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REVISED PRELIMINARY COPY
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Filed by Registrant: /x/
Filed by a Party other than the Registrant: / /
Check the appropriate box:
/x/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Materials Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
ILM SENIOR LIVING, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILM SENIOR LIVING, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/x/ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction applies:
common stock, $.01 par value, of ILM Senior Living, Inc. (ILM
Common Stock).
2) Aggregate number of securities to which transaction applies:
7,520,100 shares of ILM Common Stock.
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. The fee has been calculated as
follows:
Pursuant to Rule 0-11(c)(1) under the Exchange Act, a fee of
$19,942.30 previously was paid to the Commission in connection
with the filing of the Registrant's initial preliminary proxy
materials on April 19, 1999 (at which time the maximum aggregate
value of the transaction was $95,890,000).
4) Proposed maximum aggregate value of transaction: $87,429,000.
5) Total fee paid herewith: -0- (previously paid; see item 3).
/x/ Fee previously paid.
/ / Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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REVISED PRELIMINARY COPY
ILM SENIOR LIVING, INC.
1750 TYSONS BOULEVARD, SUITE 1200
TYSONS CORNER, VIRGINIA 22102
(888) 257-3550
May , 2000
Dear ILM Shareholders:
Your Board of Directors has unanimously approved the cash out merger of ILM
Senior Living, Inc. into a 100% owned subsidiary of Capital Senior Living
Corporation.
In the merger you will receive $11.63 in cash for each share of ILM common
stock you own and your former shares of ILM common stock will be canceled.
Accordingly, after the merger you no longer will have any ownership interest in
ILM and you will not participate in the potential future earnings and growth of
ILM or Capital.
We have described the details of the merger in the accompanying proxy
statement and encourage you to read the proxy statement and the appendices to
that document carefully and in their entirety before deciding how to vote on the
merger.
Before we can complete the merger, you must vote to approve the
transaction. A vote "FOR" the merger by the holders of at least 66- 2/3% of the
outstanding ILM common stock is required for the merger to occur.
We have studied with our attorneys and financial advisors the terms,
conditions, timing and effects of the merger, and we have reviewed and
considered alternatives to the merger. We have received the written opinion of a
nationally recognized investment banking firm confirming that the $11.63 to be
paid to you in cash in the merger for each share of your ILM common stock is
fair to you, from a financial point of view. You can find the full text of the
fairness opinion in Appendix B to the proxy statement. Please read the opinion
carefully and in its entirety.
AFTER CAREFUL CONSIDERATION OF A NUMBER OF FACTORS AND CIRCUMSTANCES WHICH
ARE DESCRIBED IN THE ATTACHED PROXY STATEMENT, YOUR BOARD OF DIRECTORS HAS
DETERMINED THAT THE MERGER IS FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT
THE MERGER IS ADVISABLE. YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER
AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
TO PROPERLY VOTE YOUR SHARES you can use the enclosed proxy card or attend
the special meeting that will be held specifically for this very important vote.
The special meeting will be held at 10:00 a.m., local time, on June , 2000 at
the Key Bridge Marriott Hotel, 1401 Lee Highway, Arlington, Virginia 22209.
If you use the enclosed proxy card, please complete, sign and date it and
return it to us in the enclosed envelope as soon as possible. The envelope
requires no postage if mailed in the United States.
YOUR VOTE IS VERY IMPORTANT. To approve the merger, you must indicate a
"FOR" vote by following the instructions appearing on the enclosed proxy card.
IF YOU DO NOT VOTE, IT WILL COUNT AS A VOTE AGAINST THE MERGER.
Sincerely,
/s/ J. WILLIAM SHARMAN, JR.
-----------------------------------
J. William Sharman, Jr.
Chairman of the Board of Directors,
President and Chief Executive
Officer
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE ATTACHED PROXY STATEMENT DATED MAY , 2000 IS FIRST BEING MAILED TO
SHAREHOLDERS ON OR ABOUT MAY , 2000.
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REVISED PRELIMINARY COPY
ILM SENIOR LIVING, INC.
1750 TYSONS BOULEVARD, SUITE 1200
TYSONS CORNER, VIRGINIA 22102
(888) 257-3550
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Dear ILM Shareholders:
We invite you to attend a special meeting of the shareholders of ILM Senior
Living, Inc. to be held at 10:00 a.m., local time, on June , 2000 at the Key
Bridge Marriott Hotel, 1401 Lee Highway, Arlington, Virginia 22209. The special
meeting will be held for the following very important purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger dated October 19, 1999, as amended,
among ILM Senior Living, Inc., a Virginia finite-life corporation, Capital
Senior Living Corporation, a Delaware corporation, and Capital Senior
Living Acquisition, LLC, a Delaware limited liability company, whereby ILM
will be merged with Capital Acquisition upon the terms and subject to the
conditions of the merger agreement described in the proxy statement; and
2. To transact such other business as may properly be presented at the
special meeting or any adjournment or postponement of the special meeting.
These items of business are described for you in detail in the attached
proxy statement and in the appendices to the attached document. We encourage you
to read these materials very carefully and in their entirety.
Only holders of record of ILM common stock at the close of business on
May , 2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement of the special meeting. A list of holders eligible
to vote at the special meeting will be available for inspection at the special
meeting and for a period of 10 days prior to the special meeting during regular
business hours at ILM's address indicated above.
AFTER CAREFUL CONSIDERATION OF A NUMBER OF FACTORS AND CIRCUMSTANCES WHICH
ARE DESCRIBED IN THE ATTACHED PROXY STATEMENT, YOUR BOARD OF DIRECTORS HAS
DETERMINED THAT THE MERGER IS FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT
THE MERGER IS ADVISABLE. YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER
AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
PLEASE DO NOT SEND US YOUR ILM STOCK CERTIFICATES AT THIS TIME.
BY ORDER OF YOUR BOARD OF
DIRECTORS
/s/ J. WILLIAM SHARMAN, JR.
--------------------------------------
J. William Sharman, Jr.
Chairman of the Board of Directors,
President and Chief Executive Officer
Tysons Corner, Virginia
May , 2000
IF YOU HAVE ANY QUESTIONS REGARDING THE SPECIAL MEETING, THE ATTACHED PROXY
STATEMENT OR THE PROCEDURES FOR VOTING, PLEASE CALL OUR PROXY SOLICITOR, D.F.
KING & CO. INC., TOLL FREE AT 1-800-735-3591.
<PAGE>
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
SUMMARY.................................................................................................... 3
The Parties in the Merger............................................................................... 3
Capital Senior Living Corporation.................................................................... 3
ILM Senior Living, Inc............................................................................... 3
The Merger.............................................................................................. 3
The Payment You Will Receive for Your Shares of ILM Stock............................................ 3
The Merger Agreement................................................................................. 3
There Are Conditions to Completing the Merger........................................................ 3
Termination of the Merger Agreement.................................................................. 4
Termination Fees..................................................................................... 4
Our Recommendation to You............................................................................... 5
Vote Required........................................................................................... 5
Purposes and Reasons for the Merger..................................................................... 5
Opinion of Our Financial Advisor........................................................................ 6
Payments Previously Made and to be Made to Our Financial Advisors....................................... 7
Conduct of ILM's Business if the Merger is Not Completed................................................ 7
Plans and Proposals of ILM and Capital if the Merger Occurs............................................. 7
You Have No Appraisal Rights............................................................................ 7
U.S. Federal Income Tax Consequences.................................................................... 7
Accounting Treatment.................................................................................... 8
Conflicts of Interest of ILM Management................................................................. 8
Financing of the Merger................................................................................. 8
Litigation Pertaining to the Merger..................................................................... 8
Concurrent ILM II Merger................................................................................ 9
Merger Procedures....................................................................................... 9
ILM'S CORPORATE STRUCTURE.................................................................................. 10
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 11
THERE IS NO ESTABLISHED MARKET FOR ILM'S COMMON STOCK; DIVIDENDS........................................... 13
THE SPECIAL MEETING........................................................................................ 14
Purpose of Special Meeting.............................................................................. 14
Record Date for the Special Meeting..................................................................... 14
Vote Required for Approval of the Merger Agreement...................................................... 14
Proxies; Solicitation and Revocation.................................................................... 14
Beneficial Ownership by Directors....................................................................... 16
People with Disabilities................................................................................ 16
Confidential Voting..................................................................................... 16
Solicitation of Proxies by Soliciting Agent............................................................. 16
Annual Meeting.......................................................................................... 16
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 17
A Very Important Warning About Our Forward-Looking Statements........................................... 17
SPECIAL FACTORS............................................................................................ 19
</TABLE>
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The Merger.............................................................................................. 19
History................................................................................................. 19
Background of the Merger................................................................................ 27
Recommendation of the ILM Board......................................................................... 52
Purposes, Alternatives, Timing and Reasons for the Merger............................................... 56
Determination of Merger Consideration................................................................... 57
Opinion of Cohen & Steers............................................................................... 57
Plans and Proposals of ILM and Capital.................................................................. 66
Present Intentions and Recommendations of Certain Persons with Regard to the Merger..................... 67
Conduct of ILM's Business if the Merger is not Completed................................................ 67
Interests of Certain Persons in the Merger.............................................................. 67
No Independent Committee................................................................................ 68
The Merger Agreement.................................................................................... 68
The Merger........................................................................................... 69
Effective Time....................................................................................... 69
Conversion of Shares................................................................................. 69
Exchange of Certificates............................................................................. 69
Representations and Warranties....................................................................... 70
Conduct of ILM's Business Prior to the Merger........................................................ 71
Conduct of Capital's Business Prior to the Merger.................................................... 72
Conditions to Completing the Merger.................................................................. 72
No Solicitation of Alternative Transactions.......................................................... 73
Termination of the Merger Agreement.................................................................. 74
Termination Fees; Reimbursement of Expenses.......................................................... 75
Proxy Statement; The Special Meeting.................................................................... 76
Accounting Treatment.................................................................................... 76
Simultaneous ILM II Merger.............................................................................. 76
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER..................................................... 77
Federal Income Tax Consequences of the Merger........................................................... 77
Tax Characterization of the Merger to ILM............................................................ 77
Tax Consequences to ILM Shareholders................................................................. 77
Back-up Withholding Requirements..................................................................... 77
Alien Holders........................................................................................ 78
ESTIMATED COSTS AND FINANCING OF THE MERGER................................................................ 79
Financing; Source and Amount of Funds................................................................... 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ILM............... 81
General................................................................................................. 81
Liquidity and Capital Resources......................................................................... 81
Growth Strategies....................................................................................... 83
Year 2000............................................................................................... 84
Results of Operations for ILM........................................................................... 84
Six Months Ended February 29, 2000 versus Six Months Ended
February 28, 1999................................................................................. 84
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Three Months Ended February 29, 2000 versus Three Months Ended
February 28, 1999................................................................................. 85
1999 Compared to 1998................................................................................ 85
1998 Compared to 1997................................................................................ 86
CERTAIN INFORMATION WITH RESPECT TO ILM.................................................................... 87
General................................................................................................. 87
Properties.............................................................................................. 87
Asset Management........................................................................................ 89
Legal Proceedings....................................................................................... 89
Competition............................................................................................. 91
Regulations............................................................................................. 91
Employees............................................................................................... 92
Insurance............................................................................................... 92
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 93
SHAREHOLDER PROPOSALS...................................................................................... 97
OTHER MATTERS.............................................................................................. 97
EXPERTS.................................................................................................... 97
NO APPRAISAL RIGHTS........................................................................................ 97
</TABLE>
LIST OF APPENDICES
Appendix A Composite Merger Agreement
Appendix B Opinion of Cohen & Steers Capital Advisors, LLC
(iii)
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QUESTIONS AND ANSWERS ABOUT THE MERGER
1. Q: WHO IS SOLICITING MY PROXY?
A: ILM's Board of Directors.
2. Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to vote to approve the merger agreement so that ILM
can be merged into a 100% owned subsidiary of Capital Senior Living Corporation.
3. Q: WHO IS CAPITAL?
A: Capital is one of the largest developers and operators of senior living
communities in the United States, in terms of resident capacity. Capital has
been the manager of ILM's senior living communities since 1996.
4. Q: WHAT WILL I RECEIVE IN THE MERGER FOR EACH OF MY SHARES?
A: You will receive $11.63 in cash for each share of your ILM common stock.
No interest will be paid on this amount.
5. Q: WHERE DOES CAPITAL INTEND TO OBTAIN THE FUNDS WHICH ARE NECESSARY TO
PAY $11.63 PER SHARE IN CASH TO ALL HOLDERS OF ILM'S COMMON STOCK?
A: Capital has obtained the commitment of GMAC Commercial Mortgage
Corporation to provide to Capital $11.46 of the $11.63 per share in cash
required by the merger agreement, and Capital has agreed to segregate in its
accounts the remaining $0.17 per share. GMAC's commitment to provide funds is
subject to a variety of conditions and termination events, and expires by its
terms on July 31, 2000.
6. Q: WHAT DO I NEED TO DO NOW?
A: Please sign, date and complete your proxy card and promptly return it in
the enclosed, self-addressed, prepaid envelope so that your shares of ILM common
stock can be represented at the special meeting.
7. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will vote your shares for you ONLY if you instruct your broker
how to vote for you. Your broker should mail information to you that will
explain how to give it these instructions.
8. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send by mail a written revocation or a later-dated, completed
and signed proxy card before the special meeting or simply attend the special
meeting and vote in person. You may not change your vote by facsimile or
telephone.
9. Q: WHAT IF I DON'T SEND BACK A PROXY CARD OR VOTE MY SHARES OF ILM STOCK IN
PERSON AT THE SPECIAL MEETING?
A: If you don't return your proxy card or vote your shares of ILM stock in
person at the special meeting, each share of your stock will be treated as a
vote AGAINST approval of the merger agreement.
10. Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. If the merger is completed, you will receive detailed written
instructions for delivering your ILM stock physically or electronically.
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11. Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT?
A: A vote by the holders of at least 66- 2/3% of the outstanding ILM common
stock "FOR" approval of the merger agreement is required to approve the merger
agreement.
12. Q: WHAT HAPPENS IF THE MERGER IS NOT COMPLETED BY SEPTEMBER 30, 2000?
A: The merger agreement will terminate and the merger of ILM into Capital
will not occur, unless the September 30, 2000 expiration date is extended by the
parties. There is no requirement or present intention to extend the
September 30, 2000 expiration date.
13. Q: WILL I HAVE APPRAISAL RIGHTS IN THE MERGER?
A: No. You will not have any right to dissent from the merger and receive a
value for your shares of ILM common stock determined by a court.
14. Q: WHEN WILL I RECEIVE $11.63 IN CASH FOR EACH SHARE OF MY ILM COMMON STOCK?
A: If the merger is completed you will receive $11.63 in cash for each
share of ILM common stock you own, promptly after we receive from you a properly
completed letter of transmittal together with your stock certificates or, if you
do not own any physical stock certificates, promptly after we receive your
properly completed letter of transmittal and electronic transfer of your ILM
common stock.
15. Q: HOW WILL I KNOW THE MERGER HAS OCCURRED?
A: If the merger occurs, ILM and Capital will make a public announcement
and you will receive notice of such fact by mail.
16. Q: ARE THERE ANY SIGNIFICANT RISKS IN THE MERGER THAT I SHOULD BE AWARE OF?
A: Yes. There are significant risks involved with the merger. Before making
any decision on how to vote on the merger or whether to vote, we encourage you
to read carefully and in its entirety the "Special Factors--Interests of Certain
Persons in the Merger" section of this document beginning on page 71.
17. Q: WHAT HAPPENS TO MY ILM COMMON STOCK DIVIDENDS AFTER THE MERGER?
A: If the merger occurs, you no longer will receive any dividends after the
merger is completed because you no longer will be an ILM shareholder and you
will not become a Capital shareholder in the merger.
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SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS VERY IMPORTANT INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT BUT DOES NOT CONTAIN ALL OF THE INFORMATION IN
THIS PROXY STATEMENT THAT IS IMPORTANT TO YOUR VOTING DECISION.
YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND ALL OF THE ATTACHED
DOCUMENTS BEFORE YOU DECIDE HOW TO VOTE. SEE "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE 17.
THE PARTIES IN THE MERGER
CAPITAL SENIOR LIVING CORPORATION
14160 Dallas Parkway, Suite 300
Dallas, Texas 75240
(972) 770-5600
Capital is one of the largest developers and operators of senior living
communities in the United States, in terms of resident capacity.
Capital Senior Living Acquisition, LLC is a Delaware limited liability
company that is 100% owned by Capital and was formed primarily to effect the
merger.
Capital Acquisition has the same address and phone number as Capital.
ILM SENIOR LIVING, INC.
1750 Tysons Boulevard, Suite 1200
Tysons Corner, Virginia 22102
(888) 257-3550
ILM and its subsidiaries own eight senior living communities in seven
states with a total resident capacity of approximately 1,335 residents. The ILM
senior living communities have been managed by Capital since 1996.
THE MERGER
If ILM's shareholders approve the merger and all conditions to the merger
are met, ILM will be merged into Capital Acquisition and ILM's separate
corporate existence will terminate.
After the merger you no longer will have any ownership interest in ILM and
you no longer will participate in the potential future earnings and growth of
ILM.
THE PAYMENT YOU WILL RECEIVE IN THE MERGER FOR YOUR SHARES OF ILM COMMON
STOCK (SEE PAGE 69)
After the merger occurs you will receive $11.63 in cash for each share of
ILM common stock you own. No interest will be paid on that amount. Under certain
circumstances, this amount could be reduced by stock transfer and withholding
taxes applicable to you.
THE MERGER AGREEMENT (SEE PAGE 68)
A composite version of the merger agreement, as amended, is attached to
this document as Appendix A. We encourage you to read that document in its
entirety because it is the legal document that governs all of the terms and
conditions of the merger.
THERE ARE CONDITIONS TO COMPLETING THE MERGER (SEE PAGE 72)
Completion of the merger depends on satisfying a number of conditions.
These conditions include the:
o approval of the merger agreement by the holders of at least 66- 2/3% of
the outstanding ILM common stock;
o receipt of all authorizations, consents and approvals from government
authorities relevant to the business and operations of the parties;
o absence of any government or court order preventing or significantly
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delaying the occurrence of the merger;
o accuracy of the representations and warranties made by the parties in
the merger agreement;
o performance by the parties of their respective obligations under the
merger agreement;
o receipt of all consents and approvals necessary for Capital to become
the owner of and successor to ILM's business and properties after the
merger; and
o receipt by Capital of all funds necessary to pay to you in the merger
$11.63 in cash for each share of ILM common stock you own.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 74)
The merger agreement can be terminated:
o by ILM and Capital if we mutually agree to do so;
o by ILM or Capital, if:
-- any government or court order prevents the merger from occurring;
-- ILM's shareholders do not approve the merger agreement by September
29, 2000; or
-- the merger is not completed by September 30, 2000.
o by Capital, if:
-- the ILM Board withdraws or changes its recommendation to you to
approve the merger agreement;
-- the ILM Board approves or recommends that you vote to approve a
transaction involving the sale of ILM to a party other than Capital
on terms financially superior to the merger with Capital;
-- ILM signs an agreement for a transaction to merge ILM with or sell
ILM to a party other than Capital;
-- ILM violates the merger agreement or its representations and
warranties in the merger agreement are inaccurate; or
-- there has been or there is likely to be a significant negative
change in ILM's business, operations or condition.
o by ILM, if:
-- ILM signs an agreement for a transaction involving the sale of ILM
to a party other than Capital on terms financially superior to the
merger with Capital;
-- Capital violates the merger agreement or its representations and
warranties in the merger agreement are inaccurate;
-- Capital fails to complete the merger for any reason after all
conditions to do so are met under the merger agreement; or
-- there has been or there is likely to be a significant negative
change in Capital's business, operations or condition.
TERMINATION FEES (SEE PAGE 75)
ILM must pay Capital a fee of $2,404,300, plus reimburse Capital for up to
$2.0 million of its expenses incurred in the merger, if:
o the merger agreement is terminated by Capital because the ILM Board
withdraws or changes its
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recommendation to you to approve the merger agreement;
o the merger agreement is terminated by Capital because the ILM Board
approves or recommends that you vote to approve a transaction involving
the sale of ILM to a party other than Capital on terms financially
superior to the merger with Capital;
o the merger agreement is terminated by Capital because ILM signs an
agreement for a transaction to merge ILM with or sell ILM to a party
other than Capital;
o the merger agreement is terminated by ILM because it signs an agreement
for a transaction involving the sale of ILM to a party other than
Capital on terms financially superior to the merger with Capital; or
o ILM violates its obligations under the merger agreement not to initiate
or solicit offers and proposals for corporate transactions with parties
other than Capital and a corporate transaction involving ILM and a party
other than Capital is completed within 16 months after Capital
terminates the merger agreement because of ILM's violation.
Capital must pay ILM a fee of $1,540,000 if ILM terminates the merger
agreement because Capital fails for any reason to complete the merger after the
conditions for completion of the merger have been met, including Capital's
failure to obtain the cash funds necessary to pay $11.63 per share in cash to
all holders of ILM's common stock.
Neither Capital nor ILM is entitled to receive any termination fees or
reimbursement of expenses if they fail to meet their obligations under the
merger agreement or any of their representations or warranties in the merger
agreement are inaccurate.
OUR RECOMMENDATION TO YOU (SEE PAGE 52)
After careful consideration of a number of factors and circumstances which
are described in this proxy statement, your Board of Directors has determined
that the merger is fair to you and in your best interests and that the merger is
advisable.
Your Board of Directors has adopted the merger agreement and we recommend
that you vote "FOR" approval of the merger agreement.
VOTE REQUIRED (SEE PAGE 14)
Approval of the merger agreement requires the affirmative vote of the
holders of not less than 66- 2/3% of the outstanding ILM common stock.
PURPOSES AND REASONS FOR THE MERGER (SEE PAGE 56)
Your Board of Directors considered a number of factors when it adopted the
merger agreement. Those factors included:
o general economic, industry and market conditions, including the
continued significant deterioration of financial conditions in the
senior living industry during the past 12 months;
o the strategic financial alternatives available to ILM to maximize the
value of your shares of ILM common stock;
o the overall consolidation trend in the assisted living industry;
o ILM's financial condition, liquidity and profitability;
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o the likelihood of completing the merger with Capital;
o the lack of any viable transactions with parties other than Capital
having terms financially superior to the merger with Capital;
o ILM's finite-life, and current month-to-month, status;
o The opinion of ILM's financial advisor, Cohen & Steers Capital Advisors
LLC, delivered orally on April 17, 2000 to ILM's Board, subsequently
confirmed in writing on April 18, 2000, and reconfirmed in writing on
the date of this proxy statement, that, as of those dates, the $11.63
in cash to be paid to you in the merger for each share of your ILM
common stock was fair to you, from a financial point of view.
o the requirement for approval of the merger agreement by the holders of
at least 66- 2/3% of the outstanding ILM common stock;
o ILM's strengths and weaknesses as an independent public company;
o the matters described on page 67 of this proxy statement under
"Interests of Certain Persons in the Merger;"
o the fully taxable nature of the merger;
o ILM's termination fee and expense reimbursement obligations to Capital;
o the receipt by Capital of GMAC Commercial Mortgage Corporation's written
commitment to provide to Capital $11.46 of the $11.63 in cash to be paid
to you in the merger for each share of your ILM common stock;
o ILM's historical commercial arrangements and familiarity with Capital;
o the lack of any burdensome regulatory requirements for completion of the
merger;
o the likelihood of the merger with Capital succeeding;
o the termination of dividend payments on your shares of ILM common stock;
o the simplicity of paying you cash in the merger as opposed to stock or
other property;
o the going-concern and the liquidation value of ILM's properties;
and
o Capital's limited right of first and last offer in the case of
transactions involving the sale or transfer of ILM's properties.
The purpose of the merger is to sell to Capital 100% of your ILM common
stock and for Capital to acquire 100% control of ILM.
OPINION OF OUR FINANCIAL ADVISOR (SEE PAGE 57)
Cohen & Steers delivered on April 17, 2000 to ILM's Board its oral
opinion, subsequently confirmed in writing on April 18, 2000 and reconfirmed in
writing on the date of this proxy statement that the $11.63 per share in cash to
be received by you in the merger for each share of your ILM common stock was
fair to you on such dates, from a financial point of view.
The full text of Cohen & Steers' opinion which states the assumptions
made, the matters considered and the limitations on Cohen & Steers' review, is
attached as Appendix B to this proxy
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statement and should be read by you carefully and in its entirety.
PAYMENTS PREVIOUSLY MADE AND TO BE MADE TO OUR FINANCIAL ADVISORS (SEE PAGE 66)
ILM and ILM II paid $250,000 to Cohen & Steers for certain past services
provided to ILM and ILM II, and an additional $125,000 for its opinion (and a
similar opinion rendered to the ILM II Board) that the $11.63 in cash to be paid
to you in the merger for each share of your ILM common stock was, on the dates
of such opinion, fair to you, from a financial point of view.
Cohen & Steers will receive an additional $900,000 from ILM and ILM II
upon completion of the merger with Capital. ILM will seek from Cohen & Steers a
prorated allocation of that amount if the ILM merger is consummated but the ILM
II merger is not consummated, or vice versa.
CONDUCT OF ILM'S BUSINESS IF THE MERGER IS NOT COMPLETED (SEE PAGE 67)
If the Merger is not completed ILM intends to operate its business as
presently operated and, because ILM is a finite-life, and month-to-month,
entity, the ILM Board will continue to review ILM's strategic financial
alternatives to maximize the value of your common stock and reevaluate ILM's
status on a month-to-month basis.
PLANS AND PROPOSALS OF ILM AND CAPITAL IF THE MERGER OCCURS (SEE PAGE 66)
If the merger occurs, ILM's corporate existence will end and all of its
assets and liabilities will be owned and become the obligations of Capital
Acquisition.
Capital has advised ILM that it does not have any specific plans,
proposals or agreements involving the liquidation or sale of ILM's properties or
involving any mergers or reorganizations of ILM or its assets after the merger
is completed.
Capital also has informed ILM that it has no specific plans, proposals or
agreements to change the day-to-day management or operation of ILM's business
after the merger is completed.
Capital may, however, change its intentions and plans at any time and from
time to time in its discretion.
YOU HAVE NO APPRAISAL RIGHTS (SEE PAGE 97)
You will not have any right to object to the merger and receive a
judicially determined value for your shares of ILM common stock.
U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 77)
For U.S. federal income tax purposes, the merger will be treated as a sale
of ILM's assets to Capital followed by the termination of ILM's existence. As an
ILM shareholder you will recognize gain or loss for tax purposes equal to the
difference between (i) $11.63 for each share of your ILM common stock and
(ii) the amount of your adjusted cost of each share of your ILM common stock as
determined under applicable tax laws.
Any gain or loss will be treated as a long-term capital gain or loss if at
the time of the merger you have held your ILM common stock for more than
12 months. Under U.S. federal income tax law long-term capital gains are taxable
at a maximum rate of 20% for individuals and 35% for corporations. You also may
be subject to state and local taxes.
DETERMINING THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY DEPEND UPON YOUR
PERSONAL CIRCUMSTANCES. YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR
7
<PAGE>
TO UNDERSTAND HOW THE MERGER MAY AFFECT YOU FROM A TAX POINT OF VIEW.
ACCOUNTING TREATMENT (SEE PAGE 76)
For accounting and financial reporting purposes the merger will be
accounted for in accordance with the "purchase method" of accounting.
CONFLICTS OF INTEREST OF ILM MANAGEMENT (SEE PAGE 67)
In considering the recommendation of your Board of Directors to vote for
approval of the merger agreement you should know that certain directors of ILM
have relationships or interests in the merger that are different from or in
addition to your interests as a shareholder:
o After the merger is completed the current directors of ILM will become
members of a new advisory board of Capital and for seven years
thereafter Capital will indemnify ILM's officers and directors against
liabilities arising from all claims that may be made against them in
their capacity as officers and directors of ILM.
o Also, Capital will maintain at its expense liability insurance for the
benefit of ILM's officers and directors for seven years following the
merger.
o Notwithstanding ILM's long-standing relationships, familiarity and
commercial dealings with Capital and certain of its executive officers,
directors and controlling shareholders, neither ILM nor your Board of
Directors appointed or hired a special representative to negotiate the
terms of the merger agreement directly on your behalf.
These interests and financial arrangements described may create
significant actual or potential conflicts with your interests as an ILM
shareholder and you should evaluate these conflicts carefully before deciding
how to vote on the merger.
FINANCING OF THE MERGER (SEE PAGE 79)
Capital has obtained the written commitment of GMAC Commercial Mortgage
Corporation dated April 14, 2000 to provide Capital with cash funds to pay to
you $11.46 of the $11.63 payable to you in the merger for each share of ILM
common stock you own. Capital has agreed to segregate in its accounts and to pay
to you the remaining $0.17 per share necessary to complete the merger.
The GMAC commitment expires on July 31, 2000 and is subject to a variety
of termination and closing conditions, including the negotiation and signing of
definitive loan documents. GMAC's commitment also is subject to the receipt by
GMAC of satisfactory third party appraisals, environmental reports and
engineering reports with respect to ILM's properties, to minimum fair market
value requirements for ILM's properties and certain of Capital's properties,
to the ability of Capital to satisfy certain minimum cash-to-debt service ratios
and to there not having occurred any significant negative changes in the
financial condition of Capital. If GMAC's commitment expires unfunded or is
terminated, Capital will remain contractually obligated under the merger
agreement until September 30, 2000 to obtain at its expense all funds necessary
to pay to you $11.63 in cash in the merger for each share of your ILM common
stock.
LITIGATION PERTAINING TO THE MERGER (SEE PAGE 89)
See the description of "Legal Proceedings" on page 93 for information
concerning the class action litigation commenced against ILM and its directors
8
<PAGE>
and a certain Capital director regarding matters prior to and involving the
merger, and the terms and conditions of the October 15, 1999 settlement of that
litigation.
CONCURRENT ILM II MERGER (SEE PAGE 76)
ILM II Senior Living, Inc. is a finite-life corporation with
some shareholders in common with ILM. On April 18, 2000 ILM II signed an amended
merger agreement with Capital very similar to the amended merger agreement
signed by ILM and Capital. Completion of the merger described in this proxy
statement and completion of the ILM II merger are not conditioned upon one
another.
MERGER PROCEDURES (SEE PAGE 69)
Shortly after completion of the merger you will receive a letter of
transmittal and instructions on how to surrender your ILM common stock for
$11.63 per share in cash.
Please sign, date and complete your proxy card and promptly return it to
us in the enclosed envelope. The envelope requires no postage if mailed in the
United States.
PLEASE DO NOT SEND US ANY OF YOUR ILM STOCK CERTIFICATES AT THIS TIME.
9
<PAGE>
ILM'S CORPORATE STRUCTURE
[FLOW CHART]
The chart above illustrates the organizational structure of ILM, its
affiliated entities and their relationship with Capital. ILM II Senior Living,
Inc. has an identical structure to that of ILM, with ILM II Holding, Inc. owning
the senior living communities which are subject to the mortgages held by
ILM II, and ILM II Lease Corporation leasing the senior living communities from
Holding II.
10
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical consolidated financial data of ILM with
respect to each year in the five-year period ended August 31, 1999 is derived
from the consolidated financial statements of ILM. These consolidated financial
statements have been audited by Ernst & Young LLP, ILM's independent auditors.
The financial data of ILM for the six and three months ended February 29,
2000 and February 28, 1999 has been derived from ILM's unaudited consolidated
financial statements for the periods ending February 29, 2000 and February 28,
1999. The operating results for the three and six months ended February 29, 2000
are not necessarily indicative of results for the full fiscal year.
ILM is a finite-life entity whose corporate existence continues on a
month-to-month basis and presently is subject to successive 30-day extensions in
the sole discretion of ILM's Board of Directors.
The following data should be read together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of ILM appearing
later in this proxy statement, and also should be read together with the
consolidated financial statements of ILM and the notes thereto included at the
end of this proxy statement.
The unaudited historical financial statement data for ILM as of
February 29, 2000 and for the six and three months ended February 29, 2000 have
been prepared on the same basis as the historical information in the audited
financial statements and, in the opinion of the management of ILM, contain all
adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the results of operations for such periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- --------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -------------------------------------
2000 1999 2000 1999 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------- ------- ------- -------
($ IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and other
income................ $ 1,905 $ 1,870 $ 3,788 $ 3,761 $ 7,525 $ 7,222 $ 6,643 $ --
Interest income earned
on cash equivalents... 18 17 40 39 72 98 162 129
-------- -------- -------- -------- ------- ------- ------- -------
1,923 1,887 3,828 3,800 7,597 7,320 6,805 129
Expenses:
Depreciation and
amortization.......... 382 394 784 790 1,597 1,513 1,508 --
Management fees......... -- -- -- -- -- -- 70 88
Property operating
expenses.............. -- -- -- -- -- -- -- --
General and
administrative........ 96 129 164 256 559 294 866 343
Professional fees....... 579 824 1,014 1,044 2,393 674 445 315
Director compensation... 24 29 46 49 87 116 82 24
-------- -------- -------- -------- ------- ------- ------- -------
1,081 1,376 2,008 2,139 4,636 2,597 2,971 770
-------- -------- -------- -------- ------- ------- ------- -------
Operating income (loss)... 841 511 1,820 1,661 2,961 4,723 3,834 (641)
Equity in income of,
properties securing
mortgage loans(1)....... -- -- -- -- -- -- 4,756
-------- -------- -------- -------- ------- ------- ------- -------
Net income................ $ 841 $ 511 $ 1,820 $ 1,661 $ 2,961 $ 4,723 $ 3,834 $ 4,115
======== ======== ======== ======== ======= ======= ======= =======
Earnings per share of
common stock............ $ 0.11 $ 0.07 $ 0.24 $ 0.22 $ 0.39 $ 0.63 $ 0.51 $ 0.55
======== ======== ======== ======== ======= ======= ======= =======
Cash dividends paid per
share of common stock... $ 0.21 $ 0.21 $ 0.43 $ 0.43 $ 0.85 $ 0.79 $ 0.74 $ 0.70
======== ======== ======== ======== ======= ======= ======= =======
<CAPTION>
1995
-------
<S> <C>
Revenues:
Rental and other
income................ $16,239
Interest income earned
on cash equivalents... 198
-------
16,437
Expenses:
Depreciation and
amortization.......... 1,581
Management fees......... 1,092
Property operating
expenses.............. 8,626
General and
administrative........ 382
Professional fees....... 633
Director compensation... 24
-------
12,338
-------
Operating income (loss)... 4,099
Equity in income of
properties securing
mortgage loans(1)....... --
-------
Net income................ $ 4,099
=======
Earnings per share of
common stock............ $ 0.54
=======
Cash dividends paid per
share of common stock... $ 0.71
=======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31,
AT FEBRUARY 29, -----------------------------------------------
2000 1999 1998 1997 1996 1995
--------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 1,645 $ 2,615 $ 2,264 $ 3,136 $ 3,010 $ 5,006
Total assets.......................................... 36,357 37,962 38,910 40,033 41,453 44,211
Equity................................................ 33,651 35,027 38,459 39,658 41,368 43,217
Book value per share of common stock.................... 4.83 5.05 5.17 5.32 5.51 5.88
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
AT FEBRUARY 29, -----------------------------------------------
2000 1999 1998 1997 1996 1995
--------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Other Data (at end of period):
Wholly-owned facilities............................... 7 7 7 7 7 7
Joint venture facilities(2)........................... 1 1 1 1 1 1
</TABLE>
- ------------------
(1) Balance relates to ILM's ownership interest in ILM Holding. ILM acquired
control of ILM Holding in fiscal 1997. As a result, ILM Holding has been
included in ILM's consolidated financial statements beginning in 1997. The
balance was presented using the equity method of accounting in 1996 because
ILM did not control the majority of the voting common equity of ILM Holding
during that year, although ILM participated in 99% of the operating results.
(2) ILM is a tenant-in-common with ILM II for the Villa Santa Barbara,
California senior living community. ILM owns a 25% undivided ownership
interest in that community.
12
<PAGE>
THERE IS NO ESTABLISHED MARKET FOR ILM'S
COMMON STOCK; DIVIDENDS
ILM's common stock is neither listed (or admitted to unlisted trading
privileges) on a national securities exchange nor included in a U.S.
inter-dealer automated quotation system of a registered national securities
association or any other established securities market. ILM's common stock
trades irregularly ("by appointment") among available buyers and sellers and,
therefore, trading volume and price information is limited, sporadic and not
always current.
Dividends on ILM's common stock have been declared and paid quarterly since
inception. For the fiscal year ended August 31, 1998 aggregate per share
dividends were $.79, and for the fiscal year ended August 31, 1999 aggregate per
share dividends were $.85. For fiscal year ended August 31, 2000, to date,
aggregate per share dividends were $.42.
ILM is a real estate investment trust for U.S. federal income tax purposes
and is required to distribute annually, in the form of a cash dividend, at least
95% of its taxable income to its shareholders.
ILM is a finite-life entity whose corporate existence continues on a
month-to-month basis and presently is subject to successive 30-day extensions in
the sole discretion of ILM's Board of Directors.
13
<PAGE>
THE SPECIAL MEETING
The ILM Board is using this proxy statement to solicit proxies from the
holders of ILM's common stock at the special meeting. This document and the
accompanying form of proxy was first mailed to you on or about May , 2000.
Purpose of Special Meeting
The special meeting of holders of ILM common stock will be held on June ,
2000 at 10:00 a.m., local time, at the Key Bridge Marriott Hotel, 1401 Lee
Highway, Arlington, Virginia 22209 so that you can consider and vote upon a
proposal to approve the merger agreement.
AFTER CAREFUL CONSIDERATION OF A NUMBER OF FACTORS AND CIRCUMSTANCES WHICH
ARE DESCRIBED IN THIS PROXY STATEMENT, YOUR BOARD OF DIRECTORS HAS DETERMINED
THAT THE MERGER IS FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT THE MERGER IS
ADVISABLE. YOUR BOARD HAS ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Record Date for the Special Meeting
The ILM Board has fixed May , 2000 as the record date for the
determination of shareholders entitled to notice of and to vote at the special
meeting. Only shareholders of record at the close of business on the record date
will be entitled to vote at the special meeting. At the close of business on the
record date, there were outstanding 7,520,100 shares of ILM common stock, each
of which is entitled to one vote on each matter properly submitted to a vote at
the special meeting. On that date, there were 4,402 holders of record of ILM
common stock. ILM's common stock is the only outstanding class or series of
ILM's voting securities.
Vote Required for Approval of the Merger Agreement
The presence at the special meeting, in person or by proxy, of the holders
of a majority of shares of ILM common stock will constitute a quorum. A quorum
is necessary for the special meeting to be valid. The affirmative vote by the
holders of at least 66- 2/3% of the outstanding shares of ILM common stock
entitled to vote is required to approve the merger agreement. The failure to
vote, either by abstention or broker non-vote, will have the same effect as a
vote against approval of the merger agreement.
Proxies; Solicitation and Revocation
Your ILM common stock, represented by a properly executed and unrevoked
proxy, will be voted in accordance with the directions given by you in the
proxy. PLEASE DO NOT SEND ANY CERTIFICATES REPRESENTING YOUR COMMON STOCK WITH
YOUR PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF YOUR
ILM STOCK CERTIFICATES WILL BE MAILED TO YOU SHORTLY AFTER THE MERGER IS
COMPLETED. If you return an executed and unrevoked proxy, but do not direct ILM
how to vote, your ILM common stock represented by that proxy will be voted "FOR"
the approval of the merger agreement.
14
<PAGE>
If signed and returned, the proxy will authorize the persons named as your
appointed proxies to vote on the matters referred to in the proxy.
You may revoke your proxy at any time before its use at the special
meeting. A proxy may be revoked by either (a) submitting to the Secretary of ILM
a written revocation or a new signed proxy bearing a later date (any written
notice revoking a proxy for the special meeting should be sent to ILM Senior
Living, Inc. at 1750 Tysons Boulevard, Suite 1200, Tysons Corner, Virginia
22102, Attention: Corporate Secretary, or you may hand deliver your proxy to the
Secretary at the special meeting at or before the taking of the vote), or
(b) attending the special meeting, and voting in person. If you hold your shares
in a brokerage account and have instructed your broker how to vote, you must
follow your broker's instructions regarding how to change your vote. However, if
you hold your shares in a brokerage account, you cannot vote in person at the
special meeting.
The ILM Board does not know of any matters other than those described in
the notice of the special meeting that will be addressed at the special meeting.
If any other matters are properly presented at the special meeting, including,
among other things, a motion to adjourn or postpone the special meeting to
another time and/or place for the purpose of soliciting additional proxies with
respect to the merger agreement or to permit the dissemination of information
regarding any material developments relating to the merger or otherwise
pertinent to the special meeting, one or more persons named in the ILM proxy
will vote the shares represented by the proxy on such matter as determined in
their discretion, but no proxy that is voted against approval of the merger
agreement will be voted in favor of any adjournment or postponement to solicit
additional proxies. At any subsequent time of the special meeting, all proxies
will be voted in the same manner as they would have been voted at the original
time of the special meeting (except for any proxies which previously have been
properly revoked or withdrawn), even though they may have been properly voted on
the same or any other matter at a previously held special meeting date.
ILM and Capital will share the costs of soliciting proxies from ILM
shareholders. In addition to soliciting proxies by mail, directors, officers and
employees of ILM may solicit proxies by telephone, in person or otherwise,
without receiving any additional compensation. Arrangements also will be made
with brokerage firms and other custodians, nominees and fiduciaries to send
solicitation materials to the beneficial owners of shares of ILM common stock
held of record by such persons, and arrangements may be made for reimbursement
of reasonable out-of-pocket expenses incurred by these persons and entities in
connection with the solicitation.
Shares of ILM common stock represented at the special meeting but not voted
for or against the merger agreement, such as abstentions or "broker non-votes,"
will be counted in determining a quorum. A "broker non-vote" means shares
represented at the special meeting in person or by proxy by a broker or nominee
where the broker or nominee fails to vote the shares because it (1) did not
receive voting instructions on a particular matter from the beneficial owners or
person entitled to vote and (2) does not have discretionary voting power on the
matter. If your shares of ILM common stock are held in your name and you either
fail to return your proxy card or vote in person at the special meeting, the
effect will be a vote against the merger. Also, if your shares of ILM common
stock are
15
<PAGE>
held in a brokerage account and you fail to instruct your broker how to vote
your shares, the effect will be a vote against approval of the merger agreement.
Beneficial Ownership by Directors
On the record date, none of the officers or directors of ILM owned any
shares of ILM common stock or any shares of Capital common stock.
People with Disabilities
We can provide you with reasonable assistance to help you attend the
special meeting in person if you tell us about your disability.
If you fall into this category and plan to attend the special meeting in
person, please call or write to the secretary of ILM at least two weeks before
the special meeting at the telephone number or address stated under "Where You
Can Find More Information" on page 17.
Confidential Voting
Independent inspectors will count votes at the special meeting. Your
individual vote will be kept confidential from ILM unless special circumstances
exist. For example, we will receive a copy of your proxy card if you write
comments on the card.
Solicitation of Proxies by Soliciting Agent
D.F. King & Co. Inc., as the soliciting agent, has signed a solicitation
agreement with ILM and Capital pursuant to which it will use its best efforts to
solicit ILM shareholder approval of the merger agreement. D.F. King & Co. Inc.
will receive approximately $6,000 in consideration for its solicitation
services, as well as reimbursement of its reasonable out-of-pocket expenses
(including telephone, mailing and legal expenses), all of which will be shared
by ILM and Capital.
Annual Meeting
ILM will hold an annual meeting for the election of directors in calendar
year 2000 only if the merger has not already been completed. If such meeting is
held, the deadline for receipt of a proposal to be considered for inclusion in
ILM's proxy statement for the calendar year 2000 annual meeting will be October
31, 2000.
16
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This document contains important business and financial information about
ILM and Capital derived from documents that are not being delivered to you.
However, this information is available to you without charge at your oral or
written request. You can obtain these documents (other than exhibits to those
documents) by requesting them in writing, by telephone or, in the case of
Capital, by e-mail, as follows:
ILM Senior Living, Inc. Capital Senior Living Corporation
1750 Tysons Boulevard, 14160 Dallas Parkway, Suite 300
Suite 1200 Dallas, Texas 75240
Tysons Corner, Virginia 22102 (972) 770-5600
(888) 257-3550 www.capitalsenior.com
If you would like to request documents, please do so before May 31, 2000 so
you can receive them before the special meeting.
We have not authorized anyone to give you any information or to make any
representation about ILM, Capital or the proposed merger that differs from or
adds to the information contained in this document or in the documents that ILM
and Capital have filed with the SEC. Therefore, if anyone gives you any
different or additional information, you should not rely on it.
The information contained in this document speaks only as of the date
indicated on the cover page of this document unless the information specifically
indicates that another date applies.
The information in this document regarding ILM is supplied entirely by ILM
and the information in this document regarding Capital is supplied entirely by
Capital.
ILM and Capital file annual, quarterly and special reports, proxy
statements and other information with the SEC. You can inspect and copy such
materials at the public reference facilities of the SEC located at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the SEC's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. You may also obtain
copies of such material from the SEC at existing published rates by writing to
the Public Reference Section of the SEC at, 450 Fifth Street, N.W., Washington
D.C. 20549. When requesting such materals and information from the SEC, in the
case of Capital, please reference Capital's SEC File Number "1-13445" and, in
the case of ILM, please reference ILM's SEC File number "0-18249."
