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PRELIMINARY COPY
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
Filed by Registrant: /x/
Filed by a Party other than the Registrant: / /
</TABLE>
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 Section 240.14a-11(c) or Section
240.14a-12
ILM II SENIOR LIVING, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILM II 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 II Senior Living, Inc. (ILM II
Common Stock).
2) Aggregate number of securities to which transaction applies:
5,181,236 shares of ILM II 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
$15,808.10 has been previously paid with preliminary materials
which was equal to 1/50th of 1% of $74,982,000 in accordance with
the terms and subject to the conditions of that certain Amended
and Restated Agreement and Plan of Merger dated October 19, 1999,
among ILM II, Capital Senior Living Corporation and Capital Senior
Living Acquisition, LLC attached as Appendix A to and incorporated
by reference in the Proxy Statement to which this Schedule 14A
relates.
4) Proposed maximum aggregate value of transaction: $74,982,000.
5) Total fee paid herewith: -0-.
/x/ Fee paid previously with preliminary materials.
/ / 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:
<PAGE>
PRELIMINARY COPY
ILM II SENIOR LIVING, INC.
8180 GREENSBORO DRIVE, SUITE 850
MCLEAN, VIRGINIA 22102
(888) 257-3550
December , 1999
Dear ILM II Shareholders:
Your Board of Directors has unanimously approved the merger of ILM II
Senior Living, Inc. with a 100% owned subsidiary of Capital Senior Living
Corporation. Capital is one of the nation's largest developers and operators of
senior living communities and has been the manager of ILM II's properties since
July 1996.
In the merger, your shares of ILM II common stock will be canceled and you
will receive $14.47 in cash for each share of ILM II common stock you own.
Accordingly, after the merger you no longer will have any ownership interest in
ILM II and you no longer will participate in the potential future earnings and
growth of the company.
We believe that the $14.47 being paid by Capital in the merger for each
share of your stock is a significantly higher price than you could have obtained
if you sought to sell your shares to a private buyer or in an open market
transaction prior to the public announcement of the merger. 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 II common stock is required for the merger to occur.
We have studied the terms, conditions, timing and effects of the merger
with our legal and financial advisors and we have received a written opinion
from a nationally recognized investment banking firm stating that the merger
consideration of $14.47 per share is fair to you, from a financial point of
view. You can find the full text of the actual written opinion in Appendix B at
the back of the attached 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 February , 2000
at the Key Bridge Marriott Hotel, Arlington, Virginia.
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 NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE ATTACHED PROXY STATEMENT DATED DECEMBER , 1999 IS FIRST BEING MAILED TO
SHAREHOLDERS ON OR ABOUT DECEMBER , 1999.
<PAGE>
PRELIMINARY COPY
ILM II SENIOR LIVING, INC.
8180 GREENSBORO DRIVE, SUITE 850
MCLEAN, VIRGINIA 22102
(888) 257-3550
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
Dear ILM II Shareholders:
We invite you to attend a special meeting of the shareholders of ILM II
Senior Living, Inc. to be held at 10:00 a.m., local time, on February , 2000
at the Key Bridge Marriott Hotel, Arlington, Virginia. 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, among ILM II
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 II will
be merged with Capital Acquisition; 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 II common stock at the close of business on
December , 1999 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 II'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 II 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
McLean, Virginia
December , 1999
IF YOU HAVE ANY QUESTIONS REGARDING THE SPECIAL MEETING OR THE ATTACHED
PROXY STATEMENT, PLEASE CALL OUR PROXY SOLICITOR, D.F. KING & CO. INC., AT
1-800-735-3591.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
SUMMARY.................................................................................................... 3
The Parties in the Merger............................................................................... 3
Capital Senior Living Corporation.................................................................... 3
Capital Senior Living Acquisition, LLC............................................................... 3
ILM II Senior Living, Inc............................................................................ 3
The Merger..............................................................................................
