 910
Prepaid expenses and other 3,091 159 -- 3,250
---------- --------- -------- ----------
Total current assets 50,867 1,570 (7,225) 45,212
Property and equipment, net 103,596 33,832 [2A] 101,691 205,287
[2D] (33,832)
Deferred taxes 9,314 -- -- 9,314
Notes receivable from affiliates 38,620 -- -- 38,620
Investments in limited partnerships 9,453 -- -- 9,453
Assets held for sale 7,573 -- -- 7,573
Other assets 6,369 117 [1B] 3,544 7,739
[2E] (117)
[2F] (2,174) --
---------- --------- --------- ---------
Total assets $ 225,792 $ 35,519 $ 61,887 $ 323,198
========== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,214 $ 286 $ -- $ 1,500
Accrued expenses 2,716 -- [2G] 964 3,680
Current portion of notes payable 3,212 2,093 [1C] 1,092 4,304
[2H] (2,093)
Customer deposits 1,035 -- -- 1,035
---------- --------- --------- -------
Total current liabilities 8,177 2,379 (37) 10,519
Deferred income from affiliates 2,161 -- -- 2,161
Notes payable, net of current portion 57,830 -- [1C] 120,851 178,681
Line of credit 34,000 - [1F] (25,787) 8,213
Minority interest in consolidated 11,291 141 [3B] (141) 11,291
partnerships
- Shareholders' Equity:
Common stock 197 75 [2I] (75) 197
Additional paid-in capital 91,935 65,711 [2I] (65,711) 91,935
Retained earnings (deficit) 20,201 (32,787) [2I] 32,787
--------- --------- -------- --------
Total stockholders' equity 112,333 32,999 (32,999) 112,333
--------- --------- -------- --------
Total liabilities and stockholder's equity $ 225,792 $ 35,519 $ 61,887 $ 323,198
========= ========= ========= =========
</TABLE>
The accompany notes are an integral part of these pro forma consolidated
financial statements.
<TABLE>
<CAPTION>
CAPITAL AND ILM
Pro Forma Consolidated Statements of Income
Six Months Ended June 30, 2000
(in thousands, except per share amounts)
Lease II
Interest in
Santa Capital
Capital ILM Lease I Barbara And ILM
Six Months Six Months Six Months Six Months Six Months
Ended Ended Ended Ended Ended
June 30, May 31, May 31, May 31, Adjustments June 30,
--------- -------- ------------ -------- ----------- --------
2000 2000 2000 2000 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and healthcare revenue $ 20,265 $ -- $ 10,065 $ 1,287 $ -- $ 31,617
Rental and lease income 2,022 3,809 -- -- [1] (3,809) 2,022
Unaffiliated management services 1,260 -- -- -- [2] (598) 662
revenue
Affiliated management services 405 -- -- -- -- 405
revenue
Unaffiliated development fees 370 -- -- -- -- 370
Affiliated development fees 519 -- -- -- -- 519
--------- --------- --------- --------- --------- ---------
Total revenues 24,841 3,809 10,065 1,287 (4,407) 35,595
Expenses:
Operating expenses 12,320 -- 9,431 749 [3] (4,407) 18,093
General and administrative expenses 4,352 1,329 379 -- [4] (1,291) 4,769
Depreciation and amortization 2,002 727 319 -- [5] 398 3,446
--------- --------- --------- --------- --------- ---------
Total expenses 18,674 2,056 10,129 749 (5,300) 26,308
Income from operations 6,167 1,753 (64) 538 893 9,287
Other income (expense):
Interest income 2,833 31 9 1 [6] (10) 2,864
Interest expense (3,970) -- -- -- [7] (5,218) (9,188)
Gain on sale of properties 303 -- -- -- -- 303
--------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest in consolidated
partnership 5,333 1,784 (55) 539 (4,335) 3,266
Provision for income tax expense (1,705) -- -- -- [8] 773 (932)
--------- --------- --------- --------- --------- ---------
Income before minority interest in
consolidated partnership 3,628 1,784 (55) 539 (3,562) 2,334
Minority interest in consolidated (844) -- -- -- -- (844)
partnership --------- --------- --------- --------- --------- ---------
Net income $ 2,784 $ 1,784 $ (55) $ 539 $ (3,562) $ 1,490
========= ========= ========== ========= ========= =========
Net income per share:
Basic $ 0.14 $ 0.08
========= =========
Diluted $ 0.14 $ 0.08
========= =========
Weighted average share outstanding:
Basic 19,717 19,717
========= =========
Diluted 19,732 19,732
========= =========
</TABLE>
The accompany notes are an integral part of these pro forma
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CAPITAL AND ILM
Pro Forma Consolidated Statements of Income
Year Ended December 31, 1999
(in thousands)
Lease II
Interest in