Please call the SEC at 1-800-SEC-0330 for more information on the operation
of its public reference rooms. You can also find SEC filings relating to ILM and
Capital at the SEC's website at "http://www.sec.gov."
A VERY IMPORTANT WARNING ABOUT OUR FORWARD-LOOKING STATEMENTS:
ILM makes various forward-looking statements in this document. These
forward-looking statements are subject to many risks and uncertainties, and
there can be no certainty that such statements will prove to be correct.
17
<PAGE>
When words and expressions such as: "believes," "expects," "anticipates,"
"estimates," "plans," "intends," "objectives," "goals," "aims," "projects,"
"forecasts," "possible," "seeks," "may," "could," "should," "might," "likely,"
"enable" or similar words or expressions are used in this proxy statement, as
well as statements beginning or ending with phrases such as "in our view,"
"there can be no assurance," "although no assurance can be given" or "there is
no way to anticipate with certainty," forward-looking statements are being made
in all of these instances.
These forward-looking statements speak as of the date of this proxy
statement.
All subsequent written and oral forward-looking statements regarding the
merger attributable to ILM or Capital, or any person acting on their behalf, are
expressly qualified in their entirety by the cautionary statements contained or
referred to above. Neither ILM nor Capital intend to update or revise any
forward-looking statements to reflect any changes in general economic,
competitive or market conditions and developments beyond their control.
18
<PAGE>
SPECIAL FACTORS
THE MERGER
The merger agreement provides for the merger of ILM with Capital
Acquisition. Capital Acquisition, which is 100% owned by Capital, will be the
surviving entity in the merger and ILM's separate corporate existence will
terminate. The aggregate consideration to be paid by Capital in the merger to
the holders of ILM's outstanding common stock is $87,429,000 in cash. If the
merger is completed, each share of ILM common stock outstanding immediately
prior to the effective time of the merger automatically will be converted into
the right to receive $11.63 in cash (less applicable withholding taxes). No
interest will be paid on that amount.
ILM and Capital intend to complete the merger as soon as possible after the
approval of the merger agreement by ILM's shareholders and after all of the
conditions contained in the merger agreement have been satisfied or, to the
extent permitted by applicable law, waived. If ILM's shareholders approve the
merger agreement it is expected that the merger will be completed during the
Summer of calendar year 2000.
HISTORY
In 1989 PaineWebber Independent Living Mortgage Fund, Inc. was incorporated
and sponsored by PaineWebber Properties Incorporated as a finite-life
corporation for the purpose of making construction and participating mortgage
loans secured by rental housing communities for independent senior citizens. ILM
elected to qualify and be taxed as a Real Estate Investment Trust (a "REIT")
under the Internal Revenue Code of 1986, as amended. In June 1989 ILM completed
its initial public offering and invested the net proceeds therefrom in
participating mortgage loans secured by senior housing communities.
The loans originally were made to Angeles Housing Concepts Inc. ("AHC"), a
company specializing in the development, acquisition and operation of senior
housing communities. The properties securing the ILM mortgage loans did not
generate cash flows from tenant rentals sufficient to service the mortgage
indebtedness and in February 1993 AHC announced that it was experiencing
liquidity problems that subsequently resulted in mortgage payment defaults.
In May 1993 AHC's parent, Angeles Corporation, commenced a bankruptcy case
under title 11 of the United States Code. Pursuant to a settlement agreement
entered into and approved by the bankruptcy court in April 1994 ILM's
predecessor became the owner (indirectly through its subsidiaries) of the senior
housing communities presently comprising the ILM portfolio.
The terms of ILM's articles of incorporation provide for the liquidation of
ILM not later than December 31, 1999, subject to extension to any date from and
after December 31, 1999 through and including December 31, 2014 if ILM's Board
determines that such liquidation would result in net sale proceeds not
reflective (or less than) the value of ILM's properties.
The original December 31, 1999 liquidation date is now subject to extension
on a month-to-month basis by ILM's Board pursuant to action taken at a special
meeting of the Board convened on November 16, 1999 at which Messrs. J. William
Sharman, Jr., Jeffry A. Dwyer and Carl J. Schramm were present.
19
<PAGE>
From April 1994 to July 1996, AHC was the property manager for ILM and
ILM II. As described later in this proxy statement, AHC was terminated as
property manager in July 1996.
In March 1995 ILM received an unsolicited expression of interest from
Columbia Pacific Management, Inc., on behalf of Holiday Retirement Corporation,
to acquire the ILM and ILM II properties for $114.0 million, subject to receipt
of financing, the completion of due diligence and other conditions. Shortly
thereafter, ILM held informal discussions with third parties regarding possible
transactions involving its properties. PaineWebber Properties Incorporated, the
sponsor of ILM's properties and ILM's advisor, approached approximately 10
candidates (which included Holiday Retirement Corporation, The Forum Group,
Inc., Kisco Retirement Communities, Capital Senior Living Corporation, American
Retirement Corporation, The Fountains Retirement Properties, Inc., Meditrust
Corp., Nationwide Health Properties Inc., and Health Retirement Properties
Trust) from whom expressions of interest were received setting forth their
desire to explore the potential purchase of the ILM and ILM II properties for
aggregate amounts which ranged from approximately $80.0 million to
$120.0 million in cash.
In August 1995 the Board was informed by PaineWebber Properties about a
potential corporate level built-in-gains tax liability that would result from
the sale of the ILM and ILM II assets. Accordingly, the Board engaged Senior
Valuation Services, Inc., an independent appraiser specializing in the valuation
of senior living properties, to conduct an appraisal of ILM's properties. Senior
Valuation reported to the Board that as of October 30, 1995 the appraised value
of the combined ILM and ILM II properties was approximately $108.5 million, of
which $64.0 million was attributed to ILM and $44.5 million was attributed to
ILM II.
During the appraisal process the Board suspended its review and
consideration of the foregoing expressions of interest and so informed each of
the candidates named above. PaineWebber Properties was then requested to make an
assessment of the expected returns on investment to shareholders through the
scheduled finite-life terms of ILM and ILM II (i.e., December 31, 1999 and
December 31, 2001).
The Board noted both the preliminary and speculative nature of the 10
expressions of interest, the fact that no formal due diligence was conducted by
any of the transaction candidates, the uncertainty as to the values that might
result from any actual sale transaction at such time, and the fact that the
scheduled liquidation dates for the ILM and ILM II properties, which were set
forth in the articles of incorporation for those entities, were not until
December 31, 1999 and December 31, 2001, respectively. Accordingly, the Board
decided not to pursue any specific or formal discussions with any of the named
candidates, but instead, decided to continue to manage and operate the
properties and consider alternative means to maximize the value of the ILM
common stock. No specific course of action, plans or proposals were adopted by
the Board at this time to maximize such value.
In January 1996 PaineWebber Properties met with AHC to review AHC's
performance and strategies for enhancing the value of the ILM and ILM II
properties. At this meeting AHC stated that it was unwilling to inform
PaineWebber Properties about AHC's strategies to enhance such value and that AHC
was interested in purchasing
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properties in locations contiguous to the ILM properties. Accordingly, ILM
believed that AHC intended to compete directly with ILM.
On February 26, 1996 Holiday Retirement Corporation increased the
consideration referred to in its March 1995 expression of interest to $127.0
million, subject to the same due diligence, financing and other conditions
communicated to ILM and ILM II in March 1995.
At a Board meeting held on February 29, 1996 at which Messrs. J. William
Sharman Jr., Jeffry R. Dwyer and Lawrence A. Cohen were present, the Board
reviewed with PaineWebber and PaineWebber Properties various alternatives to
owning and operating the ILM properties until December 31, 1999, including a
sale and liquidation analysis, and certain corporate restructuring alternatives.
The Board determined that in view of the matters disclosed by AHC to PaineWebber
Properties and AHC's unsatisfactory performance as property manager to date, AHC
had a conflict of interest with respect to its continuing role as property
manager and that a replacement manager should promptly be identified and engaged
on commercially reasonable terms. Accordingly, the Board requested PaineWebber
to identify and contact potential candidates to serve as replacement property
manager for the ILM properties. Approximately 20 such candidates were contacted.
To assist the Board in its overall strategic financial decisional process,
it invited National Westminster Bank, PLC, New York branch, a nationally
recognized financial advisor with significant expertise in the assisted living
industry, to discuss industry trends and conditions and to provide advice on
possible methods to maximize the value of ILM's common stock.
At a special meeting of the Board convened on April 29, 1996 at which
Messrs. J. William Sharman, Jr., Jeffry R. Dwyer and Lawrence A. Cohen were
present, NatWest expressed its view that ILM should consider, among other means
to maximize shareholder value, expansion through the selective acquisition of
other senior living communities, the direct lease of the senior living
communities to a third party operator, listing ILM's common stock (as well as
the shares of ILM's affiliate leasing entity--Lease I) on a national securities
exchange or The Nasdaq Stock Market, combining (by means of merger or otherwise)
ILM with Lease I, or combining Lease I with Lease II (ILM II's affiliate leasing
entity). NatWest then noted that a liquidation or public auction of the ILM
properties at that time would be premature in view of ILM's December 31, 1999
scheduled liquidation date.
In April 1996, of the 20 potential senior living property managers
PaineWebber Properties had contacted, the Board narrowed the field to five
candidates (including Sunrise Assisted Living, Inc., Marriot Corporation, Manor
Care Inc., ARV Assisted Living, Inc. and Capital). Each of these five candidates
was interviewed by PaineWebber Properties.
Following due diligence reviews with respect to the qualifications and
performance history of the five candidates and a review of the proposals
received from each candidate (including fee quotations and termination provision
proposals), the ILM Board and the boards of directors of Lease I and Lease II,
respectively, met in mid-July 1996 to discuss the prospective engagement of
Capital Senior Management 2, Inc. (a wholly-owned subsidiary of Capital) as
property manager to replace AHC.
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At a Board meeting held on July 17, 1996 at which Messrs. Jeffry R. Dwyer,
J. William Sharman Jr. and Lawrence A. Cohen were present, Mr. Cohen, then the
President and a director of ILM, informed the Board that senior management of
Capital recently had asked him whether he was interested in joining Capital in
an executive capacity. Mr. Cohen indicated that he had no immediate plans to
pursue or accept such a position with Capital or any other entity engaged in the
senior living industry and, although he had no understanding or agreement with
Capital as to any such employment, he wanted to preserve his ability to pursue
such an opportunity in the future and, therefore, believed it was prudent to
disclose these facts to ILM's Board. Thereafter, Mr. Cohen was recused from all
ILM Board presentations, discussions and decisions regarding any commercial
relationships or transactions with Capital.
The Board asked PaineWebber Properties about its impressions of Capital and
PaineWebber Properties observed that Capital had a good industry reputation, was
experienced in the management, ownership and operation of assisted living
communities, and appeared well-suited to assume the role of successor property
manager of the ILM properties.
Considerable discussion then ensued among the directors of ILM as to the
qualifications of Capital relative to the other four candidates. The proposals
made by each of the five candidates were reviewed and it was noted that
Capital's proposed fees were the lowest of all proposals. The Board noted that
all proposals included customary termination (or "break-up") fees and that in
view of the scheduled liquidation of ILM in approximately three and one-half
years, it would not be commercially prudent to enter into an agreement providing
for the payment of such fees.
Accordingly, the Board determined that an alternative to such fees should
be proposed and in view of Capital's overall lower cost proposal, determined
that Capital was the most attractive replacement property manager. ILM
communicated to Capital's representatives that it would not agree to any
termination fees, but instead, would grant to Capital a limited right of first
and last offer pertaining to the sale of ILM's assets to an unaffiliated third
party. ILM also informed Capital that any such right would have to permit ILM to
terminate any pending asset sale transaction in its sole discretion so that ILM
could retain the right not to sell its facilities to Capital or any other
party--irrespective of whether a transaction was solicited by ILM or was
unsolicited.
Thereafter, the management agreement with AHC was terminated for cause and
the ILM Lease I Board resolved to enter into a management agreement with Capital
substantially in accordance with a draft term sheet previously reviewed by such
board and ILM's Board, with the exception that a limited right of first and last
offer would be provided for in lieu of Capital's requested termination fee. The
Board instructed PaineWebber to report directly to Mr. Dwyer for further
negotiating instructions regarding the management agreement with Capital.
Negotiations continued and a management agreement was entered into with Capital
Senior Management 2, Inc. in July 1996.
The management agreement provides that in consideration for services
provided, Lease I pays Capital Senior Management 2, Inc. a base management fee
of 4% of the monthly gross operating revenues of the ILM properties, plus an
incentive management fee of 25% of the amount by which certain net cash flows of
the properties exceed certain base amounts. The management agreement is
guaranteed by Capital.
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At a special meeting of the Board held on May 13, 1996 at which Messrs.
Jeffry R. Dwyer, J. William Sharman Jr. and Lawrence A. Cohen were present,
representatives of PaineWebber addressed ILM's directors concerning possible
financial transactions relating to ILM's properties. The Board reviewed a
marketing analysis of the assisted living industry which indicated that property
values in the industry were at a near-peak.
PaineWebber again recommended that the Board pursue a current sale of ILM's
properties. PaineWebber's reasons included that (i) the nature of the investment
of ILM's shareholders had changed substantially since 1989 because ILM initially
had been organized as a mortgage REIT (i.e., an investment directly in a pool of
mortgage loans secured by underlying properties) and subsequently was
reorganized as an equity REIT (i.e., an investment directly in senior living
properties with the consequent ability to participate in the appreciation in
value, if any, of those properties), and (ii) ILM's common stock was neither
listed on a national securities exchange or The Nasdaq Stock Market, nor traded
in any established securities market--thus there was virtually no liquidity for
the ILM common stock.
The Board did not authorize or pursue a sale of its senior living
properties at this time noting, among other reasons, that (i) an asset sale most
likely would not be reflective of the going-concern value of ILM, (ii) the
transition period associated with the retention of a new manager for the
properties would be disruptive and costly, (iii) it was necessary first to
stabilize occupancy rates and improve ILM's net operating income, and (iv) the
Board intended to study means to simplify ILM's corporate ownership structure.
The Board believed that if ILM remained an independent corporation and
viable strategic plans were adopted by the Board and implemented by management,
that the objectives stated above could be realized prior to December 31, 1999
(ILM's scheduled liquidation date) and the value of ILM's common stock could be
maximized. This was deemed a more reasonable and well-considered course of
action compared with pursuing an immediate liquidation at a time when industry
property values reportedly were below peak.
No definitive plans were adopted by the Board at this time and it resolved
to continue to study and receive advice on strategic financial alternatives to
maximize shareholder value. The Board noted the overall growth and emergence of
publicly traded assisted living companies and the fact that the mean and median
per share sale prices for ILM's common stock were approximately $5.74 and $5.82
respectively. For the calendar quarter ended June 30, 1996 such values were
higher than the book value of ILM's common stock which, at May 31, 1996, was
$5.49 per share. Although the Board did not undertake a liquidation or
"break-up" analysis at this time, it believed the purchase price that could be
obtained pursuant to a sale of ILM as a going-concern would be greater than the
purchase price that might be realized for shareholders upon a partial or
complete liquidation of the properties.
Shortly after the May 13th Board meeting PaineWebber indicated that the ILM
Board should conduct an immediate auction of the ILM and ILM II properties. Due
to PaineWebber's sponsorship of the property portfolio and its previous common
stock underwriting role for ILM and ILM II, the Board believed that PaineWebber
had an actual or apparent conflict of interest with respect to its strategic
financial advice to the ILM Board. In this connection the Board noted that:
(i) PaineWebber Properties had been the sponsor of ILM's corporate predecessor,
(ii) PaineWebber Incorporated was exclusive
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underwriter for the initial public offering of ILM's predecessor (and that the
initial investors in the IPO included a significant number of PaineWebber
customers), and (iii) PaineWebber had until 1996 a nominee on the ILM Board.
PaineWebber was informed of the Board's view and NatWest subsequently was
requested to provide strategic financial advice based primarily on its
reputation and its expertise in the representation and valuation of private and
publicly-held corporations, REITs and other participants in the healthcare and
assisted living industry. The Board noted the fact that NatWest had no prior
relationship to ILM or ILM II (or any of their directors) and did not own any
securities of ILM or ILM II. The Board believed it should seek to maximize
shareholder value and that an independent expert such as NatWest should advise
the Board so that it could be fully informed as to any commercially viable
strategic alternatives that might be available toward that end.
The Board believed that absent a compelling financial reason (whether of a
general economic, market, industry or corporate nature), liquidating ILM in
accordance with PaineWebber's recommendation approximately three and a one-half
years earlier than ILM's December 31, 1999 scheduled finite-life liquidation
date would be both imprudent and premature.
At a meeting of the Board held on January 10, 1997 at which J. William
Sharman, Jr., Julien G. Redele, Lawrence A. Cohen, Carl J. Schramm and Jeffry R.
Dwyer were present, PaineWebber indicated that because Capital had been engaged
by ILM as the new property manager and had been performing with greater success
than AHC, and because of seemingly improved trends in the real estate and
capital markets, it was an appropriate time for ILM to sell its properties to
realize for shareholders the appreciation of ILM's senior living portfolio.
PaineWebber stated that ILM was not an appropriate vehicle for long-term
investment due to the illiquid nature of ILM's common stock, ILM's limited
access to capital and lack of critical mass, and in its view, the absence at ILM
of experienced, proactive and entrepreneurial management. PaineWebber repeated
its recommendation for an immediate sale of the ILM properties by means of
auction.
PaineWebber further stated that if the Boards of ILM and ILM II agreed
within 30 days to sell the combined ILM and ILM II property portfolios in such
an auction, PaineWebber would participate in the auction as the opening or
"floor" bidder at a guaranteed minimum purchase price of $127.0 million (i.e.,
before deductions for the payment of corporate level built-in gains taxes
generated on the sale of the properties and other fees and out-of-pocket
expenses, including professional advisory fees, relating to the transaction).
The Board noted that after deducting up to approximately $5.2 million of
built-in gains taxes payable in connection with a property liquidation and after
paying related transaction expenses, PaineWebber's $127.0 million guaranteed
opening bid, if the successful bid, would result in aggregate net consideration
to ILM and ILM II shareholders of approximately only $120.0 million
(representing approximately three to five million dollars more than the
aggregate investment basis of the ILM and ILM II shareholders). The Board did
not believe this was an attractive return to shareholders on their investment.
At the January 10 Board meeting PaineWebber stated that it believed the
market for assisted living properties had peaked and that recently completed
initial public offerings of
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companies in the industry had not been well-priced. PaineWebber stated that if
the Board decided not to pursue the property liquidation, it would resign as
ILM's advisor.
After further review and consideration of PaineWebber's recommendation, it
was the view of the Board that because PaineWebber Properties repeatedly failed
to recommend any alternatives to a liquidation of ILM's properties (well in
advance of ILM's December 31, 1999 scheduled finite-life termination date),
PaineWebber probably was not in a position to analyze impartially all strategic
financial alternatives available to ILM to maximize shareholder value.
Accordingly, the Board sought to engage a nationally recognized investment
banking firm with considerable expertise in the industry regarding the strategic
financial alternatives available to ILM.
At the request of the Board Jeffry R. Dwyer was instructed to obtain
proposals from nationally recognized independent financial advisors. Mr. Dwyer
initially contacted Donaldson, Lufkin and Jenrette Securities Corporation, BT
Alex. Brown Incorporated, Morgan Stanley & Co. Incorporated and NatWest. After
consideration of the proposals received from these financial advisory
candidates, ILM retained NatWest as its exclusive financial advisor because of
NatWest's ability to devote significant attention to ILM, NatWest's industry
experience and overall reputation, and its performance on recent assignments.
In February 1997 the Board requested PaineWebber to extend its 30-day
minimum bid guarantee for an additional 30 days to provide ILM with additional
time for NatWest to complete its investigatory analyses. PaineWebber agreed and
the Board held discussions with NatWest during this time to explore a potential
corporate reorganization that would enhance shareholder value and requested
NatWest to report its findings to the full Board at the next scheduled Board
meeting.
Having completed its analyses, at a Board meeting held in March 1997 at
which J. William Sharman, Jr., Julien G. Redele, Lawrence A. Cohen, Carl J.
Schramm and Jeffry R. Dwyer were present, NatWest advised ILM that the sale of
the ILM properties at that time was not the optimum means to maximize
shareholder value. NatWest expressed its view that the senior living market was
likely to continue to appreciate and that the ILM property portfolio would
probably increase in value over the next several years.
Moreover, based upon equity valuations in the assisted living and
healthcare REIT industries at that time, NatWest believed that ILM should
explore a restructuring which would separate ILM into a real estate holding
company, as lessor, and an operating company, as lessee. NatWest stated that
such a restructuring could maximize shareholder value by obtaining a
going-concern premium in relation to the lower values to be obtained upon a
direct sale of ILM's properties. In addition, NatWest believed that such a
transaction was likely to provide ILM and ILM II with the flexibility to expand
or divest either their operating companies or their real estate entities.
After the meeting the Board informed PaineWebber that based, in part, on
the advice of NatWest, it decided not to liquidate its properties at that time,
that other potential strategic financial alternatives were available and in the
best longer-term interests of ILM's shareholders, and that the Board was
prepared to accept the resignation of PaineWebber Properties as its advisor.
PaineWebber Properties thereupon resigned.
At a Board meeting held on August 20, 1997 at which J. William Sharman,
Jr., Julien G. Redele, Lawrence A. Cohen (who was recused from the Schroders
presentation
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portion of the meeting), Carl J. Schramm and Jeffry R. Dwyer were present, the
Board received a presentation from Schroder & Co. Inc. which recently was
retained by the Board to replace NatWest as ILM's financial advisors when the
individual NatWest investment bankers who worked for NatWest on the ILM account
resigned from NatWest and joined Schroders. Schroders outlined alternatives for
restructuring the combined companies and noted that market conditions had
changed since earlier in 1997 when NatWest had suggested a corporate
reorganization of ILM into a real estate holding company and an operating
company.
Due to the increase in public market valuations since earlier in the year
for assisted living companies relative to the slight contraction in the public
market valuation for healthcare REITs during that same period of time, Schroders
believed that restructuring ILM into an independent publicly traded corporation
to own and operate senior living communities while, at the same time, seeking a
strategic merger or business combination partner with expertise in managing and
operating senior living communities would be an appropriate strategy to maximize
shareholder value.
To passively test the market, the Board asked Schroders to identify
prospective strategic financial and business combination partners. However,
Schroders was not authorized to contact or initiate any discussions with these
companies. Schroders did identify for the ILM Board approximately 10 senior
living companies (including American Retirement Corporation, Brookdale Living
Communities Inc., Capital, Sunrise Assisted Living, Inc., Alterra Healthcare
Corporation, Assisted Living Concepts, Inc., CareMatrix Corporation, Balanced
Care Corporation, Integrated Living Communities, Inc., and Emeritus
Corporation). ILM did not seek at this time to formulate the terms or ascertain
the value of any prospective transaction with any of the foregoing companies.
At no time during the foregoing time period did the ILM Board authorize or
resolve to recapitalize or reorganize ILM or sell control of ILM or any of its
properties, nor did the Board solicit offers for a merger or other business
combination transaction or instruct Schroders to do so on its behalf. At all
times during the foregoing time period, the ILM Board continued to receive
advice as to the availability of strategic financial alternatives to maximize
the value of ILM's common stock.
Although no Board determination was made to proceed with any particular
transaction or to propose, structure or negotiate the potential terms thereof,
the Board believed that of the approximately 10 candidates identified to ILM by
Schroders, Capital's successful performance as manager of the ILM properties
and, thus, its familiarity with ILM's business and operations, made Capital a
viable potential merger or business combination partner if the Board later
resolved to pursue and negotiate the terms of such a transaction.
The Board also believed that Capital's performance as property manager was
strong and that a second change in property manager (soon after the termination
of AHC) would be disruptive to ILM's management and the administration and
operation of ILM's senior living communities, potentially adversely affect ILM's
operating results and the level of services provided to its residents, and have
a potentially negative impact on the overall value of ILM.
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BACKGROUND OF THE MERGER
THE TIMING, STRUCTURE, TERMS AND CONDITIONS OF THE MERGER AND THE MERGER
AGREEMENT ARE THE RESULT OF EXTENSIVE NEGOTIATIONS BETWEEN REPRESENTATIVES OF
ILM AND REPRESENTATIVES OF CAPITAL.
SET FORTH BELOW IS A SUMMARY OF THE MATERIAL ASPECTS OF THE BACKGROUND OF
THE PROCESS AND NEGOTIATIONS WHICH RESULTED IN THE EXECUTION OF THE ORIGINAL
MERGER AGREEMENT BETWEEN ILM AND CAPITAL ON FEBRUARY 7, 1999 (WHICH WAS
TERMINATED ON OCTOBER 19, 1999), AND CULMINATED WITH THE EXECUTION AND DELIVERY
OF THE AMENDED AND RESTATED MERGER AGREEMENT BETWEEN ILM AND CAPITAL ON
OCTOBER 19, 1999, AS AMENDED BY THE FIRST AMENDMENT THERETO ENTERED INTO ON
APRIL 18, 2000. SEE APPENDIX A TO THIS PROXY STATEMENT.
At a meeting of ILM's Board convened on August 20, 1997 at which
J. William Sharman, Jr., Julien G. Redele, Lawrence A. Cohen, Jeffry R. Dwyer
and Carl J. Schramm were present, the Board determined to explore a potential
strategic financial transaction with Capital and established a special committee
comprised of Messrs. Jeffry R. Dwyer and J. William Sharman, Jr. Messrs. Dwyer
and Sharman were at that time the Board's two most senior members with extensive
familiarity with ILM and its property portfolio.
Neither Mr. Dwyer nor Mr. Sharman (i) had any material economic or
pecuniary interest in ILM, ILM II, Capital or any of their affiliated companies,
(ii) was a participant in any director, executive or employee compensation plan
or arrangement of either ILM, ILM II or Capital, or (iii) was party to any
employment, change-in-control or similar contract, arrangement or understanding
with ILM, ILM II or Capital. Accordingly, it was determined that Messrs. Dwyer
and Sharman were disinterested directors and the best qualified candidates to
serve on the special committee.
Messrs. Dwyer and Sharman were authorized at the August 20, 1997 meeting to
approach Capital and ILM's financial advisors to discuss the feasibility of a
merger or business combination transaction with Capital. The special committee's
mandate was to determine whether a transaction which would maximize the value of
ILM's common stock was feasible.
The Board decided at its August 20th meeting that prospectively, with
respect to all matters concerning Schroders or any potential extraordinary
corporate transactions involving ILM, ILM II or their assets, Mr. Cohen would be
required to recuse himself entirely from all Board discussions, communications,
deliberations and presentations.
Mr. Cohen was, in fact, so recused for the remainder of his tenure (through
July 1998) at ILM and ILM II. In addition, the minutes of all Board meetings
were redacted so that Mr. Cohen would not receive complete copies of the minutes
of the Board or the special committee with respect to discussions,
communications and deliberations with Capital, ILM's financial advisors or any
potential alternative transactions or financial strategies.
At an August 25, 1997 meeting of the Board at which J. William Sharman,
Jr., Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, Mr.
Dwyer indicated that he had contacted James A. Stroud, then the Co-Chairman of
Capital, and informed him that in addition to other potential strategic
financial alternatives, ILM was exploring the possibility of a merger with a
senior living operating company and was interested in discussing the possibility
of such a transaction with Capital.
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Mr. Dwyer informed Capital that because Capital was a closely-held company,
ILM would need to obtain all relevant financial and operating data for Schroders
to perform an analysis as to whether such a merger was feasible and whether a
transaction could be structured in a manner which was commercially advantageous
to ILM. Capital indicated its willingness to pursue exploratory discussions
relating to such a transaction and, shortly thereafter, a reciprocal
confidentiality and standstill agreement was entered into with Capital and each
of ILM and ILM II to begin a preliminary investigatory process, including the
commencement of initial due diligence investigations by each party.
At approximately this time a representative of Capital requested an initial
meeting with the ILM Board to begin discussions and Mr. Dwyer informed such
representative that such a meeting would be premature until Schroders had
completed its preliminary financial review of Capital and reported its results
to the ILM Board.
On September 17, 1997 Mr. Dwyer reported to the Board, at a meeting thereof
at which J. William Sharman, Jr., Jeffry R. Dwyer, Julien G. Redele and Carl J.
Schramm were present, that Capital had provided Schroders with a copy of its
pending Registration Statement on Form S-1 that recently had been filed publicly
with the SEC in connection with Capital's planned initial public offering.
However, as a result of the pending SEC registration process, Capital did not
pursue any transaction discussions with ILM at that time. Capital subsequently
consummated its initial public offering on November 5, 1997.
At a meeting of the ILM Board convened on December 8, 1997 at which J.
William Sharman, Jr., Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were
present, the Board discussed with Schroders a hyopothetical merger between ILM
and Capital. The Board believed that the combined ILM and ILM II properties
could be valued in the approximate range of $160.0 million to $170.0 million, to
be allocated approximately 60% to ILM and approximately 40% to ILM II.
Schroders stated that it was not certain whether Capital or another bona
fide prospective purchaser would be willing to assign such a value to the
combined ILM and ILM II properties. Mr. Redele asked whether it would be
appropriate at this time for ILM to actively solicit interest from multiple
prospective buyers or potential business combination partners even though there
had been no Board decision to sell ILM or seek a business combination. The Board
determined that because ILM was not scheduled to liquidate until December 31,
1999, it was not in the best interest of ILM's shareholders at the time to
conduct an auction for the sale of the properties or stock of ILM and that ILM
should remain an independent public company.
The Board further believed that in lieu of soliciting proposals from
multiple prospective bidders or initiating a public auction process at that
time, there were three primary reasons for continuing to privately explore a
potential merger or business combination transaction with Capital: (i) the
limited right of first and last offer provided by Lease I to Capital in lieu of
a management agreement termination fee limited ILM's ability to engage in
transactions involving the sale of its property portfolio even though such right
of first and last offer did not apply to merger transactions; (ii) in view of
Capital's extensive familiarity with ILM's business and properties, a merger or
other business combination transaction with Capital was likely to involve a
significantly less extensive due diligence process, potentially lower
transaction costs and more simple transaction documentation and a deal with
Capital providing maximum value for ILM's common stock
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was likely to be well received by ILM's shareholder constituency; and (iii) the
process of dealing with multiple prospective bidders could create a
"free-for-all" or "fire sale" atmosphere and result in considerable management
and administrative distraction at a time when ILM's properties were being well
managed by Capital and ILM had just recently recovered from the operational
disruption and transition of replacing AHC with Capital.
The Board also believed that although it had not considered or proposed any
specific forms of merger consideration at the time, if a deal could be
structured in which ILM's shareholders could receive equity securities in a
surviving merger entity or newly combined company, the Board would need to
consider carefully the probability and magnitude of any potential negative
impact on revenues from any operational and administrative disruptions during
the post-closing transition from one property manager to another.
Although the ILM Board acknowledged that if it approached other potential
purchasers they hypothetically could value ILM's portfolio higher than the
valuation which ultimately might be ascribed to ILM pursuant to negotiations
with Capital, the Board did not seek to engage in speculation and continued to
believe that privately pursuing a singular transaction with Capital was the best
course of action for ILM and its shareholders at the time.
The Board further believed that a transaction with Capital would be less
likely to adversely affect occupancy rates and, therefore, earnings of a
successor or newly combined company because Capital already was successfully
managing the ILM properties and a prospective transaction with Capital, pursuant
to which ILM's shareholders could receive publicly traded equity securities,
would provide enhanced liquidity to ILM's shareholders because Capital's common
stock was listed on the NYSE and ILM's common stock was not listed or actively
traded.
The Board realized that ILM was under a contractual obligation to honor
Capital's limited right of first and last offer relating to the purchase of
ILM's properties, but the terms of such right permitted ILM to terminate, in its
discretion, any pending sale of the properties and not to proceed with a sale to
Capital or any other party. The Board believed that if it was unable to
structure a transaction with Capital which, in the opinion of ILM's independent
financial advisors was fair from a financial point of view and otherwise in the
best interests of ILM's shareholders, ILM would always have the ability to
pursue other strategic alternatives to maximize the value of ILM's common stock
and would not enter into any contractual obligations to preclude or restrict its
ability to do so.
At the December 8, 1997 meeting the ILM directors discussed these matters
with Schroders and the Board contacted Capital to ascertain whether Capital
would be interested in pursuing a merger with ILM and ILM II at an aggregate
price of approximately $170.0 million.
The Board continued to believe that a widespread solicitation of potential
purchasers or an auction of ILM's properties (of the nature previously
recommended by PaineWebber Properties), as opposed to focusing on a specific
transaction with a single potential buyer with whom ILM had extensive
familiarity and an on-going successful commercial relationship, would be
materially disruptive to the management and administration of ILM's day-to-day
operations. The Board further believed that dealing with multiple parties could
result in the receipt of artificially lower (or "low ball") bids from industry
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competitors for the purpose of initiating a protracted auction process which
would not be in the best interests of ILM shareholders.
At a Board meeting held in January 1998 at which J. William Sharman, Jr.,
Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, Schroders
reviewed and discussed the historical stock price performance of Capital and
reviewed preliminary merger and business combination scenarios involving
Capital--using publicly available financial information. The Board requested
Schroders to examine the likelihood of a transaction with Capital and to
consider the consequences and potential risks if ILM were to continue as an
independent public company.
Although the Board sought advice as to other strategic financial
alternatives, it did not request Schroders to solicit and Schroders did not
solicit offers from other potential merger candidates because ILM was not held
out for sale and the Board believed that Capital was the best potential
transaction candidate at the time. Accordingly, other than Capital, neither the
ILM Board nor Schroders sought to evaluate specific alternative transaction
candidates at this time and Schroders was not instructed to identify or contact
alternative merger or business combination partners.
The Board held a meeting on February 10, 1998 at which J. William Sharman,
Jr., Julien G. Redele, Carl J. Schramm, Jeffry R. Dwyer, Schroders, Capital and
Lehman Brothers (Capital's financial advisor) were present, to begin focused
discussions regarding a potential merger or other form of business combination
between ILM and Capital. At that meeting representatives of ILM, Schroders,
Capital and Lehman Brothers discussed the structure and timing for a possible
transaction and how to expedite their respective due diligence investigations in
view of the commercial relationship between them, and thus the familiarity of,
the parties. Mr. Dwyer stated to Capital and Lehman Brothers that any
transaction consideration would need to have a minimum or floor value of
approximately $170.0 million. Intermittent discussions ensued between the
parties during the next three months.
In May of 1998 Andrew A. Feldman and Jeri Feldman, as trustees for the
Andrew A. and Jeri Feldman Revocable Trust, commenced a putative class action
lawsuit on behalf of that trust and all similarly situated shareholders of ILM
(see "Certain Information with Respect to ILM--Legal Proceedings") alleging
violations by the ILM directors' of their fiduciary duty to ILM's shareholders.
The plaintiffs hired E.M. Capital, Inc. as their financial advisor and
authorized E.M. Capital to contact various companies in the assisted living
industry to elicit expressions of interest to acquire ILM and ILM II.
On June 4, 1998 Redwood Investors LLC commenced an unsolicited tender offer
to purchase up to 9.3% of the outstanding ILM common stock at $8.00 per share,
net in cash. Schroders advised the ILM Board that Redwood's offer was inadequate
and not fair to ILM's shareholders, from a financial point of view. Schroders'
determination was based primarily on the fact that Redwood's tender offer price
was not reflective of the going-concern value of ILM that might be obtained in a
negotiated merger or business combination transaction. Schroders' conclusions
were derived from financial analyses which included median and mean equity
values of ILM's common stock in comparison to comparable publicly traded
assisted living companies and discounted cash flow analyses of projected free
cash flows of ILM on a C-corporation basis. Based, in part, on Schroders'
determination, the Board recommended to ILM's shareholders in its Schedule 14D-9
that
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they reject the Redwood tender offer because the consideration being offered was
inadequate. The Redwood tender offer subsequently expired without any shares
being tendered, accepted for payment or paid for.
The Board believed that the Redwood offer could spur the commencement of
additional unsolicited offers to buy non-control or "toe-hold" positions in ILM
at inadequate prices or at prices not reflecting the control premium which might
be paid in a transaction involving the purchase of a substantial majority or all
of ILM's outstanding common stock. Commencing in 1997 and continuing
periodically in 1998 and in 1999, unsolicited tender offers were commenced by
prospective purchasers for ILM's outstanding common stock at prices ranging from
$7.00 to $8.90 net per share in cash. The Board believed that these offers
(which involved "mini tender offers" to purchase less than 5% of the outstanding
ILM common stock and, therefore, were not subject to comprehensive SEC
disclosure and filing regulations pursuant to Regulation 14D under the Exchange
Act) did not represent the fair value of ILM's common stock at that time nor the
value of the underlying assets of ILM and did not offer any control premium to
shareholders for their investment in ILM. To the Boards knowledge, none of these
mini-tenders resulted in the purchase or sale of any ILM common stock.
In early June 1998, ILM received letters of inquiry from Brookdale Living
Communities, Inc., American Retirement Corporation and Sunrise Assisted Living
Inc. Because the Board believed that the pending AHC contract litigation and
Feldman litigation had to be resolved prior to pursuing any transaction to
maximize the value of ILM's common stock, the Board's attention was focused on
expeditiously resolving such litigation and attending to the day-to-day
operations of ILM.
ILM responded to these letters of inquiry noting that in view of the
uncertainty created by the pending litigation matters and the attendant
disruption and distraction to ILM's management and business, ILM was not
inclined to pursue any discussions of the type referred to in the letters of
inquiry until after a satisfactory settlement or resolution of the pending
litigation. The Board then ceased all discussions regarding a potential
strategic transaction with Capital.
Brookdale's June 1998 indication of interest referred to the payment of
$165.0 million in cash, subject to the execution of definitive purchase
agreements, commencement and completion of due diligence, receipt of requisite
approvals, and the termination of the management agreements with Capital and the
leases with Lease I and Lease II. Brookdale acknowledged Capital's right of
first and last offer with respect to the sale of ILM's assets and indicated that
if Capital did not exercise such right Brookdale would expect to enter into a
30-day exclusive negotiation period to draft and negotiate definitive purchase
agreements and commence a full due diligence review which it anticipated could
be completed within approximately 60 days. Brookdale expressed its intention to
finance 75% of the $165.0 million purchase price and that its letter of inquiry
would expire on June 30, 1998.
The Board regarded Brookdale's June 1998 correspondence as preliminary and
noted that it failed to set forth a specific transaction structure and lacked
details on its possible methods of financing. Brookdale did not request any
further information or materials from ILM and did not submit to ILM any due
diligence request lists or confidentiality agreements related to a potential due
diligence review of ILM.
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During the Summer of 1998 the Board continued to focus on the existing
litigation involving AHC. Several of the directors prepared for depositions and
ILM also became increasingly focused on the pending tortious interference suit
filed by AHC against Capital because such litigation involved alleged damages
which, if resolved adversely, could have subjected ILM to material liability
under the management agreements with Capital. At this point the Board decided to
hold in abeyance any further exploration of a strategic financial transaction or
the possibility of a merger or other form of business combination until these
matters successfully were resolved. Brookdale was orally informed of this
decision.
At a July 7, 1998 meeting of the Board at which J. William Sharman, Jr.,
Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, Schroders
addressed the performance of the overall capital markets, publicly traded senior
health care and senior living companies, and publicly traded healthcare REITs.
The Board requested from Schroders a more detailed discussion concerning the
senior living industry and strategic courses of action to be presented to ILM
and ILM II at the next Board meeting scheduled for September 1998.
On July 28, 1998 at the annual meeting of ILM's shareholders, Lawrence A.
Cohen and Julien Redele did not stand for reelection to the Board because the
composition and membership of the Board was being changed largely for
administrative cost savings reasons, and, in the case of Mr. Redele, Mr. Redele
and the ILM Board believed that because he was appointed as an officer of
Lease I and elected as a member of Lease I's Board he should focus his time and
efforts on the management of Lease I and function as the sole outside director
of Lease I. The remaining directors which comprised the Board were Messrs.
J. William Sharman, Jr., Jeffry R. Dwyer and Carl J. Schramm.
In August 1998 the AHC contract litigation was settled. On September 23,
1998 the ILM special committee met with Schroders and told them that in view of
the recent settlement of the litigation Schroders should resume seeking to
design a transaction with Capital providing the ILM shareholders with liquidity
and maximum value. The Board informed Schroders at this time that it did not
intend to conduct an auction of ILM or initiate discussions with multiple
parties, and that the Board was not interested in pursuing an asset sale
transaction or property liquidation.
For purposes of constructing a "peer group" for various comparable company
analyses, Schroders reviewed the current stock price performance of Capital and
other publicly-traded senior health care and assisted living companies, as well
as publicly-traded healthcare REIT companies deemed by Schroders to be generally
comparable to ILM. Schroders noted that based on publicly available Wall Street
analyst consensus earnings estimates published by First Call (a research company
that monitors Wall Street analysts' estimates of corporate earnings) and other
publicly available financial information, certain of these comparable companies
had a higher share price to earnings multiple than Capital. The Board noted that
these companies hypothetically might be able to pay more for ILM than Capital in
a transaction involving a significant stock component.
Because the Board never put ILM up for sale or held ILM out as such, and
did not consider ILM to be under any obligation to pursue a merger or business
combination with any party, the Board did not contact any of the foregoing peer
group entities, including Sunrise Assisted Living, Inc., American Retirement
Corporation or Brookdale Living Communities, Inc., to ascertain whether they
remained interested in pursuing a transaction
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with ILM. Instead, in view of past discussions with Capital about a potential
merger or business combination transaction and the successful property
management relationship with Capital, ILM remained focused on resuming
discussions with Capital to see if a deal could be struck. The Board understood
that the limited right of first and last offer in favor of Capital was not
applicable to a merger or business combination transaction involving ILM's
common stock and did not seek to explore means to effect an asset sale
transaction which could avoid triggering the rights of first and last offer.
The Board instructed Schroders to contact Capital and its financial
advisors to impart the details and structure of a proposed transaction in which
ILM's shareholders could receive a combination of cash and exchange listed
dividend-paying or interest-paying securities at the election of ILM's
shareholders.
A meeting of the special committee of ILM's Board consisting of Messrs.
Dwyer and Sharman was convened on October 29, 1998 with Schroders and
representatives of Capital and Lehman Brothers. At the meeting Lawrence A.
Cohen, James A. Stroud and Jeffrey L. Beck, respectively, of Capital provided an
overview of Capital's performance noting that in relation to its competitors it
had less leverage and approximately $34.0 million in cash. Capital reminded ILM
that it had a very successful history of operating the ILM properties and noted
that to its knowledge no operating company in the senior living industry
currently paid dividends on its common stock.
Based on its continued discussions with Capital the Board believed that
pursuing a cash and convertible stock transaction with Capital was in the best
interests of ILM's shareholders because they would have the opportunity to elect
to liquidate all or a portion of their investment for cash while, at the same
time, have an opportunity to continue a portion of their investment in a
successor entity. ILM also was of the view that a hybrid cash/convertible stock
transaction could be more beneficial than a straight cash transaction because
ILM proposed merger consideration consisting in part of common stock and a
convertible fixed coupon security of Capital--the dividend or interest component
of which would approximate the 8- 1/2% annual dividend historically paid by ILM
on its common stock and which, upon conversion into Capital's common stock,
would allow for participation in the potential future growth and earnings of
Capital.
In this connection the Board observed that the 8- 1/2% annual cash dividend
ILM currently was paying on its common stock exceeded then prevailing annual
interest rates on certificates of deposit. Since its incorporation in 1989 as a
mortgage REIT through and including its corporate reorganization as an equity
REIT, ILM had sought for its shareholders annualized rates of return on
investment at least equal to prevailing certificate of deposit interest rates.
Because Capital's common stock did not pay any dividends, the Board asked
Schroders to contact Lehman and determine whether a transaction could be
structured to include convertible securities so that ILM's shareholders could
elect to receive a dividend-paying or interest-paying security. ILM also
informed Schroders that to enhance liquidity for ILM's shareholders, any such
security would have to be listed on a national securities exchange.
During approximately the next two and a half weeks discussions ensued
between representatives of ILM and Capital regarding the appropriate structure
for a merger or business combination transaction involving cash and securities
(including dividend-paying or interest-paying securities convertible into or
exchangeable for shares of Capital's
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common stock). During this time ILM's special committee met with representatives
of Schroders to review merger scenarios provided by Schroders and Lehman
Brothers, and Schroders informed Lehman Brothers that ILM needed additional due
diligence information and financial data from Capital regarding its analyst's
consensus estimates.
In approximately late November 1998 Schroders reported to the special
committee that it recently received a phone call from senior management of
Sunrise Assisted Living, Inc. Sunrise was generally familiar with the ILM
properties because it was one of the five final candidates that bid for the ILM
and ILM II property management assignment after ILM terminated its relationship
with AHC in July 1996 and had expressed an interest in pursuing discussions with
ILM in June 1998. Sunrise communicated that because of its relative low cost of
borrowing it believed it was well-positioned to buy the ILM assets. Sunrise did
not submit a specific proposal or term sheet. ILM continued its discussions with
Capital and did not pursue communications or discussions with Sunrise. Sunrise
did not request any ILM information or further seek to initiate a dialogue or to
commence a due diligence process.