The payment you will receive for your shares of ILM II stock......................................... 3
The merger agreement................................................................................. 3
There are conditions to completing the merger........................................................ 3
Termination of the merger agreement.................................................................. 4
Termination fees..................................................................................... 5
Our Recommendation to You............................................................................... 5
Vote Required........................................................................................... 5
Purposes and Reasons for the Merger..................................................................... 5
Opinion of Our Financial Advisor........................................................................ 6
Payments to Our Financial Advisors...................................................................... 6
Conduct of ILM II's Business if the Merger is Not Completed............................................. 7
Plans and Proposals of ILM II and Capital............................................................... 7
You Have No Appraisal Rights............................................................................ 7
U.S. Federal Income Tax Consequences.................................................................... 7
Accounting Treatment.................................................................................... 7
Interests of Certain Persons in the Merger.............................................................. 7
Financing of the Merger................................................................................. 8
Litigation Pertaining to the Merger..................................................................... 8
Concurrent ILM Merger................................................................................... 8
Merger Procedures....................................................................................... 8
ILM II CORPORATE STRUCTURE................................................................................. 9
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 10
There is No Established Market for ILM II's Common Stock; Dividend History................................. 12
THE SPECIAL MEETING........................................................................................ 13
Purpose of Special Meeting........................................................................... 13
Record Date for the Special Meeting.................................................................. 13
Vote Required for Approval of the Merger Agreement................................................... 13
Proxies; Solicitation and Revocation................................................................. 13
Beneficial Ownership by Directors.................................................................... 15
People with Disabilities............................................................................. 15
Confidential Voting.................................................................................. 15
Solicitation of Proxies by Soliciting Agent.......................................................... 15
Annual Meeting....................................................................................... 15
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 16
A very important warning about our forward looking statements........................................ 16
SPECIAL FACTORS............................................................................................ 18
</TABLE>
(i)
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<TABLE>
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PAGE
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The Merger--General..................................................................................... 18
History................................................................................................. 18
Background of the Merger................................................................................ 25
Recommendation of the ILM II Board...................................................................... 44
Purposes, Alternatives, Timing and Reasons for the Merger............................................... 47
Determination of Merger Consideration................................................................... 48
Opinion of Cohen & Steers............................................................................... 48
Plans and Proposals of ILM II and Capital............................................................... 57
Present Intentions and Recommendations of Certain Persons with Regard to the Merger..................... 58
Conduct of ILM II's Business if the Merger is not Completed............................................. 58
Interests of Certain Persons in the Merger.............................................................. 58
No Independent Committee................................................................................ 59
The Merger Agreement.................................................................................... 59
The Merger........................................................................................... 60
Effective Time....................................................................................... 60
Conversion of Shares................................................................................. 60
Exchange of Certificates............................................................................. 60
Representations and Warranties....................................................................... 61
Conduct of ILM II's Business Prior to the Merger..................................................... 62
Conduct of Capital's Business Prior to the Merger.................................................... 63
Conditions to Completing the Merger.................................................................. 63
No Solicitation of Alternative Transactions.......................................................... 64
Termination of the Merger Agreement.................................................................. 65
Termination Fees; Reimbursement of Expenses.......................................................... 66
Proxy Statement; The Special Meeting.................................................................... 67
Accounting Treatment.................................................................................... 67
Simultaneous ILM Merger................................................................................. 67
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER..................................................... 68
Federal Income Tax Consequences of the Merger........................................................... 68
Tax Characterization of the Merger to ILM II......................................................... 68
Tax Consequences to ILM II Shareholders.............................................................. 68
Back-up Withholding Requirements..................................................................... 68
Alien Holders........................................................................................ 69
COSTS AND FINANCING OF THE MERGER.......................................................................... 70
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ILM II............ 71
General................................................................................................. 71
Liquidity and Capital Resources......................................................................... 72
Growth Strategies....................................................................................... 73
Year 2000............................................................................................... 74
Results of Operations................................................................................... 75
Nine Months Ended May 31, 1999 Compared to Nine Months Ended
May 31, 1998...................................................................................... 75
1998 Compared to 1997................................................................................ 75
</TABLE>
(ii)
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1997 Compared to 1996................................................................................ 75
CERTAIN INFORMATION WITH RESPECT TO ILM II................................................................. 77
General................................................................................................. 77
Properties.............................................................................................. 79
Asset Management........................................................................................ 79
Legal Proceedings....................................................................................... 79
Competition............................................................................................. 80
Regulations............................................................................................. 81
Employees............................................................................................... 81
Insurance............................................................................................... 81
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 82
SHAREHOLDER PROPOSALS...................................................................................... 86
OTHER MATTERS.............................................................................................. 86
EXPERTS.................................................................................................... 86
NO APPRAISAL RIGHTS........................................................................................ 86
</TABLE>
LIST OF APPENDICES
<TABLE>
<S> <C>
Appendix A Amended and Restated Agreement and Plan of Merger, dated October 19, 1999, by and among
Capital Senior Living Corporation, Capital Senior Living Acquisition, LLC, and ILM II Senior
Living, Inc.
Appendix B Opinion of Cohen & Steers Capital Advisors, LLC
Appendix C Form of Solicitation Agreement
Appendix D Form of Proxy
</TABLE>
(iii)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
1. Q: WHO IS SOLICITING MY PROXY?
A: ILM II's Board of Directors.
2. Q: WHAT AM I BEING ASKED TO VOTE ON?
A: You are being asked to vote to approve a merger agreement so that ILM II
will be merged with 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 II's senior living communities since 1996.