Santa Capital
Capital ILM Lease I Barbara And ILM
Year Ended Year Ended Year Ended Year Ended Year Ended
Dec. 31, Nov. 30, Nov. 30, Nov. 30, Adjustments Dec. 31,
--------- --------- --------- --------- ----------- --------
1999 1999 1999 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Resident and healthcare revenue $ 41,071 $ -- $ 19,973 $ 2,448 $ -- $ 63,492
Rental and lease income 4,304 7,518 -- -- [1] (7,518) 4,304
Unaffiliated management services 2,695 -- -- -- [2] (1,200) 1,495
revenue
Affiliated management services 456 -- -- -- -- 456
revenue
Unaffiliated development fees 1,341 -- -- -- -- 1,341
Affiliated development fees 14,085 -- -- -- -- 14,085
--------- --------- --------- --------- --------- ---------
Total revenues 63,952 7,518 19,973 2,448 (8,718) 85,173
Expenses:
Operating expenses 24,470 -- 18,534 1,142 [3] (8,718) 35,428
General and administrative expenses 9,212 3,194 507 264 [4] (2,647) 10,530
Depreciation and amortization 4,671 1,602 716 -- [5] 571 7,560
Provision for bad debts 15,896 -- -- -- -- 15,896
--------- --------- --------- --------- --------- ---------
Total expenses 54,249 4,796 19,757 1,406 (10,794) 69,414
--------- --------- --------- --------- --------- ---------
Income from operations 9,703 2,722 216 1,042 2,076 15,759
Other income (expense):
Interest income 5,822 71 14 1 [6] (15) 5,893
Interest expense (7,089) -- -- -- [7] (10,436) (17,525)
Gain on sale of properties 748 -- -- -- -- 748
--------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest in consolidated 9,184 2,793 230 1,043 (8,375) 4,875
partnership
Provision for income tax expense (2,992) -- -- -- [8] 1,869 (1,356)
--------- --------- --------- --------- --------- ---------
Income before minority interest in
consolidated partnership 6,192 2,793 230 1,043 (6,506) 3,519
Minority interest in consolidated (1,354) -- (233) -- -- (1,354)
partnership --------- --------- --------- --------- --------- ---------
Net income $ 4,838 $ 2,793 $ (3) $ 1,043 $ (6,506) $ 2,165
========= ========= ========== ========= ========= =========
Net income per share:
Basic $ 0.25 $ 0.11
========= =========
Diluted $ 0.24 $ 0.11
========= =========
Weighted average share outstanding:
Basic 19,717 19,717
========= =========
Diluted 19,806 19,806
========= =========
</TABLE>
The accompany notes are an integral part of these pro forma
consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CAPITAL AND ILM
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation.
The acquisition of ILM and Santa Barbara by Capital are being accounted for as a
purchase business combination as follows:
<S> <C>
ILM and
Santa Barbara
-------------
Purchase price:
Cash paid (financed with mortgage notes) $ 97,603
Cash paid by Capital for acquisition fees 2,174
Cash paid by Capital for Fleet Loan payoff 2,093
Liabilities assumed from ILM and Santa Barbara for transaction cost 1,250
--------------
$ 103,120
Assets acquired:
Current assets:
Cash $ 956
Other 473
Property and equipment 101,691
--------------
$ 103,120
</TABLE>
Note 2. Financing Purchase of ILM and Santa Barbara.
The acquisitions were paid for with cash consideration of approximately $97.6
million consisting of $87.5 in total consideration to the ILM shareholders with
respect to the merger and $10.1 to the ILM II interest in the Santa Barbara
property. The Company also refinanced three of its existing properties in
conjunction with the mergers. As a result of the refinancing the Company repaid
approximately $25.8 million on its $34.0 million loan with Bank One Texas N.A.,
as agent, resulting in an amended loan facility of up to $9.0 million. GMAC
Commercial Mortgage Corporation ("GMAC") provided approximately $102.0 million
of the consideration and Newman Financial Services, Inc. ("Newman") provided
$20.0 million of acquisition financing for the merger and the refinancing. The
GMAC loans are for a five-year term and bear interest at LIBOR plus a spread of
250 basis points and are amortized over a twenty-five year term. The Newman
loans are for a two-year term and bear interest at LIBOR plus a spread of 550
basis points with interest due monthly and the principal due at the loan
maturity date.
<PAGE>
Note 3. Pro Forma Adjustments.