On November 17, 1998 Capital provided ILM with a draft term sheet for a
proposed transaction between subsidiaries of Capital and each of ILM and ILM II
for a combined value of $160.0 million. The proposed transaction was structured
as a taxable forward triangular merger of ILM with and into a Capital
acquisition subsidiary which would be the surviving entity in the merger. The
transaction provided that merger consideration would be payable to ILM's
shareholders in the form of cash, Capital common stock and convertible debt
securities. ILM would have the right to designate individuals for nomination to
Capital's board of directors, the transaction would include "no-shop" or no-
solicitation provisions and "break-up" fees, and Capital would not have any due
diligence "walkaway" rights. The draft term sheet also provided for cross-option
or "leg up" agreements in favor of Capital and ILM--providing each party with
the right to acquire up to 19.9% of the other party's outstanding shares of
common stock at prescribed prices, and provided that the transaction structure
would permit Capital to elect to treat the transaction as an acquisition of
assets for U.S. federal income tax purposes and to "step-up" the basis of its
investment in those assets.
In late November 1998 ILM engaged Greenberg Traurig, as its special mergers
and acquisitions counsel, and representatives of ILM and Capital negotiated with
respect to the term sheet and discussed the terms of a definitive agreement and
plan of merger for the proposed transaction. During this time, Greenberg Traurig
discussed with ILM and its representatives the appropriateness and scope of
financing commitments, break-up fees, cross-option agreements, no-solicitation
covenants, pre-closing operating restrictions, closing conditions, termination
rights, proration requirements, "collars and caps," and floating exchange
ratios. ILM directed Greenberg Traurig to prepare and submit to Capital a
revised term sheet based on these discussions.
On December 4, 1998 a meeting of the special committee was held
telephonically with Schroders and Greenberg Traurig to discuss a letter
addressed to the Chairman of ILM and published over the Internet by Brookdale on
December 4, 1998 wherein Brookdale referred to its June 3, 1998 letter of
inquiry and reiterated its interest to acquire the assets of ILM. The
December 4, 1998 letter was viewed by the Board as an inquiry
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and not a definitive offer or proposal because Brookdale again failed to set
forth any specific terms, structure or acquisition consideration.
Mr. Sharman reminded the ILM Board that he had spoken in June 1998 with
Brookdale's advisors and that he told such advisors that ILM was focused at that
time on resolving the AHC litigation and that after such litigation was
resolved, ILM intended to examine with its advisors methods to maximize the
liquidity and value of ILM's common stock. Mr. Sharman noted that he never
suggested or committed to Brookdale that he or ILM would contact Brookdale about
a possible transaction following resolution of the AHC litigation. The Board
chose not to contact Brookdale at the time the AHC litigation was settled
because the Board believed there was a greater likelihood of successfully
negotiating with Capital and consummating a transaction in the best interests of
ILM's shareholders.
Schroders said they would review Brookdale's publicly available financial
statements and discuss their findings with the Board at a special meeting
scheduled to be held on December 8, 1998.
Greenberg Traurig delivered to Capital a revised term sheet dated
December 10, 1998 which provided for total merger consideration of
$170.0 million to be allocated among ILM and ILM II based upon the relative net
operating income of both entities. The parties discussed that the
$170.0 million of merger consideration was a net amount to ILM's shareholders
and ILM reminded Capital that it would be assuming by operation of law all of
ILM's liabilities, including approximately $5.2 million of built-in gains tax
liabilities associated with ILM's and ILM II's investment in its assets. The
parties further discussed that the merger consideration would be paid 60% in the
form of cash and 40% in the form of a dividend-paying convertible trust
preferred securities of an affiliated business trust of Capital, that
termination fees of $8.0 million would be allocated $4.8 million to the proposed
ILM merger and $3.2 million to the proposed ILM II merger (in contrast to the
almost $17.0 million of termination fees initially requested by Capital and its
advisors), and that reimbursement of Capital's expenses would not exceed
$2.0 million in the aggregate if the proposed ILM and ILM II merger transactions
were not consummated under certain circumstances.
ILM had previously authorized Greenberg Traurig to prepare initial drafts
of the ILM and ILM II merger agreements and, on December 4, 1998, ILM provided
Capital with an initial draft of the proposed agreements and plans of merger in
connection with the proposed transactions.
On December 7, 1998 ILM responded to Brookdale's letter of December 4, 1998
by indicating that as previously communicated to Brookdale's advisors in June
1998, ILM did not desire to sell its assets at such time. In its December 7th
letter ILM communicated to Brookdale that it would consider bona fide offers
deemed by the ILM Board to be in the best interests of ILM's shareholders,
including business combination transactions. The Board did not suggest to
Brookdale which transactions might be optimal and in the best interests of ILM's
shareholders. Because the Board did not seek to undertake an asset sale or
property liquidation transaction and believed that Capital was the most viable
and attractive potential transaction merger partner at the time, it did not
solicit indications of interest from other parties nor did it announce its
desire to pursue a merger with potential partners providing for a combination of
cash and preferred securities.
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At a December 8, 1998 meeting of the ILM Board at which J. William Sharman,
Jr., Carl J. Schramm and Jeffry R. Dwyer were present, representatives of
Schroders discussed Brookdale's financial profile and market value. In response
to Board inquiries, ILM's counsel informed the Board that the Brookdale letter
did not constitute a definitive offer or proposal, but rather, was a letter of
inquiry or expression of interest in that it merely proposed to explore a
potential transaction, subject to full due diligence and failed to set forth
specific terms regarding structure, covenants, representations and warranties
financing, timing, assumption of liabilities, required consents and approvals,
termination provisions, closing conditions, fees and expenses, indemnification
provisions, deal protection provisions, accounting and tax treatment, and the
like.
The Board noted that the Brookdale letter referenced an asset sale rather
than a merger transaction or other form of business combination transaction
involving the purchase of ILM's common stock and that an asset sale could
involve protracted negotiations and due diligence on the part of Brookdale and
its prospective external financing sources, contractual allocations of assumed
liabilities and purchased assets (unlike a merger transaction pursuant to which
the surviving entity would assume all liabilities of ILM by operation of law),
indemnification arrangements, lease assignments, escrows, schedules of assets
and liabilities, and the potential need to obtain and pay for third party
consents and approvals. The ILM Board did not suggest to Brookdale a definitive
transaction structure and price because the Board did not believe this would be
an appropriate commercial posture and was already involved in detailed
negotiations with a viable merger partner.
At approximately this time the terms of the Capital offer continued to be
refined by ILM and Capital in consultation with their respective legal and
financial advisors and the deal was predicated upon establishing a minimum price
that would allow ILM's shareholders to receive the maximum obtainable return on
their investment and a premium to the prices deemed generally available to
buyers and sellers in the illiquid secondary market for ILM's common stock.
On December 18, 1998 Brookdale submitted a proposal to acquire the assets
of ILM and ILM II for aggregate consideration of $170.2 million, of which
$95,332,000 would be allocated to ILM and $74,868,000 would be allocated to ILM
II. The proposal indicated that the transactions contemplated asset purchase
agreements and would be subject to customary closing conditions, including
termination of the management agreements with Capital. As part of its proposal,
Brookdale stated its desire to commence a full legal and business due diligence
review of ILM and ILM II.
On December 28, 1998 ILM responded to Brookdale's December 18, 1998
proposal indicating that ILM was pursuing means to enhance liquidity and
maximize value for ILM's shareholders. ILM also indicated that bona fide offers
in the best interests of the ILM shareholders would be reviewed in due course by
the ILM Board with Greenberg Traurig and Schroders, and the proposal would be
presented to the ILM Board at its next regularly scheduled board meeting in
January 1999.
During the early portion of January 1999 representatives of ILM and Capital
participated in several telephonic and in-person meetings negotiating the terms
of draft transaction documents prepared by Greenberg Traurig. Capital's advisors
included in its November term sheet and reiterated in subsequent discussions
with ILM's advisors that
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Capital required a "leg-up" option to protect the transaction during the period
following the execution of a definitive agreement and prior to consummation of a
merger. Capital stated that it required the right to purchase up to 19.9% of
ILM's outstanding common stock at the merger consideration per share offered by
Capital to ILM's shareholders under the merger agreement. Capital proposed that
such right would become exercisable by Capital if ILM terminated the merger
agreement under certain circumstances or, in any case, if ILM entered into a
competing transaction. Capital requested the right to require ILM to purchase
the option shares from Capital for an amount in cash equal to the highest price
per share offered in any transaction which might be consumated within a
specified time period after any termination of the merger agreement with
Capital.
Greenberg Traurig related to the Board that such features were onerous and
that, in its view, a "leg-up" option was inappropriate for a transaction such as
the proposed merger which involved a sale of control of ILM thereby foreclosing,
if consummated, any future potential control premium for ILM's shareholders.
Discussions continued between legal counsel for Capital and Greenberg
Traurig, whereupon Capital offered to eliminate the "put" option feature of the
"leg-up" option and reduce the percentage of option shares from 19.9% to 9.9%.
Upon advice from Greenberg Traurig ILM insisted that it would not enter into a
"leg-up" arrangement (whether or not reciprocal) and transaction negotiations
were suspended for the next several days. After further discussions on this
subject, negotiations resumed and Capital withdrew its request for a "leg-up"
option. Capital noted that it still needed deal protection in the form of
comprehensive break-up fees and expense reimbursement provisions.
The ILM Board and Greenberg Traurig stressed the need for a broad-based
"fiduciary out" to enable ILM to provide non-public information to, become fully
informed as to the nature of, and negotiate with, unsolicited third party
bidders offering bona fide alternative transactions. The ILM Board stated that
in all cases it needed to have the contractual freedom to enter into a deal that
was financially superior to the Capital deal after allowing Capital a reasonable
opportunity to "top" such deal.
The parties next discussed and negotiated the nature and breadth of the
so-called "MAC (or material adverse change) Out"; i.e., the circumstances under
which either party would be permitted to terminate the merger transaction in the
case of a material adverse change.
"Break up" fee negotiations then continued. Capital initially requested a
break-up fee of approximately $10.0 million in the case of ILM (and
approximately $7.0 million in the case of ILM II), plus reimbursement of
unlimited out-of-pocket expenses. After discussions with the ILM Board,
Greenberg Traurig responded that although ILM recognized the desire for deal
protection, ILM would not agree to measures that were unreasonable in relation
to Capital's perceived risks of losing the deal after signing and that ILM would
not agree to a payment structure which, in itself, might deter (or appear to
deter) bona fide competing or alternative transactions in the best interests of
ILM's shareholders. Capital and ILM eventually agreed to a break-up fee of
$3,835,600, plus reimbursement of up to $1.0 million of Capital's
"out-of-pocket" expenses incurred in connection with the termination of the
merger agreement in certain circumstances.
With respect to the parameters of the break-up fee, Capital proposed that
the fee would be payable if the merger was not consummated by October 31, 1999
for failure of
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ILM to obtain requisite shareholder approval or for any material breach by ILM
under the merger agreement. ILM rejected this proposal and, after some
negotiations ensued, the parties agreed that a break-up fee would be payable if:
(i) ILM materially breached its no-solicitation covenants and a third party
acquisition was consummated within a certain period of time subsequent to
termination of the merger agreement by Capital, (ii) ILM terminated the merger
agreement following the execution of a definitive agreement for a financially
superior alternative deal, or (iii) Capital terminated the merger agreement
following: a change or withdrawal by the ILM Board, in a manner adverse to
Capital, of its recommendation to ILM's shareholders to vote to approve the
merger agreement, the affirmative recommendation of a financially superior
alternative deal by the ILM Board, or the execution by ILM of a definitive
agreement providing for the sale of ILM to a party other than Capital.
Capital also requested a "holdback" or escrow of a portion of the cash
component of the merger consideration as security for any obligations payable to
Capital in connection with material breaches by ILM under the merger agreement
and similarly requested that ILM maintain at closing cash reserves to fund
Capital's assumption at closing of the estimated $5.2 million of ILM's corporate
level "built-in" gains tax liabilities, dividend obligations and other
liabilities. Following discussions among the ILM Board, Greenberg Traurig and
Schroders on these points and after further negotiations between ILM and
Capital, Capital withdrew its request for these provisions.
Thereafter, covenants restricting ILM's and Capital's conduct during the
period between the signing of the merger agreement and the closing of the merger
were also negotiated by Greenberg Traurig and Capital's legal advisors. Because
a portion of the merger consideration was proposed to include securities (and,
therefore, an investment was being made by ILM's shareholders in Capital), ILM
required restrictions on Capital's ability to operate its business prior to
consummation of the merger. Capital agreed that subject to certain monetary
thresholds, it would continue to operate its business in a manner consistent
with past practices and not issue capital stock, consummate acquisitions, sell
assets, incur debt, or consummate other transactions potentially dilutive to the
earnings per share of Capital's common stock.
In January 1999 "collars," "caps," floating exchange periods and other
variable pricing mechanisms were further explored by ILM, Schroders and
Greenberg Traurig in view of the risks associated with recent fluctuations in
the market price of Capital's common stock and other public company participants
in the senior living industry. Discussions between the ILM Board and ILM's
advisors ensued regarding the conversion ratio (the ratio at which the number of
shares of Capital common stock would be issued upon conversion of Capital's
trust preferred securities) and whether a floating valuation period or price
adjustment formula should be included in the merger agreement.
Schroders advised ILM that a fixed conversion ratio at the time the merger
agreement was signed would be more likely to lock-in accretion/dilution for
ILM's shareholders and, although there could be no assurance, a fixed ratio
would enable ILM's shareholders to participate in any prospective appreciation
of Capital's stock price after execution of the merger agreement. During this
time, ILM's Board instructed Greenberg Traurig to negotiate and obtain a
guarantee in favor of ILM's shareholders pursuant to which Capital guaranteed
payment of the trust preferred securities to be offered in the merger so that in
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the case of a default relating to such securities, ILM's shareholders would have
recourse against both Capital and the Capital subsidiary intended to be the
issuer of the trust preferred securities.
Schroders and Greenberg Traurig were next instructed to undertake a
supplemental due diligence review of Capital because of the securities component
of the merger consideration contained in the draft merger agreement.
At a January 19, 1999 ILM Board meeting at which J. William Sharman, Jr.,
Carl J. Schramm and Jeffry R. Dwyer were present, the ILM Board reviewed with
Greenberg Traurig and Schroders the terms of the transactions as then proposed
(in which each outstanding share of ILM common stock would be exchanged for
approximately $12.75 worth of merger consideration). The ILM Board noted that
the proposed merger consideration of $12.75 (or aggregate merger consideration
of $170.0 million allocable to ILM and ILM II in the amounts of $95,110,000 and
$74,840,000, respectively) represented a premium of approximately 30% per share
over the best available share price information for the ILM common stock as
reported to ILM by Schroders. Next, the terms of the Brookdale proposal were
presented to and discussed by the ILM Board. Following discussions with
Greenberg Traurig and Schroders the Board determined that the Brookdale proposal
was structurally inferior and uncertain and, therefore, not a superior offer to
acquire ILM.
Accordingly, the Board believed it would not be prudent to jeopardize the
fully negotiated and viable Capital transaction by delaying the signing of a
deal with Capital and pursuing any further discussions with Brookdale. Further,
the Board noted that although ILM never undertook a pre-signing auction or
"market check" process, it intended to publicly announce the Capital transaction
and include in its periodic Exchange Act reports statements acknowledging that
ILM was for sale. Also, the Board was advised by Greenberg Traurig and Schroders
that the merger agreement with Capital contained commercially reasonable deal
protections with broad-based fiduciary outs that would not operate to unduly
"chill" or preclude potential alternative superior bids. For the foregoing
reasons and the fact that no agreement providing for the sale of control,
liquidation, or break-up of ILM had been entered into, ILM's Board was of the
view that it was under no present obligation to actively solicit from other
parties, including Brookdale, alternative offers.
On January 20, 1999 ILM informed Brookdale that based upon its review of
Brookdale's December 18 correspondence ILM did not believe that a
$170.2 million all-cash asset sale transaction (which included as part of such
proposed purchase price, the assumption by Brookdale of up to $5.2 million of
ILM's built-in gains tax) represented the best potential transaction structure
for ILM's shareholders at that time. The Board was of the view that although the
Brookdale proposal provided for nominally higher consideration than the
consideration in the Capital transaction, because (i) an asset transaction was
not the optimum deal structure for ILM and its shareholders (because all of
ILM's known and unknown liabilities would not be assumed by Brookdale as a
matter of law), (ii) the $200,000 premium was immaterial in the context of
pending negotiations with Capital, and (iii) Brookdale would first need to
conduct a due diligence review, including visitation and inspection of 13
property sites, it would not be prudent to interrupt or suspend its advanced
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negotiations with Capital for an uncertain transaction with speculative
prospects for consummation.
In early February 1999 final negotiations continued between Capital and ILM
regarding the reconfiguration of the merger consideration in view of the recent
decline in the price of Capital's common stock. Discussions ensued between
Schroders and Lehman regarding a change in the proposed percentage of merger
consideration payable in cash and the proposed percentage of merger
consideration payable with convertible trust preferred securities. Also
discussed was Capital's proposed increase in the conversion premium from 22.5%
to 25% in relation to the $12.75 closing sale price of Capital's common stock as
reported on the NYSE on February 5, 1999. Schroders indicated that the proposed
change from a 60% cash/40% convertible trust preferred securities deal to a 65%
cash/35% convertible trust preferred securities deal, and a conversion premium
of 25%, would be a good deal for ILM's shareholders because they would receive
the same aggregate consideration as previously negotiated (in terms of per share
dollar value), except that more cash would be available for shareholders if they
so elected and virtually the same pro forma (i.e., "as-converted") diluted
common equity ownership of Capital would be available for shareholder elections
as was the case with the previously proposed 40% stock deal and a hypothetical
$14.00 Capital stock price at signing.
At its February 6, 1999 meeting at which Messrs. Jeffry R. Dwyer, J.
William Sharman Jr. and Carl J. Schramm were present, the ILM Board reviewed
with Greenberg Traurig the material terms of the revised draft merger
agreements, including the "break-up fee" and termination provisions, the
covenants applicable to ILM and Capital between signing and closing, the
cash/stock election procedures and proration provisions, the "no-shop" and
"fiduciary out" provisions, the representations and warranties of the parties,
the conditions to closing, the indemnification provisions, and the termination
provisions.
Discussions then followed with respect to the proposed exchange ratio and
the conversion premium for the trust preferred securities, the fact that the
closing sale price of Capital's common stock as reported on the NYSE on the
immediately preceding trading day was $12.75 (i.e., the amount of the per share
merger consideration), the regulatory aspects of the proposed merger (including
the process for obtaining shareholder approval under Virginia corporate law,
ILM's constituent instruments and federal securities laws), the Board's
fiduciary duties to shareholders, the SEC preliminary proxy review and
registration process, the fact that no other definitive offers from any bona
fide merger or business combination partners were available at the time, the
complexity of the transaction and the likelihood of obtaining the requisite
shareholder approval and, the scheduled December 31, 1999 finite-life
liquidation date for ILM.
At this time the Board also considered the fact that (i) the proposed
merger consideration and transaction structure was fully taxable to ILM's
shareholders, (ii) the trading price of Capital's preferred securities would not
be fixed and could decline in value between signing and closing, (iii) the fact
that the rate at which the preferred securities would be converted into shares
of Capital common stock would be fixed, and (iv) the holders of the preferred
securities would be "structurally subordinated" to Capital's creditors.
Representatives of Schroders then presented their fairness analyses of the
proposed merger consideration to be received by ILM's shareholders. Upon
conclusion of such
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analyses Schroders delivered its oral opinion (which opinion subsequently was
confirmed by delivery to the ILM Board of a written opinion dated February 7,
1999) to the effect that, as of such date and based upon and subject to certain
matters and assumptions stated in such opinion, the merger consideration was
fair to holders of ILM common stock, from a financial point of view.
Greenberg Traurig noted to the ILM Board that the terms of the merger
agreement with Capital preserved ILM's ability to accept a superior offer and
terminate the transactions with Capital upon payment of a $3,835,600 termination
fee, plus reimbursement of up to $1.0 million of out-of-pocket expenses incurred
by Capital in connection with the transaction. Based upon the advice of
Greenberg Traurig and Schroders, the ILM Board determined that because the
termination fee was not commercially excessive, the fee would not be a material
deterrent for other prospective purchasers seeking to make a bona fide competing
offer and that the pending Capital deal was preferable to an indefinite third
party proposal, which was subject to due diligence. Greenberg Traurig also noted
to the Board the absence of stock leg-ups and asset lock-ups which could defer
competing bids and "pooling-of-interest" structures.
Based on the foregoing, including the perceived benefits of the terms of
the proposed merger with Capital in relation to the perceived risks outlined
above and the opinion of Schroders that the merger consideration was fair to the
holders of ILM common stock, from a financial point of view, the ILM Board
unanimously approved the merger and authorized the execution of the merger
agreement (with certain further non-substantive modifications to be negotiated
upon the advice of Greenberg Traurig and Schroders). Such Board authorization
was communicated by Greenberg Traurig to Capital's legal counsel late in the
evening of February 6, 1999 and discussions ensued between such counsel into the
early hours of February 7th regarding technical modifications to the transaction
documents.
Greenberg Traurig prepared revised execution copies of the merger
documentation and distributed them to all parties on the morning of February 7,
1999. The merger agreement was signed on the evening of February 7, 1999 and
during the morning of February 8, 1999 ILM issued a press release reporting such
event. The executed merger agreement provided for total merger consideration of
$95,890,000, of which 65% was payable in the form of cash and 35% was payable in
the form of trust preferred securities of a wholly owned Delaware business trust
of Capital. The preferred securities were convertible into shares of Capital
common stock at a fixed conversion ratio.
On March 9, 1999, Brookdale revised its December 18, 1999 correspondence by
setting forth its desire to explore a transaction to acquire the assets of ILM
and ILM II for an aggregate purchase price of $185.0 million, of which
$103,122,000 would be allocated to ILM and $81,878,000 would be allocated to ILM
II. $135.0 million of the purchase price was proposed to be in the form of cash
and the remaining $50.0 million of consideration was proposed to be in the form
of 8% convertible preferred equity securities of a grantor trust to be formed by
Brookdale or 7% convertible subordinated debt securities of Brookdale. The
proposal indicated that the convertible securities would be convertible into
shares of Brookdale common stock and provided that shareholders would have the
right to elect to receive any combination of cash and convertible securities,
subject to proration in the case of over-subscriptions for convertible
securities. After being told of
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ILM's preference for a merger or stock sale, Brookdale's representatives
verbally indicated that the foregoing proposal was intended to be the functional
equivalent of the Capital merger structure at higher aggregate consideration and
that full legal and financial due diligence was required to confirm Brookdale's
willingness to proceed. Under the terms of the merger agreement with Capital ILM
was required to provide the Brookdale proposal to Capital.
After discussions with its advisors ILM's Board instructed Greenberg
Traurig to prepare, and on March 22, 1999 Brookdale, ILM and ILM II entered
into, confidentiality and standstill agreements whereby ILM and ILM II agreed to
make available to Brookdale certain non-public business and financial
information, subject to Brookdale's agreement to use such confidential
information solely for purposes of formulating a definitive offer and evaluating
a possible transaction with ILM and ILM II consistent with what was outlined in
Brookdale's March 9, 1999 letter. Brookdale agreed that so long as such
negotiations with ILM and ILM II were pending and for two years thereafter it
would not acquire any shares of ILM or ILM II common stock, seek to influence or
call for any ILM or ILM II shareholder votes or consents, or propose to enter
into a merger, tender or exchange offer or similar transaction with ILM or ILM
II. In early April 1999 Brookdale commenced its due diligence review of ILM.
On April 22, 1999 the ILM Board, consisting of J. William Sharman, Jr.,
Carl J. Schramm and Jeffry R. Dwyer, met with Greenberg Traurig and Cohen &
Steers (Cohen & Steers Capital Management, Inc., together with its affiliate
Cohen & Steers Capital Advisors LLC, recently had been retained by the ILM Board
as ILM's financial advisors when the individual Schroders investment bankers who
worked for Schroders on the ILM account resigned from Schroders and joined Cohen
& Steers) to discuss the status of the Brookdale's latest proposal. The Board
was informed by Greenberg Traurig that attorneys from Brookdale were prepared to
conduct a due diligence review of ILM.
Approximately at this time legal and financial due diligence lists were
exchanged, together with requests for mutual access to information. ILM
requested access to certain Brookdale material and non-public information
because of the securities portion of the proposed asset purchase consideration.
ILM also requested details as to Brookdale's financing sources and
creditworthiness. No due diligence materials were ever provided to ILM pursuant
to its requests.
On April 28, 1999 Brookdale revised its March 9, 1999 letter to propose an
all-cash transaction for total consideration of $185.0 million, to be allocated
$102,213,000 to ILM and $82,787,000 to ILM II. Brookdale stated that prior to
closing it intended to assign all transaction documentation to an unaffiliated
third party leasing company that would lease back the purchased ILM assets to
Brookdale. Brookdale stated that the U.S. federal income tax consequences to
ILM's shareholders under its proposed asset purchase transaction structure and
the payment by ILM to its shareholders of subsequent liquidating dividend
distributions was substantially similar to the U.S. federal income tax
consequences of the pending merger transaction with Capital. Brookdale's revised
proposal was subject to satisfactory completion of due diligence, which
Brookdale anticipated it could complete within 30 days after it was afforded
access to certain non-public information, ILM personnel and property sites. A
copy of this latest proposal was delivered by ILM to Capital.
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On June 17, 1999 Greenberg Traurig received from Brookdale's counsel a
draft asset purchase agreement. The correspondence accompanying such draft
suggested that ILM's representations and warranties were intended to be
substantially similar to those included in the February 7, 1999 merger agreement
with Capital and that the draft asset purchase agreement reflected the terms of
Brookdale's April 28, 1999 letter. Brookdale's counsel also referenced
Brookdale's ability to externally finance the proposed transaction, subject to
satisfactory completion of due diligence.
At a July 8, 1999 meeting of the ILM Board at which J. William Sharman,
Jr., Carl J. Schramm and Jeffry R. Dwyer were present, discussions ensued
regarding the draft asset purchase agreement received from Brookdale. The Board
was informed by Greenberg Traurig and Cohen & Steers that, after careful review,
the proposed agreements were significantly biased in favor of Brookdale.
On July 9, 1999, at the direction of ILM's Board, Greenberg Traurig
informed Brookdale's counsel that after careful review of the agreement and
deliberation by the full ILM Board, and based further upon the advice of
Greenberg Traurig and Cohen & Steers, it was the Board's position that the terms
and conditions of the draft asset purchase agreement relating to the transaction
structure, unassumed liabilities, conditions to closing, affirmative and
negative covenants, termination and liquidated damages, and expense allocations,
among other provisions, was commercially unreasonable and did not represent a
transaction in the best interests of ILM's shareholders.
The ILM Board informed Brookdale that a transaction in the best interests
of ILM's shareholders would more appropriately be structured as, or would be the
functional equivalent of, a statutory merger with all known and unknown
liabilities of ILM being assumed at closing by the acquiring entity and with no
survival of representations and warranties, no purchase price "holdbacks,"
escrows or adjustments, and no indemnification provisions.
The Board reiterated to Brookdale that any definitive agreement entered
into with a bona fide purchaser would have to be financially superior to the
pending merger transaction with Capital and have a very high likelihood of
consummation, and would need to include remedies in favor of ILM if Brookdale
failed to consummate the transaction under certain circumstances. The ILM Board
also advised Brookdale that bona fide agreements consistent with the foregoing
criteria would be considered by the Board in due course. Accordingly, the ILM
Board indicated to Brookdale that it would be inappropriate and unproductive at
that time to negotiate or provide detailed comments with respect to Brookdale's
previously distributed draft asset purchase agreement.
On July 20, 1999 Brookdale, in response to ILM's July 9, 1999
correspondence, sent a letter to ILM expressing its disappointment over ILM's
decision not to negotiate the terms of Brookdale's draft asset purchase
agreement and ILM's preference for a statutory merger or functionally equivalent
transaction. Brookdale stated that it remained interested in pursuing an asset
purchase transaction with ILM and that if ILM did not proceed to negotiate such
a transaction and respond with comments to Brookdale's draft asset purchase
agreement, Brookdale would pursue available legal remedies.
The ILM Board was advised by its legal and financial advisors that such
"threat" did not merit a response because Brookdale had been informed of the
Board's requirement of a superior financial transaction and structure and ILM
did not act to foreclose such
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possibility. Furthermore, the ILM Board viewed Brookdale's draft agreement as
commercially unreasonable in that it: did not provide for Brookdale's assumption
of any of ILM's liabilities (other than up to $5.2 million of built-in gains tax
liabilities); did not provide for contractual remedies in favor of ILM in the
event Brookdale breached the agreements; contained burdensome restrictions on
ILM's ability to manage its business prior to closing because the agreements did
not specify an outside termination date; would allow Brookdale to conduct
unlimited due diligence which would disrupt the operations of ILM and distract
management due to the lack of an outside termination date; and contained deal
protection provisions and break-up fees which were more onerous than those
negotiated with Capital. The Board and ILM's advisors also noted that the
agreements further contained unusual termination events.
During this time, ILM, Greenberg Traurig and Cohen & Steers discussed
declining trends in the assisted living industry, prevailing conditions and
prospects for the U.S. capital and financial markets, the pending SEC review and
comment process with respect to the confidential preliminary proxy
statement/prospectus submitted to the SEC by the parties in late April 1999, and
the material decline in the closing sale prices of Capital's common stock in
relation to such prices in February 1999 when the original merger transaction
was entered into. These discussions focused primarily on ILM's concern that
there was now a potentially decreased likelihood of consummating the original
merger transaction because of the significant non-cash portion of the
consideration in that deal and the lower value of that consideration component.
ILM and its advisors expressed concern that as of the mid-summer of 1999, the
original February 7, 1999 merger consideration (particularly the form thereof)
may no longer be fair to ILM's shareholders and, therefore, the ILM Board might
not be in a position to recommend the transaction to ILM's shareholders if
conditions in the assisted living industry and, therefore, Capital's stock
price, did not improve.
ILM acknowledged that because of the lack of "collars," "caps" and
adjustable exchange ratios in the original merger documentation, there was no
mechanism for those ILM shareholders who would receive Capital's trust preferred
securities to actually obtain the full value of the $12.75 of merger
consideration agreed to by the parties on February 7, 1999. Accordingly, Cohen &
Steers and Greenberg Traurig were instructed to consider different combinations
or reconfigurations of the cash and stock portions of the merger consideration.
Following several discussions with Capital about ILM's concerns and in
connection with class action settlement proceedings in the pending Feldman
lawsuit against ILM and its directors, Capital agreed in a draft stipulation of
settlement relating to such litigation to amend the existing February 7, 1999
merger agreements to provide for increased and restructured merger
consideration.
On July 28, 1999 Capital's advisors delivered to ILM and ILM II a draft
letter agreement which proposed to amend the pending ILM and ILM II merger
agreements to increase the aggregate merger consideration in those transactions
to $172.0 million (from $170.0 million) and allow the ILM and ILM II
shareholders to elect to receive 100% cash consideration or a combination of
cash and trust preferred securities, provided that no more than 35% of the total
merger consideration would be payable in the form of trust preferred securities.
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ILM, Greenberg Traurig and Cohen & Steers questioned whether the merger
simply should be amended to provide for 100% cash consideration and no stock
election in view of the dramatic decline in the market price for Capital's
common stock. Capital and its advisors stated that they would need some time to
complete their analyses on the impact and post-merger pro forma effect of an
all-cash transaction.
On August 2, 1999 Brookdale submitted yet another revised proposal which
proposed to acquire, by means of tender offer, all of the outstanding shares of
ILM and ILM II common stock for aggregate cash consideration of $185.0 million,
to be allocated $102,213,000 to ILM and $82,787,000 to ILM II. In its letter
Brookdale noted that a tender offer structure would eliminate the need for
statutory shareholder approval under Virginia law and potentially be a more
expeditious transaction than the pending Capital merger because SEC review, if
any, of the tender offer documents would not occur until after commencement of
the offer. Brookdale stated that it expected to utilize available cash and
obtain first mortgage financing secured by ILM's properties to fund the tender
offer consideration and that its latest proposal was subject to satisfactory
completion of additional legal and financial due diligence necessitated by a
stock acquisition structure and the negotiation, execution and delivery of
definitive agreements. Brookdale proposed a meeting between representatives of
the companies and their legal and financial advisors to begin the negotiation
process.
Brookdale and ILM exchanged various correspondence regarding potential
face-to-face meeting dates. In the meantime ILM instructed Greenberg Traurig and
Cohen & Steers to contact Brookdale's advisors and seek clarification and
unequivocal assurances that the proposed $185.0 million of tender offer
consideration was a net amount payable in cash directly to ILM's shareholders
and ILM II's shareholders. Brookdale's legal and financial advisors verbally
acknowledged that Brookdale intended the $185.0 million consideration to be a
net cash amount to shareholders and would not be reduced by any ILM liabilities,
taxes or merger termination fee and expense reimbursement obligations to
Capital.
At a Board meeting held on August 9, 1999 at which J. William Sharman, Jr.,
Carl J. Schramm and Jeffry R. Dwyer all were present, Greenberg Traurig and
Cohen & Steers presented to the ILM Board an analysis and comparison of the
Brookdale proposal, the pending February 1999 merger transaction with Capital
and the proposed amendments thereto, and the ILM Board instructed Greenberg
Traurig to prepare proposed tender offer guidelines in the form of a term sheet
and to deliver them to Brookdale in anticipation of the upcoming meeting with
Brookdale.
On August 12, 1999 pursuant to instructions of ILM's Board, Greenberg
Traurig delivered to Brookdale's counsel a list of tender offer guidelines for
Brookdale to comply with if a definitive transaction were to be pursued and
entered into with Brookdale. Specifically, ILM stated, among other things, that
(i) Brookdale needed to guarantee the performance of its lessor-assignee under
all transaction documents and instruments; (ii) ILM would not provide any
indemnification agreements; (iii) all of ILM's representations, warranties and
covenants would need to terminate after the tender offer was completed and
Brookdale acquired legal control of ILM; (iv) the tender offer would need to
include a 66- 2/3% minimum tender condition, subject to certain extension
requirements to enable a "short-form" second step merger; (v) there could be no
due diligence "outs" and the tender offer conditions would need to be as minimal
as possible (limited essentially only to customary material adverse change and
so-called "market
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outs"); (vi) the non-solicitation provisions of the transaction documentation
would need to include broad-based "fiduciary outs" and "break-up" fees not
greater in amount or scope than those contained in the existing ILM-Capital
merger documents; (vii) adequate agreements and assurances would need to be
provided by Brookdale as to the payment and assumption by Brookdale of ILM's
existing termination fee and expense reimbursement obligations to Capital under
the February 7, 1999 merger agreement; (viii) the tender offer would be
commenced not later than five business days after entering into definitive
merger agreements and that the preparation and negotiation of such agreements
and all tender offer documentation would need to proceed as expeditiously as
possible; and (ix) prior to commencement of the tender offer Brookdale would
need to obtain and pay for a signed financing commitment letter from a money
center financial institution or nationally recognized investment banking firm
sufficient in amount to pay the $185.0 million of tender offer consideration,
net in cash, to ILM's and ILM II's shareholders.
Greenberg Traurig and Cohen & Steers again requested and received verbal
assurances from Brookdale's representatives that the $185.0 million of cash
consideration was a net amount payable in cash to shareholders of ILM and
ILM II, less applicable withholding taxes.
On August 30, 1999, one day prior to Brookdale's scheduled meeting with ILM
and its advisors at the New York offices of Greenberg Traurig, Brookdale
informed ILM by letter that additional due diligence materials were required
with respect to ILM's liabilities due to the revised structure of Brookdale's
most recent proposal and, in direct contradiction to what had been stated
previously by Brookdale's advisors, Brookdale informed ILM of its unwillingness
to assume at closing or otherwise to pay any termination fees, litigation
settlement costs or other transaction expenses that may be or become payable to
Capital in connection with the merger and the pending Feldman litigation.
Irrespective of the fact that this latest communication from Brookdale differed
from previous verbal statements of Brookdale's intention as to the nature and
net amount of the proposed tender offer, the ILM Board decided to proceed with
the scheduled face-to-face meeting with Brookdale and its advisors on
August 31, 1999.
On August 31, 1999 the ILM Board, comprised of J. William Sharman, Jr.,
Carl Schramm and Jeffry R. Dwyer, together with Greenberg Traurig and Cohen &
Steers, met with Brookdale and its advisors to discuss and negotiate Brookdale's
August 2, 1999 tender offer proposal. At the outset of the meeting Brookdale
informed ILM that its $185.0 million proposal did not include the assumption of
termination fees, legal settlement costs or other transaction expenses and
liabilities incurred or to be incurred by ILM which, based upon ILM's estimates
approximated at least $9.0 million. After further discussions with Brookdale and
its advisors ILM concluded that the Brookdale offer was not functionally
equivalent to a "net" cash offer to ILM's shareholders. Because, other than the
assumption of up to $5.2 million of built-in gains tax liability, Brookdale
stated that it was not assuming any of ILM's liabilities (whether known,
unknown, fixed or contingent), ILM was unable to quantify, and could not
quantify, what Brookdale's net offer was. However, because the ILM Board had
estimated transaction costs (i.e., legal, accounting, financial advisory,
solicitation and printing) of approximately $4,000,000 and did not want to
preclude ILM's ability to pay dividends to ILM's stockholders in the ordinary
course (which was expressly negotiated by ILM and provided for in the merger
agreement), the
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Board believed that Brookdale's offer was lower in net value than the $172.0
million face amount of consideration.
ILM informed Brookdale that only bona fide, good faith offers on terms
financially superior to the pending Capital merger and with a high likelihood of
closing would be negotiated and that in view of the recent course of dealing
with Brookdale and its advisors, including the inconsistent and indefinite
communications from Brookdale and its advisors, ILM was suspect about
Brookdale's intentions to acquire ILM. At Brookdale's request, ILM nevertheless
agreed to provide Brookdale with the additional due diligence materials that
Brookdale stated it needed to prepare a definitive offer. Brookdale acknowledged
that it had received materials from ILM approximately three weeks earlier but
had not yet reviewed them. ILM then reminded Brookdale and their advisors about
their existing confidentiality and "standstill" obligations, the Board's
intention to pursue only genuine superior offers with a high likelihood of
consummation, and the meeting was adjourned.
On September 2, 1999 ILM confirmed to Brookdale in writing its
disappointment regarding the August 31, 1999 meeting and that, contrary to
previous verbal assurances from Brookdale's advisors relating to the proposed
$185.0 million of net cash consideration, and after having received several
proposals from Brookdale involving a variety of transaction structures, the most
recent tender offer proposal outlined in Brookdale's August 2, 1999 letter did
not appear to be the functional equivalent of a net cash offer payable to the
shareholders of ILM and ILM II. ILM reiterated its commitment to fully
investigate and negotiate only superior offers from bona fide parties to
maximize shareholder value and asked Brookdale to promptly submit its final and
definitive "best" offer to acquire the outstanding shares of ILM's common stock.
In early September 1999 Brookdale received the additional materials from
ILM it indicated that it needed to complete its due diligence review of ILM. On
September 10, 1999, by letter to ILM, Brookdale indicated that its August 2,
1999 tender offer proposal remained outstanding but that it would not pay or
assume any contractual or other liabilities of ILM, other than the assumption of
up to $5.2 million of ILM's built-in gains tax liabilities. Brookdale reiterated
that its offer was subject to satisfactory completion of continuing legal and
financial due diligence in its sole discretion, and the negotiation and
execution of definitive agreements.
After discussions with Greenberg Traurig and Cohen & Steers the ILM Board
concluded that because Brookdale's transaction was structurally uncertain and
did not represent a definitive offer, due to the fact that the course of dealing
between the parties did not provide the Board with a high degree of confidence
that a transaction with Brookdale could be expeditiously or successfully
consummated, and because Brookdale's repeated failure to propose a bona fide
transaction structure which was superior to the Capital transaction, any further
dealings and communications with Brookdale would be entirely unproductive and
unlikely to produce such a transaction in the best interests of ILM's
shareholders.
Brookdale has not contacted ILM since September 10, 1999 and no further
communications between ILM and Brookdale have ensued through the date of this
proxy statement.
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Against the backdrop of a continued decline in the senior living industry
and a material deterioration of Capital's stock price, commencing in late
September and continuing through mid-October 1999, ILM's and Capital's legal
representatives discussed and negotiated various proposed amendments to the
February 7, 1999 merger agreement. Greenberg Traurig informed Capital that ILM
would not negotiate or agree to any limitations on the scope of ILM's "fiduciary
out" because ILM needed maximum flexibility to pursue and negotiate unsolicited
superior alternative transactions. Also, because the form of the proposed merger
consideration payable in the merger changed from a combination of cash and trust
preferred securities to 100% cash (in the amount of $97,018,000) at ILM's
insistence, the parties agreed to delete various representations, warranties and
covenants of Capital relating to the ownership of its properties and the conduct
of its business.
Negotiations ensued with respect to Capital's financing of the merger and
the anticipated timing of Capital's receipt from Lehman Brothers of a currently
dated "highly confident" letter as to Lehman's willingness, intention and
ability to arrange the necessary cash financing for the merger, and the
anticipated timing of definitive financing commitments from Capital's investment
or commercial bankers. Capital declined to seek to obtain a financing commitment
letter at that time. ILM requested that full financing commitments be obtained
upon entering into the revised merger agreement. After discussions regarding the
prompt need for and costs of such commitments the parties agreed that Capital
would obtain one or more financing commitments from nationally recognized
lenders at least five days prior to the date on which ILM first mailed its
definitive proxy materials to shareholders. Capital did agree to obtain a "bring
down" of Lehman's "highly confident" letter previously delivered to Capital in
August 1999.
Capital then suggested certain proposed modifications to the tenor and
scope of the existing "break-up" fee provisions in the February 7, 1999 merger
agreement. Capital stated that it required payment of a termination fee if ILM's
shareholders failed to approve the merger agreement. After several variations of
the foregoing concept were discussed among representatives of Greenberg Traurig
and Capital's legal advisors, ILM insisted that such a provision was not
appropriate and that receipt of ILM shareholder approval would remain a mutual
risk of the parties.
Thereafter, negotiations ensued regarding items such as allocating between
the parties the payment of proxy preparation, filing and dissemination costs
incurred and to be incurred in connection with the merger, Capital's payment of
ILM's director's and officer's liability insurance, and other contractual
matters. ILM then negotiated and the parties agreed to provisions entitling ILM
to the payment by Capital of a limited reverse "break-up" or termination fee
under certain circumstances.
Based on the foregoing negotiations, the parties reached an
agreement-in-principle to modifications of the February 7, 1999 merger
agreement. Greenberg Traurig prepared a draft amended and restated merger
agreement which was delivered to Capital and its advisors during the first week
of October 1999.
On October 6, 1999 the full ILM Board, consisting of Jeffry R. Dwyer,
J. William Sharman, Jr., and Carl Schramm, met with Greenberg Traurig and Cohen
& Steers to review the terms of the revised merger agreement. Cohen & Steers
provided the Board with an assessment of prevailing trends in the senior living
industry and Capital's market
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performance and capitalization, financial condition and creditworthiness. Cohen
& Steers next presented to the ILM Board its fairness analyses and at the
conclusion thereof delivered its oral opinion to the ILM Board that, based on
the qualifications and assumptions expressed to the ILM Board, as of October 6,
1999, the payment of $12.90 per share in cash to ILM's shareholders in the
merger was fair to such holders, from a financial point of view.
Greenberg Traurig then presented the ILM Board with a detailed description
of the terms of the revised merger agreement, outlining the various material
differences between the current draft agreement and the February 7, 1999 merger
agreement. After further deliberations and a general discussion with Greenberg
Traurig of the ILM Board's fiduciary responsibilities, the Board unanimously
adopted the amended and restated merger agreement and the transactions
contemplated thereby, with such non-material modifications thereto as might be
suggested by the parties' advisors in the course of finalizing the transaction
documents. The ILM Board authorized the prompt execution and delivery of the
merger agreement and the refiling with the SEC of all appropriate proxy
solicitation materials.
On October 15, 1999 a final order approving the stipulation of settlement
in the Feldman class action litigation was entered in the United States District
Court, Southern District of New York.
On October 18, 1999, Capital Senior Living Corporation received from Lehman
Brothers a letter indicating that as of that date and based upon current market
conditions and their present understanding of the proposed merger with ILM,
Lehman Brothers was "highly confident" of its ability to arrange financing of
the aggregate cash consideration of the merger and the ILM II merger.
On October 19, 1999, Cohen & Steers confirmed in writing its oral opinion
delivered to the ILM Board on October 6, 1999. Based upon Cohen & Steers'
opinion that as of October 19, 1999 the $12.90 per share in cash to be received
by ILM's shareholders in the merger was fair to such holders, from a financial
point of view, ILM entered into a revised merger agreement with Capital and
concurrently terminated the February 7, 1999 merger agreement.
On October 21, 1999 ILM issued a press release announcing the execution of
the amended and restated merger agreement and filed with the SEC its Current
Report on Form 8-K disclosing such event.
On November 16, 1999 the full ILM Board met with Greenberg Traurig to
discuss the status of the proxy filing, the finite life of ILM (which was
scheduled to expire on December 31, 1999), as well as the possibility of
amending the facilities lease agreement with Lease I. After receiving an update
by Greenberg Traurig as to the status of the proxy filings with the SEC, the ILM
Board noted that pursuant to ILM's Articles of Incorporation it had authority to
extend the life of ILM in the event that a liquidation of ILM on or prior to
December 31, 1999 would result in an underrealization of the property portfolio.