4. Q: WHAT WILL I RECEIVE IN THE MERGER FOR EACH OF MY SHARES?
A: You will receive $14.47 in cash for each share of your ILM II common
stock. No interest will be paid on this amount.
5. Q: WHAT DO I NEED TO DO NOW?
A: Please sign, date and complete your proxy card and return it in the
enclosed envelope so that your shares of ILM II common stock can be represented
at the special meeting. The envelope requires no postage if mailed in the United
States.
6. 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 ONLY if you instruct your broker how to
vote. Your broker should mail information to you that will explain how to give
instructions to your broker.
7. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN 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.
8. Q: WHAT IF I DON'T SEND BACK A PROXY CARD OR VOTE MY SHARES OF ILM II STOCK
IN PERSON AT THE SPECIAL MEETING?
A: If you don't return your proxy card or vote your shares of ILM II stock at
the special meeting, each share of your stock will be treated as a vote AGAINST
the merger.
9. 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 II stock certificates.
10. Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT?
A: A "FOR" vote by the holders of at least 66- 2/3% of the outstanding
ILM II common stock is required to approve the merger agreement.
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11. Q: WHAT HAPPENS IF THE MERGER IS NOT COMPLETED BY SEPTEMBER 30, 2000?
A: The merger agreement will terminate, unless the September 30, 2000
expiration date is waived by the parties. There is no requirement or present
intention to waive the September 30, 2000 expiration date.
12. 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 II common stock determined by a court.
13. Q: WHEN WILL I RECEIVE THE MERGER CONSIDERATION?
A: You will receive the merger consideration shortly after completion of
the merger.
14. Q: HOW WILL I KNOW THE MERGER OCCURRED?
A: ILM II and Capital will make a public announcement and you will receive
notice of such fact by mail.
15. 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
your decision on how to vote on the merger, we encourage you to read carefully
the "Special Factors--Interests of Certain Persons in the Merger" section of
this document beginning on page 58.
16. Q: WHAT HAPPENED TO THE PREVIOUSLY ANNOUNCED FEBRUARY 7, 1999 MERGER
AGREEMENT WHICH PROVIDED FOR CASH AND PREFERRED STOCK MERGER CONSIDERATION?
A: That agreement has been terminated and replaced by the current merger
agreement described in this document which provides for merger consideration
payable exclusively in cash.
17. Q: WHAT HAPPENS TO MY ILM II COMMON STOCK DIVIDENDS AFTER THE MERGER?
A: You no longer will receive any dividends after the merger is completed
because you no longer will be an ILM II shareholder and you will not become a
Capital shareholder.
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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 THE OTHER DOCUMENTS ATTACHED TO THIS
DOCUMENT AS APPENDICES. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 16.
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
14160 Dallas Parkway, Suite 300
Dallas, Texas 75240
(972) 770-5600
Capital Acquisition is a Delaware limited liability company that is 100%
owned by Capital.
ILM II SENIOR LIVING, INC.
8180 Greensboro Drive, Suite 850
McLean, Virginia 22102
(888) 257-3550
ILM II and its subsidiaries own six senior living communities in five
states with a total capacity of approximately 936 residents. The ILM II senior
living communities have been managed by Capital since 1996.
THE MERGER
If ILM II's shareholders approve the merger and all other conditions to
the merger are met, ILM II will be merged into Capital Acquisition and ILM II's
separate corporate existence will terminate.
After the merger, you no longer will have any ownership interest in ILM II
and you will no longer participate in the potential future earnings and growth
of ILM II.
The payment you will receive in the merger for your shares of ILM II common
stock (see page 60)
After the merger occurs, you will receive $14.47 in cash for each of your
shares of ILM II common stock. No interest will be paid on that amount.
The merger agreement (see page 59)
The merger agreement is attached to this document as Appendix A. We
encourage you to read the merger agreement carefully and 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 63)
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 II common stock;
o receipt of all authorizations, consents and approvals from
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governmental authorities which are material to the business, operations
and condition of the parties;
o absence of any governmental or court order preventing or materially
delaying the merger;
o accuracy of the representations and warranties made by the parties in
the merger agreement;
o performance by the parties of their obligations in the merger agreement;
o receipt of all consents and approvals necessary for Capital to become
the owner of ILM II after the merger; and
o receipt by Capital of all funds necessary to pay the merger
consideration to ILM II's shareholders.