The pro forma adjustments to the consolidated balance sheet and consolidated
statements of income, and related assumptions, are detailed below:
Pro Forma Consolidated Balance Sheet
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 2000
1. To record cash proceeds received by Capital related to mortgage loans to
finance the of ILM and Santa Barbara purchase
(A) Proceeds received by Capital $ 121,943
(B) Adjustments to reflect the net increase in deferred financing charges
incurred as a result the mortgage loans to finance the ILM and Santa
Barbara purchase 3,544
(C) Adjustment to reflect the increase in notes payable related to the
mortgage loans to finance the ILM and Santa Barbara purchase and to
refinance three of Capital's owned properties (Canton, Towne Center
and Harrison)
Current $ 1,092
Long-term 120,851
(D) Payment of debt issuance costs in connection with the mortgage loans 3,544
(E) Cash paid on Line of Credit for the Canton, Towne Center and Harrison loans 25,787
(F) Repayment of the Company's Line of Credit 25,787
-----------
151,274 151,274
2. To record Capital's purchase accounting for ILM and Santa Barbara
(A) Property and equipment purchased 101,691
(B) Cash paid to ILM and Santa Barbara stockholders 97,603
(C) Cash paid to Fleet Bank to repay ILM loan 2,093
(D) Elimination of historical basis of property and equipment acquired 33,832
(E) Elimination of unamortized loan origination fees for ILM 117
(F) Acquisition costs and advisory fees paid 2,174
(G) Acquisition costs and advisory fees incurred 964
(H) Record Fleet Loan payoff 2,093
(I) Adjustment to reflect the elimination of ILM equity:
Common stock of ILM 75
Additional paid-in capital of ILM 65,711
Retained deficit of ILM 32,787
----------- ------------
169,570 169,570
3. To record the elimination of minority interest in preferred stock of ILM:
(A) Payment to redeem the minority interest in ILM 141
(B) Adjustment to reflect the elimination of the minority interest 141
-----------
141 141
4. To reclass restricted cash to cash and cash equivalents, as restrictions
terminated with the ILM transaction closing:
(A) Cash 2,274
(B) Restricted cash 2,274
----------- ------------
2,274 2,274
</TABLE>
<PAGE>
Pro Forma Consolidated Statement of Income
<TABLE>
<CAPTION>
<S> <C>
Six Months Ended
June 30, 2000
1. Adjustment to reflect the elimination of intercompany rental revenue derived
between ILM and ILM I Lease Corporation $ (3,809)
2. Adjustment to reflect the elimination of ILM Lease Corporation's management
fees paid to Capital (598)
3. Adjustment to reflect the elimination of intercompany master lease rental expense
incurred by ILM I Lease Corporation ($3,809) and management fee expense
incurred by ILM Lease Corporation ($598) (4,407)
4. Reduction of expenses related to operating a public company including directors
fees, director's and officer's insurance, legal and accountant's fees, printing,
postage, and investor service costs; and merger costs including financial
advisors fees; and shareholders' litigation for ILM I and Lease I (1,291)
5. Adjustment to reflect depreciation and amortization expense as a result of the merger
with ILM and Santa Barbara and to eliminate depreciation and amortization expense
for Lease I and Santa Barbara 398
6. Adjustment to reflect the elimination of interest income for Lease I and Santa Barbara (10)
7. Adjustment to reflect the net increase in interest expense resulting from the mortgage
loans for ILM and Santa Barbara ($96.2 million) at 9.5% and the amortization of
the deferred financing charges for ILM of $3,544
GMAC deferred financing charges of $2,545; five-year loans
Newman deferred financing charges of $999; two-year loans (5,218)
8. Adjustment reflects income tax expense using an effective rate of 38.5% 773
</TABLE>
<PAGE>
Pro Forma Consolidated Statement of Income
<TABLE>
<CAPTION>
<S> <C>
Year Ended
December 31, 1999
1. Adjustment to reflect the elimination of intercompany rental revenue derived
between ILM and Lease I $ (7,518)
2. Adjustment to reflect the elimination of Lease I management
fees paid to Capital (1,200)
3. Adjustment to reflect the elimination of intercompany master lease rental expense
incurred by ILM I Lease Corporation ($7,518) and management fee expense
incurred by ILM Lease Corporation ($1,200) (8,718)
4. Reduction of expenses related to operating a public company including directors
fees, director's and officer's insurance, legal and accountant's fees, printing,
postage, and investor service costs; and merger cost including financial
advisors fees; and shareholders' litigation for ILM I and Lease I (2,647)
5. Adjustment to reflect depreciation and amortization expense as a result of the
merger with ILM and Santa Barbara and to eliminate depreciation and amortization
expense for Lease I and Santa Barbara 571
6. Adjustment to reflect the elimination of interest income for Lease I and Santa Barbara (15)
7. Adjustment to reflect the net increase in interest expense resulting from
the mortgage loans for ILM and Santa Barbara ($96.2 million) at 9.5% and
the amortization of the deferred financing charges for ILM of $3,544
GMAC deferred financing charges of $2,545; five-year loans
Newman deferred financing charges of $999; two-year loans (10,436)
8. Adjustment reflects income tax expense using an effective rate of 38.5% 1,869
</TABLE>
<PAGE>
(c) Exhibits.
--------
Exhibits.
--------
*10.1 Form of GMAC Loan Agreement, Promissory Note and
Exceptions to Nonrecourse Guaranty
*10.2 Newman Pool B Loan Agreement, Promissory Note and
Guaranty
*10.3 Newman Pool C Loan Agreement, Promissory Note and
Guaranty
*10.4 First Amendment to Triad II Partnership Agreement
*10.5 Second Modification to the Bank One Loan Agreement
*10.6 Assignment of Note, Liens and Other Loan Documents
between Fleet National Bank and CSLI.
*99.1 Press Release, dated August 16, 2000
* Filed previously with the Current Report on Form 8-K of the Company, dated
August 15, 2000.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: October 30, 2000.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ Ralph Beattie
-------------------------------
Ralph Beattie, Chief Financial
Officer