Because the Board believed that the going-concern value of ILM and the merger
consideration payable by Capital upon consummation of the merger were both in
excess of ILM's liquidation value, the ILM Board resolved to extend the term of
ILM's corporate existence on a month-to-month basis, but in no event beyond
December 31, 2014. The Board believes that this should enable ILM's directors to
monitor prevailing market trends
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and conditions and provide the directors with maximum decisional flexibility,
subject to ILM's contractual obligations under the merger agreement with
Capital. Thereafter, the Board authorized ILM to cause ILM Holding to offer to
Lease I an extension of the facilities lease agreement on a month-to-month basis
and to provide with respect to the Santa Barbara property that the facilities
lease agreement may be partially terminated.
As noted above, the October 19, 1999 Merger Agreement provided that not
later than the fifth business day next preceding the anticipated date of the
mailing of ILM's Proxy Statement in definitive form to ILM's shareholders in
connection with ILM's solicitation of such holders' approval of the merger
agreement, Capital was required to pay for and receive one or more definitive
commitments from a money center financial institution or investment bank, each
of national standing, sufficient in the aggregate to pay at the effective time
of the Merger the aggregate merger consideration.
On April 4, 2000, the ILM and ILM II Boards each received a letter from
Capital stating that since October 19, 1999, there have been material changes in
both the capital and financial markets, in the operations of the ILM and ILM II
facilities; and a significant decline in Capital's stock price. Capital proposed
the following amendments to the merger agreements: the reduction of the
aggregate merger consideration from $172.0 million to $152.0 million in cash;
increasing Capital's aggregate expense reimbursement from $4.0 to $7.0 million;
broadening the instances in which Capital's transaction expenses would be
payable by ILM and ILM II; ILM's and ILM II's agreement not to draw down or
borrow any additional money under the Fleet Loan Agreement prior to consummation
of the merger; and, ILM and ILM II each agree to sell their entire fee interest
in the Crown Pointe and Crown Villa properties if both the merger and the ILM II
merger are not consummated.
On April 5, 2000, ILM and ILM II responded to Capital's April 4th
correspondence by indicating that ILM and ILM II might consider modifying the
merger agreements to reflect merger transactions that would have an aggregate
merger consideration of $156.0 million if Capital agreed to the following
amendments to the merger agreements: an increased cash termination fee (in favor
of ILM and ILM II) of $4.68 million, plus reimbursement of up to $2.0 million of
ILM's and ILM II's out-of-pocket transactional expenses; no broadening of the
circumstances in which termination fees would be payable to Capital; and, a
reduction in the amount of Capital's termination fee and transactional expense
reimbursement to $4.68 million and $2.0 million, respectively. ILM and ILM II
restated their commitment to consummate the transactions contemplated by the
current merger agreements, stated their disappointment as to the likelihood of
that not occurring and expressed their general willingness to entertain (without
any commitment to do so) in good faith, a bona-fide proposal to amend the merger
agreements at a price and upon other terms and conditions that are in the very
best interests of their stockholders.
On April 10, 2000, Capital delivered to ILM and ILM II a letter proposing
the following amendments to the merger agreements that: the total merger
consideration under both of the ILM and ILM II merger agreements be reduced to
$155.0 million in cash; Capital's expense reimbursement of $4.0 million in the
merger agreements be increased to $5.0 million; and, the Crown Pointe and Crown
Villa option be included in the revised merger agreements. In addition, Capital
expressed both its willingness to accept a reduction
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of its $6.8 million termination fee to $6.16 million and its willingness to
increase the $1.7 million termination fee payable to ILM and ILM II to
$3.08 million.
By letter dated April 12, 2000, ILM and ILM II responded to Capital's April
10th correspondence by indicating that they would consider further amending the
ILM and ILM II merger agreements to reflect a reduced merger consideration of
$155.0 million in cash if Capital would agree to amend the merger agreement as
follows: the distribution of identical termination fees payable to ILM and ILM
II (on the one hand) and Capital (on the other hand) ranging from 1% to 3% of
the aggregate merger consideration; identical expense reimbursements of up to
$1.0 million for out-of-pocket expenses; a reduction in the circumstances in
which termination fees are payable to Capital; ILM's and ILM II's unwillingness
to provide for the Crowne Villa/Crowne Point option; and, a requirement that a
financing commitment in the amount of $155.0 million and related fees and
expenses be executed and delivered by Capital prior to the execution and
delivery of an amendment to the merger agreements. ILM and ILM II restated their
disappointment over the likelihood that the transactions contemplated by the
merger agreements would not be consummated.
On April 12, 2000, the full ILM Board consisting of Jeffry R. Dwyer, J.
William Sharman, Jr. and Carl Schramm, met with Greenberg Traurig and Cohen &
Steers to consider Capital's proposal to reduce the aggregate merger
consideration and ILM's response to such proposal. Cohen & Steers provided the
Board with the results of updated financial studies and analyses which had been
performed by Cohen & Steers, based upon ILM's current operations and financial
projections (since October 19, 1999, the date of execution of the Merger
Agreement and the date of the original fairness opinion rendered by Cohen &
Steers). Cohen & Steers advised the Board regarding its updated review of the
financial data relating to ILM's valuation, as well as Cohen & Steers' analyses
of the recent performance of stock prices of assisted living industry
participants. Cohen & Steers informed the Board that during the past 12 months,
although the Standard & Poor's 500 Index of stock prices had been up 13.4%, the
senior and assisted living industry stock price index had been down 66.3%, the
health care REIT index had been down 35.9%, and the average stock price of long
term care companies had been down 51.1%. Furthermore, during the past 30 days
the stocks of a subset peer group of assisted living industry participants were
down over 10%.
Against the backdrop of the recent dramatic decline in the senior living
industry and the continued material deterioration of Capital's common stock
price, the merger consideration was reduced to $155.0 million, allocable to ILM
and ILM II in the amounts of $87,429,000 and $67,571,000 respectively, and ILM
successfully negotiated increased break-up fees in favor of ILM, lower break-up
fees in favor of Capital, Capital's receipt of a GMAC executed financing
commitment in an amount equal to substantially all of the merger consideration
prior to execution of the proposed amendment and Capital's withdrawal of its
option request regarding the Crown Point/Crown Villa properties.
On April 14, 2000, Capital obtained from GMAC its written commitment
pursuant to which, GMAC agreed, subject to certain conditions and termination
events, to provide Capital cash funds sufficient to pay substantially all of the
aggregate cash consideration payable in the merger. See "Financing; Source and
Amount of Funds."
On April 17, 2000 the full ILM Board, consisting of Jeffry R. Dwyer, J.
William Sharman, Jr., and Carl Schramm, met with Greenberg Traurig and Cohen &
Steers to review the terms of the proposed amendment to the October 19, 1999
merger agreement which has been received from Capital's attorneys and reviewed
and rewritten by Greenberg Traurig. Cohen & Steers provided the Board with an
assessment of prevailing trends in the senior living industry and Capital's
recent market performance and capitalization, financial condition and
creditworthiness. Cohen & Steers delivered its oral opinion to the ILM Board
that, based on the qualifications and assumptions expressed to the ILM Board, as
of April 17, 2000, the $11.63 per share in cash to be received by ILM's
shareholders in the merger, was fair to such holders, from a financial point of
view.
Greenberg Traurig then presented the ILM Board with a detailed description
of the terms of the amendments to the merger agreement, outlining the various
material
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differences between the proposed amendment and the merger agreement. After
further deliberations and a general discussion with Greenberg Traurig of the ILM
Board's fiduciary responsibilities, the ILM Board resolved unanimously to adopt
the proposed amendment to the merger agreement and to execute the same. The ILM
Board next authorized the prompt execution and delivery of the amendment and the
refiling with the SEC of all appropriately revised proxy solicitation materials.
On April 18, 2000, Cohen & Steers confirmed in writing its oral opinion
delivered to the ILM Board on April 17, 2000. Based upon Cohen & Steers' opinion
that as of April 18, 2000 the $11.63 per share in cash to be received by ILM's
shareholders in the merger was fair to such holders, from a financial point of
view, and the other factors described elsewhere in this proxy statement under
"Recommendation of the ILM Board," ILM entered into the amendment with Capital
and thereafter issued a press release announcing the execution of the amendment
to the restated merger agreement.
On April 24, 2000 ILM filed with the SEC its Current Report on Form 8-K
disclosing such event.
RECOMMENDATION OF THE ILM BOARD
Your Board of Directors has determined that the merger is fair to you and
in your best interests and that the merger is advisable. Your Board of Directors
has unanimously adopted the merger agreement and recommends that you vote "FOR"
approval of the merger agreement. In determining to adopt the merger agreement,
none of ILM's directors abstained from voting or voted against adoption.
In resolving to adopt and recommend to ILM's shareholders approval of the
merger agreement, the ILM Board considered a number of factors, including the
following which sets forth all of the material factors considered:
o The Board's belief that because the equity interests in ILM, a
finite-life, month-to-month entity, are of a fixed and short-term
nature, any proposed strategic financial transaction should provide
ILM shareholders with maximum liquidity.
o the strategic financial alternatives available to ILM to maximize
shareholder value, such as listing ILM's common stock on a national
securities exchange or The Nasdaq Stock Market, the reorganization of
Lease I (the lessor of the senior living communities owned by ILM
Holdings) into assisted living community operating companies, and the
lease of ILM's senior living communities to Capital. The Board was
not convinced of the viability of the alternatives because no one
alternative guaranteed the liquidity of ILM's common stock;
o the trend of continued consolidation in the senior living industry
and the likelihood that ILM would not have the financial or
structural ability to be an acquiring entity in a business
combination transaction;
o ILM's financial condition, cash flows and results of operations;
o the higher likelihood of the merger with Capital being consummated in
relation to other potential transactions because of Capital's
historical commercial relationship with ILM and its extensive
familiarity with ILM's day-to-day operations, and the lack of due
diligence "outs" in the merger agreement;
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o ILM's month-to-month, finite life status and the Board's belief that
a present liquidation was not likely to capture for ILM's
shareholders maximum value for their investment;
o ILM's strengths and weaknesses as an independent public company,
which included ILM's reputation, market share and financial
resources; ILM's lack of personnel base and liquidity, inability to
directly operate an assisted living business due to its statutory
REIT status; and ILM's inability to expand operations on a relative
debt-free basis because of its statutory obligation as a REIT to
distribute each year 95% of its income to its shareholders;
o the material decline in the market price of Capital's common stock
since February 7, 1999 and the fact that the original merger
agreement and transactions proposed by Capital provided for the
issuance of fixed income trust preferred securities without
adjustment provisions, "collars" or "caps". This factor was a primary
reason for amending the February 7, 1999 and October 19, 1999 merger
agreements to provide for $11.63 of all-cash consideration;
o the fact that after the merger ILM's current shareholders no longer
would receive any dividends relating to the earnings and growth of
ILM unless they independently reinvest the cash consideration to be
received by them in the merger in shares of Capital common stock;
o the simplicity of a unitary, all-cash transaction compared with
either a protracted auction process involving the serial liquidation
of the properties or a singular asset sale transaction without taking
into account a control premium or going-concern valuation for ILM's
shareholders. The ILM Board believed that a merger transaction could
be consummated more expeditiously and would ultimately provide
shareholders with greater value;
o the Board's belief that the going-concern value of ILM obtainable in
the merger into Capital was greater than the present or reasonably
foreseeable liquidation or "break-up" value of the ILM properties.
This belief was based upon the liquidation valuation analysis
performed by Cohen & Steers referred to in its fairness opinion, in
which capitalization rates ranging from 10.0% to 12.5% were applied
to resident level cash flows after deduction for all operating
expenses, including management fees. The analysis indicated a range
of liquidation values derived by applying such capitalization rates
with an average of $75,315,000 or $10.02 per share of ILM's common
stock. Cohen & Steers did not make an independent valuation or
appraisal of the ILM properties and was not furnished with any such
valuation or appraisal. The ILM Board noted that the value of
Capital's offer was approximately $12.1 million in excess of such
indicated mean liquidation value and concluded that the going-concern
value of ILM obtainable in the merger transaction exceeded ILM's
liquidation or "break-up" value.
o the recent dramatic economic and market declines in the senior living
industry, the overall condition of the U.S. capital and financial
markets, and the substantial deterioration of Capital's common stock
price and inability to raise
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equity capital which led to amending the merger agreement to provide
for all-cash consideration;
o the belief that, after months of dealings and discussions, Brookdale
demonstrated its inability or lack of intention to structure,
negotiate and consummate a superior alternative transaction with ILM
that was in the best interests of ILM's shareholders;
o Cohen & Steers' opinion that the $11.63 per share in cash to be
received in the merger by ILM's shareholders was fair to such
holders, from a financial point of view and the Board's adoption of
the conclusions set forth in such opinion;
o the lack of any firm competing or alternative offers from bona fide
purchasers, irrespective of the fact that ILM had, since February
1999, publicly disclosed its intention to consummate a sale or
change-in-control transaction and that from approximately February
1999 through September 1999 ILM pursued various acquisition proposals
from Brookdale which ultimately did not lead to any definitive
superior alternative offer;
o ILM's requirement to pay a reduced (in comparison to the amount that
was payable pursuant to the merger agreement prior to the current
amendment) termination fee in the event a superior offer is accepted
by ILM and the merger is terminated which, given the amount of the
fee and the scope of the circumstances under which the fee would
become payable, was not commercially unreasonable in the ILM Board's
view or likely to deter a bona fide, superior competing bid for ILM;
o the fact that the all-cash merger with Capital is a fully taxable
transaction to ILM's shareholders;
o the fact that the merger structure would allow Capital to realize
certain tax advantages which the ILM Board believed had resulted in
obtaining a higher price per share for ILM's shareholders;
o the terms of the merger agreement, including the closing conditions,
the termination fees and reimbursement of expenses payable to Capital
under certain circumstances, the absence of indemmification
provisions and lack of survival of most representations and
warranties, and the restrictions imposed on the conduct of ILM's
business and operations during the period prior to closing--all of
which were extensively negotiated and deemed commercially reasonable
by the Board;
o the agreement of ILM not to solicit alternative transactions with
third parties and the broad "fiduciary out" which enables ILM to
terminate the merger agreement and pursue unsolicited superior
transactions with parties other than Capital; subject to the payment
to Capital of termination fees and expenses under certain
circumstances;
o the actual and potential conflicts of interest of ILM's officers and
directors with respect to the merger in relation to the interests of
ILM's shareholders--which potential conflicts the ILM Board viewed as
immaterial in relation to the benefits to be received by ILM's
shareholders in the merger;
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o the fact that none of ILM's officers or directors own any ILM common
stock or Capital common stock, that they do not participate in any
ILM executive compensation or stock option plans, and that they are
not parties to any employment or similar agreements providing for
renumeration or other pecuniary benefits upon a change-in-control of
ILM; accordingly, the ILM directors did not (and do not) have any
direct financial interest in the outcome of the merger;
o the risks of the merger not being consummated--which the ILM Board
did not consider unreasonable in relation to similar transactions
negotiated at arms'-length;
o the fact that the property management agreement provides Capital with
a limited right of first and last offer on sales of the ILM
properties, and that such right of first and last offer could have
the effect of deterring prospective purchasers from bidding for ILM's
assets but did not apply to merger transactions or stock
transactions;
o the fact that Capital has obtained the written commitment from GMAC
to provide Capital with substantially all of the necessary merger
financing at closing. This provided the ILM Board an additional level
of comfort that financing could be obtained at or before closing
assuming the U.S. financial markets or values in the senior living
industry did not substantially decline;
o the amount and scope of the termination fee payable under the merger
agreement to Capital under certain circumstances which the Board did
not consider unusual in relation to similar and customary
transactions negotiated at arms'-length;
o the fact that the merger must be approved by the holders of at least
66- 2/3% of the outstanding ILM common stock which might require a
lengthy shareholder proxy solicitation period;
o the lack of burdensome regulatory consents and approvals in
connection with the merger which the ILM Board believed enhanced the
likelihood that the merger could be completed in a reasonable time
frame;
o the fact that after the merger Capital will assume and become legally
responsible for all of ILM's known and unknown liabilities, which
made a statutory merger the optimum transaction structure compared to
an asset transaction where assumed liabilities and purchased assets
typically are apportioned by the parties by contract pursuant to
extensive due diligence and negotiation; and
o the fact that consummation of the ILM II merger is not a condition to
consummation of the merger or vice versa--so that the closing of one
transaction would not be delayed for any reason relating to the
status of the other transaction.
In view of the variety of factors considered in connection with its
evaluation and deliberations with respect to the merger, the ILM Board did not
find it practical to and, therefore, did not attempt to rank or assign relative
weight to the above factors. In addition,
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individual members of the ILM Board may have assigned different weights to
different factors.
PURPOSES, ALTERNATIVES, TIMING AND REASONS FOR THE MERGER
In the merger, each share of ILM common stock will be canceled and ILM's
separate corporate existence will be terminated upon the payment to you of
$11.63 in cash (less applicable stock transfer and withholding taxes). The
purpose of the merger is to sell to Capital 100% of the ownership interests in
and, therefore, 100% control of, ILM and its businesses and properties. The
merger has been structured as an all-cash transaction because of the simplicity
of this structure, the absence of market risk otherwise associated with the
receipt of securities or other property (particularly in light of the declining
values in the senior living industry), and the flexibility afforded ILM's
shareholders in an all-cash merger with respect to future investment decisions.
Structurally, the acquisition of ILM by Capital was designed as a merger
rather than an asset sale or tender offer to ensure Capital's assumption, by
operation of law, of all of ILM's liabilities, to eliminate unnecessary
indemnification provisions, to facilitate an orderly shareholder decisional
process pursuant to applicable federal and state law and subject to input by the
ILM Board, and to enable the transaction to be completed in a single step,
rather than a front-end purchase of a controlling interest with a second-step
squeeze-out merger. The Board believes that a unitary merger transaction
minimized the risk that the transaction would not be consummated, reduced
overall transaction costs and increased Capital's ability to pay a higher amount
of merger consideration to ILM's shareholders.
Additionally, although the transaction has been structured as a merger
under Virginia corporate law, for U.S. federal tax purposes it will be treated
as a fully taxable sale of assets by ILM and an acquisition by Capital followed
by a dissolution of ILM. This structure allows Capital to receive a higher
deemed original cost of ILM's assets and a correspondingly greater recognition
by Capital of the depreciation expense of those assets.
Although ILM and Capital considered structural alternatives such as an
acquisition by means of tender offer, ILM and Capital rejected these
alternatives on the grounds that Capital would not derive certain tax benefits
which would have resulted in a reduction of the merger consideration Capital
could pay to ILM's shareholders.
The merger is being entered into by ILM at this time primarily because
(i) ILM is a finite-life, month-to-month, entity and, as such, its corporate
existence is not intended to continue for the long-term; (ii) the uncertainty of
future appreciation of ILM's portfolio in the rapidly declining senior living
industry; (iii) the opportunity for ILM to obtain for its shareholders a sale
price per share based on the going-concern valuation of the company rather than
the liquidation (or break-up) value of the portfolio; (iv) of the lack of any
bona fide alternative transactions on terms financially superior to the merger
despite the fact that ILM publicly announced in February 1999 that it was
available for sale and pursued negotiations with Brookdale--the only third party
that has expressed interest in acquiring ILM since that date; (v) after almost
three years of studying strategic financial alternatives to maximize shareholder
value and, in particular, the extensive negotiations with Capital and its
advisors, the ILM Board believes it has obtained the best price and the best
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transaction structure available for ILM's shareholders; and (vi) the ILM Board's
belief that the current merger has a reasonably high likelihood of completion.
Additionally, the ILM Board is recommending approval of the merger because
it believes, based upon its adoption of the conclusions set forth in Cohen &
Steers' fairness opinion, that the merger consideration to ILM's shareholders is
fair from a financial point of view.
DETERMINATION OF MERGER CONSIDERATION
The consideration of $11.63 per share, in cash, to be paid in the merger to
ILM's shareholders was the result of extensive negotiation between
representatives of the parties (see "Special Factors--Background of the
Merger"). No interest will be paid on that amount and, under certain
circumstances described elsewhere in this proxy statement, such per share amount
could be reduced by stock transfer and withholding taxes applicable to certain
holders of ILM's common stock.
The aggregate consideration offered by Capital for ILM and ILM II is
$155.0 million, which amount was allocated to ILM and ILM II based upon their
relative net operating incomes. Applying this agreed upon method of allocation,
of the $155.0 million, $87,429,000 was allocated to ILM and $67,571,000 was
allocated to ILM II.
The merger consideration in the ILM merger was calculated by dividing the
total merger consideration of $87,429,000 allocated to ILM, by the 7,520,100
shares of ILM common stock outstanding at the time of the amended merger
agreement on April 18, 2000. This resulted in an approximate dollar amount of
$11.63 per share. The merger consideration of $87,429,000 exceeds the book value
of ILM's assets by approximately $54.0 million as of February 29, 2000.
Because the ILM Board believes that the fair market value of its portfolio
on a property-by-property basis is less than the value of ILM as a
going-concern, ILM did not believe it was necessary in connection with the
merger to obtain an asset appraisal of its senior living communities.
OPINION OF COHEN & STEERS
On April 17, 2000 at a special meeting of the directors of ILM (at which
each of Messrs. J. William Sharman, Jr., Jeffry R. Dwyer and Carl D. Schramm
were present), Cohen & Steers Capital Advisors, LLC delivered to the ILM Board
its oral opinion, subsequently confirmed in writing on April 18, 2000, to the
effect that, as of the dates of such opinions, the $11.63 per share in cash to
be received by ILM's shareholders in the merger, was fair to such holders, from
a financial point of view. On the date of this proxy statement, Cohen & Steers
confirmed such opinion in writing. If a material amendment is made to the merger
agreement, ILM will seek a new fairness opinion from Cohen & Steers.
A copy of Cohen & Steers' written opinion, which sets forth the assumptions
made, valuation techniques, matters considered and limitations on the scope of
review undertaken by Cohen & Steers, is attached as Appendix B to this document.
o Cohen & Steers' opinion is directed only to the fairness of the merger
consideration, from a financial point of view.
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o Cohen & Steers' opinion was provided at the request and for the
information of ILM's Board of directors in evaluating the merger
consideration, and does not constitute a recommendation to any
shareholder to vote in favor of the merger and should not be relied upon
as such.
o The summary of Cohen & Steers' opinion set forth in this document
describes the assumptions made, valuation techniques, matters considered
and limitations on the scope of review undertaken by Cohen & Steers, but
does not purport to be complete and is qualified in its entirety by
reference to the full text of Cohen & Steers' opinion attached as
Appendix B hereto. The principal assumptions made, valuation techniques
employed and analyses performed by Cohen & Steers are described in the
first full paragraph on page 58 through the first full paragraph on
page 60, and in the fourth full paragraph on page 65; the principal
matters considered by Cohen & Steers are described in the fourth full
paragraph on page 59 and the significant limitations on the scope of
review by Cohen & Steers are described in the first and second full
paragraphs on page 60.
o Shareholders of ILM should read Cohen & Steers' opinion carefully and in
its entirety for information with respect to the procedures followed,
assumptions made, matters considered and limitations on the review
undertaken by Cohen & Steers in rendering its opinion.
o Cohen & Steers consents to the references to its name and opinion in this
proxy statement and to the attachment of its opinion to this document as
Appendix B hereto.
To enable Cohen & Steers to compare the facility operations of the
portfolio of assets in ILM to other publicly traded assisted living operating
companies and perform various financial analyses and valuation techniques
described herein, ILM combined the operations of ILM and an affiliated entity,
ILM I Lease Corporation ("Lease I") and it reviewed the historical and projected
operating data of ILM on a projected C-corporation basis. ILM is structured as a
finite-life Real Estate Investment Trust ("REIT") and to maintain its REIT
status, ILM cannot operate the facilities itself. As such, ILM owns the real
estate and leases the operations to Lease I, a taxable C-corporation, under a
facilities lease agreement which ILM may cancel, upon notice, at any time. ILM
receives lease payments from Lease I and does not consolidate the revenues and
expenses of the operations in its financial statements. As a basis for the
projected financial statements of the ILM C-corporation, ILM combined the actual
financial statements for the three months ended February 29, 2000 of ILM I and
the draft financial statements for the three months ended February 29, 2000 of
Lease I and made the following adjustments:
o ILM eliminated the rental and other income revenues from ILM and the
master lease rent expense from Lease I (i.e., the lease payment paid
from Lease I to ILM);
o ILM decreased the general and administrative expense to be the sum of
(a) 5% of the total rental and other income of Lease I plus
(b) $400,000 per year for public company expenses (the resulting
general and administrative expense was
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management's projection for the stabilized portfolio on a
going-concern basis); and
o ILM increased the aggregate state and federal tax rate to 40%.
By analyzing ILM on a C-corporation basis, Cohen & Steers was then able to
compare the portfolio of assets in ILM to other publicly traded assisted living
companies and perform the various financial analyses using the accepted
methodologies described herein.
To compare the finite-life portfolio of assets of ILM to other publicly
traded healthcare REIT companies and perform some of the financial analyses
using the valuation techniques described herein, Cohen & Steers also reviewed at
ILM's request certain information reflecting ILM as a going-concern REIT. To
enable Cohen & Steers to do so, ILM made the following adjustment to its
financial statements for the three months ended February 29, 2000:
o ILM decreased the general and administrative expense to 7.7% of
rental revenues, which management believed was necessary to reflect a
stabilized REIT portfolio on a going-concern basis.
By analyzing ILM as a going-concern REIT, Cohen & Steers was able to
compare the portfolio of assets in ILM to other publicly traded healthcare REIT
companies and perform various financial analyses using the accepted
methodologies described herein.
In arriving at the Cohen & Steers Opinion, Cohen & Steers:
o reviewed a draft of the merger agreement and assumed that the draft
of the merger agreement which Cohen & Steers reviewed would conform
in all material respects to the merger agreement as executed and
delivered (such draft did in fact conform in all material respects to
the definitive merger agreement as executed and delivered by ILM,
Capital and Capital Acquisition on April 18, 2000);
o reviewed certain publicly available financial statements and other
information of ILM and Lease I;
o reviewed historical financial information of ILM on a C-corporation
basis prepared by ILM, and certain projected information for ILM on a
C-corporation basis prepared by ILM for the calendar years ending
December 31, 2000 through December 31, 2002;
o visited certain communities of ILM and held discussions with ILM
regarding its business, operations and prospects;
o performed various financial analyses, as Cohen & Steers deemed
appropriate, using certain valuation techniques, including:
o the application of the public trading multiples of assisted
living companies which Cohen & Steers deemed reasonably
comparable to ILM, to the financial results of ILM on a
C-corporation basis;
o the application of the multiples reflected in recently reported
assisted living public mergers and acquisitions for businesses
which Cohen &
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Steers deemed reasonably comparable to ILM, to the financial
results of ILM on a C-corporation basis;
o a discounted projected cash flow analysis of ILM on a
C-corporation basis;
o an analysis with respect to liquidation of ILM's portfolio
assets as a financial alternative to the merger; and
o the application of the public trading multiples of health care
REITs which Cohen & Steers deemed reasonably comparable to ILM,
to the financial results of ILM as a going-concern REIT.
In its review and analysis and in formulating its opinion, Cohen & Steers:
o assumed and relied upon the accuracy and completeness of all
information supplied or otherwise made available to it by ILM or
obtained by Cohen & Steers from other sources, and upon the assurance
of ILM that it was not aware of any information or facts that would
make the information provided to Cohen & Steers materially incomplete
or misleading;
o did not attempt to independently verify any of such information;
o did not undertake an independent appraisal of the assets or
liabilities (contingent or otherwise) of ILM or Capital, nor was
Cohen & Steers furnished with any such appraisals;
o with respect to the financial and operating projections of ILM
reviewed by Cohen & Steers, Cohen & Steers assumed that they were
reasonably prepared on a basis reflecting the best current estimates
and good faith judgments of management as to ILM's anticipated future
financial condition and operating results;
o The financial and operational projections made by ILM are
quantified as follows:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------------
1999 ACTUAL 2000 2001 2002
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
(US $ in thousands)
Revenues........................................ $19,997.3 $20,721.1 $21,516.3 $22,341.6
EBITDAR......................................... 8,354.2 8,719.8 9,142.9 9,584.0
Margin........................................ 41.8% 42.1% 42.5% 42.9%
Net Income...................................... 4,059.9 4,266.6 4,507.4 4,758.6
Margin........................................ 20.3% 20.6% 20.9% 21.3%
</TABLE>
o expressed no opinion with respect to such projected financial
statements.
Cohen & Steers' opinion was necessarily based upon financial, economic,
market and other conditions as they existed and that could be evaluated by Cohen
& Steers on the date of its opinion. Cohen & Steers disclaimed any undertaking
or obligation to advise any person of any change in any fact or matter affecting
its opinion which may come or be brought to its attention after the date of its
opinion unless specifically requested by ILM to do so pursuant to an agreement
with ILM.
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<PAGE>
Cohen & Steers' opinion does not constitute a recommendation as to any
action any shareholder of ILM should take in connection with the merger
agreement, the merger or any aspect thereof, including whether to vote in favor
of the merger or to purchase, sell or hold ILM's common stock or take or refrain
from taking any other action, and should not be relied upon as such. Although
Cohen & Steers discussed, at ILM's request, strategic financial alternatives, it
expressed no opinion or recommendation with respect to the desirability of
pursuing any such alternatives.
In rendering its opinion, Cohen & Steers was not engaged as an agent or
fiduciary of ILM's shareholders or of any other third party. Cohen & Steers'
opinion related solely to the fairness, from a financial point of view, of the
$11.63 per share in cash to be received by the holders of ILM common stock in
the merger. Cohen & Steers expressed no opinion as to the structure, terms or
effects of any other aspect of the transactions contemplated by, or provisions
of, the merger agreement or any of the agreements or instruments delivered
pursuant thereto.
The following is a summary of all of the material financial analyses
performed by Cohen & Steers in arriving at its opinion and was provided by Cohen
& Steers for inclusion herein.
Selected Comparable Public Assisted Living Companies Analysis. Cohen &
Steers compared selected projected financial and operating data of ILM on a
C-corporation basis to the corresponding data of a group of publicly traded
companies that it deemed to be reasonably comparable to ILM on such basis. In
determining the appropriate comparable companies, Cohen & Steers considered a
variety of factors, including market capitalization, business focus, revenues,
cash flow and resident capacity. These four companies (the "ILM Comparable
Companies") consisted of:
o American Retirement Corporation;
o Brookdale Living Communities, Inc.;
o Capital Senior Living Corporation; and
o Sunrise Assisted Living, Inc.
Cohen & Steers calculated multiples of Adjusted Enterprise Value (defined
as market value of equity plus the sum of total debt and capitalized rent
payments (i.e., eight times rent expense), less cash and cash equivalents) to
resident capacity (defined as total owned and leased operating beds), to latest
quarter annualized ("LQA") revenues and LQA earnings before interest, taxes,
depreciation, amortization and rent expense ("EBITDAR"). Cohen & Steers also
calculated multiples of the market value of equity to LQA earnings per share
("EPS"), actual calendar year 1999 EPS, projected calendar year 2000 EPS and
projected calendar year 2001 EPS, based on information provided by a variety of
sources, including published consensus street analyst earnings estimates and
reports and information published by First Call (an on-line data service which
compiles estimates developed by research analysts).
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<PAGE>
The following table sets forth the implied mean values per share of ILM
common stock based upon the foregoing analysis:
<TABLE>
<CAPTION>
DISCOUNT/
IMPLIED (PREMIUM) IMPLIED DISCOUNT/
COMPARABLE MEAN TO MEDIAN (PREMIUM)
MULTIPLES VALUES MERGER VALUES TO MERGER
ADJUSTED ENTERPRISE ------------------- PER CONSID- PER CONSID-
VALUE MULTIPLES MEAN MEDIAN SHARE ERATION SHARE ERATION
- ------------------------------------------------- -------- -------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Resident Capacity................................ $ 84,800 $ 91,500 $12.13 $ (0.50) $13.11 $ (1.48)
LQA Revenues..................................... 3.5x 3.7x $ 9.08 $ 2.55 $ 9.62 $ 2.01
LQA EBITDAR...................................... 10.9x 11.4x $10.46 $ 1.17 $10.95 $ 0.68
<CAPTION>
MARKET VALUE OF
EQUITY MULTIPLES
- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LQA EPS.......................................... 13.9x 10.6x $ 5.63 $ 6.00 $ 4.29 $ 7.34
Actual 1999 EPS.................................. 11.3x 13.0x $ 6.10 $ 5.53 $ 7.02 $ 4.61
Projected 2000 EPS............................... 11.6x 12.9x $ 6.58 $ 5.05 $ 7.32 $ 4.31
Projected 2001 EPS............................... 10.3x 10.2x $ 6.17 $ 5.46 $ 6.11 $ 5.52
</TABLE>
In arriving at its opinion, Cohen & Steers noted the following: $11.63 per
share to be paid in the merger to ILM's shareholders exceeds the implied mean
and median values per share based on multiples of LQA Revenues, LQA EBITDAR, LQA
EPS, Actual 1999 EPS, Projected 2000 EPS and Projected 2001 EPS. The implied
mean and median values per share based on Resident Capacity exceeds the $11.63
per share. The range of implied mean equity values per ILM share derived from
this analysis ranged from a high of $12.13 to a low of $5.63 with a mean of
$8.02 and a median of $6.58 compared with the $11.63 per share. The range of
Implied Median Equity Values per ILM Share derived from this calculation ranged
from a high of $13.11 to a low of $4.29 with a mean of $8.35 and median of $7.32
compared with the $11.63 to be paid in the merger to ILM's shareholders.
Comparable Transactions Analysis. Cohen & Steers considered the terms, to
the extent publicly available, of selected cash transactions that it deemed
reasonably comparable to the merger (the "Comparable ILM Transactions") and
sought to compare the $11.63 per share to be paid by Capital with the
consideration involved in such transactions. The six Comparable ILM Transactions
and their pertinent dates were as follows:
o the acquisition of select assisted living assets of Manor Care, Inc.
by Alterra Healthcare Corporation (completed in July 1999);
o the acquisition by Lazard Freres Real Estate LLC of Atria
Communities, Inc. (completed in September 1999);
o the acquisition by Lazard Freres Real Estate LLC of Kapson Senior
Quarters Corp. (completed in April 1998);
o the acquisition by Lazard Freres Real Estate LLC of a controlling
stake in ARV Assisted Living, Inc. (completed in December 1997);
o The Whitehall Group's acquisition of Integrated Living Communities,
Inc. (completed in July 1997); and
o Host Marriott Corporation's acquisition of certain Forum Group
retirement assets from Marriott International, Inc. (completed in
June 1997).
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<PAGE>
In considering the preceding transactions, and taking into account the
start-up nature of the industry, Cohen & Steers determined that with the
exception of per bed values there is a significant lack of meaningful multiples
based on comparable transactions. To calculate operating per bed values, Cohen &
Steers calculated multiples of Adjusted Transaction Value (defined as equity
value of the transaction plus the sum of total assumed debt and capitalized rent
payments (i.e., eight times rent expense), less cash and cash equivalents) to
resident capacity (defined as total owned and leased operating beds). The mean
and median operating bed values were $92,500 and $73,600, respectively, implying
a value of $13.26 per share and $10.49 per share, respectively, for ILM based
upon the mean and median of the values for the companies implied in the
Comparable ILM Transactions.
In arriving at its opinion, Cohen & Steers noted that the implied mean
value per share based on per bed values of Comparable ILM Transactions exceeds
the $11.63 per share of merger consideration. However, such amount exceeds the
implied median value per share based on per bed values of Comparable ILM
Transactions. Cohen & Steers also reviewed recent mergers and acquisitions in
the long-term care industry, but due to the significant valuation differences
between long-term care and assisted living companies, Cohen & Steers did not
consider the results of this analysis to be meaningful.
Discounted Cash Flow Analysis. Cohen & Steers performed discounted cash
flow analyses of the projected free cash flows of ILM on a C-corporation basis
for the calendar years 2000 through 2004 based on projections prepared by
management for the existing portfolio of assets and modest expansion
assumptions.
Free cash flows are defined as after-tax earnings before interest and taxes
("EBIAT"), plus depreciation and amortization, less capital expenditures and an
estimated change in working capital.
The discounted cash flow analyses of ILM were determined by:
o adding:
-- the present value of the projected free cash flows of ILM for its
portfolio of senior living communities over the five-year period
from 2000 to 2004; and
-- the present value of the estimated terminal value of the business
at the end of 2004;
o and subtracting therefrom the current net debt outstanding of ILM.
The range of estimated terminal values at the end of the five-year period
was calculated by applying terminal multiples ranging from 8.0x to 10.0x to the
projected calendar year 2004 earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The range of terminal multiples was based on the
current EBITDA multiples of the ILM Comparable Companies discounted for the
future. Estimated cash flows and terminal values were discounted to present
value using discount rates ranging from 10.0% to 14.0%, a range representative
of the weighted average cost of capital for the ILM Comparable Companies. Based
on such terminal value multiples and discount rates, the derived mean and median
equity value for ILM was approximately $9.66 and $9.64, respectively. The $11.63
per share to be paid in the merger to ILM's shareholders exceeds
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<PAGE>
both the implied mean and median equity value per share based on the discounted
cash flow analysis per share.
Liquidation Valuation Analysis. Cohen & Steers performed a liquidation
valuation analysis with respect to the current cash flows of the residences of
the ILM portfolio for the three months ended February 29, 2000 annualized.
Resident level current cash flows are defined as EBITDA, less existing
management fees.
The liquidation values of ILM were determined by:
o dividing:
-- the resident level current cash flows of ILM for the three months
ended February 29, 2000 annualized; by
-- capitalization rates ranging from 10.0% to 12.5%
o and subtracting therefrom the current net debt outstanding of ILM.
The range of capitalization rates is based on the current capitalization
rates being paid by purchasers of individual senior and assisted living
residences and these capitalization rates would be representative of the value
of the ILM portfolio if it were liquidated in an asset sale today. Based on the
liquidation analysis, the derived mean and median equity values per share for
ILM were $10.02. In arriving at its opinion, Cohen & Steers noted that the
$11.63 per share to be paid in the merger to ILM's shareholders exceeds both the
implied mean and median equity value per share based on the liquidation
valuation analysis per share.
Selected Comparable Public Healthcare REIT Companies Analysis. Because of
ILM's REIT structure, Cohen & Steers compared selected projected financial and
operating data of ILM as a going concern REIT to the corresponding data of a
group of publicly traded healthcare REITs (the "ILM Comparable REIT Companies")
which Cohen & Steers reasonably deemed comparable to ILM. In determining the
appropriate comparable companies, Cohen & Steers considered a variety of
factors, including market capitalization, business focus, revenues, cash flow
and resident capacity. These nine companies consisted of:
o Health Care REIT, Inc.;
o Health Care Property Investors, Inc.;
o Healthcare Realty Trust, Inc.;
o LTC Properties, Inc.;
o National Health Investors, Inc.;
o Nationwide Health Properties, Inc.;
o National Health Realty, Inc.;
o Omega Health Investors, Inc.; and
o Universal Health Realty Income Trust
Cohen & Steers calculated multiples of Enterprise Value (defined as market
value of equity plus total debt, less cash and cash equivalents) to LQA revenues
and LQA EBITDA. Cohen & Steers also calculated multiples of the market value of
equity to LQA funds from operations ("FFO").
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<PAGE>
The following table sets forth the implied mean values per share of ILM
common stock based upon the foregoing analysis:
<TABLE>
<CAPTION>
DISCOUNT/
IMPLIED (PREMIUM) IMPLIED DISCOUNT/
COMPARABLE MEAN TO MEDIAN (PREMIUM)
MULTIPLES VALUES MERGER VALUES TO MERGER
ENTERPRISE ------------- PER CONSID- PER CONSID-
VALUE MULTIPLES MEAN MEDIAN SHARE ERATION SHARE ERATION
- ---------------------------------------------------- ---- ------ ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
LQA Revenues........................................ 7.4x 8.1x $ 7.28 $ 4.35 $ 8.00 $ 3.63
LQA EBITDAR......................................... 8.2x 8.5x $ 7.45 $ 4.18 $ 7.74 $ 3.89
<CAPTION>
MARKET VALUE OF
EQUITY MULTIPLES
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LQA FFO............................................. 5.2x 5.4x $ 4.90 $ 6.73 $ 5.12 $ 6.51
</TABLE>
The range of implied mean equity values per ILM share derived from this
analysis ranged from a high of $7.45 to a low of $4.90, with a mean of $6.55 and
a median of $7.28. The range of implied median equity value per ILM share
derived from the analysis ranged from a high of $8.00 to a low of $5.12, with a
mean of $6.95 and a median of $7.74. In arriving at its opinion, Cohen & Steers
noted that the $11.63 per share to be paid in the merger to ILM's shareholders
exceeds the implied mean and median values per share based on all factors in
this analysis.
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analysis and the application of those methods
to the particular circumstances and, therefore, is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Cohen &
Steers considered the results of all its analyses as a whole and did not
attribute any particular weight to any analysis or factor considered by it.
Subject to the matters set forth in its opinion, the judgments made by Cohen &
Steers as to its analyses and the factors considered by it caused Cohen & Steers
to be of the opinion, that, as of the date of its opinion, the $11.63 per share
to be paid in cash in the merger to ILM's shareholders was fair to such holders,
from a financial point of view. Cohen & Steers' analyses must be considered as a
whole and considering any portion of such analyses or of the factors considered,
without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying Cohen & Steers' opinion.
In performing its analyses, Cohen & Steers assumed the political, economic,
regulatory, monetary and U.S. capital market conditions affecting the assisted
living industry would remain generally stable.
Any estimates contained in Cohen & Steers' analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those contained in such analyses.
Estimated values do not purport to be appraisals or to reflect the prices at
which businesses or companies may be sold in the future, and such estimates are
inherently subject to uncertainty.
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<PAGE>
Cohen & Steers is a an investment banking firm regularly engaged in the
valuation of businesses and their securities in connection with:
o mergers;
o acquisitions;
o private placements; and
o valuations for corporate and other purposes.
The extensive experience of Cohen & Steers' investment bankers in providing
corporate finance and financial advisory services to companies in the senior
housing and assisted living industry was a significant factor in decision of
ILM's Board to select Cohen & Steers to be its financial advisor in connection
with the merger.
Cohen & Steers has performed on-going financial advisory services for ILM
and ILM II and has received fees for such services. In the ordinary course of
business, Cohen & Steers and its affiliates may actively trade the securities of
Capital for the accounts of their clients and, accordingly, may at any time hold
a long or short position in such securities.
To date, ILM and ILM II have paid to Cohen & Steers aggregate fees of
$250,000 for certain fairness opinions furnished by Cohen & Steers to the ILM
Board on October 19, 1999 in connection with the ILM and ILM II Amended and
Restated Agreements and Plans of Merger dated October 19, 1999, and additional
aggregate fees of $125,000 for Cohen & Steers' opinion rendered on April 18,
2000 and a similar opinion addressed to the Board of Directors of ILM II. ILM
and ILM II have agreed to pay Cohen & Steers an additional $900,000 fee if the
merger and the ILM II merger are completed. ILM and ILM II have also agreed to
reimburse Cohen & Steers for certain expenses and liabilities in connection with
its engagement. The fee for Cohen & Steers' opinion was not conditioned upon the
conclusion reached by Cohen & Steers as to the fairness of the merger
consideration, nor upon the ultimate consummation of the merger or the ILM II
merger. Except as expressly set forth above, no limitation was imposed by ILM on
the nature or scope of, or methodologies and procedures used in, Cohen & Steers'
financial analyses.
PLANS AND PROPOSALS OF ILM AND CAPITAL
Upon the occurrence of the merger, ILM will be merged into Capital
Acquisition and, pursuant to applicable law, ILM's separate corporate existence
will terminate. Consequently, ILM's common stock will become eligible for
termination of registration under the Exchange Act and ILM no longer will be
subject to the periodic reporting requirements of the Exchange Act.
Capital has advised ILM that it presently has no plans or proposals that
relate to or which would impact ILM's or its subsidiary's assets, extraordinary
or otherwise, involving a merger, reorganization, liquidation or sale of assets.
Capital does however intend, from time to time, to evaluate and review the
former assets of ILM and its subsidiary and make such changes as are then deemed
appropriate.
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<PAGE>
PRESENT INTENTIONS AND RECOMMENDATIONS OF CERTAIN PERSONS WITH REGARD TO THE
MERGER
No executive officer or director of ILM or Capital owns shares of ILM's
common stock. Accordingly, no such person has any present intentions with
respect to the ownership or voting of such stock.
Except to the extent a recommendation is made in a person's capacity as a
director of ILM's or Capital's board, no executive officer of ILM or Capital has
made any recommendation with respect to the adoption of the merger agreement and
consummation of the transactions contemplated thereby.
CONDUCT OF ILM'S BUSINESS IF THE MERGER IS NOT COMPLETED
If the merger is not completed, ILM intends to continue to operate its
business substantially in the manner it is operated today and, from time to
time, it will evaluate and review ILM's business, operations, properties,
management and other personnel, corporate structure, dividend policy and
capitalization, and make such changes as are deemed appropriate and to continue
to explore strategic financial alternatives to maximize shareholder value. In
addition, if the merger is not completed but the ILM II Merger is completed, ILM
will be obligated to sell its interest in the Santa Barbara facility to Capital
at an amount equal to the fair market value of the property as determined by two
appraisers, one of whom would be chosen by ILM and the other of whom would be
chosen by Capital. If the two appraisers cannot agree on a fair market value and
the difference between the two appraisals is within 10% of the higher appraisal,
then the fair market value will be deemed to be an average of the two
appraisals. If the difference between the two appraisals is greater than 10% of
the higher appraisal, then the two appraisers would select a third appraiser
whose determination of fair market value would be final and binding.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the recommendations of ILM's Board, you should be aware
that the directors of ILM will be members of a newly created advisory board of
Capital after the merger, for which they will receive customary fees. The
directors of ILM also receive the benefit of the indemnification provisions of
the merger agreement and Capital is required to obtain directors' and officers'
liability insurance for current ILM directors as described below. The ILM
directors are currently indemnified by ILM and are covered by directors' and
officers' insurance paid for by ILM.