Termination of the merger agreement (see page 65)
The merger agreement can be terminated:
o by ILM II and Capital if the parties mutually agree to do so;
o by ILM II or Capital, if:
-- any governmental or court order prevents the merger from occurring;
-- ILM II'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 II Board withdraws or changes in a manner unfavorable to
Capital its recommendation of the merger to ILM II's shareholders;
-- the ILM II Board approves or recommends an alternative transaction
involving the sale of ILM II to a third party on terms financially
superior to the merger;
-- ILM II signs an agreement for an alternative transaction to merge
ILM II with or sell ILM II to a third party;
-- ILM II 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 II's business, operations or condition.
o by ILM II, if:
-- ILM II signs an agreement for an alternative transaction involving
the sale of ILM II to a third party on terms financially superior to
the merger;
-- Capital violates the merger agreement or its representations and
warranties in the merger agreement are inaccurate;
-- Capital does not complete the merger for any reason after all
conditions to do so are met and ILM II has not violated the merger
agreement; or
-- there has been or there is likely to be a significant negative
change in Capital's business, operations or condition.
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Termination fees (see page 66)
ILM II must pay Capital a fee of $2,964,400, plus reimburse Capital for up
to $2.0 million of its expenses, if:
o the merger agreement is terminated by Capital because the ILM II Board
withdraws or changes in a manner unfavorable to Capital its
recommendation of the merger to ILM II's shareholders;
o the merger agreement is terminated by Capital because the ILM II Board
approves or recommends to ILM II's shareholders an alternative
transaction involving the sale of ILM II to a third party on terms
financially superior to the merger;
o the merger agreement is terminated by Capital because ILM II signs an
agreement for an alternative transaction to merge ILM II with or sell
ILM II to a third party;
o the merger agreement is terminated by ILM II because it signs an
agreement for an alternative transaction involving the sale of ILM II to
a third party on terms financially superior to the merger; or
o the merger is terminated by Capital because ILM II violates its
agreement not to solicit alternative transactions and an alternative
transaction involving ILM II is completed with a third party within the
following 16 months.
Capital must pay ILM II a fee of $850,000 if ILM II terminates the merger
agreement because Capital fails for any reason to consummate the merger after
all conditions for completion of the merger have been met.
Neither Capital nor ILM II 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 any of their representations or warranties
are inaccurate.
OUR RECOMMENDATION TO YOU (See page 44)
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.
We have adopted the merger agreement and recommend that you vote "FOR"
approval of the merger agreement.
VOTE REQUIRED (See page 13)
Approval of the merger agreement requires the affirmative vote of the
holders of not less than 66- 2/3% of the outstanding ILM II common stock.
PURPOSES AND REASONS FOR THE MERGER (See page 47)
The ILM II Board considered a number of factors when it approved the
merger. Those factors included:
o the strategic financial alternatives available to ILM II to maximize
shareholder value;
o the overall consolidation trend in the senior living industry;
o ILM II's financial condition, liquidity and profitability;
o the likelihood of completing the merger;
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o the lack of superior alternative transactions;
o ILM II's finite-life status;
o The October 6, 1999 and October 19, 1999 oral and written opinions of
ILM II's financial advisor, Cohen & Steers Capital Advisors LLC, that
the $14.47 per share in cash to be paid to ILM II's shareholders in the
merger was, on such dates, fair to such holders from a financial point
of view;
o the 66- 2/3% ILM II shareholder approval requirement;
o ILM II's strengths and weaknesses as an independent company;
o general economic and market conditions;
o the matters described on page 58 of this proxy statement under
"Interests of Certain Persons in the Merger;"
o the fully taxable nature of the merger;
o ILM II's termination and expense reimbursement obligations to Capital;
o Capital's ability and agreements with ILM II to obtain the funds
necessary to pay the merger consideration;
o ILM II's historical relationships and commercial arrangements with
Capital; and
o the lack of burdensome regulatory requirements for the merger.
The purpose of the merger is to sell to Capital 100% of the ownership
interests of ILM II and, therefore, to sell 100% control of ILM II to Capital.
OPINION OF OUR FINANCIAL ADVISOR (See page 48)
Cohen & Steers delivered on October 6, 1999 to ILM II's Board its oral
opinion, as subsequently confirmed in writing on October 19, 1999, that, as of
those dates, the $14.47 per share in cash to be received by you in the merger
was fair, from a financial point of view.
The full text of Cohen & Steers' written opinion, which contains more
detailed information about the assumptions made, the matters considered and the
limitations on Cohen & Steers' review, is attached as Appendix B to this proxy
statement and should be read carefully and in its entirety.
PAYMENTS TO OUR FINANCIAL ADVISORS (See page 57)
ILM II paid $125,000 to Cohen & Steers for its opinion delivered to ILM
II's Board that the $14.47 per share in cash to be paid to you in the merger was
fair to you, from a financial point of view. ILM II will pay an additional
$100,000 to Cohen & Steers if the merger is completed.
In connection with the previous February 7, 1999 merger agreement between
ILM II and Capital, ILM II paid $150,000 to Schroder & Co. Inc., ILM II's former
financial advisor, for various financial advisory services relating to that
agreement.
The February 7, 1999 merger transaction was terminated on October 19, 1999
- -- the day the current merger agreement was signed.