Pursuant to the merger agreement, all rights to indemnification existing in
favor of the present or former directors, officers and employees of ILM or any
of their respective subsidiaries as provided in applicable articles of
incorporation, bylaws or indemnification agreements with respect to matters
occurring prior to the effective time of the merger will survive and continue
for a period of not less than the statutes of limitations applicable to such
matters, and Capital will comply fully with its obligations thereunder.
In addition, pursuant to the merger agreement, Capital will maintain in
full force and effect, for a seven-year period of time commencing on the
effective time of the merger,
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<PAGE>
officers' and directors' liability insurance and fiduciary liability insurance
on terms no less advantageous to the indemnified parties than insurance existing
prior to the effective time of the merger. Capital is also required to indemnify
and hold harmless, and will advance expenses, to the fullest extent permitted
under applicable law, each director, officer, employee, fiduciary or agent of
ILM or its subsidiaries against any costs, expenses, amounts paid in settlement
or other liabilities in connection with any claims relating to the merger.
In consideration for their services during the course of calendar year
1999, Jeffry R. Dwyer received $20,500, Carl J. Schramm received $19,500 and J.
William Sharman, Jr. received $35,500 for participating in special ILM Board
meetings. In addition, each current ILM Board member, in consideration for his
service on Capital's advisory board, will receive a $7,000 annual retainer fee
and a $200 fee for each advisory board meeting attended as well as the right to
participate in the same stock options and similar programs offered by Capital to
its directors.
The ILM Board and the ILM II Board are comprised of the same directors and
each of the ILM Board, the Lease I Board and the Lease II Board have a majority
of the same directors. The interest of ILM's shareholders may be different from
or in addition to the interest of the shareholders of ILM II, Lease I and
Lease II. Accordingly, the directors of ILM may have potential or actual
conflicts of interest in connection with the merger.
No pension, profit sharing or similar plan of ILM or Capital or their
respective subsidiaries, beneficially owns any of ILM's common stock, and no
such entity has, within the past 60 days of the date this proxy statement was
filed in definitive form with the SEC, entered into any transaction relating to
ILM's common stock.
As of the date of this proxy statement, neither the officers or directors
of ILM nor the officers or directors of Capital own any shares of the issued and
outstanding ILM common stock or any stock options to acquire such stock.
As of the date of this proxy statement, ILM is not aware of any ILM
shareholder who beneficially owns 5% or more of ILM's common stock.
For a list of the directors and executive officers of ILM and Capital, see
"Directors and Executive Officers."
NO INDEPENDENT COMMITTEE
The terms of the merger were negotiated by the entire ILM Board. An
independent committee consisting only of non-employee directors was not
established to represent ILM's shareholders. If such a committee did negotiate
the terms of the merger, the terms may have been different.
THE MERGER AGREEMENT
THE FOLLOWING IS A SUMMARY OF THE IMPORTANT PROVISIONS OF THE MERGER
AGREEMENT WHICH IS ATTACHED TO THIS PROXY STATEMENT AS APPENDIX A. THIS SUMMARY
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE MERGER
AGREEMENT WHICH IS
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INCORPORATED HEREIN BY REFERENCE. ALL HOLDERS OF ILM COMMON STOCK ARE ENCOURAGED
TO READ THE MERGER AGREEMENT CAREFULLY AND IN ITS ENTIRETY.
The Merger
The merger agreement provides that, upon satisfaction or waiver, to the
extent permitted by law, of its terms and conditions, including approval of the
merger agreement by the holders of at least 66- 2/3% of the outstanding ILM
common stock, ILM will be merged into Capital Acquisition, and Capital
Acquisition will be the surviving entity in the merger. At the effective time of
the merger, the Certificate of Formation of Capital Acquisition in effect
immediately prior to such time will become the Certificate of Formation of the
surviving entity, and the Operating Agreement of Capital Acquisition in effect
immediately prior to such time will become the Operating Agreement of the
surviving entity, in each case until such documents are amended or restated.
(Sections 1.1, 1.3 and 1.4 of the merger agreement).
Effective Time
The merger agreement provides that, the merger will become effective
following the filing of the Articles of Merger and Certificate of Merger with
the Secretary of State of the State of Delaware and with the Secretary of the
Commonwealth of Virginia, respectively. (Section 1.1 of the merger agreement).
Conversion of Shares
At the effective time of the merger, each share of ILM common stock
outstanding immediately prior to the effective time (other than shares held by
Capital, Capital Acquisition or any other subsidiary of Capital or of ILM) will,
by virtue of the merger and without any action on the part of any holder
thereof, be converted into the right to receive $11.63 in cash. No interest will
be paid on such amount. At the effective time of the merger, each share of ILM
common stock owned by Capital, Capital Acquisition or any 100% subsidiary of
Capital immediately prior to the effective time of the merger will be canceled,
retired and cease to exist, and no payment will be made with respect to such
shares. (Section 2.1 of the merger agreement).
Exchange of Certificates
As soon as possible after the effective time of the merger, each holder of
record of a certificate (or certificates) which, immediately prior to the
effective time of the merger, represented outstanding shares of ILM common
stock, will receive: (i) a letter of transmittal and (ii) instructions to effect
the surrender of the shares of ILM common stock in exchange for $11.63 per share
in cash (less any applicable withholding taxes). No interest will be paid on
that amount.
Upon surrender of shares of ILM common stock for cancellation or a validly
executed notice of guaranteed delivery of those shares to the exchange agent or
to such other agent or agents as may be appointed by Capital, together with such
letter of transmittal, duly executed, and any other required documents, the
holder of such shares of ILM common stock will receive $11.63 per share in cash
(less any applicable withholding taxes). Upon
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surrender, the shares of ILM common stock will be canceled. No dividends or
other distributions with respect to ILM common stock declared or made after the
effective time of the merger with a record date after such effective time will
be paid to the holder of any unsurrendered shares of ILM common stock and from
and after the effective time of the merger the ILM common stock will represent
only the right to receive $11.63 per share in cash. (Section 2.2 and 2.3 of the
merger agreement).
Representations and Warranties
Representations and Warranties of ILM. The merger agreement contains
representations and warranties of ILM, the material ones of which relate to:
o ILM's proper organization, qualification, good standing and other
corporate organizational matters;
o ILM's capital structure, and the number of its authorized and outstanding
shares of ILM common stock;
o ILM's compliance with applicable laws and its possession of all permits,
licenses, variances, exemptions, orders, authorizations and approvals of
public and governmental authorities which are material to the operation
of its business;
o the absence of any agreements or laws conflicting with the merger or any
of the transactions contemplated by the merger agreement;
o the absence of any judgment or pending or threatened lawsuit or
proceeding which, if determined adversely, would have a significant
negative effect on ILM;
o the valid title of ILM to all assets which are material to its business,
free and clear of liens or conflicting ownership rights;
o ILM's compliance with applicable environmental laws;
o maintenance of proper accounting controls and accurate books and records
by ILM;
o the absence of any significant negative change or event relating to the
business, properties and condition of ILM, its capital stock, or its
accounting principles, practices or methods;
o the absence of anti-takeover or similar laws applicable to ILM or the
merger;
o the absence of any untrue statements of a significant fact or any
omission of a significant fact relating to the representations and
warranties of ILM in the merger agreement; and
o other representations and warranties relating to due authorization of the
merger and the merger agreement by ILM and the validity and
enforceability thereof.
(Section 3.1 of the merger agreement).
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Representations and Warranties of Capital and Capital Acquisition. The
merger agreement contains representations and warranties of Capital and Capital
Acquisition, the material ones of which relate to:
o their proper organization, qualification, good standing and other
corporate organizational matters;
o Capital Acquisition's membership interests;
o the conduct of the businesses of Capital and Capital Acquisition are not
conducted in violation of any applicable laws where it is foreseeable
that such violation may prevent or materially impair Capital's completion
of the merger;
o the absence of any pending or threatened lawsuit or proceeding which, if
determined adversely, would prevent or materially impair Capital's
completion of the merger;
o Capital's 100% ownership of Capital Acquisition;
o the absence of any untrue statements of a material fact or any omission
of a material fact relating to the representations and warranties made by
Capital and Capital Acquisition in the merger agreement; and
o other representations and warranties relating to due authorization of the
merger and the merger agreement by Capital and Capital Acquisition, and
the validity and enforceability thereof.
(Section 3.2 of the merger agreement).
Conduct of ILM's Business Prior to the Merger
ILM has agreed that prior to the effective time of the merger, it will and
will cause Holding I to conduct its businesses in the ordinary course of
business, consistent with past practice, and will use reasonable efforts to
preserve the current business organization, keep available the services of
current officers and key employees, and maintain existing relationships with
those having significant business relationships with ILM and Holding I, in each
case in all significant respects; provided that ILM and Holding I must conduct
their respective businesses substantially in accordance with the operating and
capital budgets approved by ILM's Board. In addition, ILM has agreed that prior
to the effective time of the merger, except as expressly contemplated by the
merger agreement or unless Capital otherwise consents in writing, ILM will not,
and will cause each of its subsidiaries not to:
o declare or pay any dividends or other distributions, whether consisting
of cash, stock or other property, on or in respect of its capital stock,
other than ordinary cash dividends not in excess of 8.5% of the original
issue price per share of ILM's common stock in any calendar year--subject
to ILM's reasonable best efforts to maintain reserves consistent with
past practices and as required to preserve and maintain ILM's status as a
REIT until the effectiveness of the merger;
o redeem, repurchase or acquire any securities, including ILM's common
stock;
o split, combine or reclassify or issue or authorize the issuance of any
other securities in lieu of or in substitution for any shares of ILM's
capital stock;
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o complete any acquisition of assets or securities or any sale, lease,
encumbrance or other disposition of assets or securities, or enter into a
significant contract or grant any or relinquish any significant contract
rights, other than in the ordinary course of business;
o other than the existing loan agreement with Fleet Bank dated
September 26, 1998, incur, become responsible for or guarantee any
indebtedness for borrowed money;
o become responsible for or guarantee the obligations of any other person
other than 100% owned subsidiaries of ILM, except in the ordinary course
of business consistent with past practice;
o issue, deliver or sell any shares of its capital stock, any voting debt,
securities, or any securities convertible into or exchangeable or
exercisable for any shares of ILM's capital stock or voting debt
securities;
o sell or dispose of its or Holding I's material assets; or
o take any action that would be likely to result in any of its
representations or warranties set forth in the merger agreement being
untrue or any conditions set forth in the merger agreement not being
satisfied.
(Section 4.1 of the merger agreement).
Conduct of Capital's Business Prior to the Merger
Capital has agreed that prior to the effective time of the merger, except
as expressly contemplated by the merger agreement or unless ILM otherwise
consents in writing, Capital will not and will cause each of its subsidiaries
not to take any action that would be likely to result in any of its
representations or warranties in the merger agreement being untrue or any of the
conditions to the merger not being met.
(Section 4.1 of the merger agreement).
Conditions to Completing the Merger
The obligations of ILM, Capital and Capital Acquisition to complete the
merger are subject to satisfaction or waiver (if waivable under applicable law
as set forth below), at or prior to the effective time of the merger, of the
following conditions:
o approval of the merger agreement by the holders of at least 66- 2/3% of
the outstanding ILM common stock;
o receipt of all authorizations, consents, and approvals from any
governmental authorities, the failure of which is material to ILM or
Capital;
o filing in definitive form with the SEC of this proxy statement and the
Schedule 13E-3 Transaction Statement and there not being any stop order
or similar proceeding in effect;
o absence of any governmental or court order preventing or delaying
completion of the merger;
o redemption at the stated value of the outstanding shares of Holding I
preferred stock (which is waiveable by Capital); and
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o inapplicability of state takeover laws.
(Section 6.1 of the merger agreement).
Additionally, the obligation of ILM to complete the merger, is subject to
the satisfaction or waiver (if waivable under applicable law), at or prior to
the effective time of the merger, of the following conditions:
o the accuracy of Capital's representations and warranties (which is
waiveable by ILM);
o receipt by Capital of funds in an amount sufficient to pay the aggregate
merger consideration to all ILM shareholders;
o receipt by Capital of all consents or approvals that are necessary to
permit Capital to become the owner of ILM after the merger, except for
those consents which in the reasonable opinion of ILM, would not have a
material adverse effect on Capital or materially affect completion of the
merger (which is waiveable by ILM); and
o performance by Capital and Capital Acquisition of their obligations under
the merger agreement (which is waiveable by ILM).
(Section 6.3 of the merger agreement).
Additionally, the obligation of Capital and Capital Acquisition to complete
the merger is subject to satisfaction or waiver (if waivable under applicable
law) at or prior to the effective time of the merger, of the following
conditions:
o the accuracy of ILM's representations and warranties (which is waiveable
by Capital);
o the performance by ILM of its obligations under the merger agreement
(which is waiveable by Capital);
o receipt by ILM of all consents necessary to allow Capital to acquire all
contractual rights, interests and obligations of ILM, except for those
which if not obtained would not have or be likely to have a significant
negative effect on ILM or, which would prevent or delay completion of the
merger (which is waiveable by Capital); and
o receipt by Capital of evidence that ILM is not a "foreign person" for
United States income tax purposes and that ILM is a domestically
controlled REIT for United States income tax purposes (which is waiveable
by Capital).
(Section 6.2 of the merger agreement).
No Solicitation of Alternative Transactions
ILM has agreed to use its best efforts to cause its subsidiaries,
affiliates, employees, agents and representatives not to knowingly initiate,
solicit or encourage, directly or indirectly, any discussions or negotiations
with any third party or disclose any material non-public information about ILM
in connection with an acquisition proposal of 20% or more of the consolidated
assets of ILM or 20% or more of any class or series of equity securities of ILM
or any of its subsidiaries, any tender offer or exchange offer which, if
consummated, would result in any person owning 20% or more of any class or
series of equity securities of ILM or any of its subsidiaries, or any merger,
consolidation, business
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combination, sale or other transfer of assets, recapitalization, exchange,
liquidation, dissolution, divestiture, reorganization or other extraordinary
corporate transaction involving ILM or any of its subsidiaries.
However, if ILM's Board determines with the advice of counsel that it is
required to do so in the exercise of its fiduciary duties to ILM or its
shareholders, the ILM Board may respond to, or engage in discussions with
respect to, a written offer for those acquisition proposals referred to above if
certain criteria are met; and provided further, that ILM or the ILM Board may
take and disclose to the shareholders of ILM a position with respect to any
acquisition proposal referred to above that, in the judgment of the ILM Board,
as determined in good faith by the Board based upon the advice of counsel, is
required by applicable law. ILM has also agreed to promptly communicate to
Capital the terms of any such acquisition proposal that it receives and to keep
Capital informed as to the status of any such matters. (Section 4.1(e) of the
merger agreement).
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the effective
time of the merger under the following circumstances:
o by mutual written consent of ILM and Capital;
o by either Capital or ILM if:
o any injunction or other court or governmental order prevents the
completion of the merger;
o ILM's shareholders do not approve the merger agreement by
September 29, 2000; and
o the merger is not completed by September 30, 2000.
o by Capital if:
o the ILM Board withdraws or modifies in a manner unfavorable to
Capital its recommendation to ILM's shareholders of the merger or the
merger agreement.
o ILM approves or recommends an alternative transaction involving the
sale of ILM to a third party on terms financially superior to the
merger;
o ILM shall have entered into a definitive agreement regarding an
acquisition proposal;
o there has been or there is likely to be one or more events likely to
have a significant negative impact on ILM's business, operations or
its financial condition; and
o ILM is in material breach of any representation, warranty, or
covenant in the merger agreement which ILM has not cured after its
receipt of notice of such breach.
o by ILM if:
o ILM enters into an alternative transaction involving the sale of ILM
to a third party on terms financially superior to the merger;
provided the failure to do so is determined by ILM's Board to be a
violation by it of applicable law, ILM pays Capital a termination fee
and ILM gives Capital proper notice;
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o Capital is in material breach of any representation, warranty, or
covenant in the merger agreement, which Capital has not cured after
its receipt of notice of such breach;
o the merger is not completed by Capital after all of Capital's
conditions to completing the merger have either been satisfied or
waived, provided that ILM is not then in material breach of any of
its representations, warranties or agreements; and
o there has been or there is likely to be one or more events likely to
have a significant negative impact on Capital's business, its
operations or its financial condition.
Termination Fees; Reimbursement of Expenses
ILM must pay Capital a termination fee of $2,404,300, and reimburse
Capital's out-of-pocket expenses incurred and paid for by or on behalf of
Capital in connection with the merger agreement and the related transactions,
provided such expenses do not exceed $2.0 million, if Capital or Capital
Acquisition terminates the merger agreement because ILM's Board withdraws,
modifies or changes (in a manner adverse to Capital) its recommendation of the
merger to ILM's shareholders, recommends to ILM's shareholders a transaction
involving the sale of ILM to a third party on terms financially to the merger,
or enters into such agreement for a superior transaction.
Under the merger agreement, a proposed transaction will be deemed to be
superior if there is a written proposal to acquire, directly or indirectly
(whether in a single transaction or series of related transactions), for
consideration consisting of cash, securities and/or other property, 50% or more
of ILM's common stock then outstanding or 50% or more of the consolidated assets
of ILM, upon terms and subject to conditions which ILM's Board of Directors
determines in its good faith judgment (based upon the advice of an investment
banking firm of nationally recognized reputation), to be more favorable from a
financial point of view to the holders of ILM's common stock than the merger,
and in respect of which external financing, if required to be obtained by the
acquiring person or entity, either then is fully committed (pursuant to a
customary commitment letter) or, in the good faith judgment of ILM's Board of
Directors (based upon the advice of said investment banking firm), obtainable by
the acquiring person or entity based upon the creditworthiness of such person or
entity.
In the event the merger agreement is terminated by Capital upon ILM's
material breach of the non-solicitation (or so-called "no-shop") provisions of
the merger agreement, and within 16 months after such termination an acquisition
with a third party is consummated, then ILM shall pay to Capital a $2,404,300
termination fee, together with Capital's out of pocket expenses incurred in
connection with the merger, but not to exceed $2.0 million.
Provided all of Capital's closing conditions have either been satisfied or
waived, ILM is not in material breach of the merger agreement and neither ILM
nor Capital has terminated the merger agreement because of a material adverse
change with respect to the other, and Capital, for any reason, fails to
consummate the merger and the transactions
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contemplated by the merger agreement, Capital is obligated to pay ILM a
termination fee of $1,540,000.
Such termination fees and out-of-pocket expenses are payable to Capital by
ILM only if the merger agreement is terminated by either ILM or Capital upon
ILM's failure to obtain the requisite shareholder approval of the merger on or
before September 29, 2000 and neither Capital nor Capital Acquisition is in
material breach of any of its representations, warranties or agreements under
the merger agreement.
Neither Capital nor ILM is entitled to payment of any termination fees as
described above, or in the case of Capital, reimbursement of expenses, if they
violate the merger agreement or if any of their representations or warranties
are inaccurate.
The cost of printing and mailing this document will be borne equally by ILM
and Capital. (Sections 4.1(e), 5.6 and 7.1 of the merger agreement).
PROXY STATEMENT; THE SPECIAL MEETING
ILM has agreed to duly notice and convene as promptly as practicable a
special meeting of its shareholders for the purpose of voting upon the approval
of the merger agreement and the merger (and the transactions contemplated by the
merger agreement and the merger). ILM (through the ILM Board), has agreed to
recommend to ILM shareholders the approval of the merger agreement and the
merger; and use its best efforts to solicit and, if necessary, resolicit the
vote of the holders of not less than 66- 2/3% of the outstanding ILM common
stock in favor of approval of the merger agreement (including, if necessary,
adjourning or postponing, and subsequently reconvening, the special meeting for
the purpose of obtaining such votes and engaging proxy solicitation
professionals); provided, however, that ILM's Board may, with respect to a third
party proposal, withdraw, modify or change such recommendation if failure to
take such action would be contrary to their fiduciary obligations as board
members under the law.
ACCOUNTING TREATMENT
The merger will be treated for accounting purposes in accordance with the
rules for purchase accounting. Accordingly, the assets and liabilities of ILM
will be recorded on Capital's books at their estimated fair market values with
the remaining purchase price reflected as goodwill.
SIMULTANEOUS ILM II MERGER
Simultaneously with entering into the merger agreement, ILM II entered into
an amended and restated agreement and plan of merger with Capital and Capital
Acquisition providing for the merger of ILM II into Capital Acquisition, for an
aggregate merger consideration of $67,571,000 payable in cash. Consummation of
the ILM II merger is not a condition to consummation of the ILM and Capital
merger. The ILM II merger has been structured substantially similar to the
merger of ILM with Capital. If the ILM II merger is consummated, but the ILM and
Capital merger is not consummated, ILM has agreed to cause ILM Holding to
transfer its 25% interest in the Villa Santa Barbara property to Capital (or one
of its wholly owned subsidiaries) at the fair market value of such property. ILM
II has made the reciprocal agreement (with respect to its 75% interest in such
property) in its merger agreement with Capital and Capital Acquisition.
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF THE MERGER
The following is a summary of the material United States federal income tax
consequences to ILM shareholders of their receipt pursuant to the merger, of the
cash merger consideration. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change, possibly on a retroactive basis. This discussion
is being provided for general informational purposes only and is not intended to
be a complete description of all of the tax consequences of the merger.
BECAUSE DETERMINING THE TAX CONSEQUENCES OF THE MERGER MAY DEPEND UPON YOUR
PERSONAL CIRCUMSTANCES, YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR TO
UNDERSTAND HOW THE MERGER MAY AFFECT YOU.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Tax Characterization of the Merger to ILM. The merger will be treated for
federal income tax purposes as a taxable deemed sale of assets by ILM to Capital
followed by a taxable deemed liquidation of ILM. The merger will not qualify as
a "reorganization" within the meaning of Section 368(a) of the Code. ILM decided
to elect under IRS Notice 88-19 to defer the built-in gains tax attributable to
the period when ILM was a C corporation until the date the assets were sold. ILM
will recognize a built-in gains corporate-level tax of approximately
$2.9 million on the deemed sale of its assets resulting from the merger. ILM
will not be subject to any additional corporate-level federal income tax as a
result of the merger so long as the amount of the deemed liquidating
distribution to the ILM shareholders exceeds ILM's real estate investment trust
taxable income for the current taxable year. ILM management has represented that
the amount of the deemed liquidating distribution to the ILM shareholders will
exceed ILM's real estate investment trust taxable income for the current taxable
year.
Tax Consequences to ILM Shareholders. The ILM shareholders will be deemed
to receive a liquidating distribution from ILM equal to the cash they received
for their ILM common stock pursuant to the merger. The ILM shareholders will
recognize gain or loss upon the receipt of the cash in exchange for their ILM
common stock equal to the difference between (i) the amount of cash received and
(ii) their tax basis in the ILM common stock. Gain or loss will be capital gain
or loss if the ILM common stock was a capital asset in the hands of the ILM
shareholder and will be a long-term capital gain or loss, if at the time of the
merger, the ILM common stock was held by the shareholder for more than
12 months. Under present United States federal law, long-term capital gains are
generally taxable at a maximum rate of 20% for individuals and 35% for
corporations.
Back-up Withholding Requirements. United States federal tax code
information requirements and backup withholding at the rate of 31% may apply
with respect to dividends paid on, and proceeds from the taxable sale, exchange
or other disposition of ILM common stock, unless the shareholder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates these facts, or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup
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withholding rules. A shareholder who does not supply ILM with a correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any amount
withheld under these rules will be refunded or credited against the
shareholder's federal income tax liability. Shareholders should consult their
tax advisers as to their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption. If information reporting
requirements apply to a shareholder, the amount of dividends paid with respect
to such shares will be reported annually to the IRS and to such shareholder.
Alien Holders. Management of ILM has represented that ILM is a
"domestically-controlled" REIT within the meaning of Section 897(h)(2) of the
Code. As a "domestically-controlled" REIT, Alien Holders of ILM stock will not
be subject to United States tax on any gain realized upon the receipt of cash
merger consideration in exchange for their ILM common stock, and no United
States withholding tax will be imposed on the payment of the cash to Alien
Holders of ILM stock unless (i) the Alien Holder is an individual who is present
in the United States for 183 days or more in the taxable year of disposition and
certain other conditions apply, (ii) the gain is effectively connected with the
conduct by the Alien Holder of a trade or business in the United States, or
(iii) the Alien Holder is subject to tax pursuant to the provisions of the Code
applicable to certain United States expatriates.
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ESTIMATED COSTS AND FINANCING OF THE MERGER
<TABLE>
<S> <C>
Financial Advisory Fees and Expenses and Fairness Opinion -- Cohen & Steers Capital Advisors,
LLC (ILM Expense).............................................................................. $ 714,000
Financial Advisory Fees and Expenses and Fairness Opinion -- Lehman Brothers (Capital
Expense)....................................................................................... 500,000
Financing Commitment Fees and Expenses (Capital Expense).......................................... 923,632
Proxy Solicitation Fees and Expenses -- D.F. King & Co. Inc. (shared equally by ILM and
Capital)....................................................................................... 10,000
Legal Fees and Expenses (ILM Expense)............................................................. 1,000,000
Legal Fees and Expenses (Capital Expense)......................................................... 325,000
Accounting Fees and Expenses (ILM Expense)........................................................ 135,000
Accounting Fees and Expenses (Capital Expense).................................................... 50,000
Financial Printer Fees and Expenses (shared equally by ILM and Capital)........................... 325,000
SEC Filing Fees................................................................................... 19,942
Miscellaneous..................................................................................... 20,000
----------
Total Fees and Expenses............................................................... $4,022,574
==========
</TABLE>
The merger agreement provides that the cost of preparing, printing and
mailing this proxy statement and related material will be borne equally by ILM
and Capital. All other costs and expenses will be borne as indicated in the
table above.
Approximately $87.4 million will be required to pay the aggregate cash to
be received by ILM's shareholders in the merger.
FINANCING; SOURCE AND AMOUNT OF FUNDS
Capital's source of funds to pay substantially all of the merger
consideration is intended to be provided by mortgage loans collateralized by
ILM's properties and certain of Capital's properties. Capital has received the
written commitment of GMAC Commercial Mortgage Corporation dated April 14, 2000
to provide Capital with loans aggregating $152,726,447 to finance Capital's
acquisition of ILM and ILM II pursuant to the merger and the ILM II merger. The
remaining funds necessary to complete the merger and the ILM II merger (or
$2,273,553) are intended to be derived from available cash of Capital, which
Capital has agreed to segregate in its accounts. The GMAC commitment expires on
July 31, 2000. If the GMAC commitment expires unfunded or is terminated, Capital
remains contractually obligated under the merger agreement until September 30,
2000 to obtain the funds necessary to complete the merger.
The GMAC commitment provides for loans of $152,726,447 to be made to
Capital. Following completion of the merger (and the merger with ILM II),
Capital will own certain ILM and ILM II communities and/or communities currently
owned by Capital. The loan will be secured with a first lien and security
interest on the properties, on the leases and rents of the properties and on
accounts receivable from the properties as well as in the licenses, permits and
contracts relating to the properties. The loans also will be secured by an
assignment of the management agreement for each property with an affiliate of
Capital. The loans will be non-recourse subject to customary exceptions and will
be guaranteed by
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Capital. The loans will be cross-collateralized among the various properties
owned by each entity.
The GMAC commitment provides that each of the loans will have a variable
interest rate calculated at the one month LIBOR rate plus 240 basis points. The
interest rate will be determined monthly. The borrowers will be required to
purchase interest rate protection agreements to protect against significant
interest rate increases. The loans will have a five-year term, with payments
based on a twenty-five year amortization schedule.
The GMAC commitment is subject to customary conditions, including the
negotiation, execution and delivery of definitive loan documents. The GMAC
commitment is subject to the review by GMAC of third party appraisals,
environmental reports and engineering reports on the communities, to achievement
of certain loan-to-value ratios and debt service coverage requirements and to no
material adverse change occurring in the financial condition of Capital.
Capital expects that the loan documents with GMAC will contain
representations, events of default, affirmative and negative covenants,
maintenance of financial ratios, financial reporting requirements and other
covenants customary for credit facilities of similar size and type.
Capital expects to repay the GMAC debt incurred in connection with the
merger from cash flow from its operations and/or proceeds from later debt or
equity financings. Although, as indicated above, Capital would remain
contractually obligated to obtain all necessary funds to complete the merger, no
alternative financing arrangements or plans exist if the GMAC commitment expires
unfunded.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ILM
The following is a discussion and analysis of ILM's financial and certain
statistical data that ILM believes is important to your understanding of ILM's
financial condition and results of operations. This section should be read in
conjunction with ILM's consolidated financial statements beginning on Page F-1
of this proxy statement.
GENERAL
ILM holds mortgages on eight senior living communities located in seven
different states. ILM Holding, a majority owned subsidiary of ILM, holds title
to the eight senior living communities.
The principal balance of each of ILM's mortgage loans was modified to
reflect the estimated fair value of the senior living communities as of the date
they were transferred to the predecessor of ILM Holding. The modified loans
require interest-only payments on a monthly basis at a rate of 13.5% per year
for the period of January 1 through December 31, 1997, 14% per year for the
period of January 1 through December 31, 1998 and 14.5% per year for the period
of January 1, 1999 through maturity. Since ILM Holding is consolidated in ILM's
financial statements, the mortgage loans and related interest expense have been
eliminated through the consolidation.
The Facilities Lease Agreement is between ILM's consolidated affiliate,
ILM Holding, as owner of the senior living communities and Lessor, and Lease I
as Lessee. The facilities lease is a "triple-net" lease whereby the Lessee pays
all operating expenses, governmental taxes and assessments, utility charges and
insurance premiums, as well as the costs of all required maintenance, personal
property and non-structural repairs in connection with the operation of the
senior living communities. ILM Holding, as the Lessor, is responsible for all
major capital improvements and structural repairs to the senior living
communities. Pursuant to the Facilities Lease Agreement, which originally
expired on December 31, 1999 but was extended on a month-to-month basis in
December 1999, Lease I pays annual base rent for the use of all of the senior
living communities in the aggregate amount of $6,364,800. Lease I also pays
variable rent, on a quarterly basis, for each senior living community in an
amount equal to 40% of the excess, if any, of the aggregate total revenues for
the senior living communities, on an annualized basis, over $16,996,000.
Variable rental income for the six- and three-month periods ended February 29,
2000 was $615,000, and $313,000, respectively, compared to $564,000 and $288,000
for the six- and three-month periods ended February 28, 1999, respectively.
Variable rental income related to fiscal years 1999 and 1998 was $1,164,000 and
$894,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 2000, ILM had cash and cash equivalents of $1,645,000
compared to $2,615,000 at August 31, 1999. Such amounts will be used for the
working capital requirements of ILM, along with the possible investment in the
properties owned by ILM Holding for certain capital improvements and for
dividends to the ILM shareholders. Future capital improvements could be financed
from operations or through borrowings, depending
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on the magnitude of the improvements, the availability of financing and the
Company's incremental borrowing rate. The source of future liquidity and
dividends to the ILM shareholders is expected to be through facilities lease
payments from Lease I, interest income earned on invested cash reserves and
proceeds from the future sales of the underlying operating investment
properties. Such sources of liquidity are expected to be adequate to meet ILM's
operating requirements on both a short-term and long-term basis. ILM generally
will be obligated to distribute annually at least 95% of its taxable income to
its shareholders in order to continue to qualify as a REIT under the Internal
Revenue Code.
If the merger is consummated, the ILM shareholders will receive the merger
consideration of approximately $11.63 per share.
Because the ownership of the senior living communities was expected to be
transferred to ILM or its wholly-owned subsidiary, ILM Holding was capitalized
with funds to provide it with working capital for only a limited period of time.
At the present time, ILM Holding is not expected to have sufficient cash flow
during fiscal year 1999 to (i) meet its obligations to make debt service
payments under the loans and (ii) pay for capital improvements and structural
repairs in accordance with the terms of the master lease. Although ILM Holding
is not expected to fully fund its scheduled debt service payments to ILM, the
current values of the senior living communities are well in excess of the
mortgage principal amount plus accrued interest thereon at August 31, 1999. As a
result, ILM is expected to recover the full amount that would be due under the
loans upon the sale of the communities, even if the merger is not consummated.
Occupancy levels, based upon the percentage arrived at by dividing actual
revenues received from residents for a particular period of time by the maximum
potential revenue to be generated by a community if the community was fully
occupied for the same period of time, for the senior living communities has
averaged 90% for the three-month periods ended February 29, 2000, compared to
95% for the three-month periods ended February 28, 1999. Occupancy levels for
fiscal year 1999 and 1998 averaged 96% and 96%, respectively. Because of the
master lease structure, ILM's net operating cash flow is expected to be
relatively stable and predictable. The annual base rental payments owed to ILM
Holding is $6,364,800 and will remain at that level for the remainder of the
lease term. In addition, the senior living communities are currently generating
gross revenues which are in excess of the specified threshold in the variable
rent calculation, as discussed further above, which became effective in January
1997. Accordingly, ILM Holding received variable rent payments in fiscal 1999
and 1998 in the amounts of $1,164,000 and $894,000, respectively. As a result of
ILM's net operating cash flow under the current master lease arrangement, ILM
increased its quarterly dividend payment from $0.1875 per share to $0.20 per
share effective with the dividend paid in January 1998 for the quarter ended
November 30, 1997. Subsequent to fiscal year end, ILM increased its quarterly
dividend payment to $0.2125 per share effective with the dividend paid on
October 15, 1998 for the quarter ended August 31, 1998.
The assumption of ownership of the senior living communities through ILM
Holding, which was taxed as a C-corporation at the time of the assumption, may
result in a possible future tax liability which would be payable upon the
ultimate sale of the properties (the "Built-In Gain Tax"). The amount of such
tax would be calculated based on the lesser of
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the total net gain realized from the sale of the properties or the portion of
the net gain realized upon a final sale which is attributable to the period
during which the properties were held by an entity taxed as a C-corporation. The
Built-in Gain Tax would in all likelihood not be incurred if the properties were
held for a period of at least ten years from the date of qualification of ILM
Holding as a REIT. On November 16, 1999 the ILM board extended the finite life
of ILM on a month-to-month basis, based upon the Board's opinion that the
disposition of ILM's assets on December 31, 1999, ILM's scheduled liquidation
date, would result in a material under-realization of the value of such assets;
provided, however, that such extension may not extend beyond December 31, 2014,
absent amendment of ILM's Articles of Incorporation. Based on management's
estimate of the increase in values of the senior living communities which
occurred between April 1994 and January 1996, as supported by independent
appraisals, a sale of the senior living communities within ten years of the date
of qualification of ILM Holding as a REIT could result in a Built-in Gains Tax
of as much as $2.9 million. If the merger is consummated, Capital is obligated
to pay ILM the amount of the Built-in Gains Tax, up to a maximum of
$2.9 million.
GROWTH STRATEGIES
ILM has been pursuing the potential for future expansion of several of the
facilities which are located in areas that have particularly strong senior
housing markets. Potential expansion candidates include the facilities located
in Raleigh, North Carolina; East Lansing, Michigan; Omaha, Nebraska; Peoria,
Illinois; and Hot Springs, Arkansas. As part of this expansion program,
approximately two acres of land located adjacent to the East Lansing facility
and approximately two and one-half acres of land located adjacent to the Omaha
facility were acquired in the first quarter of fiscal year 1998 for
approximately $200,000 and $265,000, respectively. Also included in land on the
consolidated balance sheet are significant costs incurred at existing facilities
for possible future expansions. In addition, an agreement was obtained to
purchase approximately five acres of land located adjacent to the Peoria
facility for approximately $600,000. The Hot Springs facility includes a vacant
parcel of approximately two acres, which could accommodate an expansion of the
existing facility or the construction of a new freestanding facility. Other than
with respect to the Peoria facility, preliminary feasibility evaluations have
been completed for all potential expansions and pre-construction design and
construction-cost evaluations are underway for expansions of the facilities
located in Raleigh and Omaha.
ILM secured a construction loan facility with a major bank that provides
ILM 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 living communities and collateral assignment of ILM's
leases of such senior living communities. 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%. Loan origination costs in connection with this loan facility
are being amortized over the life of the loan.
On June 7, 1999, ILM borrowed approximately $2.1 million under the
construction loan facility to fund the pre-construction capital costs incurred
through April 1999 of the
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potential expansions of the senior living communities. As of February 29, 2000
and August 31, 1999, approximately $22.4 million of the construction loan
facility is unused and available.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of ILM's computer
programs or hardware that have date-sensitive software or embedded chips may
recognize the year 2000 as a date other than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
ILM has assessed its exposure to operating equipment, and such exposure is
not significant due to the nature of ILM's business.
ILM is not aware of any external agent with a Year 2000 issue that would
materially impact ILM's results of operations, liquidity, or capital resources.
ILM has contacted its only material external agent (Capital) and has received
assurances from Capital that it is Year 2000 compliant.
Management of ILM believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, ILM has completed all
necessary phases of its Year 2000 program. However, disruptions in the economy
generally resulting from Year 2000 issues could adversely affect ILM. Although
the amount of potential liability and lost revenue cannot be reasonably
estimated at this time, in a worst case situation, if Capital, ILM's most
significant third party contractor, were to experience a Year 2000 problem, it
is likely that Lease I would not receive rental income as it became due from
senior living facility residents. Lease I in turn would fail to pay ILM Holding
lease payments as they arise under the master lease, and ILM Holding in turn may
fail to pay ILM mortgage payments due it. However, if this were to occur, ILM
believes that given the nature of its business, such a problem would be
temporary and easily remediable with a simple accounting.
RESULTS OF OPERATIONS
Six Months Ended February 29, 2000 versus Six Months Ended February 28, 1999
Net income increased $159,000 or 9.6% to $1,820,000 for the six-month
period ended February 29, 2000 compared to $1,661,000 for the six-month period
ended February 29, 1999. Total revenue was $3,828,000 representing an increase
of $28,000 or 0.7%, compared to $3,800,000 for the same period of the prior
year. Rental and other income increased $27,000 or 0.7%, to $3,761,000, due to
increased rental income earned pursuant to the terms of the Facilities Lease
Agreement. Total expenses decreased $131,000 or 6.1% to $2,008,000 for the
six-month period ended February 29, 2000, compared to $2,139,000 for the
six-month period ended February 28, 1999. This overall decrease in expenses is
primarily attributable to a $92,000 or 36.0% decrease in general and
administrative costs due to decreased insurance costs of $52,000 or 42.3% and
decreased printing costs of
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$31,000 or 79.5% as well as a $30,000 or 2.9% decrease in the use of legal,
financial and advisory professionals who were engaged to assist the Company with
the agreement and plan of merger with Capital Senior Living Corporation (as
discussed in Note 1 to the financial statements.) In addition, legal fees
associated with the construction loan facility, also an expense of the prior
year, were not repeated this year contributing to the overall decrease in
professional fees when compared to 1999.
Three Months Ended February 29, 2000 versus Three Months Ended February 28,
1999
Net income increaseed $331,000 or 64.8%, to $842,000 for the second quarter
ended February 29, 2000 compared to $511,000 for the second quarter ended
February 28, 1999. Total revenue was $1,923,000 representing an increase of
$36,000 or 1.9%, compared to $1,887,000 for the same period of the prior year.
Rental and other income increased $35,000 or 1.9%, to $1,905,000, due to
increased rental income earned pursuant to the terms of the Facilities Lease
Agreement. Total expenses decreased $295,000, or 21.4%, to $1,081,000 for the
quarter ended February 29, 2000 compared to $1,376,000 for the quarter ended
February 28, 1999. This decrease in expenses is primarily attributable to a
decrease of $245,000 or 29.7% in professional fees due to legal, financial and
advisory professionals who were engaged to assist the Company with the agreement
and plan of merger with Capital Senior Living Corporation (as directed in
Note 1 to the financial statements). In addition, legal fees associated with the
construction loan facility, an expense of the prior year, were not repeated this
year, contributing to the overall decrease in professional fees when compared to
1999. The $33,000 or 25.6% decrease in general and administrative expenses to
$96,000, for the second quarter ended February 29, 2000, compared to $129,000
for the same period last year, was due to a variety of factors including
decreased Director and Officer insurance costs of $11,000 or 23.9%; decreased
postage and mailing costs of $5,000 or 20.0%; decreased printing costs of
$16,000 or 69.6% for the annual and quarterly reports which were completed
timely, distributing incurred costs more evenly when compared to the previous
year; and a $14,000 or 18.9% decrease in amortization expense as a result of
mortgage placement fees becoming fully amortized during the quarter ended
February 29, 2000.
1999 Compared to 1998
Net income decreased $1,762,000, or 37.3%, to $2,961,000 for the fiscal
year ended August 31, 1999, compared to $4,723,000 for the fiscal year ended
August 31, 1998. Total revenue was $7,597,000 for fiscal year 1999, representing
an increase in revenue of $277,000, or 3.8%, compared to total revenue of
$7,320,000 for fiscal year 1998. Interest income decreased $26,000, or 26.5%, to
$72,000 for the year ended August 31, 1999, compared to $98,000 for the same
period last year, primarily due to a decrease in cash and cash equivalents
throughout most of fiscal year 1999. Rental and other income increased $303,000,
or 4.2%, to $7,525,000 from $7,222,000 last year, primarily due to increased
rental income earned pursuant to the terms of the Facilities Lease Agreement.
Total expenses increased $2,039,000, or 78.5%, to $4,636,000 for the fiscal year
ended August 31, 1999, compared to $2,597,000 for the fiscal year ended August
31, 1998. This increase in expenses was primarily attributable to an increase in
professional fees of $1,719,000, or 255.0%, due to increased legal, financial
and advisory professionals who were engaged to
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assist the Company with the proposed agreement and plan of merger with Capital
Senior Living Corporation, as discussed in Note 1 to the financial statements,
and increased legal fees associated with finalizing the construction loan
facility. General and administrative expenses increased $265,000 to $559,000, or
90.1%, for the fiscal year ended August 31, 1999, compared to $294,000 for the
same period last year, due to a variety of factors including increased Director
and Officer insurance costs of $147,000; increased printing costs of $149,000
due to the potential merger transaction with Capital Senior Living Corporation,
offset by a $64,000 decrease in postage and mailing costs and minor increases
and decreases in other general and administrative costs. Directors' compensation
decreased $29,000, or 25.0%, due to a decrease in the number of Board members.
1998 Compared to 1997
Net income increased $889,000 for fiscal year 1998 compared to 1997. Total
revenue was $7,320,000 representing an increase in revenue of $515,000 over the
prior year. Rental and other income increased by $579,000 from $6,643,000 to
$7,222,000 as a result of increased rental income earned pursuant to the terms
of the Facilities Lease Agreement. Interest income decreased $64,000 as a result
of a decrease in the average balances of cash and cash equivalents in 1998
versus 1997. Total expenses were $2,597,000 representing a decrease of $374,000
or 13% when compared to total expenses of $2,971,000 for the fiscal year 1997.
General and administrative expenses decreased $572,000 due, in part, to
reductions in advisory fees, reimbursable costs and ILM Holding restructuring
costs of the prior year. This decrease in expenses was offset by a $229,000
increase in professional fees associated with restructuring advice provided by
an independent investment banking firm and increased legal fees, as well as a
$34,000 increase in director's fees.
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CERTAIN INFORMATION WITH RESPECT TO ILM
The following is a general description of the business of ILM, its
properties, and certain other matters.
GENERAL
ILM is a finite-life corporation organized on March 6, 1989 in the
Commonwealth of Virginia for the purpose of making construction and
participating mortgage loans secured by its senior living communities. ILM has
elected to qualify and be taxed as a REIT under the Code for each taxable year
of its operations. As a REIT, ILM is allowed a deduction for the amount of
dividends it pays to its shareholders, thereby effectively subjecting the
distributed net income of ILM to taxation at the shareholder level only. In
order to qualify as a REIT, among other things, ILM must distribute at least 95%
of its taxable income on an annual basis and meet certain other requirements.
ILM Holding holds title to the senior living communities which comprise the
balance of operating investment properties on ILM's consolidated balance sheet
subject to certain mortgage loans payable to ILM. Such mortgage loans and the
related interest expense is eliminated on ILM's consolidated financial
statements.
For a complete corporate organization chart, see "ILM Entities Organization
Chart" at page 9.
PROPERTIES
ILM's investments as of February 29, 2000 are described below:
<TABLE>
<CAPTION>
YEAR
PROPERTY NAME FACILITY DATE OF RENTABLE RESIDENT
AND LOCATION TYPE OF PROPERTY BUILT INVESTMENT UNITS(2) CAPACITIES(2)
- ------------------------------ ----------------- -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Independence Village of Senior Living 1989 6/29/89 159 161
Winston-Salem Community
Winston-Salem, NC
Independence Village of East Senior Living 1989 6/29/89 161 162
Lansing Community
East Lansing, MI
Independence Village of Senior Living 1991 4/29/91 164 205
Raleigh Community
Raleigh, NC
Independence Village of Peoria Senior Living 1990 11/30/90 166 183
Peoria, IL Community
Crown Pointe Apartments Senior Living 1984 2/14/90 135 163
Omaha, NE Community
Sedgwick Plaza Apartments Senior Living 1984 2/14/90 150 170
Wichita, KS Community
West Shores Senior Living 1986 12/14/90 136 166
Hot Springs, AR Community
Villa Santa Barbara(1) Senior Living 1979* 7/13/92 125 125
Santa Barbara, CA. Community *(extensively
renovated
in 1995)
</TABLE>
(Footnotes on next page)
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(Footnotes from previous page)
- ------------------
(1) The acquisition of Villa Santa Barbara was financed jointly by ILM and ILM
II. All amounts generated from Villa Santa Barbara are equitably apportioned
between ILM, 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.
The assisted living industry is a hybrid of both the commercial real estate
industry and the non-regulated health care services industry. Information
regarding rentable units and resident capacities have been included in this
proxy statement and ILM's periodic reports filed with the SEC because ILM earns
revenues based upon a flat fee per unit plus an additional fee per resident. As
resident occupancy in a unit increases, ILM's expenses increase as well.
Accordingly, in considering the income potential of ILM, knowledge of both the
number of rentable units and resident capacities of each senior living community
has been deemed relevant.
The above referenced properties have been leased to Lease I by ILM Holding
pursuant to a master lease. This master lease is a "triple-net" lease whereby
the lessee (Lease I) 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 living communities. The lease terms provide
that ILM Holding, as the lessor, is responsible for all major capital
improvements and structural repairs during the initial term of the master lease,
which expires on December 31, 1999, Lease I is obligated to pay annual base rent
for the use of all of the facilities in the aggregate amount of $6,364,800.
Lease I is also obligated to pay variable rent for each senior living community.
Such variable rent is payable quarterly and is equal to 40% of the excess, if
any, of the aggregate total revenues for the senior living communities, on an
annualized basis, over $16,996,000. Variable rental income for the years ended
August 31, 1998 and 1997 was $894,000 and $315,000, respectively and for the six
months ended February 28, 1999 and 1998 was $564,000 and $288,000, respectively.
Average occupancy levels, calculated as the percentage arrived at by
dividing actual revenues received from residents for a particular period of time
by the maximum potential revenue to be generated by a facility if the facility
was fully occupied for that same period of time, for each fiscal quarter during
1999 and the first fiscal quarter during 2000 along with an average are, for
each property presented below:
<TABLE>
<CAPTION>
AVERAGE QUARTERLY OCCUPANCY
------------------------------------------------------
11/30/98 2/28/99 5/31/99 8/31/99 11/30/99 2/29/00 AVERAGE
-------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Independence Village of Winston-Salem.............. 92% 94% 93% 96% 92% 90 93
Independence Village of East Lansing............... 94% 89% 87% 87% 80% 80 86
Independence Village of Raleigh.................... 95% 94% 95% 97% 97% 97 96
Independence Village of Peoria..................... 98% 98% 98% 95% 98% 99 98
Crown Pointe Apartments............................ 98% 98% 96% 93% 95% 91 95
Sedgwick Plaza Apartments.......................... 94% 91% 89% 87% 80% 79 87
West Shores........................................ 97% 94% 97% 97% 96% 96 96
Villa Santa Barbara................................ 97% 99% 97% 97% 98% 98 98
</TABLE>
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ASSET MANAGEMENT
Through June 18, 1997 and subject to the supervision of ILM's Board,
assistance in the management of the business of ILM was provided by PaineWebber.
PaineWebber resigned from this position effective as of June 18, 1997, although
PaineWebber agreed to provide certain administrative services to ILM and its
affiliates through August 31, 1997. Through the date of its resignation,
PaineWebber performed the day-to-day operations of ILM and acted as the
investment advisor for, and consultant to, ILM. PaineWebber provided cash
management, accounting, tax preparation, financial reporting, investor
communications and relations as well as asset management services to ILM. These
services are now being provided to ILM, subject to the supervision of ILM's
Board, by various companies and consultants including Fleet Bank, Ernst & Young
LLP, MAVRICC Management Systems, Inc. and Smith and Company. In addition, C.
David Carlson, who was a Vice President of ILM until the date of PaineWebber's
resignation and a Vice President of PaineWebber through October 1997, now serves
as a consultant to ILM.
LEGAL PROCEEDINGS
On May 8, 1998, Andrew A. Feldman and Jeri Feldman, as Trustees for the
Andrew A. and Jeri Feldman Revocable Trust dated September 18, 1989, in the
Supreme Court of the State New York, County of New York commenced a purported
class action suit on behalf of the trust and all ILM and ILM II shareholders
naming ILM, ILM II and their directors as defendants. The class action complaint
alleged that the directors engaged in wasteful and oppressive conduct, breached
their fiduciary duties in preventing the sale or liquidation of the assets of
ILM and ILM II, and diverted certain of the corporate assets. The complaint
sought compensatory damages in an unspecified amount, punitive damages, the
judicial dissolution of ILM and ILM II, an order requiring the ILM and ILM II
Boards to take all steps to maximize shareholder value, including either an
auction or liquidation, and rescinding certain agreements, and attorney's fees.
Defendants removed the action to the United States District Court for the
Southern District of New York. On July 8, 1998, ILM and its other co-defendants
moved to dismiss the complaint on all counts.
On December 8, 1998, the court granted ILM's dismissal motion in part but
afforded the plaintiffs leave to amend their complaint. By doing so, the court
accepted ILM's position that all claims that were derivative in nature were
filed improperly. In addition, the Court dismissed stand alone claims for
punitive damages, but allowed plaintiffs to amend their complaint to assert
claims alleging that the defendants injured shareholders. On January 22, 1999,
the Feldman plaintiffs filed an amended complaint, again as a purported class
action, and added claims under Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder. Even before ILM and the ILM Board responded
to the 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 and, alternatively, for compensatory and punitive
damages. At a hearing held on March 4, 1999 relating to the motion for leave to
file the 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 ILM's motion
to dismiss the
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second amended complaint, the Court issued an order dismissing the plaintiffs'
federal securities law 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 the merits of the action.
On June 21, 1999, ILM, ILM II and each of their directors answered the
second amended complaint and denied any and all liability to plaintiffs or the
putative class, 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, ILM, ILM II and other defendants and non-party witnesses produced
documents to the plaintiffs and the depositions of both current and former
directors as well as others were taken. As of July 1, 1999, all discovery had
been completed in this action.
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 (the "Stipulation") 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, following notice to the proposed settlement class,
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 and any related documents filed with the Court on or before
October 15, 1999. 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 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. On or about October 14, 1999,
plaintiffs' counsel reapplied to the Court for fees and expenses.
The revised Stipulation of Settlement approved by the Court provided that
in consideration for the settlement class plaintiffs' release of their claims,
ILM, ILM II and each of their directors would (a) cause ILM and ILM II to make
available to Brookdale all information reasonably requested by Brookdale to
enable Brookdale to finalize its offer for an extraordinary transaction
involving ILM and ILM II; (b) inform class plaintiffs' counsel on a timely basis
of all material developments of the negotiations; (c) provide copies of all
material documents concerning bidding and negotiations of an extraordinary
transaction to class counsel and consult with class counsel prior to and
regarding any and all material decisions of ILM's or ILM II's board relating to
a proposed extraordinary transaction; (d) ensure that neither ILM, ILM II nor
their boards would approve an extraordinary transaction which would provide the
class plaintiffs with aggregate consideration that is less than $172.0 million
unless there were any material adverse changes or unless it was in the best
interests of ILM and ILM II or their shareholders to do otherwise or unless
Capital refused to close on the revised acquisition proposal; and (e) ensure
that ILM and ILM II would pay the costs of printing and sending notice of
settlement to class plaintiffs. In addition, the Stipulation of Settlement
provided that Capital would cause Capital Acquisition to increase the merger
consideration payable upon consummation of the merger
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to $172.0 million, provided that such merger consideration would be payable
exclusively in cash, that the merger agreement would be amended to provide for
the new form of merger consideration and termination dates of September 30,
2000, and that certain disclosures would be made in the proxy statement
including, if relevant, disclosures regarding the preferred securities
previously contemplated by the original merger agreement dated February 7, 1999.
Under the Stipulation of Settlement, Capital is responsible for payment of
attorneys' fees and expenses sought under the application as long as a merger
with Capital is consummated. If ILM and ILM II consummated an extraordinary
transaction with any other party, ILM and ILM II would be responsible for such
payment. On November 5, 1999, the court awarded plaintiffs $950,000 in attorneys
fees and $182,000 in expenses.
COMPETITION
In general, ILM competes with other long-term health care providers in
seven states on a local and regional basis. Some competitors have financial
resources greater than those of ILM while others are non-profit or charitable
organizations. ILM expects that significant competitive factors will include the
quality and spectrum of care and services provided, the reputation of the
personnel employed, the physical appearance of the facilities and, in the case
of private-pay patients, the level of charges for services. ILM also believes
that ILM's communities compete on a local and regional basis, rather than on a
national basis. As a result, ILM seeks to meet competition in each locality or
region, as the case may be, by improving the quality and type of services
provided, the appearance of its facilities, and by responding appropriately to
regional variations in demographics and preferences. Historically, regulations
such as building code requirements and certificate of need requirements have
often deterred the construction of long-term care facilities.
REGULATIONS
License and certification standards vary from jurisdiction to jurisdiction
and undergo periodic revision. These requirements relate to, among other things,
the quality of the professional care provided, the qualification of
administrative personnel and professional or licensed staff, the adequacy of the
facility and its equipment, and continuing compliance with laws and regulations
relating to the operation of the communities. The failure to obtain, renew or
maintain any of the required regulatory approvals or licenses could adversely
affect expansion of ILM's business and could prevent the location involved from
offering services to patients. ILM believes it is currently in substantial
compliance with licensing requirements; however, there can be no assurance that
ILM will be able to maintain such licenses for its communities or that ILM will
not be required to expend significant funds in order to meet such requirements.
Of the states in which ILM operates assisted living facilities, Arkansas,
Michigan and North Carolina have a "Certificate of Need" statute. In these
states, approval by the appropriate state health regulatory agencies must be
obtained and a Certificate of Need or similar authorization issued prior to
certain activities being taken, including in some states, changes in the
management of a long-term care facility, the addition of new beds or services or
the making of certain capital expenditures. To the extent Certificate of Need
approvals are required for expansion of ILM's operations, such expansion may be
delayed
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<PAGE>
or otherwise affected. Furthermore, certain states have now or in the past
imposed moratoriums on the development of new facilities.
EMPLOYEES
As of February 29, 2000 all of ILM's properties are managed by Capital and
ILM retains one consultant, David Carlson, to oversee the operations of ILM's
business.
INSURANCE
ILM maintains, on behalf of itself and its subsidiaries, Building and
Contents insurance in the amount of $100.0 million, Comprehensive General
Liability insurance in the amount of $2.0 million, and Professional Liability
insurance in the amount of $2.0 million, subject to certain deductibles,
exclusions and other terms.
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DIRECTORS AND EXECUTIVE OFFICERS
Below is a list of the names of the directors and executive officers of ILM
and Capital, respectively, including their principal occupations and the name,
principal business and location of the corporation or organization in which the
occupation or employment is conducted. Also set forth below is a description of
their occupation and employment during the last five years. Each person listed
below is a citizen of the United States. Unless otherwise indicated, the
business location of each director and executive officer of ILM or Capital, for
the past five years, has been the principal executive office of ILM or Capital,
as the case may be.
ILM
<TABLE>
<CAPTION>
NAME AGE
- ------ ---
<S> <C> <C>
J. William Sharman, Jr....................... 58 Chairman of the Board, Chief Executive
Officer, President and Director
Jeffry R. Dwyer.............................. 52 Secretary and Director
Carl J. Schramm.............................. 52 Director
</TABLE>
CAPITAL
<TABLE>
<CAPTION>
NAME AGE
- ------ ---
<S> <C> <C>
James A. Stroud............................... 49 Chairman of the Board, Chairman and Secretary
Lawrence A. Cohen............................. 46 Vice Chairman and Chief Executive Officer
Keith N. Johannessen.......................... 42 President, Chief Operating Officer and
Director
Ralph A. Beattie.............................. Executive Vice President
and Chief Financial Officer
Dr. Gordon I. Goldstein....................... 63 Director
James A. Moore................................ 65 Director
Dr. Victor W. Nee............................. 64 Director
</TABLE>
J. WILLIAM SHARMAN, JR. has served as a director of ILM since its inception
in 1989 and has been ILM's President, Chief Executive Officer and Chairman of
the Board since July 28, 1998. Mr. Sharman is the Chairman of the Board and CEO
of Lancaster Hotels and Resorts, Inc., a hotel management company, and Bayou
Equities, Inc., a hotel development company which have principal places of
business in Houston, Texas. He has held these positions respectively since 1995
and 1992. Mr. Sharman served for 10 years, beginning in 1989, as Chairman of the
Board and President of The Lancaster Group, Inc., a real estate development firm
based in Houston, Texas, which is the predecessor of Lancaster Hotel Management,
L.C. and Bayou Equities, Inc. Mr. Sharman serves as Director of Small Luxury
Hotels, Ltd. of the United Kingdom, an international hotel marketing and
reservations firm, and also serves on the Board of Trustees of St. Edwards
University in Austin, Texas. Mr. Sharman also has served as President and
Director of ILM II since 1998, and Director of Lease I and Lease II. Each of
ILM II, Lease I and
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Lease II is an affiliate of ILM. He has a Bachelor of Science degree in Civil
Engineering from the University of Notre Dame.
JEFFRY R. DWYER presently serves as a director and Secretary of ILM. He has
served as a director of ILM since its inception in 1989. Mr. Dwyer has been a
shareholder of the international law firm of Greenberg Traurig located in
Washington, D.C. since June 1997. From 1993 to 1997, Mr. Dwyer was a partner
with the law firm of Akin, Gump, Strauss, Hauer & Feld in the District of
Columbia. Mr. Dwyer also presently serves as Secretary and a director of ILM II
and President and Director, Lease I and Lease II. Mr. Dwyer has written several
law review articles and a major treatise on real estate financing and has taught
Real Estate Planning as an Adjunct Professor at the Georgetown University Law
Center. Mr. Dwyer graduated from Georgetown University and received his juris
doctor from the Georgetown University Law Center.
CARL J. SCHRAMM has been a director of ILM since December 5, 1996.
Mr. Schramm is President of Greenspring Advisors, Inc., located in Towson,
Maryland, a consulting and advisory firm serving clients in the managed care,
health insurance and health information industries. He has occupied this
position since 1996. From 1993 to 1995, Mr. Schramm served as Executive Vice
President of Fortis, Inc., a diversified insurance and financial services
company located in New York City. From 1987 to 1992, Mr. Schramm was President
of the Health Insurance Association of America, the national trade association
of commercial health underwriters. Mr. Schramm currently serves on the boards of
HCIA, Inc., the Rochdale Insurance Group, Health Process Management and Post
Acute Care, L.L.C. Mr. Schramm holds a Ph.D in Economics from the University of
Wisconsin and received his juris doctor from Georgetown University. Mr. Schramm
also presently serves as a director of ILM II.
JAMES A. STROUD is Chairman of the Board, Chairman and Secretary of
Capital. He has served as a director of Capital and its predecessors since
January 1986 and was Chief Operating Officer from January 1986 to May 1999.
Mr. Stroud also serves on the board of various educational and charitable
organizations, and in varying capacities with several trade organizations,
including as a member of the Founder's Council and Board of Directors of the
Assisted Living Federation of America, and as President, and as a member of the
Board of Directors of the National Association for Senior Living Industry
Executives. Mr. Stroud also serves as an Advisory Group member to the National
Investment Conference. Mr. Stroud was a Founder of the Texas Assisted Living
Association and serves as a member of its Board of Directors. Mr. Stroud has
earned a Masters in Law, is a licensed attorney and also is a certified public
accountant.
LAWRENCE A. COHEN is Vice Chairman and Chief Executive Officer of Capital.
He has served as a director and Vice Chairman of Capital since November 1996 and
was Chief Financial Officer from November 1996 to June 1999. Mr. Cohen became
Chief Executive Officer in May 1999. From 1991 to 1996, Mr. Cohen served as
President and Chief Executive Officer of PaineWebber Properties Incorporated,
which controlled a real estate portfolio having a cost basis of approximately
$3.0 billion, including senior living facilities of approximately
$110.0 million. From April 1991 to May 1998, Mr. Cohen was President and a
member of the boards of directors of ILM and ILM II. From April 1991 to July 7,
1998 Mr. Cohen was a member of the board of directors of Lease I and Lease II.
94
<PAGE>
Mr. Cohen serves as a member of the Corporate Finance Committee of the NASD
Regulation, Inc., and was a founding member of the executive committee of the
Board of the American Seniors Housing Association. Mr. Cohen has earned a
Masters in Law, is a licensed attorney and also is a certified public
accountant. Mr. Cohen has had positions with businesses involved in senior
living for 14 years.
KEITH N. JOHANNESSEN is President and Chief Operating Officer of Capital.
He has served as President of Capital and its predecessors since March 1994, and
previously served as Executive Vice President from May 1993 to February 1994.
From 1992 to 1993, Mr. Johannessen served as Senior Manager in the health care
practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen was Executive Vice
President of Oxford Retirement Services, Inc. Mr. Johannessen has served on the
State of the Industry and Model Assisted Living Regulations Committees of the
American Seniors Housing Association. Mr. Johannessen has been active in
operational aspects of senior housing for 21 years.
RALPH A. BEATTIE joined Capital as Executive Vice President and Chief
Financial Officer in June 1999. From 1997 to 1999, he served as an Executive
Vice President and the Chief Financial Officer of Universal Sports America, Inc.
For the previous eight years, he was an Executive Vice President and the Chief
Financial Officer for Haggar Clothing Company, during which time Haggar
successfully completed its initial public offering. Mr. Beattie has earned his
Masters of Business Administration and is both a certified management accountant
and a Certified Financial Planner.
DR. GORDON I. GOLDSTEIN is a director of Capital. Dr. Goldstein was an
attending anesthesiologist at Presbyterian Hospital in Dallas, Texas from 1967
through 1998 and at the Surgery Center Southwest since 1990. He is currently
emeritus staff at Presbyterian Hospital of Dallas. He is board certified by the
American Board of Anesthesiology and has been a Fellow of the American College
of Anesthesiology since 1996. Dr. Goldstein has published Diagnosis and
Treatment of Reactions of Chymopapain and Successful Treatment of Cafe Coronary.
Dr. Goldstein received his undergraduate degree in biology and chemistry from
East Tennessee State University, his M.D. from the University of Tennessee
Medical School and has served in the medical profession in the northeast and
currently in the southwest. Dr. Goldstein served as the Chairman of the
Department of Anesthesiology at Presbyterian Hospital in Dallas, Texas, from
1994 to 1997. He is currently managing director of GF Holdings and a director of
Sage Medical Experts.
JAMES A. MOORE is a director of Capital. He is currently President of Moore
Diversified Services, Inc., a senior living consulting firm engaged in market
feasibility studies, investment advisory services and marketing and strategic
consulting in the senior living industry, which has its principal offices in
Fort Worth, Texas. Mr. Moore has held this position since May 1971. Mr. Moore
has 35 years of industry experience and has conducted over 1,600 senior living
consulting engagements in approximately 475 markets, in 46 states and six
countries. Mr. Moore has authored numerous senior living and health care
industry technical papers and trade journal articles, as well as the books
Assisted Living--Pure & Simple Development and Operating Strategies and Assisted
Living 2000, which are required assisted living certification course material
for the American College of Health Care Administrators. Mr. Moore holds a
Bachelor of Science degree in Industrial Technology from Texas Christian
University.
95
<PAGE>
DR. VICTOR W. NEE is a director of Capital. He has been a Professor in the
Department of Aerospace and Mechanical Engineering at the University of Notre
Dame since 1965. In addition to his professional duties, Dr. Nee has served as
Director of the Advanced Technology Center at the University of Massachusetts,
Dartmouth from 1993 to 1995, and as Director of the Advanced Engineering
Research Laboratory at the University of Notre Dame from 1991 to 1993. Dr. Nee
received a Bachelors of Science from the National Taiwan University in Civil
Engineering and a Ph.D. in Fluid Mechanics from The Johns Hopkins University.
Dr. Nee holds international positions as an advisor to governmental, educational
and industrial organizations in China.
None of the executive officers or directors of ILM or Capital has during
the last five years (i) been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) has been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree of final
order enjoining future violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
96
<PAGE>
SHAREHOLDER PROPOSALS
If the merger is not completed, ILM will hold an annual meeting for the
election of directors in calendar year 2000. If such meeting is held, the
deadline for receipt of a proposal to be considered for inclusion in ILM's proxy
statement for the calendar year 2000 annual meeting will be October 31, 2000.
OTHER MATTERS
The ILM Board is not aware of any matter not set forth herein that may be
raised at the special meeting. If, however, further business is properly raised
at the special meeting, the persons named in the proxies will vote the shares
represented by the proxies in accordance with their judgment. If, on the date of
the special meeting, the relevant number of proxies needed to approve the merger
have not been obtained, then, to the extent permitted by law, the special
meeting will be adjourned until the requisite number of proxies necessary to
approve the merger have been received.
EXPERTS
The consolidated financial statements of ILM at August 31, 1999 and 1998
and for each of the three years in the period ended August 31, 1999, included in
this document have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere in this proxy statement.
The financial statements referred to above are included in reliance upon such
report given on the authority of Ernst & Young LLP as experts in accounting and
auditing.
NO APPRAISAL RIGHTS
Because ILM has at least 2,000 shareholders of record and neither ILM's
Articles of Incorporation nor its by-laws provide for any appraisal rights,
ILM's shareholders will not have any right to object to the merger and have the
value of their shares of ILM common stock determined by a court. Accordingly,
ILM's shareholders will not be afforded these dissenter's rights.
ILM SENIOR LIVING, INC.
May , 2000
97
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of ILM Senior Living, Inc.:
Report of Ernst & Young LLP, Independent Auditors.................................................... F-2
Consolidated Balance Sheets--February 29, 2000 (Unaudited) and August 31, 1999 and 1998.............. F-3
Consolidated Statements of Income--Six and three months ended February 29, 2000 and February 28,
1999 (Unaudited) and Years ended August 31, 1999, 1998, and 1997................................... F-4
Consolidated Statements of Changes in Shareholders' Equity--Six months ended February 29, 2000
(Unaudited) and Years ended August 31, 1999, 1998, and 1997........................................ F-5
Consolidated Statements of Cash Flows--Six months ended February 29, 2000 and February 28, 1999
(Unaudited) and Years ended August 31, 1999, 1998, and 1997........................................ F-6
Notes to Consolidated Financial Statements........................................................... F-8
</TABLE>
F-1
<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. 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 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.
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
F-2
<PAGE>
ILM SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -------------------
2000 1999 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Operating investment properties, at cost:
Land.................................................................. $ 4,925 $ 4,921 $ 4,768
Building and improvements............................................. 38,270 38,197 38,166
Furniture, fixtures and equipment..................................... 4,948 4,948 4,948
-------- -------- --------
48,143 48,066 47,882
Less: accumulated depreciation........................................ (14,061) (13,417) (12,131)
-------- -------- --------
34,082 34,649 35,751
Mortgage placement fees.................................................. 2,256 2,256 2,256
Less: accumulated amortization........................................... (2,256) (2,163) (1,938)
-------- -------- --------
-- 93 318
Loan origination fees, net............................................... 140 187 102
Cash and cash equivalents................................................ 1,645 2,615 2,264
Accounts receivable--related party....................................... 314 306 336
Prepaid expenses and other assets........................................ 176 100 90
Deferred rent receivable................................................. -- 12 49
-------- -------- --------
$ 36,357 $ 37,962 $ 38,910
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable--related party.......................................... $ 238 365 $ --
Accounts payable and accrued expenses.................................... 237 343 326
Construction loan payable................................................ 2,093 2,093 --
Preferred shareholders' minority interest in consolidated subsidiary..... 138 134 125
-------- -------- --------
Total liabilities.................................................. 2,706 2,935 451
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 10,000,000 shares authorized, 7,520,100
shares issued and outstanding...................................... 75 75 75
Additional paid-in capital............................................ 65,711 65,711 65,711
Accumulated deficit................................................... (32,135) (30,759) (27,327)
-------- -------- --------
Total shareholders' equity......................................... 33,651 35,027 38,459
-------- -------- --------
$ 36,357 $ 37,962 $ 38,910
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, ------------------------
2000 1999 2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Rental and other
income................ $1,905 $1,870 $3,788 $3,761 $7,525 $7,222 $6,643
Interest income earned on
cash equivalents...... 18 17 40 39 72 98 162
------ ------ ------ ------ ------ ------ ------
1,923 1,887 3,828 3,800 7,597 7,320 6,805
EXPENSES:
Depreciation............. 322 320 644 643 1,286 1,287 1,282
Amortization............. 60 74 140 147 311 226 226
Management fees.......... -- -- -- -- -- -- 70
General and
administrative........ 96 129 164 256 559 294 866
Professional fees........ 579 824 1,014 1,044 2,393 674 445
Director compensation.... 24 29 46 49 87 116 82
------ ------ ------ ------ ------ ------ ------
1,081 1,376 2,008 2,139 4,636 2,597 2,971
------ ------ ------ ------ ------ ------ ------
NET INCOME................. $ 841 $ 511 $1,820 $1,661 $2,961 $4,723 $3,834
====== ====== ====== ====== ====== ====== ======
Earnings per share of
common stock............. $ 0.11 $ 0.07 $ 0.24 $ 0.22 $ 0.39 $ 0.63 $ 0.51
====== ====== ====== ====== ====== ====== ======
Cash dividends paid per
share of common stock.... $ 0.21 $ 0.21 $ 0.43 $ 0.43 $ 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.
F-4
<PAGE>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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, 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
Cash dividends paid............................ -- -- -- (3,196) (3,196)
Net income..................................... -- -- -- 1,820 1,820
--------- ---- -------- --------- -------
Shareholders' equity at February 29, 2000
(Unaudited).................................... 7,520,100 $ 75 $ 65,711 $ (32,135) $33,651
========= ==== ======== ========= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, ---------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 1,820 $ 1,661 $ 2,961 $ 4,723 $ 3,834
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 784 790 1,597 1,513 1,508
Charitable contribution of subsidiary's
preferred stock and accrued
dividends............................. 4 5 9 9 116
Changes in assets and liabilities:
Interest and other receivables........ -- -- -- -- 397
Accounts receivable--related party.... (8) 47 30 (220) 232
Prepaid expenses and other assets..... (76) 62 (11) 18 (97)
Deferred rent receivable.............. 12 18 37 37 37
Accounts payable--related party....... (105) 133 276 (93) 71
Accounts payable and accrued
expenses........................... (128) -- 106 160 105
-------- -------- ------- ------- -------
Net cash provided by operating
activities...................... 2,303 2,716 5,005 6,147 6,203
-------- -------- ------- ------- -------
Cash flows used in investing activities:
ILM Holding acquired cash balance........... -- -- 400
Additions to operating investment
properties............................... (77) (97) (184) (995) (533)
-------- -------- ------- ------- -------
Net cash used in investing
activities...................... (77) (97) (184) (995) (133)
-------- -------- ------- ------- -------
</TABLE>
F-6
<PAGE>
ILM SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, ---------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows used in financing activities:
Loan origination fees....................... -- (168) (170) (102) --
Proceeds from construction loan facility.... -- -- 2,093 -- --
Cash dividends paid to shareholders......... (3,196) (3,196) (6,393) (5,922) (5,544)
-------- -------- ------- ------- -------
Net cash used in financing
activities...................... (3,196) (3,364) (4,470) (6,024) (5,544)
-------- -------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................. (970) (745) 351 (872) 526
Cash and cash equivalents, beginning of year... 2,615 2,264 2,264 3,136 2,610
-------- -------- ------- ------- -------
Cash and cash equivalents, end of period....... $ 1,645 $ 1,519 $ 2,615 $ 2,264 $ 3,136
======== ======== ======= ======= =======
Cash paid for state income taxes............... $ -- $ -- $ 42 $ 13 $ --
======== ======== ======= ======= =======
Cash paid for interest......................... $ 47 $ -- $ 20 $ -- $ --
======== ======== ======= ======= =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
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 located in seven different states ("Senior Housing Facilities"). All
of the loans made by the Company were originally to Angeles Housing Concepts,
Inc. ("AHC"), a company specializing in the development, acquisition and
operation of senior housing facilities.
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 properties 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 properties 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
F-8
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
ILM Holding, Inc. ("ILM Holding"), a Virginia corporation. In August 1995, each
of the Property Companies merged into ILM Holding which is majority owned by 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 holds title to the eight Senior Housing Facilities which
comprise the balance of 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
consolidation. 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
$693,000 and had issued 10,000 shares of common stock to PaineWebber 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. 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 of 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
nonvoting, 8% cumulative preferred stock issued to the Company. 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 will accrue at a rate of 8% per
annum on the original $1,000 liquidation preference and will be 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
F-9
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
at the amount of the initial liquidation preference of $111,000. Such amount is
included in general and administrative expense on the accompanying income
statement 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
approximately $23,000 and $14,000, respectively. Cumulative dividends accrued as
of May 31, 1999 on the preferred stock in ILM Holding totaled approximately
$20,720.
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 properties 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 master 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 and further amended
on April 18, 2000, 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 $11.63 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. The agreement presently
provides that it may be terminated if the merger is not consummated by September
30, 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 as of December 31, 1999, beyond
its original expiration date of December 31, 1999. Although the pending merger
agreement remains operative and in full force and effect, Capital has
communicated certain proposed modifications to the pending transaction which
have not been agreed to in principle or otherwise by the Company. The Company
presently is in discussions with Capital regarding the pending merger
transaction and is considering potential modifications thereto including a
reduced merger consideration. There can be no assurance as to whether the merger
will be consummated or, if consummated, as to the timing thereof.
F-10
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
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 estimate 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 sheet is 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. Accordingly, the
accounts of ILM Holding have been consolidated with those of the Company as
though this controlling interest had been acquired at September 1, 1996.
The accompanying financial statements include the financial statements of
the Company and ILM Holding. 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 properties 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 properties that are now owned by an affiliate of the
Company are Senior Housing Facilities that 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
F-11
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 properties 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 master lease agreement).
The assumption of ownership of the properties through ILM Holding, which
was a regular C corporation for tax purposes at the time of assumption, resulted
in a possible future tax liability which would be payable upon the ultimate sale
of the properties (the "built-in gain tax"). The amount of such tax would be
calculated based on the lesser of the total net gain realized from the sale
transaction or the portion of the net gain realized upon a final sale which is
attributable to the period during which the properties were held 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 properties
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 two years, the properties 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. Based on management's
estimate of the increase in the values of the properties 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.
F-12
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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
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 at August 31, 1999 and 1998, is $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 master lease described in Note 4. Base rental
income under the master lease is recognized on a straight-line basis over the
term of the lease. Deferred rent receivable
F-13
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 master lease.
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 nonfinancial 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.
G. INTERIM FINANCIAL INFORMATION
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 interim financial statements have been prepared on the accrual
basis of accounting in accordance with U.S. generally accepted accounting
principles for interim financial information, which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of February
29, 2000 and revenues and expenses for each of the six- and three-month periods
ended February 29, 2000 and February 28, 1999. Actual results may differ from
the estimates and assumptions used. The results of operations for the six- and
three-month periods ended February 29, 2000, are not necessarily indicative of
the results that may be expected for the year ending August 31, 2000.
F-14
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
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. As
previously discussed in Note 1, 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% annum. PaineWebber earned base management fees totaling
$0, $0 and $7,000 for the years ended August 31, 1999, 1998 and 1997,
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 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
F-15
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS--(CONTINUED)
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. Mitchell Hutchins earned
$0, $0 and $9,000, (included in general and administrative expenses) for
managing the Company's cash assets during fiscal 1999, 1998 and 1997,
respectively.
Lease I has retained Capital Senior Management, 2, Inc. ("Capital") to be
the property manager of the Senior Housing Facilities, and the Company has
guaranteed the payment of all fees due to Capital under the terms of 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 of Capital Senior Living Corporation, an affiliate of Capital, since
November 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. Capital earned property management fees from Lease I
of $1,011,000 and $919,000 for the years ended August 31, 1999 and 1998,
respectively. For the three-month period ended February 29, 2000, and February
28, 1999, Capital earned property management fees from Lease I of $271,000 and
$277,000 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. At
November 30, 1999, the amount advanced to Capital by Lease I and Lease II for
legal fees totaled approximately $563,000.
F-16
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS--(CONTINUED)
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, which began acting as Counsel to the Company and its
affiliates in late fiscal year 1997. Greenberg Traurig earned fees from the
Company of $1,315,000 and $214,000 for the years ended August 31, 1999 and 1998,
respectively. For the three-month periods ended February 29, 2000 and February
28, 1999, Greenberg Traurig earned fees from the Company of $483,000 and
$287,000 respectively.
Accounts receivable--related party at August 31, 1999 and 1998 represent
amounts due from an affiliated company, Lease I, principally for variable rent.
Accounts payable--related party at February 29, 2000, 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.
F-17
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE
As of August 31, 1999 the Company, through its consolidated affiliate,
owned eight Senior Housing Facilities. The name, location and size of the
properties and the date that the Company made its initial investment in such
assets are as set forth below:
<TABLE>
<CAPTION>
RENTABLE RESIDENT DATE OF
NAME LOCATION UNITS(3) CAPACITIES(3) INVESTMENT(1)
- ----------------------------------- ----------------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Independence Village of East
Lansing......................... East Lansing, MI 161 162 6/29/89
Independence Village of
Winston-Salem................... Winston-Salem, NC 159 161 6/29/89
Independence Village of Raleigh.... Raleigh, NC 164 205 4/29/91
Independence Village of Peoria..... Peoria, IL 165 181 11/30/90
Crown Pointe Apartments............ Omaha, NE 135 163 2/14/90
Sedgwick Plaza Apartments.......... Wichita, KS 150 170 2/14/90
West Shores........................ Hot Springs, AR 136 166 12/14/90
Villa Santa Barbara(2)............. Santa Barbara, CA 125 125 7/13/92
</TABLE>
- ------------------
(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.
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 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
F-18
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
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 from 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 master lease
agreement. As of August 31, 1995, Lease I, which is taxable as a regular 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.
F-19
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
The Facilities Lease Agreement, is between the Company's consolidated
subsidiary, ILM Holding, as owner of the properties and lessor, and Lease I as
lessee. The lessor has the right to terminate the master lease as to any
property sold by the lessor as of the date of such sale. The master 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 initial term of the master
lease, 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 the 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. Variable rent was
$615,000 and $313,000 for the six- and three-month periods ended February 29,
2000, respectively, compared to $564,000 and $288,000 for the six- and
three-month periods ended February 28, 1999, respectively.
Condensed balance sheets as of August 31, 1999 and 1998, and condensed
statements of operations for the years ended August 31, 1999 and 1998, of Lease
I are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
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
======= =======
STATEMENTS OF OPERATIONS
Revenues..................................................................... $19,923 $19,294
Operating expenses........................................................... 19,530 19,729
Income tax expense (benefit)................................................. (273) (54)
------- -------
Net loss..................................................................... $ 120 $ (381)
======= =======
</TABLE>
F-20
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
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. The management agreement was
terminated for "cause" pursuant to the terms of 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 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 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 judgement against the Company and ILM II in the aggregate
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
F-21
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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. At November 30, 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 against the Company, ILM II and the Directors of both corporations. The
class action complaint alleges 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 and changing the nature of the Company and ILM II. The complaint seeks
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
joined with all other defendants 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 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 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
F-22
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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
Summer 1999.
On March 9, 1999, the Feldman plantiffs 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, ILM, ILM II and each of its directors 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, ILM, ILM II and other defendants
produced documents to the plaintiffs and depositions of current and former
directors and others were taken. Discovery was completed on 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(the "Stipulation") 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 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, plaintiff's 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
F-23
<PAGE>
ILM SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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 EVENTS
On March 20, 2000, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended February 29, 2000. On April 17, 2000,
a dividend of $0.2125 per share of common stock, totaling approximately
$1,598,000, will be paid to Shareholders of record as of March 31, 2000.
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.
On December 15, 1999, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended November 30, 1999. On January 15,
2000, a dividend of $0.2125 per share of common stock, totaling approximately
$1,598,000, was paid to Shareholders of record as of December 31, 1999.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRELIMINARY COPY
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
APPENDICES
TO
SCHEDULE 14A
------------------------
ILM SENIOR LIVING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX A
==============================================================================
COMPOSITE* AGREEMENT AND PLAN OF MERGER
among
CAPITAL SENIOR LIVING CORPORATION,
CAPITAL SENIOR LIVING ACQUISITION, LLC
and
ILM SENIOR LIVING, INC.
==============================================================================
- ----------
* Composite Agreement reflecting the terms of the October 19, 1999 Amended and
Restated Agreement and Plan of Merger as amended by a First Amendment on April
18, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER
SECTION 1.1 Effective Time of the Merger...........................2
SECTION 1.2 Closing................................................2
SECTION 1.3 Effects of the Merger..................................2
SECTION 1.4 Organizational Instruments.............................3
SECTION 1.5 Member.................................................3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK AND MEMBERSHIP
INTERESTS OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF
CERTIFICATES
SECTION 2.1 Effect on Capital Stock and Membership
Interests..............................................3
SECTION 2.2 Letters of Transmittal.................................4
SECTION 2.3 Exchange Procedures....................................4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the
Company................................................6
SECTION 3.2 Representations and Warranties of CSLC and
Sub...................................................16
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Covenants of the Company CSLC and Sub.................19
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Preparation of the Company Proxy Statement
and the Schedule 13E-3................................25
SECTION 5.2 Access to Information.................................25
SECTION 5.3 Stockholder's Meeting.................................26
SECTION 5.4 Consents and Approvals................................27
SECTION 5.6 Expenses; Liquidated Damages..........................27
SECTION 5.7 Brokers or Finders....................................29
SECTION 5.8 CSLC Advisory Board...................................29
SECTION 5.9 Indemnification; Directors' and Officers'
Insurance.............................................29
SECTION 5.10 Proposed Simultaneous Acquisition.....................31
(i)
<PAGE>
SECTION 5.11 Additional Agreements; Best Efforts...................32
SECTION 5.12 Conveyance Taxes......................................32
SECTION 5.13 Public Announcements..................................33
SECTION 5.14 Notification of Certain Matters.......................33
SECTION 5.15 Company Taxes.........................................33
SECTION 5.16 Original Agreement....................................33
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to
Effect the Merger.....................................34
SECTION 6.2 Conditions of Obligations of CSLC and Sub.............35
SECTION 6.3 Conditions of Obligations of the Company..............35
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.1 Termination...........................................36
SECTION 7.2 Effect of Termination.................................37
SECTION 7.3 Amendment.............................................38
SECTION 7.4 Extension; Waiver.....................................38
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties
and Agreements........................................38
SECTION 8.2 Notices...............................................38
SECTION 8.3 Interpretation........................................40
SECTION 8.4 Counterparts..........................................40
SECTION 8.5 Entire Agreement; No Third Party
Beneficiaries.........................................40
SECTION 8.6 Governing Law.........................................40
SECTION 8.7 No Remedy in Certain Circumstances....................40
SECTION 8.8 Assignment............................................41
SECTION 8.9 Gender and Number Classification......................41
SECTION 8.10 Knowledge.............................................41
(ii)
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated October 19, 1999
(this "Agreement"), among CAPITAL SENIOR LIVING CORPORATION, a Delaware
corporation ("CSLC"); CAPITAL SENIOR LIVING ACQUISITION, LLC, a Delaware limited
liability company, all of the outstanding membership interests in which are
wholly-owned by CSLC ("Sub"); and ILM SENIOR LIVING, INC., a Virginia
finite-life corporation (the "Company").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, CSLC, Sub, Capital Senior Living Trust I, a grantor trust
established under the laws of the State of Delaware and a wholly owned
subsidiary of CSLC, and the Company, entered into an Agreement and Plan of
Merger dated as of February 7, 1999 (the "Original Agreement");
WHEREAS, the parties to the Original Agreement desire to amend and restate
in their entirety the terms and conditions of the Original Agreement as
hereinafter set forth;
WHEREAS, the respective Boards of Directors of CSLC and the Company have
determined that it is fair to and in the best interests of their respective
stockholders to consummate the acquisition of the Company by CSLC, by means of a
cash out merger of the Company with and into Sub, upon the terms and subject to
the conditions set forth herein (the "Merger");
WHEREAS, the respective Boards of Directors of CSLC and the Company, and
CSLC as sole member of Sub, have approved the Merger and this Agreement and the
transactions contemplated hereby;
WHEREAS, it is intended that the Merger shall be recorded for accounting
purposes as a purchase of the Company by CSLC, and the Merger shall be reported
for federal, state and local income tax purposes as a fully taxable acquisition
by CSLC of all of the assets of the Company;
WHEREAS, CSLC, Sub, and the Company desire to make certain representations,
warranties, agreements and covenants in respect of the Merger and also to
prescribe various conditions thereto, all as hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual premises and the
representations, warranties, agreements and covenants herein contained, the
parties hereto, intending to be legally bound, hereby agree as follows:
<PAGE>
ARTICLE I
THE MERGER
SECTION 1.1 Effective Time of the Merger. Upon the terms and subject to
the conditions of this Agreement, articles of merger (the "Articles of Merger")
and a certificate of merger (the "Certificate of Merger"), respectively, shall
be duly prepared, executed and acknowledged by the "Surviving Entity" (as
defined in Section 1.3) and delivered to the Secretary of the Commonwealth of
Virginia (the "Virginia Secretary") and to the Secretary of State of Delaware
(the "Delaware Secretary") for filing as provided in the Virginia Stock
Corporation Act, as amended (the "Va Act"), and as provided in the Delaware
Limited Liability Company Act, as amended (the "DLLCA"), as soon as practicable
on or after the "Closing Date" (as defined in Section 1.2). The Merger shall
become effective upon the filing of the Articles of Merger and the Certificate
of Merger with the Virginia Secretary and the Delaware Secretary, respectively,
or at such other date and time subsequent thereto as mutually agreed by CSLC and
the Company and expressly provided in the Articles of Merger and the Certificate
of Merger (the "Effective Time").
SECTION 1.2 Closing. The closing of the Merger (the "Closing") shall occur
at 10:00 a.m., Eastern time, on a date to be mutually specified by the parties
hereto, which date shall be the first day of the calendar month (provided that
if such day is not a business day, then the Closing shall occur on the first
business day next following such day but nonetheless shall be deemed to have
occurred on the first day of such calendar month) next following the waiver or
satisfaction, as applicable, of the last to occur of the conditions set forth in
Article VI hereof (the "Closing Date"), at the offices of Greenberg Traurig, The
MetLife Building, 200 Park Avenue, 15th Floor, New York, NY 10166, unless
another date, time or place is agreed to by the parties hereto.
SECTION 1.3 Effects of the Merger. (a) At the Effective Time, the Company
shall be merged with and into Sub, and thereupon, the separate corporate
existence of the Company shall cease (Sub and the Company being sometimes
hereafter referred to as the "Constituent Corporations" and Sub being sometimes
hereafter referred to as the "Surviving Entity").
(b) At the Effective Time, the effect of the Merger shall be as
provided in the Va Act and the DLLCA. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property, rights,
interests, privileges, powers and franchises of the Company and Sub thereupon
shall vest in the Surviving Entity, and all debts, liabilities, obligations,
restrictions, disabilities and duties of each of the Company and Sub
("Liabilities") thereupon shall become the Liabilities of the Surviving Entity.
2
<PAGE>
SECTION 1.4 Organizational Instruments. The Certificate of Formation of
Sub in effect immediately prior to the Effective Time shall be the Certificate
of Formation of the Surviving Entity from and after the Effective Time until
thereafter duly amended or restated in accordance with applicable law. The
Operating Agreement of Sub in effect immediately prior to the Effective Time
shall be the Operating Agreement of the Surviving Entity from and after the
Effective Time until thereafter duly amended or restated in accordance with the
Certificate of Formation of the Surviving Entity and applicable law.
SECTION 1.5 Member. The sole member of Sub immediately prior to the
Effective Time shall continue as the sole member of the Surviving Entity from
and after the Effective Time until thereafter substituted or changed pursuant to
the Operating Agreement and the DLLCA.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK AND MEMBERSHIP INTERESTS OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock and Membership Interests. At the
Effective Time, by virtue of the Merger and without any further action on the
part of the holder of any shares of capital stock or membership interests of the
Company, CSLC, or Sub:
(a) Membership Interests of Sub. Each membership interest of Sub
outstanding immediately prior to the Effective Time and owned by CSLC
automatically shall be converted into and become one duly authorized, validly
issued, fully paid and nonassessable membership interest of the Surviving
Entity.
(b) Cancellation of Certain Stock. All shares of common stock,
$.01 par value, of the Company (the "Company Common Stock") owned by the Company
as treasury stock and all shares of the Company Common Stock owned by CSLC, Sub,
or any other Subsidiary of the Company and CSLC, automatically shall be canceled
and retired and shall cease to exist and no capital stock or other interests of
CSLC, Sub, or any other Subsidiary of CSLC or other consideration (whether
consisting of cash or property) shall be delivered in exchange therefor.
As used in this Agreement, the word "Subsidiary" means, with respect
to any person or entity, any person or entity of which more than 50% of the
securities or other ownership interests having ordinary voting power to elect a
majority of the Board of Directors or others performing similar functions are
owned directly, or indirectly through one or more intermediaries, by such person
or entity.