ILM II will pay Schroders an additional $ upon completion of
the merger.
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CONDUCT OF ILM II'S BUSINESS IF THE MERGER IS NOT COMPLETED (See page 58)
If the Merger is not completed, ILM II intends to operate its business as
presently operated and, because ILM II is a finite-life entity, the ILM II Board
will continue to review ILM II's strategic financial alternatives to maximize
the value of ILM II's common stock.
PLANS AND PROPOSALS OF ILM II AND CAPITAL (See page 57)
After the merger, ILM II's separate corporate existence will terminate and
all of its assets, properties and liabilities will be owned and become the
responsibility of Capital Acquisition.
Capital has advised ILM II that it currently does not have any firm plans,
proposals or understandings involving the future liquidation or sale of ILM II's
properties or any mergers or reorganizations of ILM II or its assets, management
or business of ILM II. However, Capital reserves its right to enter into these
types of transactions from time to time following the merger.
YOU HAVE NO APPRAISAL RIGHTS (See page 87)
You will not have any right to object to the merger and receive a value
for your shares of ILM II common stock determined by a court.
U.S. FEDERAL INCOME TAX CONSEQUENCES (See page 68)
For U.S. federal income tax purposes, the merger will be treated as a sale
of ILM II's assets to Capital followed by the termination of ILM II's existence.
As an ILM II shareholder you will recognize gain or loss for tax purposes equal
to the difference between (i) $14.47 for each share of your ILM II's common
stock and (ii) the amount of your adjusted cost of each share of your ILM II
common stock as determined under applicable tax law.
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 II common stock for more than
12 months. Under present U.S. federal income tax law, long-term capital gains
are generally taxable at a maximum rate of 20% for individuals and 35% for
corporations. You also may be subject to state and local taxes.
BECAUSE DETERMINING THE TAX CONSEQUENCES OF THE MERGER MAY DEPEND UPON
YOUR PERSONAL CIRCUMSTANCES, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR TO
UNDERSTAND HOW THE MERGER MAY AFFECT YOU.
ACCOUNTING TREATMENT (See page 67)
For accounting and financial reporting purposes, the merger will be
accounted for in accordance with the "purchase method" of accounting.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (See page 58)
In considering the recommendation of ILM II's Board of Directors to vote
for approval of the merger agreement, you should know that certain directors of
ILM II have relationships or interests in the merger that are different from or
in addition to your interests as a shareholder.
These interests may create actual or potential conflicts with your
interests. You also should know that neither ILM II nor any of its shareholders
has appointed or hired a special representative to negotiate the terms of the
merger agreement.
7
<PAGE>
After the merger, the current directors of ILM II will become members of a
newly created advisory board of Capital. Capital will protect certain persons
serving as directors and officers of ILM II at the time of the merger from any
lawsuits filed against them in their positions as directors and officers for a
period of seven years after the merger.
Also, Capital will keep directors' and officers' liability insurance for
the benefit of those persons for the same seven-year period.
FINANCING OF THE MERGER (See page 70)
Capital agreed to obtain and has obtained just prior to the date this
proxy statement was mailed to you a written commitment from ____________ to
provide Capital at or prior to closing with all the funds necessary to pay to
ILM II's shareholders the aggregate cash they are entitled to receive in the
merger.
LITIGATION PERTAINING TO THE MERGER (See page 79)
See the description of "Legal Proceedings" on page 80 for information
concerning the class action litigation commenced against ILM II and its
directors regarding matters prior to and involving the merger, and the terms and
conditions of the October 15, 1999 settlement of that litigation.
CONCURRENT ILM MERGER (See page 67)
ILM Senior Living, Inc. is a separate finite-life corporation with some
shareholders in common with ILM II Senior Living Inc. On October 19, 1999 ILM
signed a merger agreement with Capital very similar to the merger agreement
signed by ILM II and Capital. Completion of the merger and the ILM merger are
not conditioned upon one another.
MERGER PROCEDURES (See page 60)
Shortly after completion of the merger, you will receive a letter of
transmittal and instructions on how to surrender your ILM II common stock for
$14.47 in cash. Please sign, date and complete your proxy card and return it to
us in the enclosed envelope. The envelope requires no postage if mailed in the
United States. PLEASE DO NOT SEND US YOUR STOCK CERTIFICATES AT THIS TIME.
8
<PAGE>
THE ILM II CORPORATE STRUCTURE
[ILM II CORPORATE STRUCTURE
FLOW CHART]
This chart sets forth the current organizational structure of ILM II and
its affiliated entities. ILM Senior Living, Inc. has an identical structure to
that of ILM II, with ILM Holding, Inc. owning the senior living communities
which are subject to the mortgages held by ILM, and ILM Lease Corporation
leasing the senior living communities from Holding.