3
<PAGE>
(c) Merger Consideration. Each share of Company Common Stock
outstanding immediately prior to the Effective Time (other than any shares to be
canceled in accordance with Section 2.1(b)) shall, at the Effective Time,
automatically be converted into the right to receive $11.626042 in cash (the
"Merger Consideration"). All such shares of Company Common Stock, when converted
as provided in this Section 2.1(c), no longer shall be outstanding and
automatically shall be canceled and retired and shall cease to exist, and each
certificate previously evidencing such shares of Company Common Stock thereafter
shall represent only the right to receive the Merger Consideration. The holders
of certificates previously evidencing such shares of Company Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights of beneficial ownership or otherwise with respect to such shares except
as otherwise provided in this Agreement or by law and upon the surrender of
certificates therefor in accordance with the provisions of Section 2.3 shall
only represent the right to receive the Merger Consideration, without any
interest thereon.
SECTION 2.2 Letters of Transmittal. On such date on which the Company
Proxy Statement (as defined in Section 3.1(c)) is mailed to holders of the
Company Common Stock, the Company shall mail to each such holder on the record
date established for such holders entitled to notice of and to vote at the
Company Stockholders' Meeting (as defined in Section 3.1(c)), a form of letter
of transmittal, and other appropriate materials instructing each such holder on
the procedures required to receive the Merger Consideration in respect of each
share of Company Common Stock.
SECTION 2.3 Exchange Procedures (a) Exchange Agent; Exchange Funds.
Immediately prior to the Effective Time, CSLC shall deposit (or cause to be
deposited) with ChaseMellon Shareholder Services, L.L.C., or such other bank or
trust company designated by CSLC and having net capital in excess of
$250,000,000 and reasonably acceptable to the Company (the "Exchange Agent"),
for the benefit of the holders of the Company Common Stock, for exchange in
accordance with this Article II, the aggregate Merger Consideration payable by
CSLC in the Merger to all holders of the Company Common Stock (the "Exchange
Funds").
(b) Surrender of Certificates. Promptly after the Effective Time,
the Exchange Agent shall distribute to each holder of the Company Common Stock,
upon surrender to the Exchange Agent of the certificate(s) for cancellation in
exchange for the Exchange Funds in accordance with this Article II, the
aggregate Merger Consideration to which each such holder is entitled to receive
in the Merger. In the event of a transfer of ownership of the Company Common
Stock which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of the Company Common Stock
may be issued to a transferee if certificate(s) representing such Company Common
Stock are presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and to evidence that all applicable stock
4
<PAGE>
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.3, each certificate shall be deemed from and after the Effective Time to
represent only the right to receive upon such surrender the Exchange Funds in
accordance with this Article II, without any interest thereon.
(c) No Further Ownership Rights in the Company Common Stock. All
Exchange Funds issued and paid upon the surrender for exchange of shares of the
Company Common Stock in accordance with the terms hereof shall be deemed to have
been issued and paid in full satisfaction of all rights pertaining to such
shares, subject, however, to the Surviving Entity's obligation to pay any
dividends and make any other distributions having a record date prior to the
Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock after the date hereof and otherwise in accordance
with the terms of this Agreement and which remain unpaid at the Effective Time,
and there shall be no further registration of transfers on the stock transfer
books of the Surviving Entity of the shares of the Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificate(s) representing shares of the Company Common Stock
are presented to the Surviving Entity for any reason, they shall be canceled and
exchanged as provided in this Article II.
(d) Termination of Exchange Funds. Any portion of the Exchange
Funds which remains undistributed to the holders of the Company Common Stock on
the first anniversary of the Effective Time shall be delivered to CSLC or the
Surviving Entity, upon demand by CSLC, and any holders of the Company Common
Stock who have not theretofore surrendered their shares (in accordance with this
Article II and the instructions set forth in the letter of transmittal received
by such holders) thereafter shall look only to CSLC and the Surviving Entity for
payment of the aggregate Merger Consideration to which they are entitled in the
Merger.
(e) No Liability. Neither CSLC, Sub, nor the Company shall be
liable to any holder of Company Common Stock for any cash or property in respect
thereof delivered to a public official pursuant to any applicable abandoned
property, escheat or other similar law.
(f) Lost or Stolen, etc. Certificates. If any certificate
evidencing shares of the Company Common Stock shall have been lost, stolen or
destroyed, then in such event, upon the submission of a duly notarized affidavit
of that fact by the person claiming such certificate(s) to be lost, stolen or
destroyed and, if required by the Surviving Entity, the posting by such person
of a bond, indemnity or similar surety in such reasonable amount as the
Surviving Entity may direct as indemnity against any claim that may be made
against it with respect to such certificate(s), the Exchange Agent shall issue
in exchange for such lost, stolen or destroyed certificate the applicable Merger
Consideration.
5
<PAGE>
(g) Withholding Taxes. CSLC and Sub shall be entitled to deduct
and withhold (or cause the Exchange Agent to deduct and withhold) from the
Merger Consideration payable to a holder of the Company Common Stock, all
withholding and stock transfer taxes, including, without limitation, withholding
taxes imposed by the Foreign Investors Real Property Tax Act of 1980. To the
extent such amounts are so withheld, they shall be treated for all purposes of
this Agreement as having been paid to the holder of the Company Common Stock in
respect of whom such deduction and withholding was made by CSLC and Sub.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company. The Company
represents and warrants to each of CSLC and Sub as follows:
(a) Organization, Standing and Power. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation or
organization, has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now being conducted, and is duly
qualified and in good standing to transact business in each jurisdiction in
which the nature of its business or the ownership or leasing of its properties
makes such qualification necessary, except where the failure to be in good
standing or so to qualify would not have a material adverse effect on the
properties, assets, financial condition or operations of the Company and its
Subsidiaries taken as a whole and/or would prevent or materially impair the
consummation by the Company of the Merger and the transactions contemplated
thereby and hereby (a "Material Adverse Effect").
(b) Capital Structure. The authorized capital stock of the Company
consists of 10,000,000 shares of the Company Common Stock, $.01 par value. At
the close of business on the date hereof, 7,520,100 shares of the Company Common
Stock were issued and outstanding. Except as provided in this Agreement, there
are no shares of capital stock of the Company outstanding and there are no
options, warrants, calls, rights or agreements to which the Company or any
Subsidiary of the Company is a party or by which it is bound obligating the
Company or any Subsidiary of the Company to issue, deliver or sell, or cause to
be issued, delivered or sold, additional shares of capital stock or any voting
debt securities of the Company or of any Subsidiary of the Company, or
obligating the Company or any Subsidiary of the Company to grant, extend or
enter into any such option, warrant, call, right or agreement. All outstanding
shares of the Company Common Stock have been duly authorized and are validly
issued, fully paid and nonassessable.
6
<PAGE>
The authorized capital stock of ILM Holding, Inc. ("ILM Holding")
consists of 50,000 shares of common stock, $.01 par value ("Holding Common
Stock") and 275 shares of Series A Preferred Stock, no par value ("Holding
Preferred Stock"). At the close of business on the date hereof, 50,000 shares of
Holding Common Stock and 275 shares of Holding Preferred Stock, respectively,
were issued and outstanding. All outstanding shares of Holding Common Stock have
been duly authorized and are validly issued, fully paid, nonassessable and
wholly owned by the Company. All outstanding shares of Holding Preferred Stock
have been duly authorized and are validly issued, fully paid and nonassessable.
(c) Authority. The Company has all requisite corporate power and
authority to enter into this Agreement and, subject to the adoption of this
Agreement and the Merger by the holders of not less than 66-2/3% of the
outstanding Company Common Stock (the "Company Stockholder Approval Condition"),
to consummate the transactions contemplated hereby. The execution and delivery
of this Agreement has been duly authorized by all necessary corporate action on
the part of the Company, and the consummation by it of the transactions
contemplated hereby has been duly authorized by all necessary corporate action
on the part of the Company, subject to the Company Stockholder Approval
Condition. This Agreement has been duly executed and delivered by the Company
and, subject to the Company Stockholder Approval Condition, constitutes a valid
and binding obligation of the Company enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally. The execution and delivery of this Agreement does not, and
the consummation by the Company of the transactions contemplated hereby will
not, conflict with or result in any violation of or default (with or without
notice or lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or the loss of a material right
or benefit under, or the creation or imposition of any lien, pledge, adverse
claim, security interest, charge or other encumbrance ("Lien") on or against any
assets or properties of the Company or any of its Subsidiaries (any such
conflict, violation, default, right of termination, cancellation, acceleration,
loss, creation or imposition, hereafter a "Violation"), pursuant to, (i) any
provision of the Articles of Incorporation or By-laws or analogous instruments
of governance or formation of the Company or any of its Subsidiaries presently
in effect, or (ii) any loan or credit agreement, note, mortgage, indenture,
lease, Company Benefit Plan (as defined in Section 3.1(j)(i)) or other
agreement, obligation, instrument, permit, concession, franchise, license,
judgment, writ, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any of its Subsidiaries, or their respective
properties or assets, except in the case of this clause (ii), for any such
Violation which insofar as reasonably can be foreseen would not have a Material
Adverse Effect.
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No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency, commission or
other public or governmental authority (a "Governmental Entity") is required by
or with respect to the Company or any of its Subsidiaries in connection with the
execution and delivery by the Company of this Agreement or the consummation by
the Company of the transactions contemplated hereby, the failure to obtain which
insofar as reasonably can be foreseen would have a Material Adverse Effect,
except for (i) the filing with the Securities and Exchange Commission ("SEC") of
a proxy statement (the "Company Proxy Statement") in definitive form on Schedule
14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
relating to the special meeting (the "Company Stockholders' Meeting") of holders
of the Company Common Stock to be convened as required by the Va Act and in
accordance with the Company's Articles of Incorporation and By-laws to vote upon
the adoption and approval of this Agreement and the Merger and the transactions
contemplated hereby and thereby, the related Transaction Statement of the
Company and CSLC on Schedule 13E-3 (the "Schedule 13E-3"), and such reports and
other transaction statements under the Exchange Act as may be required in
connection with this Agreement, the Merger and the transactions contemplated
hereby and thereby, (ii) the filing of the Articles of Merger, the Certificate
of Merger and such other appropriate documents with the Virginia Secretary and
the Delaware Secretary, as applicable, and relevant authorities of other
jurisdictions in which the Company or any of its Subsidiaries is qualified to do
business, (iii) all applicable filings, if any, with, and submissions of
information to, the United States Federal Trade Commission ("FTC") and the
United States Department of Justice, Antitrust Division ("DOJ"), pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and (iv) such other filings, authorizations, orders and approvals as may
be required and which heretofore have been made or obtained.
The Board of Directors of the Company (the "Company Board") has
unanimously approved this Agreement, the Merger and all of the transactions
contemplated hereby and thereby and has resolved unanimously to recommend that
holders of the Company Common Stock approve and adopt this Agreement and the
Merger; provided that the Company Board may withdraw, modify or change such
recommendation (including in a manner adverse to CSLC) under the circumstances
set forth in the second sentence of Section 4.1(e)(ii).
(d) SEC Documents. The Company has made available to CSLC a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the SEC since September 1,
1997 (as such documents have been amended to date, the "Company SEC Documents")
which constitute all the documents (other than preliminary material) that the
Company was required to file with the SEC since such date. As of their
respective dates, the Company SEC Documents complied in all material respects
with the requirements of the Securities Act of 1933, as
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amended (the "Securities Act"), the Exchange Act and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), as the case may be, and the rules
and regulations of the SEC thereunder applicable thereto (other than with
respect to the timely filing thereof), and none of the Company SEC Documents
contained, at the time they were filed, any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of the Company
included in the Company SEC Documents comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto or,
in the case of unaudited or interim statements, as permitted by the SEC's
Quarterly Report on Form 10-Q) and fairly present (subject, in the case of the
unaudited or interim statements, to normal and recurring audit adjustments) the
consolidated financial position of the Company and its Subsidiaries at the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended. Since November 30, 1998, neither the Company nor any of its
Subsidiaries has incurred any liabilities, except for (i) liabilities or
obligations incurred in the ordinary course of business consistent with past
practice, including the Company's obligations under the "Fleet Agreement" (as
hereinafter defined), (ii) liabilities incurred in connection with or as a
result of this Agreement and the Merger and the transactions contemplated
thereby, and (iii) such other liabilities and obligations which, individually or
in the aggregate, are de minimis.
(e) Information Supplied. None of the information supplied or to
be supplied by the Company expressly for inclusion or (to the extent permitted
by applicable rules of the SEC) incorporated by reference in the Company Proxy
Statement and/or the Schedule 13E-3 shall, on the date the same is filed with
the SEC in definitive form, on each date on which the Company Proxy Statement is
mailed to holders of the Company Common Stock, and on the date of the Company
Stockholders' Meeting, as applicable, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading. The Company Proxy Statement shall, on each
date mailed to holders of Company Common Stock in connection with the Company
Stockholders' Meeting and at all times thereafter to the Closing Date, comply in
all material respects with the provisions of Regulation 14A under the Exchange
Act.
(f) Compliance with Applicable Laws. The Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders,
authorizations and approvals of all Governmental Entities which are material to
the operation of their respective businesses (the "Company Permits"). The
Company and its Subsidiaries are in
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compliance with the terms of the Company Permits, except where the failure so to
comply insofar as reasonably can be foreseen would not have a Material Adverse
Effect. Except as disclosed in the Company SEC Documents, the respective
businesses of the Company and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity, except
for violations which do not, and insofar as reasonably can be foreseen would
not, have a Material Adverse Effect. As of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending or, to the knowledge of the Company,
threatened, nor has any Governmental Entity indicated an intention to conduct
the same other than those the outcome of which, insofar as reasonably can be
foreseen, would not have a Material Adverse Effect.
(g) Litigation. Except as disclosed in the Company SEC Documents,
there is no suit, action or proceeding pending or, to the knowledge of the
Company, threatened, against or affecting the Company or any of its Subsidiaries
which, if determined adversely to the Company or any of its Subsidiaries, would
insofar as reasonably can be foreseen, have a Material Adverse Effect, nor is
there any judgment, decree, writ, injunction, rule or order of any Governmental
Entity or arbitrator outstanding against the Company or any of its Subsidiaries
of the Company having, or which insofar as reasonably can be foreseen would
have, a Material Adverse Effect.
(h) Taxes. (i) The Company and each of its Subsidiaries has filed
all material tax returns required to be filed by any of them and has paid (or
the Company has paid on its behalf) all taxes required to be paid as shown on
such returns, and all such tax returns are complete and accurate in all material
respects. The most recent financial statements contained in the Company SEC
Documents reflect an adequate reserve for all taxes payable by the Company and
its Subsidiaries accrued through the date of such financial statements. Since
November 30, 1998, and September 25, 1998 neither the Company nor any of its
Subsidiaries have incurred any liability for taxes under Sections 857(b), 860(c)
or 4981 of the Internal Revenue Code of 1986, as amended (the "Code"), and
neither the Company nor any of its Subsidiaries has incurred any liability for
taxes other than in the ordinary course of business. No event has occurred and
no condition exists which presents a material risk that any material tax
liability described in the preceding sentence will be imposed upon the Company
and its Subsidiaries. No material deficiencies for any taxes have been proposed,
asserted or assessed by any Governmental Entity against the Company or any of
its Subsidiaries. No requests for waivers of the time to assess taxes are
pending and no tax returns of the Company or any of its Subsidiaries has been or
are currently being audited by any applicable taxing authority. There are no tax
liens on any asset of the Company or its Subsidiaries other than liens for
current taxes not past due and payable.
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For purposes of this Agreement, the term "tax" (including, with
correlative meaning, the terms "taxes" and "taxable") includes all Federal,
state, local and foreign income, profits, franchise, gross receipts, payroll,
sales, windfall profits, ad valorem, stamp, severance, occupation, premium,
customs duties, commercial rent, capital stock, paid-up capital, value added,
unemployment, disability, alternative or add-on minimum, single business, social
security, registration, estimated, environmental, employment, use, real or
personal property, withholding, excise and other taxes, imposts, duties or
assessments of any nature whatsoever, together with all interest, penalties,
charges and additions to tax imposed with respect to such amounts.
(ii) The Company (A) for all taxable years commencing with the
tax year which began January 1, 1996 through its most recent taxable year end
has been subject to taxation as a real estate investment trust (a "REIT") within
the meaning of Section 856 of the Code, has not been subject to Section 269B(a)
of the Code, and has satisfied all requirements to qualify as a REIT for such
periods, (B) has operated since its most recent tax year end in such a manner so
as to qualify as a REIT for the taxable year ending through the Closing Date,
and (C) has not taken (or omitted to take) any action which reasonably would be
expected to (1) result in any rents paid by the tenants of the "Senior Housing
Facilities" (as such term is defined in the Company SEC Documents) to be
excluded from the definition of "rents from real property" under Section
856(d)(2) of the Code or (2) otherwise result in a challenge to its status as a
REIT, and no such challenge is pending or, to the Company's knowledge,
threatened, by or before any Governmental Entity.
(iii) ILM Holding (A) for all taxable years commencing with
the tax year which commenced on January 1, 1996 through its most recent taxable
year end has been subject to taxation as a REIT within the meaning of Section
856 of the Code, has not been subject to Section 269B(a) of the Code, and has
satisfied all requirements to qualify as a REIT for such periods, (B) has
operated since its most recent taxable year end in such manner so as to qualify
as a REIT for the taxable year ending through the Closing Date, and (C) has not
taken (or omitted to take) any action which reasonably would be expected to (1)
result in any rents paid by the tenants of the Senior Housing Facilities to be
excluded from the definition of rents from real property under Section 856(d)(2)
of the Code or (2) otherwise result in a challenge by any taxing authority to
its status as a REIT, and no such challenge is pending or, to the Company's or
ILM Holding's knowledge, threatened, by or before any Governmental Entity.
(iv) Each of the Company and ILM Holding is a
"domestically-controlled REIT" (as defined in Section 897(4) of the Code).
(i) Certain Agreements. Neither the Company nor any of its
Subsidiaries is a party to any oral or written (i) consulting agreement not
terminable on 60 days' or less notice involving the payment of more than $25,000
per annum, (other than
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that certain consulting agreement between the Company, ILM II Senior Living,
Inc., ILM I Lease Corporation, ILM II Lease Corporation and David Carlson, dated
October 16, 1997, as amended on August 6, 1998 and September 25, 1998, which is
renewable annually by the parties thereto and upon failure to renew or
termination, provides for a $100,000 payment to Mr. Carlson) or any union, guild
or collective bargaining agreement, (ii) agreement with any executive officer or
key employee of the Company or any Subsidiary of the Company the benefits of
which are contingent or the terms of which would be materially altered upon the
occurrence of a transaction involving the Company of the nature contemplated by
this Agreement, or agreement with respect to any executive officer of the
Company providing any term of employment or compensation guarantee or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
would be increased or the vesting of the benefits of which would be accelerated
upon consummation of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which would be calculated by reference to
any of the transactions contemplated by this Agreement.
(j) Benefit Plans. (i) Neither the Company nor any other member of
a "Company Controlled Group" (as hereafter defined) maintains, contributes to or
participates in, or has any obligation to maintain, contribute to or participate
in, any employee benefit plan (within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
retirement or deferred compensation plan, incentive compensation plan,
consulting agreement, unemployment compensation plan, vacation pay plan,
severance plan, retiree medical plan, bonus plan, stock compensation plan or any
other type of employee-related arrangement, program, policy, plan or agreement
(all of such plans being hereinafter referred to as "Company Benefit Plans").
For purposes of this Section 3.1(j), the term "Company Controlled Group" means
the Company and each other corporation or other entity which has at any other
time been under common control with the Company pursuant to Sections 414(b),
(c), (m) or (o) of the Code.
(ii) With respect to each Company Benefit Plan, (A) there has
been no material violation of any applicable provision of ERISA which could
result in a material liability being imposed upon the Company; (B) each Company
Benefit Plan intended to qualify under Section 401(a) of the Code has received
(or prior to the Effective Time shall have received) a favorable determination
letter with respect to such qualification and, to the knowledge of the Company,
nothing has occurred (or prior to the Effective Time shall occur) which could
reasonably be expected to jeopardize such favorable determination; (C) neither
the Company nor any other member of the Company Controlled Group is subject to
any material outstanding liability or obligation relating to any such Company
Benefit Plan (other than the obligation to make contributions to, or pay
benefits with respect to, any such Company Benefit Plan, such contributions
and/or
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benefits being made or paid no later than the date(s) required by law or the
terms of such Company Benefit Plan); and (D) to the knowledge of the Company
there are no actual or pending claims or actions (other than claims for benefits
in the ordinary course) relating to any such Company Benefit Plan.
(iii) There are no unfunded and accrued benefit obligations
for which contributions have not been properly accrued to the extent required by
GAAP, on the consolidated financial statements of the Company and its
Subsidiaries, which obligations reasonably are likely to have a Material Adverse
Effect.
(k) Title to and Sufficiency of Assets. The Company directly, or
indirectly through a wholly-owned Subsidiary, owns, and as of the Effective Time
the Company shall own, valid title to all of its assets constituting the Senior
Housing Facilities and personal property which is material to the businesses of
the Company and its Subsidiaries taken as a whole, free and clear of any and all
Liens, except as set forth in the Company SEC Documents. Such assets include all
tangible and intangible real or personal property, contracts and rights
necessary or required for the operation of the business of the Company and its
Subsidiaries.
(l) Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Documents, since November 30, 1998, the Company and its
Subsidiaries have conducted their respective businesses in the ordinary course
and, there has not been (i) any damage, destruction or loss, whether covered by
insurance or not, which has, or insofar as reasonably can be foreseen would
have, a Material Adverse Effect; (ii) any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's or its Subsidiaries' capital stock, except for
cash dividends in respect of the Company's or its Subsidiaries' taxable income,
the declaration and payment of which is necessary to preserve the Company's or
its Subsidiaries' REIT status; (iii) any change in the Company's significant
accounting policies; or (iv) any transaction, commitment, dispute or other event
or condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) having, or which insofar as reasonably can be
foreseen would have, a Material Adverse Effect.
(m) Opinion of Financial Advisor. The Company has received the
written opinion of Cohen & Steers Capital Advisors LLC dated April 17, 2000, a
true and complete copy of which has been delivered (but not addressed) to CSLC,
to the effect that as of the date of such opinion the Merger Consideration to be
paid by CSLC in the Merger is fair to the holders of Company Common Stock, from
a financial point of view.
(n) Virginia Anti-takeover Statutes Not Applicable. The Company
has taken or caused to have been taken (or prior to the Effective Time shall
have taken or cause to have been taken) and has done or caused to have been done
(or prior to the
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Effective Time shall do or cause to have been done) all things necessary to make
inapplicable to this Agreement, the Merger and the transactions contemplated
hereby and thereby, all "change-in-control," "fair price," "interested
stockholder," "business combination," "control share acquisition," "merger
moratorium," "voting sterilization" and all other anti-takeover and stockholder
protection laws enacted under the Va Act or any other internal laws of the
Commonwealth of Virginia (collectively, "State Takeover Laws").
(o) Vote Required. The affirmative vote of the holders of not less
than 66-2/3% of the outstanding shares of the Company Common Stock is the only
vote of the holders of any class or series of capital stock of the Company
necessary to approve this Agreement, the Merger and the transactions
contemplated hereby and thereby.
(p) Environmental Matters. The operations of the Company and its
Subsidiaries are in compliance with all applicable "Environmental Laws" (as
defined herein) and all of the Company Permits issued pursuant to Environmental
Laws, except where the failure so to comply insofar as reasonably can be
foreseen would not have a Material Adverse Effect. The Company and its
Subsidiaries have obtained all of the Company Permits under all applicable
Environmental Laws necessary to operate their businesses. Neither the Company
nor any of its Subsidiaries have received any written notification from any
Governmental Entity asserting that the Company or any of its Subsidiaries is in
violation of any the Company Permits issued pursuant to any Environmental Law.
There are no investigations of the business, operations or Senior Housing
Facilities, pending or, to the Company's or any of its Subsidiaries' knowledge,
threatened, by any Governmental Entity which violation, insofar as reasonably
can be foreseen, would result in the imposition of material liability on the
Company or any of its Subsidiaries (or any successor-in-interest thereto)
pursuant to any Environmental Law. There is not located at any of the Senior
Housing Facilities any underground storage tanks ("USTs") or asbestos -
containing or polychlorinated biphenyls ("PCBs").
For purposes of this Agreement, "Environmental Law" means any
foreign, Federal, state or local statute, regulation, ordinance or rule of
common-law as now or hereafter in effect in any way relating to the protection
of human health and safety or the environment, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C. ss. 9601 et. seq.), the Hazardous Materials Transportation Act (49 U.S.C.
ss. 1801 et. seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss.
6901 et. seq.), the Clean Water Act (33 U.S.C. ss.1251 et. seq.), the Clean Air
Act (42 U.S.C. ss. 7401 et. seq.), the Toxic Substances Control Act (15 U.S.C.
ss.2601 et. seq.), the Federal Insecticide, Fungicide and Rodenticide Act (17
U.S.C. ss. 136 et. seq.), and the Occupational Safety and Health Act (29 U.S.C.
ss. 651 et. seq.), and the rules and regulations promulgated thereunder.
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(q) Insurance. The properties, buildings, fixtures, equipment and
machinery of the Company and its Subsidiaries are adequately insured by
financially sound and reputable insurers in adequate amounts and against such
risks and contingencies as are insured against by persons customarily owning,
operating and leasing properties, buildings, fixtures, equipment and machinery
in substantially the same manner and in the same locations as the Company and
its Subsidiaries. All insurance policies of the Company and its Subsidiaries
relative to the foregoing are in full force and effect and, to the Company's
knowledge, neither the Company nor any of its Subsidiaries is in default of any
provision thereof, except for such defaults which insofar as reasonably can be
foreseen would not have a Material Adverse Effect.
(r) FCPA. Neither the Company or any of its Subsidiaries nor, to
the Company's knowledge, any of its or any of its Subsidiaries' directors or
officers, has (i) used any Company or such Subsidiary funds for any unlawful
contribution, endorsement, gift, entertainment or other unlawful expense
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from any
Company or such Subsidiary funds; (iii) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended ("FCPA"); or (iv) made any bribe,
rebate, payoff, influence payment, "kickback" or other unlawful payment to any
person or entity with respect to any Company or any of its Subsidiaries'
matters.
(s) Company Affiliate Transactions. Except as disclosed in the
Company SEC Documents, from September 1, 1997 to the date hereof, there have
been no transactions, agreements or understandings between the Company or any of
its Subsidiaries on the one hand, and the Company's or any of its Subsidiaries'
affiliates, officers or directors on the other hand, that would be required to
be disclosed pursuant to Item 404 of Regulation S-K under the Securities Act.
(t) Company Internal Controls. The Company maintains accurate
books and records reflecting its assets and maintains proper and adequate
internal accounting controls which provide assurance that (i) transactions are
executed with management's authorization; (ii) transactions are recorded as
necessary to permit preparation of the consolidated financial statements of the
Company and to maintain accountability for the assets of the Company; (iii)
access to the assets of the Company is generally permitted only in accordance
with management's authorization; (iv) the reported accountability of the assets
of the Company is compared with existing assets at regular intervals; and (v)
accounts, notes and other receivables and inventory are recorded accurately, and
proper and adequate procedures are implemented to effect the collection of such
receivables on a current and timely basis. The books of account, stock records,
minute books and other records of the Company and its Subsidiaries are complete
and correct in all material respects.
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(u) Investment Company Act. The Company is not (and immediately
after consummation of the Merger and the other transactions contemplated by this
Agreement shall not be) an investment company within the meaning of, or a
company controlled by an investment company within the meaning of, or otherwise
subject to any provisions of, the Investment Company Act of 1940, as amended
(the "Investment Company Act") and the rules and regulations of the SEC
thereunder.
(v) Articles of Incorporation and Bylaws. The Company heretofore
has furnished to CSLC complete and correct copies of the Articles of
Incorporation and the Bylaws (or equivalent organizational documents), in each
case as amended or restated to the date hereof, of the Company and each of its
Subsidiaries. Neither the Company nor any of its Subsidiaries is in violation of
any provisions of its Articles of Incorporation or Bylaws (or equivalent
organizational documents).
(w) Disclosure. No representation or warranty made by the Company
in this Agreement and no statement of the Company contained in the Schedules
hereto or in any certificate delivered by the Company pursuant to this
Agreement, contains any untrue statement of a material fact or omits any
material fact necessary to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading; it being hereby
agreed and understood that for purposes of this Section 3.1(w) the term
"material" shall be measured by reference to the Company and its Subsidiaries,
considered as an entirety.
SECTION 3.2 Representations and Warranties of CSLC and Sub. CSLC and Sub
jointly and severally hereby represent and warrant to the Company as follows:
(a) Organization; Standing and Power. Each of CSLC, Sub, and
CSLC's other Subsidiaries is a corporation, limited partnership, limited
liability company or trust, as the case may be, duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
incorporation or organization and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted, and is duly qualified and in good standing to transact business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary, except where the
failure to be in good standing or so to qualify would not have a material
adverse effect on the properties, assets, financial condition or operations of
CSLC and its Subsidiaries, taken as a whole (a "CSLC Material Adverse Effect").
(b) Authority. CSLC and Sub have all requisite corporate and
limited liability company authority, as applicable, to enter into this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by CSLC and Sub have been duly authorized by all
necessary corporate and limited liability company action, as applicable, on the
part of CSLC and Sub, and the
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consummation by CSLC and Sub of the transactions contemplated hereby and thereby
has been duly authorized by all necessary corporate, and limited liability
company action, as applicable, on the part of CSLC and Sub. This Agreement has
been duly executed and delivered by CSLC and Sub, as applicable, and, this
Agreement constitutes the valid and binding obligations of CSLC and Sub, as
applicable, enforceable against them in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally.
The execution and delivery of this Agreement does not result in any Violation
pursuant to (i) any provision of the Certificate of Incorporation, Certificate
of Formation, Operating Agreement, By-laws or analogous instruments of formation
or governance of CSLC, Sub, or any of CSLC's Subsidiaries presently in effect
or, (ii) any loan or credit agreement, note, mortgage, indenture, lease,
employee benefit plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, writ, order, decree, statute, law,
ordinance, rule or regulation applicable to CSLC or any of its Subsidiaries or
their respective properties or assets, except in the case of this clause (ii),
for any such Violation which insofar as reasonably can be foreseen would not
have a CSLC Material Adverse Effect. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity, is required by, or with respect to CSLC or any of its Subsidiaries in
connection with the execution and delivery of this Agreement, or the
consummation by CSLC or Sub of the transactions contemplated hereby and thereby,
the failure to obtain which insofar as reasonably can be foreseen would have a
CSLC Material Adverse Effect, except for (i) the filing with the SEC of the
Schedule 13E-3 and such other reports and transaction statements under the
Exchange Act as may be required in connection with this Agreement, the Merger
and the transactions contemplated hereby and thereby, (ii) the filing of the
Articles of Merger, the Certificate of Merger and such other appropriate
documents with the Virginia Secretary and the Delaware Secretary, as applicable,
and other relevant authorities of jurisdictions in which CSLC is qualified to do
business, (iii) all applicable filings with, and submissions of information to,
the FTC and DOJ pursuant to the HSR Act, and (iv) such other filings,
authorizations, orders and approvals as may be required and which heretofore
have been made or obtained.
(c) Information Supplied. None of the information supplied or to
be supplied by CSLC or Sub for inclusion or (to the extent permitted by
applicable rules of the SEC) incorporated by reference in the Company Proxy
Statement and/or the Schedule 13E-3 shall, on the date the same is filed with
the SEC in definitive form, on each date on which the Company Proxy Statement is
mailed to holders of the Company Common Stock, and on the date of the Company
Stockholders' Meeting, as applicable, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, not misleading contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein
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or necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading.
(d) Compliance with Applicable Laws. The businesses of CSLC and
its Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any Governmental Entity which violation, insofar as reasonably can
be foreseen, would prevent or materially impair the consummation by CSLC of the
Merger and the transactions contemplated thereby and hereby. As of the date of
this Agreement, no investigation or review by any Governmental Entity with
respect to CSLC or any of its Subsidiaries is pending or, to the knowledge of
CSLC, threatened, nor has any Governmental Entity indicated an intention to
conduct the same which investigation or review, insofar as reasonably can be
foreseen, would prevent or materially impair the consummation by CSLC of the
Merger and the transactions contemplated thereby and hereby.
(e) Capital Structure. All of the limited liability member
interests of Sub have been duly authorized and are validly issued, fully paid
and nonassessable and owned by CSLC.
(f) Litigation. There is no suit, action or proceeding pending or,
to the knowledge of CSLC, threatened against or affecting CSLC or any of its
Subsidiaries, which, if determined adversely to CSLC or any of the Subsidiaries
and insofar as reasonably can be foreseen, would prevent or materially impair
the consummation by CSLC of the Merger and the transactions contemplated thereby
and hereby; nor is there any judgment, decree, writ, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against CSLC or any of its
Subsidiaries which judgment, decree, writ, injunction, rule or order, insofar as
reasonably can be foreseen, would prevent or materially impair the consummation
by CSLC of the Merger and the transactions contemplated thereby and hereby.
(g) Ownership and Interim Operations of Sub. The Sub was formed
solely for the purpose of engaging in the transactions contemplated hereby and
has engaged in no other business activities and has conducted its operations
only as contemplated by this Agreement. The Sub is, and at the Effective Time
will be directly and wholly owned by CSLC. Sub does not own, and at all times
from and after the date hereof and prior to the Effective Time will continue not
to own, any asset other than an amount of cash necessary for its due
incorporation and good standing and to pay the fees and expenses of the Merger
attributable to it if the Merger is consummated.
(h) Organizational Instruments. CSLC heretofore has furnished to
the Company complete and correct copies of the respective organizational and
constituent instruments and documents of CSLC, Sub, and each other Subsidiary of
CSLC, in each case as amended or restated to the date hereof. None of CSLC, Sub,
or any other
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Subsidiary of CSLC is in violation of any provisions of its respective
organizational and constituent instruments and documents.
(i) Disclosure. No representation or warranty made by any of CSLC
or Sub in this Agreement and no statement of any of CSLC or Sub contained in any
certificate delivered by any of CSLC or Sub pursuant to this Agreement, contains
any untrue statement of a material fact or omits any material fact necessary to
make the statements herein or therein, in light of the circumstances under which
they were made, not misleading; it being hereby agreed and understood that for
purposes of this Section 3.2(i), the term "material" shall be measured by
reference to CSLC and its Subsidiaries, considered as an entirety.
(j) "Receipt of Financing Commitment". CSLC has paid for and
obtained, and heretofore has provided the Company with true and complete
executed copies of, that certain commitment letter of GMAC Commercial Mortgage
Corporation ("GMAC") dated April 14, 2000 and addressed to CSLC, pursuant to
which GMAC has committed, upon the terms and subject to the conditions specified
therein, to provide to CSLC an aggregate sum in cash which, together with funds
segregated by CSLC, will be sufficient in amount to pay, in full at the
Effective Time, but not late than July 31, 2000, to the holders of Company
Common Stock, the Exchange Funds (the "Financing Commitment").
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Covenants of the Company CSLC and Sub. During the period from
the date of this Agreement and continuing until the Effective Time, to the
extent expressly indicated herein, the Company, CSLC and Sub, as applicable,
each agrees as to itself and its respective Subsidiaries that (except as
otherwise expressly contemplated or permitted by this Agreement, or to the
extent that the other party shall consent in writing):
(a) Ordinary Course. Each of the Company and its Subsidiaries
shall conduct its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted. Each of the Company, and
its Subsidiaries shall use its reasonable best efforts to preserve intact its
present business organizations, keep available the services of its present
officers and employees and preserve satisfactory relationships with customers,
suppliers and others having business dealings with it to the end that its
goodwill and on-going businesses shall not be impaired in any material respect
at the Effective Time; provided, however, that without limiting the generality
of the foregoing, the Company and its Subsidiaries shall conduct their business
substantially in accordance
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with the operating budgets heretofore approved and presently in effect for the
Senior Housing Facilities and the capital budgets as approved by the Company
Board.
(b) Dividends; Changes in Stock. The Company shall not, nor shall
the Company permit any of its Subsidiaries to, nor shall the Company or any of
its Subsidiaries propose to, (i) declare or pay any dividends (whether of cash,
stock or other property) on or make any other distributions in respect of its
capital stock, (ii) split, combine or reclassify, or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for, any shares of its capital stock, or (iii) redeem, repurchase
or otherwise acquire for value, or permit any of its Subsidiaries to redeem,
repurchase or otherwise acquire for value, any shares of its capital stock,
except in the case of clause (i) above, ordinary cash dividends declared and
paid in respect of the Company Common Stock not in excess of 8.5% of the
original issue price per share in any calendar year (subject to the Company's
reasonable best efforts to maintain reserves therefor consistent with past
practices) and as otherwise required to preserve and maintain the Company's
status as a REIT through the Effective Time, and except, in the case of clause
(iii) above, in connection with the redemption of the Holding Preferred Stock as
contemplated by this Agreement.
(c) Issuance of Securities. The Company shall not, nor shall the
Company permit any of its Subsidiaries to, issue, deliver or sell, or authorize
or propose the issuance, delivery or sale of, any shares of any class or series
of its capital stock, any voting debt securities or any securities convertible
into, or exchangeable or exercisable for, any such shares of capital stock or
voting debt securities.
(d) Governing Documents. Neither the Company, CSLC, Sub, nor any
of the Company's Subsidiaries, shall amend or restate (or propose to amend or
restate) its Articles of Incorporation, limited liability company operating
agreement, partnership agreement, By-laws or any analogous organizational or
constituent instruments, except to the extent necessary to facilitate
consummation of the Merger.
(e) No Solicitation. (i) Until the termination of this Agreement
in accordance with Article VII hereof, the Company and its Subsidiaries shall
not, directly or indirectly, and the Company shall use its best efforts to
ensure that the respective officers, directors and employees of the Company and
its Subsidiaries, and its best efforts to ensure that any investment banker,
financial advisor, attorney, accountant, broker or other representative or agent
retained by or authorized to act on behalf of it or any of its Subsidiaries
shall not, directly or indirectly (A) solicit, initiate, facilitate or encourage
(including by way of furnishing information or assistance) the submission or
receipt of any "Acquisition Proposal" (as defined below) or (B) participate or
engage in negotiations or discussions, disclose any material non-public
information relating to the Company or any of its Subsidiaries, or afford access
to the properties, books or records of the Company or any of its Subsidiaries,
in connection with any Acquisition Proposal (or
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propose or agree to do any of the foregoing); provided that if the Company Board
determines, based upon the advice of outside legal counsel, that the failure to
engage in such negotiations or discussions, furnish or disclose such information
or afford such access would be inconsistent with the fiduciary duties of the
Company Board under applicable law, then the Company, in response to an
Acquisition Proposal, may furnish and disclose such material non-public
information and afford such access with respect to the Company and its
Subsidiaries and may fully participate in discussions and negotiations regarding
such Acquisition Proposal and conduct all such due diligence and do all acts and
things and incur all such expenses necessary to become deliberately and fully
informed as to the nature, material terms and likelihood of consummation of the
Acquisition Proposal; provided, further, however, that, in connection therewith,
the Company and the potential acquiring party shall enter into a customary
confidentiality and "standstill" agreement of not less than two years' duration
and such agreement otherwise shall be no less restrictive in tenor or scope than
that certain Letter Agreement dated March 9, 1998, among the Company, CSLC and
the other parties signatory thereto (the "CSLC Letter Agreement").
For purposes of this Section 4.1(e), "Acquisition Proposal" means
any inquiry, expression of interest, letter of intent, memorandum of
understanding, term sheet, offer or proposal from any person or entity
(including any "group" within the meaning of Rule 13d-5 under the Exchange Act)
relating to any direct or indirect acquisition, lease, sale or other similar
transaction (whether in a single transaction or series of related transactions)
of 20% or more of the consolidated assets of the Company or 20% or more of any
class or series of equity securities of the Company or any of its Subsidiaries,
any tender offer or exchange offer which, if consummated, would result in any
person or entity (including any "group" referred to above) beneficially owning
20% or more of any class or series of equity securities of the Company or any of
its Subsidiaries, and any merger, consolidation, business combination, sale or
other transfer of assets substantially as an entirety, recapitalization,
exchange, liquidation, dissolution, divestiture, reorganization or other
extraordinary corporate transaction involving the Company or any of its
Subsidiaries, other than the transactions contemplated by this Agreement and the
Merger.
Anything to the contrary in this Section 4.1(e) notwithstanding,
nothing contained in this Section 4.1(e) shall prohibit the Company or the
Company Board from taking and disclosing to the holders of Company Common Stock
pursuant to Rules 14d-9 and 14e-2(a) and Regulations 14A and 14C under the
Exchange Act, a position with respect to a tender or exchange offer or
solicitation of proxies conducted by a third party or from making such
disclosure to holders of the Company Common Stock, or otherwise, as may be
required by applicable law (including, without limitation, requirements of the
Exchange Act and the regulations promulgated thereunder, the regulations of any
national securities exchange registered pursuant to Section 6 of the Exchange
Act or U.S. inter-
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dealer quotation system of a registered national securities association, or
Sections 13.1-770 through and including 13.1-775 of the Va Act); provided that
neither the Company nor the Company Board (or any special or other committee
thereof) shall, except as set forth in Sections 4.1(e)(ii) or 5.3, withdraw,
modify or change (or propose to withdraw, modify or change) its recommendation
of approval of this Agreement and the Merger or approve or recommend (or propose
to approve or recommend) an Acquisition Proposal.
(ii) Except as provided in the next sentence of this Section
4.1(e)(ii) and in Section 5.3, neither the Company nor the Company Board (or any
special or other committee thereof) shall (A) withdraw, modify or change (or
propose to withdraw, modify or change) in a manner adverse to CSLC, the
recommendation by the Company Board (or any such committee) of the approval of
this Agreement and the Merger, (B) approve or recommend (or propose to approve
or recommend) an Acquisition Proposal, or (C) cause the Company to enter into a
definitive agreement with respect to an Acquisition Proposal. Notwithstanding
the immediately preceding sentence, if the Company Board determines, based upon
the advice of outside legal counsel, that the failure to take any of the actions
contemplated by the immediately preceding sentence would be inconsistent with
the fiduciary duties of the Company Board under applicable law, then the Company
Board may withdraw, modify or change its recommendation of approval of this
Agreement and the Merger, affirmatively approve or recommend a "Superior
Proposal" (as defined below), or cause the Company to enter into an agreement
with respect to a Superior Proposal; provided, that, in the case of approving,
recommending or causing the Company to enter into an agreement with respect to a
Superior Proposal, such approval, recommendation or execution and delivery shall
occur not earlier than the seventh day next following CSLC's receipt of written
notice (by facsimile) advising CSLC that the Company Board has received a
Superior Proposal, specifying the material terms and conditions thereof
(including, without limitation, the price, structure, tax and accounting
treatment, financing requirements (if any), requisite regulatory consents and
approvals (if any) and the anticipated timing of receipt of such approvals and,
if then known, the approximate anticipated date of consummation thereof) and
identifying the person(s) making such Superior Proposal.
For purposes of this Agreement, a "Superior Proposal" means
any written Acquisition Proposal to acquire, directly or indirectly (whether in
a single transaction or series of related transactions), for consideration
consisting of cash, securities and/or other property, 50% or more of the Company
Common Stock then outstanding or 50% or more of the consolidated assets of the
Company, upon terms and subject to conditions which the Company Board determines
in its good faith judgment (based upon the advice of an investment banking firm
of nationally recognized reputation) to be more favorable from a financial point
of view to the holders of the Company Common Stock than the Merger, and in
respect of which external financing, if required to be obtained by the acquiring
person or entity, either then is fully committed
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(pursuant to a customary commitment letter) or, in the good faith judgment of
the Company Board (based upon the advice of said investment banking firm),
obtainable by the acquiring person or entity based upon the creditworthiness of
such person or entity.
(iii) In addition to the obligations of the Company set forth
in Sections 4.1(e)(i) and (ii), the Company shall notify CSLC in writing (by
facsimile) within three days of the Company's receipt of any request for
information or of the receipt of any Acquisition Proposal, or any communication
with respect to (or which reasonably would be expected to result in) an
Acquisition Proposal, and the material terms and conditions of such request,
Acquisition Proposal or communication (to the same extent set forth
parenthetically in the proviso to the second sentence of Section 4.1(e)(ii)).
The Company shall inform CSLC of the status and details of (including amendments
or proposed amendments to) any such request, Acquisition Proposal or
communication. In addition, the Company promptly shall provide to CSLC any due
diligence information in respect of the Company furnished to the party making
the Acquisition Proposal.
(iv) In the event that the Company releases any third party
from its obligations under any standstill agreement or arrangement relating to
an Acquisition Proposal or otherwise under any confidentiality or other similar
agreement relating to information material to the Company or any of its
Subsidiaries, the Company shall simultaneously release CSLC from its obligations
and restrictions under the CSLC Letter Agreement.
(f) No Acquisitions. The Company shall not, nor shall it permit
any of its Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business or
corporation, partnership, limited liability entity, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets, in each case, which are material, individually or in the
aggregate, to the Company and its Subsidiaries taken as a whole.
(g) No Dispositions. The Company shall not, nor shall the Company
permit any of its Subsidiaries to sell, lease, encumber or otherwise dispose of
or agree to sell, lease, encumber or otherwise dispose of, any of its assets,
which are material to the Company and its Subsidiaries taken as a whole.