9
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical consolidated financial data of ILM II
with respect to each year in the five-year period ended August 31, 1998 is
derived from the consolidated financial statements of ILM II. These consolidated
financial statements have been audited by Ernst & Young LLP, ILM II's
independent auditors.
The financial data of ILM II for the three and nine months ended May 31,
1999 and 1998 has been derived from ILM II's unaudited consolidated financial
statements for the periods ending May 31, 1999 and 1998. The operating results
for the three and nine months ended May 31, 1999 are not necessarily indicative
of results for the full fiscal year.
The following data should be read together with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of ILM II
appearing later in this proxy statement, and also should be read together with
the consolidated financial statements of ILM II and the notes thereto included
at the end of this proxy statement.
The unaudited historical financial statement data for ILM II as of May 31,
1999 and for the nine months ended May 31, 1999 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 II, contain all adjustments, consisting
only of normal recurring accruals, necessary for the fair presentation of the
results of operations for such periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31, YEAR ENDED AUGUST 31,
----------------- -----------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and other income..................... $ 3,946 $ 3,700 $ 4,988 $ 4,416 $ -- $11,789 $10,863
Interest income earned on cash
equivalents.............................. 39 57 77 99 46 87 74
------- ------- ------- ------- ------- ------- -------
3,985 3,757 5,065 4,515 46 11,876 10,937
Expenses:
Depreciation and amortization............... 987 956 1,285 1,275 -- 1,313 1,254
Management fees............................. -- -- -- 103 130 857 728
Property operating expenses................. -- -- -- -- -- 7,446 7,062
General and administrative.................. 255 88 222 563 246 277 302
Professional fees........................... 1,335 337 540 308 233 528 379
Director compensation....................... 66 86 111 82 24 24 24
------- ------- ------- ------- ------- ------- -------
2,643 1,467 2,158 2,331 633 10,445 9,749
------- ------- ------- ------- ------- ------- -------
Operating income (loss)....................... 1,342 2,290 2,907 2,184 (587) 1,431 1,188
Equity in income of properties securing
mortgage loans(1)........................... -- -- -- -- 2,674 -- --
------- ------- ------- ------- ------- ------- -------
Net income.................................... 1,342 2,290 2,907 2,184 2,087 1,431 1,188
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Earnings per share of common stock............ $ 0.26 $ 0.44 $ 0.56 $ 0.42 $ 0.40 $ 0.27 $ 0.23
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Cash dividends paid per share of common
stock....................................... $ 0.64 $ 0.54 $ 0.73 $ 0.61 $ 0.50 $ 0.43 $ 0.40
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Book value per share of common stock.......... $ 5.89 $ 6.25
------- -------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, -----------------------------------------------
1999 1998 1997 1996 1995 1994
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 651 $ 1,896 $ 2,361 $ 1,694 $ 2,409 $ 1,394
Total assets.................................... 30,497 32,383 33,355 33,976 35,552 35,748
Equity.......................................... 30,077 32,038 32,887 33,876 34,881 35,227
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
MAY 31, -----------------------------------------------
1999 1998 1997 1996 1995 1994
---------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Other Data (at end of period):
Wholly-owned facilities....................... 5 5 5 5 5 5
Joint venture facilities(2)................... 1 1 1 1 1 1
</TABLE>
- ------------------
(1) Balance relates to ILM II's interest in ILM II Holding. ILM II acquired
complete control over ILM II Holding in fiscal 1997; as a result, ILM II
Holding is consolidated beginning in 1997. The balance was presented using
the equity method of accounting in 1996 as ILM II did not control the
majority of the voting equity of ILM II Holding during the year, although
ILM II participated in 99% of the operating results.
(2) ILM II is a tenant in common with ILM for the Villa Santa Barbara facility,
with ILM II having a 75% interest in the property.
11
<PAGE>
THERE IS NO ESTABLISHED MARKET FOR ILM II'S COMMON STOCK; DIVIDEND HISTORY
ILM II'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 II'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 II's common stock have been declared and paid quarterly
since inception. For the fiscal year ended August 31, 1998, dividends were paid
in an amount which aggregated $.78 per share and for the fiscal year ended
August 31, 1999, dividends were paid in an amount which aggregated $.85 per
share.
Moreover, ILM II 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.
12
<PAGE>
THE SPECIAL MEETING
The ILM II Board is using this document to solicit proxies from the holders
of ILM II's common stock at the special meeting. This document and the
accompanying form of proxy was first mailed to ILM II's shareholders on or about
December , 1999.
Purpose of Special Meeting
The special meeting of holders of ILM II common stock will be held on
February , 2000 at 10:00 a.m., local time, at the Key Bridge Marriott Hotel,
Arlington, Virginia so that ILM II's shareholders may 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 II Board has fixed December , 1999 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 5,181,236 shares of ILM II 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 _______________ holders of
record of ILM II common stock. ILM II common stock is the only outstanding class
or series of ILM II'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 II 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 II 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 II 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 II 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
II on your vote, your ILM II common stock represented by that proxy will be
voted "FOR" the approval of the merger agreement.
13
<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
II 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 II Senior
Living, Inc. at 8180 Greensboro Drive, Suite 850, McLean, 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 may not vote in person at the
special meeting.
The ILM II Board does not know of any matters other than those described in
the notice of the special meeting that will be mentioned 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 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 II proxy will vote the
shares represented by the proxy on such matter as determined in their
discretion, but no proxy that is voted against the merger 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 II will pay its own costs of soliciting proxies from ILM II
shareholders. In addition to soliciting proxies by mail, directors, officers and
employees of ILM II 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 II 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 II common stock represented at the special meeting but not
voted for or against the merger, 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) didn't 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 II 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 II common stock
are
14
<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 the merger.
Beneficial Ownership by Directors
On the record date, none of the officers or directors of ILM II owned any
shares of ILM II 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 II at least two weeks
before the special meeting at the telephone number or address stated under
"Where You Can Find More Information" on page 16.
Confidential Voting
Independent inspectors will count votes at the special meeting. Your
individual vote will be kept confidential from ILM II 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 II pursuant to which it will use its best efforts to solicit
ILM II shareholder approval of the merger. A copy of the soliciting agent
agreement is attached hereto as Appendix C.
D.F. King & Co. Inc. will receive commissions equal to $6,000 in connection
with its services, as well as reimbursement of its reasonable out-of-pocket
expenses (including telephone, mailing and legal expenses), all of which will be
paid by ILM II.
Annual Meeting
ILM II 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 II's proxy statement for the calendar year 2000 annual meeting
will be .
15
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
This document contains important business and financial information about
ILM II 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:
<TABLE>
<S> <C>
ILM II Senior Living, Inc. Capital Senior Living Corporation
8180 Greenboro Drive, Suite 850 14160 Dallas Parkway, Suite 300
McLean, Virginia 22102 Dallas, Texas 75240
(888) 257-3550 (972) 770-5600
www.capitalsenior.com
</TABLE>
If you would like to request documents, please do so before February ,
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 II, Capital or the proposed merger that differs from or
adds to the information contained in this document or in the documents that ILM
II 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 II is supplied by ILM II
and the information in this document regarding Capital is supplied by Capital.]
ILM II 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 II please reference ILM II's SEC File number "0-18942".
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 II
and Capital at the SEC's website at "http://www.sec.gov."
A VERY IMPORTANT WARNING ABOUT OUR FORWARD LOOKING STATEMENTS
ILM II 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.
16
<PAGE>
When words 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 "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 only as of the date of this proxy
statement.
All subsequent written and oral forward-looking statements regarding the
merger attributable to ILM II, or any person acting on its behalf, are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. ILM II does not intend to update or revise any
forward-looking statements to reflect any changes in general economic,
competitive or market conditions and developments beyond its control.
17
<PAGE>
SPECIAL FACTORS
THE MERGER--GENERAL
The merger agreement provides for the merger of ILM II with Capital
Acquisition. Capital Acquisition will be the surviving entity in the merger and
ILM II's separate corporate existence will terminate. The aggregate
consideration to be paid by Capital in the merger is $74,982,000 in cash. If the
merger is completed, each share of ILM II common stock outstanding immediately
prior to the effective time of the merger automatically will be converted into
the right to receive $14.47 in cash. No interest will be paid on such amount.
ILM II and Capital intend to complete the merger as promptly as possible
after the approval of the merger agreement by ILM II's shareholders and when all
of the conditions contained in the merger agreement have been satisfied or
waived. If ILM II's shareholders approve the merger agreement, it is expected
that the merger will be completed during the first quarter of calendar year
2000.
HISTORY
In 1990 PaineWebber Independent Living Mortgage Fund, II, 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 II elected to qualify and be taxed as a Real Estate Investment
Trust (a "REIT") under the Internal Revenue Code of 1986, as amended. In
September 1990, ILM II completed an initial public offering and invested the net
proceeds therefrom in participating mortgage loans secured by the senior housing
communities. The loans by ILM II 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 II
mortgage loans did not generate cash flows from tenant rentals sufficient to
service the mortgage indebteness. 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 case under
Title 11 of the United States Bankruptcy Code. Pursuant to a settlement
agreement entered into and approved by the Bankruptcy Court in April 1994, ILM
II's predecessor became the owner (indirectly through its subsidiaries) of the
senior housing communities presently comprising the ILM II portfolio.
The organizational instruments of ILM II provided for the liquidation of
the property portfolio not later than December 31, 2001.
From April 1994 to July 1996, AHC was the property manager for ILM II and
ILM. Due to AHC's failure to perform adequately under its management agreements,
AHC was terminated as the property manager in July 1996.
In March 1995 ILM II received an unsolicited expression of interest from
Columbia Pacific Management, Inc. on behalf of Holiday Retirement Corporation to
acquire the ILM II and ILM portfolios for $114.0 million, subject to receipt of
financing, the completion of due diligence and other conditions. Shortly
thereafter, ILM II engaged in informal
18
<PAGE>
discussions with third parties regarding possible transactions involving its
senior living communities portfolio. PaineWebber Properties Incorporated, the
sponsor of the ILM II portfolio and ILM II's advisor, approached approximately
10 candidates (which included Holiday Retirement Corporation, The Forum Group,
Inc., Kisco Retirement Communities, Capital Senior Living, Inc., American
Retirement Corporation, The Fountains Retirement Properties, Inc., Meditrust
Corp., Nationwide Health Properties Inc. and Health and Retirement Properties
Trust) from whom expressions of interest were received setting forth their
preliminary desire to explore the purchase of the ILM II and ILM portfolios for
aggregate amounts which ranged from approximately $80.0 to approximately
$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 II and ILM portfolio 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 the portfolio.
Such appraiser reported to the Board that as of October 30, 1995, the appraised
value of the combined ILM II and ILM portfolios was approximately $108.5
million, of which $44.5 million was attributed to ILM II and of which
$64.0 million was attributed to ILM. During the pendency of 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 II and ILM (i.e., December 31, 2001 and December 31, 1999, respectively).
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 II and ILM portfolios were not then
imminent.
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 portfolio and consider alternative means to maximize
the value of the ILM II 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 II and ILM
portfolios. 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 properties in locations contiguous to the ILM II
properties. Accordingly, ILM II believed that AHC intended to compete directly
with ILM II.
On February 26, 1996 Holiday Retirement Corporation orally increased its
March 1995 expression of interest to $127.0 million, subject to the same due
diligence, financing and other conditions set forth in its March expression of
interest.
At a Board meeting held on February 29, 1996, the Board reviewed with
PaineWebber and PaineWebber Properties various alternatives to owning and
operating the properties until December 31, 2001, including a portfolio sale and
liquidation analysis, and corporate
19
<PAGE>
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, AHC likely 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 contact potential candidates to
serve as replacement property manager for the ILM II portfolios. Approximately
20 such candidates initially were identified and contacted.
To assist the Board in its decisional process, it invited National
Westminster Bank, PLC, New York Branch, a nationally recognized financial
advisor with significant expertise in the senior living industry, to discuss
industry trends and conditions and to provide strategic financial advice on
methods to maximize the value of ILM II's common stock.
At a special meeting of the Board convened on April 29, 1996, at which J.
William Sharman, Jeffry R. Dwyer and Lawrence A. Cohen were present, NatWest
expressed its preliminary view that the Board might consider, among other means
to maximize shareholder value, a transaction in which ILM II would pursue
expansion through the selective acquisition of other senior living communities,
the direct lease of the senior living communities to a third party operator,
listing the shares of ILM II common stock (as well as the shares of ILM II's
affiliate leasing entity--Lease II) on a national securities exchange or The
Nasdaq Stock Market, combining, by means of merger or otherwise, ILM II with
Lease II, or combining Lease II with Lease I (ILM's affiliate leasing entity).
NatWest then related to the Board its view that a current liquidation or public
auction of the ILM II portfolio at that time would be premature in view of ILM
II's December 31, 2001 scheduled finite-life liquidation date.
In April 1996, of the 20 potential senior living property managers
PaineWebber Properties had contacted, the Board narrowed its decision to five
candidates (including Sunrise Assisted Living, Inc., Marriot Corporation, Manor
Care Inc., ARV Assisted Living, Inc. and Capital), each of whom, at the Board's
direction, were interviewed by PaineWebber Properties.
Following due diligence reviews with respect to the qualifications and
performance history of each candidate and a review of the proposals received
from each candidate (including fee quotations and termination provision
proposals), the Board and the boards of directors of Lease II and Lease I 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. At the Board meeting at which Messrs. Dwyer, Sharman and Cohen were
present, Mr. Cohen, then the President and a director of ILM II, informed the
Board that senior management of Capital had asked Mr. Cohen 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 that he had no
arrangement or agreement with Capital as to any such employment, he wanted to
preserve his ability to pursue such an opportunity in the future and believed it
was prudent to disclose these facts to the Board. Mr. Cohen thereupon was
recused from all ILM II Board presentations, discussions and decisions regarding
arrangements and commercial relationships with Capital.
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The Board asked PaineWebber Properties about its impressions of Capital and
PaineWebber Properties observed that