(h) Indebtedness. Other than the indebtedness and the transactions
contemplated by that certain Term Loan Agreement dated September 29, 1998,
between the Company, ILM Holding, ILM I Lease Corporation ("ILM I Lease Co") and
Fleet National Bank (the "Fleet Agreement"), a true and complete copy of which
agreement has been made available to CSLC for inspection, the Company shall not,
nor shall the
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Company permit any of its Subsidiaries to, incur, assume or guarantee any
indebtedness for borrowed money.
(i) Other Actions. Neither the Company, CSLC, or Sub shall, nor
shall the Company, CSLC, or Sub permit any of its Subsidiaries to, take any
action that would or reasonably would be likely to result in any of its
representations and warranties set forth in this Agreement being untrue as of
the date made (to the extent so limited) or any of the conditions to the Merger
set forth in Article VI hereof not being satisfied.
(j) Advice of Changes; SEC Filings. Each of the Company and CSLC
shall confer on a regular basis with the other, report on operational matters
and promptly advise the other orally and in writing of any change or event
having, or which insofar as reasonably can be foreseen would have, a Material
Adverse Effect or a CSLC Material Adverse Effect. Each of the Company and CSLC
promptly shall provide the other with true and complete copies of all filings
made by it with any Governmental Entity in connection with this Agreement, the
Merger and the transactions contemplated hereby and thereby.
(k) Certain Other Actions.
(i) The Company shall, and shall cause each of its
Subsidiaries to, duly and timely file all reports, Federal, state and local tax
returns and other documents required to be filed with Federal, state, local and
other authorities, subject to extensions permitted by applicable law; provided
that, in the case of the Company and ILM Holding, such extensions do not
adversely affect the status of the Company or ILM Holding as a qualified REIT
under the Code.
(ii) The Company shall not and the Company shall cause its
Subsidiaries not to, make or rescind any express or deemed election relative to
taxes (unless, in the case of the Company or ILM Holding, it is required by law
or necessary to preserve the status of the Company or ILM Holding as a REIT for
Federal income tax purposes).
(iii) The Company shall promptly notify CSLC of any action,
suit, proceeding, claim or audit pending against or with respect to such party
or its Subsidiaries in respect of any Federal, state or local taxes where there
is a reasonable probability of a determination or decision by a relevant
authority which would materially increase the tax liabilities of such party, and
the Company shall not change any of the tax elections, accounting methods,
conventions or principles which relate to it or its Subsidiaries that insofar as
reasonably could be foreseen would materially increase such party's liabilities.
(iv) The Company shall, and shall cause ILM Holding to, take
(or refrain from taking, as applicable) such action(s) as are necessary to
maintain the status of
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each of the Company and ILM Holding as a REIT for Federal income tax purposes,
through the Closing Date.
(l) Facilities Lease Agreement. Immediately prior to the Effective
Time, the Company shall cause that certain Facilities Lease Agreement, dated
September 1, 1995 (the "Lease Agreement"), between ILM Holding and ILM Lease Co.
to be terminated without any cost or expense to any of the Company, ILM Holding,
CSLC, Sub or the Surviving Entity. From the date hereof, through and including
the date of termination of the Lease Agreement, the Company shall not, nor shall
it permit any of its Subsidiaries to, amend the Lease Agreement or waive the
performance by ILM Lease Co of any of its duties or obligations under the Lease
Agreement.
(m) Fleet Agreement. From the date hereof through and including
the Effective Time, neither the Company nor any of its Subsidiaries shall draw
down or borrow any monies pursuant to the Fleet Agreement for any purpose other
than the reimbursement of expenses incurred by the Company or its Subsidiaries
in respect of the construction of expansions on the existing Senior Housing
Facilities.
(n) Contribution and Liquidation. All assets and properties owned,
leased and operated by ILM Holding and all receivables due to ILM Holding from
any person or entity, in each case shall be transferred, contributed and
assigned to the Company, and immediately prior to the Merger, ILM Holding shall
be liquidated or merged with and into the Company in a transaction pursuant to
Section 332 of the Code, and as a result of such merger or liquidation, the
separate corporate existence of ILM Holding shall have been terminated and the
Company thereupon shall own all of the assets of ILM Holding.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Preparation of the Company Proxy Statement and the Schedule
13E-3. CSLC and the Company shall cooperate to mutually prepare, file with the
SEC and have reviewed and "cleared" by the SEC, as promptly as reasonably
practicable after the date hereof, the Company Proxy Statement and the Schedule
13E-3 (including all exhibits, annexes and schedules thereto).
SECTION 5.2 Access to Information. Upon reasonable notice, the Company and
CSLC each shall (and shall cause each of its Subsidiaries to) afford to the
officers, employees, accountants, counsel and other agents and representatives
of the other, access, during normal business hours during the period from the
date hereof until the Effective
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Time, to all of its properties, books, contracts, commitments and records
(including, without limitation, using its best efforts to afford access to, the
audit work papers of the independent auditor of each of the Company and CSLC)
and, during such period, the Company and CSLC each shall (and shall cause each
of its Subsidiaries to) furnish promptly to the other (a) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the Securities Act, the Exchange Act and the
Trust Indenture Act and (b) all other information concerning its business,
properties and personnel as such other party reasonably may request. Each of the
Company and CSLC shall waive any accountant/client privilege that may exist, and
take all other necessary action, to ensure the delivery by the independent
auditor of the Company and CSLC of audit work papers to the party requesting
such information. Unless otherwise required by law, the parties shall hold all
such information which is non-public or otherwise proprietary in confidence
until such time as such information otherwise becomes publicly available through
no wrongful act of either party. In the event of termination of this Agreement
for any reason, each party promptly shall return all non-public and proprietary
information obtained from any other party, and any copies made of (and other
extrapolations from or work product or analyses based on) such documents, to
such other party.
SECTION 5.3 Stockholder's Meeting. The Company shall duly notice and
convene as promptly as practicable after the date hereof the Company
Stockholders' Meeting for the purpose of voting upon the adoption of this
Agreement and the Merger (and the transactions contemplated hereby and thereby).
The Company (through the Company Board) shall recommend to the holders of
Company Common Stock the approval and adoption of all such matters; and shall
use its best efforts to solicit and, if necessary, resolicit the vote of the
holders of not less than 66-2/3% of the Company Common Stock in favor of
adoption of this Agreement and the Merger (including, if necessary, adjourning
or postponing, and subsequently reconvening, the Company Stockholders' Meeting
for the purpose of obtaining such votes and engaging proxy solicitation firms
and other "street" professionals); provided, however, that notwithstanding
anything to the contrary contained in this Agreement, the Company Board may
withdraw, modify or change such recommendation (including in a manner adverse to
CSLC) under the circumstances set forth in the second sentence of Section
4.1(e)(ii) without any liability or obligation to CSLC (except as set forth in
Section 5.6(b)).
The Company may, if it withdraws, modifies or changes its
recommendation under the circumstances set forth in the second sentence of
Section 4.1(e)(ii), delay the filings or mailing, as the case may be, of the
Company Proxy Statement or the convening of the Company Stockholders' Meeting,
in each case to the extent necessary to revise the Company Proxy Statement to
reflect such withdrawal,
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modification or change and to provide the minimum notice thereof required under
applicable law or the Company's Articles of Incorporation or By-laws.
SECTION 5.4 Consents and Approvals. Each of the Company and CSLC shall
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger (including
furnishing all information in connection with approvals of or filings with any
Governmental Entity) and shall cooperate with and furnish information to each
other in connection with any such requirements imposed upon it or any of its
Subsidiaries in connection with the Merger. Each of the Company and CSLC shall,
and shall cause its Subsidiaries to, take all reasonable actions necessary to
obtain (and shall cooperate with the other in obtaining) each consent,
authorization, order or approval of, and each exemption by, each Governmental
Entity and other person or entity, required to be obtained or made by the
parties hereto or any of their respective Subsidiaries in connection with this
Agreement and the Merger or the taking of any action contemplated hereby or
thereby.
SECTION 5.5 Intentionally omitted
SECTION 5.6 Expenses; Liquidated Damages. (a) Except as hereinafter
provided in this Section 5.6, all fees and expenses incurred in connection with
the preparation, execution and delivery of this Agreement (including all
instruments and agreements prepared and delivered in connection herewith), the
Merger and the transactions contemplated hereby and thereby shall be paid by the
party incurring such fees or expenses, whether or not the Merger is consummated
or abandoned.
(b) Provided that neither CSLC nor Sub then is in material breach
of any of its representations, warranties or agreements under this Agreement,
the Company shall pay or cause to be paid to CSLC all of "CSLC's Expenses" (as
hereinafter defined) if this Agreement shall be terminated pursuant to Section
7.1(e).
Provided that neither CSLC nor Sub then is in material breach of any
of its representations, warranties or agreements under this Agreement, if this
Agreement shall be terminated pursuant to Sections 7.1(f) or 7.1(g), then the
Company shall pay (or cause to be paid) to CSLC by wire transfer of same day
funds to an account designated in writing by CSLC to the Company a termination
fee in the amount of $2,404,300, together with CSLC's Expenses, which fee and
expenses shall be payable by the Company not later than the third business day
next following the date of termination of this Agreement pursuant to either
Section 7.1(f) or 7.1(g).
In addition, provided that neither CSLC nor Sub then is in material
breach of any of its representations, warranties or agreements under this
Agreement, if this Agreement shall be terminated pursuant to Section 7.1(b)(i)
due to a material breach by the Company of Section 4.1(e) (and not in respect of
any other material breach by the
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Company of any other provision of this Agreement) and prior to the expiration of
the 16-month period next following the date of such termination, a "Third Party
Acquisition" (as hereinafter defined) is consummated, then the Company shall pay
or cause to be paid to CSLC by wire transfer of same day funds to an account
designated in writing by CSLC to the Company, a termination fee in the amount of
$2,404,300, together with CSLC's Expenses which fee and expenses shall be
payable by the Company on the date of consummation of such Third Party
Acquisition (if and only if such Third Party Acquisition shall be consummated
prior to the expiration of the 16-month period next following the date of such
termination).
It is expressly agreed that the amounts to be paid pursuant to this
Section 5.6(b) and Section 5.6(e) constitute liquidated damages negotiated at
arm's-length and do not constitute, and are not intended by the parties to
operate as, a penalty.
(c) Intentionally Omitted.
(d) The Company shall promptly pay or cause to be promptly paid
(not later than 10 days after submission of reasonably itemized invoices or
other reasonable documentary evidence therefor) by wire transfer of same day
funds to CSLC, CSLC's Expenses if this Agreement shall be terminated under any
of the circumstances set forth in this Section 5.6(b).
(e) Subject to the provisions of Sections 7.1(d) and 7.1(e) and
provided that the Company is not then in material breach of any of its
representations, warranties or agreements under this Agreement, the conditions
set forth in Sections 6.1 and 6.2 have been satisfied or (to the extent
waiveable under applicable law) waived, and this Agreement has not been
terminated by CSLC or Sub pursuant to Section 7.1 (i)(i), if the Merger and the
transactions contemplated by this Agreement shall not, for any reason, be
consummated by CSLC and Sub, then CSLC and Sub shall pay (or cause to be paid)
to the Company by wire transfer of same day funds to an account designated in
writing by Company to CSLC, a termination fee in the amount of $1,540,000 not
later than the third business day next following the termination of this
Agreement pursuant to Section 7.1(h).
(f) For purposes of this Section 5.6, (i) "Third Party
Acquisition" means the occurrence of any of the following events: (A) the
acquisition of the Company by means of merger, business combination or otherwise
by any person or entity (including any "group" within the meaning of Rule 13d-5
under the Exchange Act) other than CSLC, Sub, or any Subsidiary or affiliate
thereof ("Third Party"), (B) the transfer, lease, sale or other similar
disposition to or acquisition by a Third Party of 20% or more of the
consolidated assets of the Company, or (C) the transfer to or acquisition by a
Third Party of 20% or more of the outstanding shares of Company Common Stock;
and (ii) "CSLC's Expenses" means fees and out-of-pocket expenses reasonably and
actually incurred and paid by or on behalf of CSLC in connection with this
Agreement, the Merger and the
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consummation of the transactions contemplated hereby or thereby, including all
financing commitment fees and expenses, reasonable fees and expenses of outside
legal counsel, accountants, experts, financial advisors and consultants to CSLC,
in an aggregate amount not to exceed $2,000,000.
SECTION 5.7 Brokers or Finders. Each of CSLC and the Company covenants as
to itself, its Subsidiaries and its affiliates, that no agent, broker,
investment banker, financial advisor or other person or entity is or will be
entitled to receive any broker's or finder's fee or any other commission or
similar fee in connection with any of the transactions contemplated by this
Agreement, except for Schroder & Co. Inc. and Cohen & Steers, Inc., whose fees
and expenses shall be fully paid for by the Company in accordance with the
Company's agreement with such firms (true and complete copies of which have been
delivered by the Company to CSLC), and Lehman Brothers, whose fees and expenses
shall be fully paid for by CSLC in accordance with CSLC's agreement with such
firm (true and complete copies of which have been delivered by CSLC to the
Company). Each of CSLC and the Company hereby agrees to indemnify and hold
harmless the other from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such party or its affiliate.
SECTION 5.8 CSLC Advisory Board . Prior to the Effective Time, CSLC shall
have taken all requisite corporate action (i) to authorize the creation of and
to establish an advisory board (the " CSLC Advisory Board"), the members of
whom, from time to time after the Effective Time, shall be invited to attend,
but not to vote at, meetings of the CSLC Board of Directors (at the pleasure and
discretion of such Board) and (ii) to cause three nominees designated by the
Company (as set forth in that certain Letter Agreement dated February 7, 1999,
as amended on the date hereof, between CSLC and the Company) to serve as members
of the CSLC Advisory Board, for an initial term commencing at the Effective Time
and expiring on the third anniversary thereof, until their successors are duly
appointed by the CSLC Board of Directors. Each member of the Advisory Board
shall receive a $7,000 annual retainer fee for membership on the Advisory Board
and a fee of $200 for attendance or participation at each meeting of the
Advisory Board and shall be entitled to participate in the same stock option and
similar programs made available by CSLC to CSLC's directors (provided that each
member of the Advisory Board otherwise satisfies the eligibility requirements
thereof).
SECTION 5.9 Indemnification; Directors' and Officers' Insurance. (a) The
Company shall, and from and after the Effective Time, CSLC and the Surviving
Entity shall, indemnify, defend and hold harmless each person who is now, or at
any time prior to the date hereof has been or who becomes prior to the Effective
Time, an officer, director or employee of the Company or any of its Subsidiaries
(the "Indemnified Parties") from and against (i) all losses, claims, damages,
costs, expenses, liabilities or
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judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not unreasonably be withheld) of or in
connection with any claim, action, suit, proceeding, case or investigation
("Action") based in whole or in part on or arising in whole or in part out of or
in connection with the fact that such person is or was a director, officer or
employee of the Company or any Subsidiary, whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted or
claimed prior to, at or after the Effective Time ("Indemnified Liabilities") and
(ii) all Indemnified Liabilities based in whole or in part on, or arising in
whole or in part out of or in connection with this Agreement, the Merger or any
of the transactions contemplated hereby or thereby, in each case to the fullest
extent a corporation is permitted under applicable law to indemnify its own
directors, officers and employees, as the case may be and CSLC and the Surviving
Entity, as the case may be, shall pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
fullest extent permitted under applicable law upon receipt of any undertaking
contemplated by applicable law. Without limiting the foregoing, if any such
claim, action, suit, proceeding or investigation is commenced or instituted
against any Indemnified Party (whether arising before or after the Effective
Time), (i) the Indemnified Parties may retain counsel satisfactory to them and
the Company (or satisfactory to them and CSLC and the Surviving Entity after the
Effective Time); (ii) the Company (or after the Effective Time, CSLC and the
Surviving Entity) shall pay all reasonable fees and expenses of such counsel for
the Indemnified Parties promptly as reasonably itemized statements therefor are
received; and (iii) the Company (or after the Effective Time, CSLC and the
Surviving Entity) shall use best efforts to assist in the vigorous defense of
any such matter, provided that neither the Company, CSLC nor the Surviving
Entity shall be liable for any settlement of any claim effected without its
written consent (which consent shall not unreasonably be withheld). Any
Indemnified Party electing to claim indemnification under this Section 5.9, upon
learning of any such Action, shall promptly notify the Company, CSLC or the
Surviving Entity of such election (but the failure so to notify the Company
shall not relieve it from any liability which it may have under this Section
5.9, except to the extent such failure materially prejudices it or if it
otherwise forfeits substantive rights and defenses as a result of such failure),
and shall deliver to the Company (or after the Effective Time, to CSLC and the
Surviving Entity) the undertaking contemplated by applicable law. The
Indemnified Parties as a group may retain only one firm of legal counsel to
represent them with respect to each such matter unless there is, under
applicable standards of professional conduct, a conflict in respect of any
significant issue between the positions of any two or more Indemnified Parties.
(b) For a period of seven years after the Effective Time, CSLC
shall cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company and its Subsidiaries
(provided that CSLC may substitute therefor policies of at least the same
coverage and amounts containing terms
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and conditions which are no less advantageous) with respect to claims arising
from facts or events which occurred before the Effective Time to the extent
available on commercially reasonable terms; provided, however, that CSLC shall
not be obligated to incur in excess of $400,000 in the aggregate under this
Section 5.9(b).
(c) The provisions of this Section 5.9 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his heirs and
his representatives.
SECTION 5.10 Proposed Simultaneous Acquisition.
(a) The Company hereby acknowledges that it has been advised by
CSLC that CSLC, substantially simultaneously with the execution and delivery of
this Agreement, is entering into an Agreement and Plan of Merger (the "ILM II
Merger Agreement") of even date herewith, among CSLC, Sub, and ILM II Senior
Living, Inc. ("ILM II"), pursuant to which, upon the terms and subject to the
conditions thereof, ILM II will merge with and into Sub and Sub will be the
surviving corporation in such merger (the "ILM II Merger").
(b) CSLC, the Company and Sub hereby acknowledge and agree that it
shall not be a condition to the respective obligations of any party to this
Agreement to effect the Merger (and the transactions contemplated thereby) that
the ILM II Merger Agreement shall have been approved by the stockholders of ILM
II or CSLC, as applicable, or that the ILM II Merger (and the transactions
contemplated thereby) shall have been consummated.
(c) Notwithstanding anything to the contrary contained herein, the
Company shall cooperate with all reasonable requests of CSLC to coordinate the
timing of the Company Stockholders' Meeting and the meeting of stockholders
required in respect of the ILM II Merger; provided, however, that the Company
shall not be required to agree to any material delay of the Company
Stockholders' Meeting for any reason relating to the timing of the ILM II
stockholders meeting or any other matters related to the ILM II Merger. The
Company and CSLC shall cooperate and promptly provide each other with all
financial and other data regarding the Company and CSLC as reasonably may be
requested and required in connection with the preparation of any proxy statement
and Transaction Statement on Schedule 13E-3 relating to the ILM II Merger.
(d) (i) If this Agreement is terminated and the ILM II Merger has
been consummated, the Company covenants and agrees to sell, transfer and convey,
or cause to be sold, transferred and conveyed, all of its or its Subsidiary's
right, title and interest in that certain property owned 75% in fee by ILM
Holding and situated in Santa Barbara, California (the "Santa Barbara Property")
to the surviving entity (or its designee) in the ILM II Merger. The purchase
price to be paid for the Santa Barbara Property shall be the appraised value of
the Santa Barbara Property (as hereinafter defined) multiplied by the
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percentage ownership of the Santa Barbara Property held by the Company or its
Subsidiary.
(ii) The closing of the sale of the Santa Barbara Property
shall occur at such time and place as shall be mutually agreed upon by the
parties; but in no event later than 90 days subsequent to the consummation of
the ILM II Merger. At such closing, upon receipt of the purchase price for the
Santa Barbara Property, the Company shall, or shall cause, the Santa Barbara
Property to be conveyed, free and clear of all liens, claims and encumbrances,
pursuant to customary documentation.
(iii) For purposes of this Section 5.10(d), the "appraised
value of the Santa Barbara Property" shall mean the fair market value of the
Santa Barbara Property as determined by the appraisal process set forth herein.
The Company and CSLC shall each appoint one independent nationally recognized
asset appraisal firm within 15 days of consummation of the ILM II Merger. If one
party fails to appoint an appraiser within such 15-day period, the appraiser
appointed by the other party shall determine the fair market value of the Santa
Barbara Property. If the two appraisers fail to agree upon the fair market value
of such property within 60 days of their appointment and the difference between
the appraisals is 10% or less of the amount of the higher appraisal, then the
appraisals shall be averaged and that average shall be the fair market value of
the Santa Barbara Property. If the difference between the appraisals is greater
than 10% of the higher appraisal, such two appraisers shall then mutually
appoint a third independent nationally recognized asset appraisal firm and the
amount designated by such mutually selected appraiser shall be the fair market
value of the Santa Barbara Property.
SECTION 5.11 Additional Agreements; Best Efforts. Upon the terms and
subject to the conditions of this Agreement, each of the Company, CSLC and Sub
agrees to use its best efforts to take (or cause to be taken or cause to be
done), all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the receipt of the Company Stockholder Approval
Condition, including, without limitation, cooperating fully with the other
party, including by provision of information and making all necessary filings in
connection with, among other things, any Governmental Entity approval. In case
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Entity with full title to all properties, assets, rights, approvals, immunities
and franchises of either of the Constituent Corporations, the proper officers
and directors of each party to this Agreement shall promptly take all such
necessary action.
SECTION 5.12 Conveyance Taxes. CSLC and the Company shall cooperate in the
preparation, execution and filing of all tax returns, questionnaires,
applications or other documents regarding any conveyance taxes which become
payable in connection
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with the transactions contemplated by this Agreement that are required to be
filed prior to the Effective Time.
SECTION 5.13 Public Announcements. The Company and CSLC shall consult with
each other prior to issuing any press release or making any public statement or
announcement (whether or not jointly made) with respect to this Agreement and
the transactions contemplated hereby and, except as may be required by
applicable regulations of any national securities exchange registered pursuant
to Section 6 of the Exchange Act or U.S. inter-dealer quotation system of a
registered national securities association, the Company or CSLC, as the case may
be, shall not issue any such press release or make any such public statement or
announcement prior to such consultation.
SECTION 5.14 Notification of Certain Matters. The Company shall give
prompt notice to CSLC and Sub, and CSLC and Sub shall give prompt notice to the
Company, of (i) the occurrence or nonoccurrence of any event the occurrence or
nonoccurrence of which would be likely to cause any representation or warranty
given by them and contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time, (ii) any material failure of
the Company, CSLC, or Sub, as the case may be, to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it hereunder, (iii) any notice of, or other communication relating
to, a default (or an event which with notice, lapse of time or both, would
become a default) received by it or any of its Subsidiaries subsequent to the
date hereof and prior to the Effective Time, under any material agreement or
instrument, (iv) any notice or other communication from any person or entity
alleging that the consent of such person or entity is or may be required in
connection with the transactions contemplated by this Agreement, or (v) any
Material Adverse Effect or CSLC Material Adverse Effect (other than changes
resulting from general economic conditions or conditions relating generally to
the senior living industry) shall have occurred or reasonably be likely to
occur; provided, however that the delivery of any notice pursuant to this
Section 5.14 shall not cure any breach or noncompliance under this Agreement or
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION 5.15 Company Taxes. The actual distributions from the Company to
its shareholders following its most recent taxable year end through the Closing
Date plus its deemed liquidating distribution of the Company resulting from the
Merger for federal income tax purposes will eliminate its "REIT taxable income"
(as that term is defined in Section 857(b)(2)) from its most recent taxable year
end through the Closing Date, including, without limitation, gain from the
deemed sale of assets by the Company to CSLC for federal income tax purposes.
SECTION 5.16 Original Agreement. As of the date hereof, this Agreement
amends and restates the Original Agreement in its entirety.
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SECTION 5.17 Intentionally Omitted.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1.Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to consummate the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have
been adopted by the affirmative vote of the holders of not less than 66-2/3% of
the outstanding Company Common Stock.
(b) Other Approvals. All authorizations, consents, orders or
approvals of, or declarations or filings with, any Governmental Entity the
failure to obtain which insofar as reasonably can be foreseen would have a
Material Adverse Effect or a CSLC Material Adverse Effect, shall have been duly
and timely filed and obtained and all applicable waiting periods, if any,
pursuant to the HSR Act shall have expired or been early terminated.
(c) The Company Proxy Statement on Schedule 14A and the Schedule
13E-3 shall be filed in definitive form with the SEC and shall not be the
subject of any stop order or similar proceeding.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other similar order issued by any court
of competent jurisdiction or Governmental Entity preventing, materially delaying
or impairing consummation of the Merger shall be in effect.
(e) Redemption of Holding Preferred Stock. All shares of Holding
Preferred Stock shall have been redeemed at a price per share not to exceed the
stated liquidation preference thereof, together with all unpaid dividends
thereon accrued through the date next preceding the Closing Date.
(f) State Takeover Laws. Consummation of the transactions
contemplated by this Agreement and the Merger shall not be subject to the
provisions of any State Takeover Laws.
SECTION 6.2 Conditions of Obligations of CSLC and Sub. The obligations of
CSLC and Sub to consummate the Merger are subject to the satisfaction at or
prior to the Effective Time of the following conditions, unless waived in
writing by CSLC and Sub (to the extent waiveable under applicable law):
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(a) Representations and Warranties. All of the representations and
warranties of the Company set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time (except for
representations and warranties that (i) expressly speak only as of a specific
date or time which need only be true and correct as of such date and time and
(ii) by their terms are qualified by materiality or any analogous limitation on
scope which, for purposes of this Section 6.2(a), shall have to be true and
correct in all respects), and CSLC shall have received a certificate signed on
behalf of the Company by its chief executive officer or the chief financial
officer to such effect.
(b) Performance of Obligations of the Company. The Company shall
have performed all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and CSLC shall have received a
certificate signed on behalf of the Company by its chief executive officer or
chief financial officer to such effect.
(c) Consents. The Company shall have obtained the consent or
approval of each person or entity whose consent or approval shall be required to
permit the succession by the Surviving Entity to any obligation, right or
interest of the Company or any Subsidiary of the Company under any agreement or
instrument, except for those the failure of which so to obtain would not in the
reasonable opinion of CSLC have a Material Adverse Effect or upon consummation
of the transactions contemplated by the Agreement and the Merger, a CSLC
Material Adverse Effect.
(d) Nonforeign Status. The Company shall have delivered a
certificate of Non-Foreign Status which meets the requirements of Treasury
Regulation Section 1.1445-2, duly executed and acknowledged, certifying that the
Company is not a foreign person for United States income tax purposes.
(e) Domestically Controlled Status Certificate. The Company shall
have delivered a certificate certifying that the Company is a domestically
controlled REIT within the meaning of Section 897(h)(4)(B).
SECTION 6.3 Conditions of Obligations of the Company. The obligation of
the Company to consummate the Merger is subject to the satisfaction at or prior
to the Effective Time of the following conditions, unless waived in writing by
the Company (to the extent waiveable under applicable law):
(a) Representations and Warranties. The representations and
warranties of CSLC and Sub set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time (except for
representations and warranties that (i) expressly speak only as of a specific
date or time which need only be true and correct as of such
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date and time and (ii) that, by their terms are qualified by materiality or any
analogous limitation on scope which, for purposes of this Section 6.3 (a), shall
have to be true and correct in all respects) and the Company shall have received
a certificate signed on behalf of CSLC by its chief executive officer or the
chief financial officer to such effect.
(b) Performance of Obligations of CSLC and Sub. CSLC and Sub shall
have performed all obligations required to be performed by them under this
Agreement at or prior to the Effective Time, and the Company shall have received
a certificate signed on behalf of CSLC by its chief executive officer or chief
financial officer to such effect.
(c) Consents. CSLC shall have obtained the consent or approval of
each person whose consent or approval shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease or other agreement or instrument, except those for
which failure to obtain such consents and approvals would not, in the reasonable
opinion of the Company, individually or in the aggregate, have a CSLC Material
Adverse Effect, or materially affect the consummation of the transactions
contemplated hereby.
(d) Payment of Exchange Funds. CSLC shall have received the
proceeds of the Financing Commitment, or otherwise shall have obtained and
segregated for payment to the Company sufficient cash funds, to pay in full at
the Effective Time to the holders of the Company Common Stock, the Exchange
Funds.
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the holders of Company Common Stock
or by the holders of CSLC Common Stock:
(a) by the mutual written consent of CSLC and the Company;
(b) by (i) CSLC, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the Company set
forth in this Agreement which has not been cured within 20 business days next
following receipt by the Company of notice of such breach, or (ii) the Company,
if there has been a material breach of any representation, warranty, covenant or
agreement on the part of CSLC or Sub set forth in this Agreement which has not
been cured within 20 business days next following receipt by CSLC of notice of
such breach;
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(c) by either CSLC or the Company if any permanent injunction or
other order of a court, Governmental Entity or other competent authority
preventing consummation of the Merger shall have been issued;
(d) by either CSLC or the Company if the Merger shall not have
been consummated at or prior to 5:00 p.m., Eastern time, on September 30,
2000;
(e) by CSLC or the Company, if the Company Stockholder Approval
Condition shall not have been satisfied by September 29, 2000.
(f) by CSLC or Sub if (i) the Company Board (or any special or
other committee thereof) shall have withdrawn, modified or changed in a manner
adverse to CSLC its recommendation of approval (by the holders of Company Common
Stock) of this Agreement or the Merger, or shall have approved or recommended
(to the holders of Company Common Stock) a Superior Proposal or (ii) the Company
shall have entered into a definitive agreement with respect to an Acquisition
Proposal;
(g) by the Company, upon entering into a definitive agreement in
respect of a Superior Proposal pursuant to Section 4.1(e) hereof; provided that
the Company has complied with all provisions of Section 4.1(e), including the
notice provisions thereof, and satisfies its payment obligations as provided in
Section 5.6;
(h) by the Company if the Merger and the transactions contemplated
by this Agreement shall not, for any reason, be consummated by CSLC and Sub;
provided that the Company is not then in material breach of any of its
representations, warranties or agreements under this Agreement, the conditions
set forth in Sections 6.1 and 6.2 have been satisfied or (to the extent
waiveable under applicable law) waived, and this Agreement has not been
terminated by CSLC or Sub pursuant to Section 7.1(i)(i); or
(i) (i) by CSLC or Sub if there shall have occurred or there shall
exist any events, changes, set of circumstances or conditions having or which
reasonably could be likely to have a Material Adverse Effect or (ii) the
Company, if there shall have occurred or there shall exist any events, changes,
set of circumstances or conditions having or which reasonably could be likely to
have a CSLC Material Adverse Effect.
SECTION 7.2 Effect of Termination. If this Agreement is terminated either
by the Company or CSLC as provided in Section 7.1, this Agreement forthwith
shall become null and void and there shall be no liability or obligation on the
part of CSLC, Sub, or the Company, or any of their respective officers or
directors, except (a) with respect to the last sentence of Section 5.2, and
Sections 5.6, 5.7 and 5.9 and (b) to the extent that such termination results
from the willful breach by a party hereto of any of its representations,
warranties, covenants or agreements set forth in this Agreement, except as
provided in Section 8.7.
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SECTION 7.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective boards of directors,
at any time before or after approval of the matters presented in connection with
the Merger by the holders of Company Common Stock or by the holders of CSLC
Common Stock, but, after any such approval, no amendment shall be made which by
law requires further approval by such holders without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of all of the parties hereto.
SECTION 7.4 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective board of
directors, may, to the extent legally permissible, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Article II and Sections 5.6, 5.7,
5.9, 5.10 and 5.11, the last sentence of Section 7.3 and this Article VIII in
its entirety which shall survive termination indefinitely.
SECTION 8.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given upon receipt if delivered personally,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to the parties at the following addresses (or at such other
address for a party as shall be specified in a notice given in accordance with
this Section 8.2):
(a) if to CSLC or Sub, to:
Capital Senior Living Corporation
237 Park Avenue, 21st Floor
New York, New York
(212) 551-1770 (telephone)
(212) 551-1774 (facsimile)
Attention: Lawrence A. Cohen,
Vice Chairman and Chief Executive Officer,
with copies (which shall not constitute
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notice pursuant to this Section 8.2) to:
Capital Senior Living Corporation
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
(972) 770-5600 (telephone)
(972) 661-5403 (facsimile)
Attention: James A. Stroud, Chairman of the Company
- and -
Jenkens & Gilchrist, P.C.
1445 Ross Avenue, Suite 2900
Dallas, Texas 75202
(214) 855-4500 (telephone)
(214) 855-4300 (facsimile)
Attention: Winston W. Walp, II, Esq.
- and -
(b) if to the Company, to:
ILM Senior Living, Inc.
28 State Street, Suite 1100
Boston, Massachusetts 02109
(617) 573-5035 (telephone)
(617) 573-5036 (facsimile)
Attention: J. William Sharman,
Chairman and Chief Executive Officer,
with a copy (which shall not constitute notice pursuant to
this Section 8.2) to:
Greenberg Traurig
The MetLife Building
200 Park Avenue, 15th Floor
New York, New York 10166
(212) 801-9200 (telephone)
(212) 801-6400 (facsimile)
http://[email protected] (electronic mail)
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Attention: Clifford E. Neimeth, Esq.
SECTION 8.3 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement," "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to
October 19, 1999.
SECTION 8.4 Counterparts. This Agreement may be executed in one or more
counterparts (including by facsimile transmission), all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by all of the parties hereto and delivered to
the other parties; it being hereby understood that all parties need not sign the
same counterpart.
SECTION 8.5 Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents and the instruments referred to herein, which are
hereby incorporated herein and made a part hereof for all purposes as if fully
set forth herein), the Management Agreement between ILM Lease Co. and Capital
Senior Management 2, Inc. and Capital Senior Living Inc., and the CSLC Letter
Agreement (a) constitutes the entire agreement among the parties with respect to
the subject matter hereof, and supersedes all prior agreements and
understandings, both written and oral, among the parties hereto with respect to
the subject matter hereof, and (b) except as provided in Section 5.9, is not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
SECTION 8.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia,
applicable to contracts executed and performed entirely in such jurisdiction.
SECTION 8.7 No Remedy in Certain Circumstances. Each party agrees that,
should any court, or Governmental Entity or other competent authority hold any
provision of this Agreement or portion hereof to be null, void or unenforceable,
or order or direct any party to take any action inconsistent herewith or not to
take any action required herein, the other party shall not be entitled to
specific performance of such provision or part hereof or thereof or to any other
remedy, including, without limitation, limited to money damages, for breach
hereof or thereof or of any other provision of this Agreement or portion hereof
as a result of such holding or order.
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SECTION 8.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
CSLC or to any direct or indirect wholly-owned Subsidiary of CSLC; provided that
no such assignment shall change the amount or nature of the Merger Consideration
or relieve the assigning party of its obligations hereunder if such assignee
does not perform such obligations. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective successors and assigns.
SECTION 8.9 Gender and Number Classification. All words used herein,
irrespective of the number and gender specifically used, shall be deemed and
construed to include or mean any other number, singular or plural, and any other
gender, masculine, feminine or neuter, as the context requires.
SECTION 8.10 Knowledge. For purposes of this Agreement, "knowledge" "to
its knowledge", or analogous expressions, when used with reference to the
Company, CSLC and/or any of their respective Subsidiaries, means knowledge of a
particular fact or set of circumstances, events or conditions by any executive
officer (or employee acting in an analogous capacity) or director of the
Company, CSLC or any of their respective Subsidiaries, as applicable, to the
extent actually known by any one or more of such persons or, after due inquiry
and reasonable investigation by one or more of such persons, should have been
known.
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IN WITNESS WHEREOF, CSLC, Sub, and the Company have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, all on this 19th day of October 1999.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ James A. Stroud
----------------------------------------------
Name: James A. Stroud
Title: Chairman of the Company
CAPITAL SENIOR LIVING ACQUISITION, LLC
By: /s/ Lawrence A. Cohen
----------------------------------------------
Name: Lawrence A. Cohen
Title: Chief Executive Officer
ILM SENIOR LIVING, INC.
By: /s/ J. William Sharman, Jr.
----------------------------------------------
Name: J. William Sharman, Jr.
Title: Chairman of the Board of Directors,
President and Chief Executive Officer
With respect to Section 5.16, the undersigned agrees and consents:
CAPITAL SENIOR LIVING TRUST I
By: /s/ Lawrence A. Cohen
----------------------------
Name: Lawrence A. Cohen
Title: Trustee
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APPENDIX B
April 18, 2000
Board of Directors
ILM Senior Living, Inc.
1750 Tysons Boulevard; Suite 1200
Tysons Corner, Virginia 22102
Members of the Board of Directors:
On the date hereof, Cohen & Steers Capital Advisors LLC ("Cohen &
Steers") delivered to you its oral opinion as of today's date that, subject to
the matters stated below, the merger consideration of $11.626042 per share in
cash (the "Merger Consideration") provided for in the proposed First Amendment
to be dated as of April 18, 2000 (the "First Amendment"), to the Amended and
Restated Agreement and Plan of Merger among ILM Senior Living, Inc., a Virginia
finite life corporation (the "Company"), Capital Senior Living Corporation, a
Delaware corporation ("CSLC") and Capital Senior Living Acquisition, LLC, a
Delaware limited liability company ("Sub"), dated October 19, 1999 (as amended,
the "Merger Agreement") was fair to the stockholders of the Company, from a
financial point of view. We hereby confirm our opinion as at the date hereof, as
follows.
We understand that the Company, CSLC and Sub propose to enter into the
First Amendment on the date hereof. Pursuant to the Merger Agreement, the
Company will merge with and into Sub (the "Merger"), and the separate corporate
existence of the Company shall cease. In the Merger, each outstanding share of
common stock of the Company ("Company Common Stock") shall be converted into the
right to receive $11.626042 in cash (the "Merger Consideration"). The terms and
conditions of the Merger are more fully set forth in the Merger Agreement.
The Board of Directors of the Company (the "Board") has requested our
opinion as to the fairness, from a financial point of view, of the Merger
Consideration to the holders of Company Common Stock (the "Stockholders").
In arriving at our opinion expressed herein, we have, among other
things:
(1) reviewed the forms of the First Amendment and the Merger
Agreement;
<PAGE>
(2) reviewed certain publicly available historical
consolidated financial and operating data with respect to the Company
and ILM Lease Corporation;
(3) reviewed certain internal business plans and financial and
operating forecasts with respect to the Company and ILM Lease
Corporation, as prepared by management;
(4) reviewed certain pro forma historical financial
information of the Company on a C-corporation basis prepared by the
Company, and certain projected financial information of the Company on
a C-corporation basis prepared by management;
(5) reviewed publicly available information of certain
companies engaged in businesses we deemed comparable to the Company;
(6) considered the terms, to the extent publicly available, of
selected recent transactions we deemed comparable;
(7) visited certain facilities of the Company and held
discussions with the Company and its representatives and consultants
regarding its business, operations and prospects;
(8) performed various financial analyses, as we deemed
appropriate, using generally accepted analytical methodologies; and
(9) conducted such other financial studies, analyses and
financial investigations as we deemed appropriate.
We were not requested to and, therefore, did not verify independently
the accuracy or completeness of any information furnished by the Company or any
publicly available information which we reviewed in arriving at our opinion
expressed herein. With the permission of the Board, we assumed and relied,
without independent verification, upon the accuracy and completeness of all such
information and upon the assurance of the Company that it was not aware of any
information or facts that would make the information provided to us materially
incomplete or misleading. With the permission of the Board, we assumed further
that the financial and operating forecasts of the Company reviewed by us were
reasonably prepared on a basis reflecting the best current estimates and good
faith judgment of management as to its anticipated future financial condition
and operating results, and we express no opinion with respect to such forecasts.
We were not engaged to conduct a physical inspection of any properties or make
an independent valuation or appraisal of any assets or liabilities, contingent
or otherwise, of the Company and we were not furnished with any such valuations
or
2
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appraisals. We were not engaged to review any legal, accounting or tax
aspects of the Merger.
Our opinion herein is necessarily based on our assessment of economic,
monetary, market and regulatory conditions as they exist and which can be
evaluated on the date hereof. The Board has not requested that we conduct any
review or analysis with respect to the Company after the date hereof, and we
disclaim any undertaking or obligation to update or revise our opinion or advise
the Board of any matter affecting our opinion after the date hereof unless we
are specifically requested to do so pursuant to an agreement with the Company.
We express no opinion concerning the future financial condition and operating
results of the Company or the price or trading range at which the Company Common
Stock may trade following the date hereof. Our opinion does not address and we
hereby make no recommendation as to the Company's underlying decision to proceed
with the Merger or the relative merits of its decision not to proceed with any
alternative financial strategies that may be available to the Company.
Our opinion expressed herein is provided at the Board's request and for
its use in connection with evaluating the Merger Consideration, and for no other
purpose. We have not been engaged as an agent or fiduciary of the Stockholders
or any third person. Our opinion does not constitute a recommendation concerning
any action the Board, any Stockholder or any third person should take concerning
the Merger, the Merger Agreement or any aspect thereof or alternative thereto
(including whether to vote in favor of the Merger or take or refrain from taking
any other action), and should not be relied upon as such. We express no opinion
with respect to the desirability of pursuing any alternative to the Merger.
The Company and ILM II Senior Living, Inc. ("ILM II") have agreed to
pay Cohen & Steers fees in the total amount of $125,000 at the time we render
the opinion expressed herein and a similar opinion addressed to the Board of
Directors of ILM II in connection with the merger involving ILM II (the "ILM II
Merger"). In addition, the Company and ILM II have agreed to pay us a $900,000
cash success fee conditional upon consummation of the Merger and the ILM II
Merger. In the past, Cohen & Steers has provided financial advisory services to
the Company and has received fees for such services. In the ordinary course of
business, we and our affiliates may actively trade the securities of CSLC for
the accounts of our clients and, accordingly, they may at any time hold a long
or short position in such securities.
Neither this letter nor our opinion expressed herein may be reproduced,
summarized, excerpted, quoted from, referred to or disclosed in any filing,
report, document, release or other communication, whether written or oral, made,
prepared, issued or transmitted by the Company, CSLC or Sub without our prior
written approval; provided, however, that this letter may be submitted to and
filed
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with the Securities Exchange Commission in connection with its review of
the Merger, and may be reproduced without alteration in the definitive proxy
statement disseminated to the Stockholders relating to the Merger and referred
to in such proxy statement if reproduced without alteration therein.
Based upon and subject to the foregoing, we are of the opinion that as
of the date hereof the Merger Consideration is fair to the Stockholders, from a
financial point of view.
Very truly yours,
/s/ Cohen & Steers
<PAGE>
REVISED PRELIMINARY COPY
[FACE SIDE OF PROXY] FORM OF PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ILM SENIOR
LIVING, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
MAY , 2000
The undersigned hereby appoints Jeffry R. Dwyer and J. William
Sharman, Jr., or either of them, as attorneys-in-fact and proxies to vote all
the shares of common stock, $.01 par value, of ILM Senior Living, Inc., a
Virginia finite-life corporation, which are outstanding and issued in the name
of the undersigned and which the undersigned is entitled to vote at the special
meeting of shareholders of ILM, to be held at 10:00 a.m., local time, on
June , 2000, at the Key Bridge Marriott Hotel, 1401 Lee Highway, Arlington,
Virginia 22209, and at any adjournment or postponement of the special meeting.
The undersigned hereby instructs and authorizes these attorneys-in-fact to vote
the shares as indicated on the reverse side of this proxy.
The shares represented by this proxy will be voted in accordance with the
instructions contained on the reverse side. If no instructions are given, the
shares will be voted "FOR" approval of the merger agreement as fully described
in the notice of special meeting of shareholders and accompanying proxy
statement, which the undersigned has received together with this proxy.
If there is proposed any adjournment or postponement of the special meeting
to permit further solicitation of proxies with respect to approval of the merger
agreement, the shares will be voted "FOR" such adjournment or postponement if
the shares represented by this proxy were to be voted "FOR" approval of the
merger agreement (including if there were no specifications), and "AGAINST"
adjournment or postponement if the shares represented by this proxy were to be
voted "AGAINST" approval of the merger agreement.
(Continued and to be signed on reverse side)
...............................................................................
FOLD AND DETACH HERE
<PAGE>
REVISED PRELIMINARY COPY Please mark /X/
[REVERSE SIDE OF PROXY] your vote
as indicated
in the example
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C>
/ / / / / / 1. Approval of the Amended and Restated Agreement and Plan of Merger, dated
October 19, 1999, as amended, among ILM Senior Living, Inc., a Virginia finite-life
corporation, Capital Senior Living Corporation, a Delaware corporation, and Capital
Senior Living Acquisition, LLC, a Delaware limited liability company; and
/ / / / / / 2. To transact such other business as may properly be presented at the special meeting
or any adjournment or postponement of the special meeting.
AFTER CAREFUL CONSIDERATION OF A NUMBER OR FACTORS AND CIRCUMSTANCES DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT, YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER
IS FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT THE MERGER IS ADVISABLE.
YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
WHETHER OR NOT YOU INTEND TO COME TO THE SPECIAL MEETING YOU ARE URGED TO COMPLETE,
DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED SELF-ADDRESSED, PREPAID
RETURN ENVELOPE SO THAT YOUR SHARES CAN BE REPRESENTED AT THE SPECIAL MEETING.
</TABLE>
THIS PROXY MAY BE REVOKED PRIOR TO ITS USE.
PLEASE DATE, SIGN AND MAIL THIS PROXY IN THE ENCLOSED ENVELOPE.
SIGNATURES OF SHAREHOLDER(S) ________________________ DATED ______________
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by president or other
authorized officer. If a partnership, please sign in partnership name by
authorized person.
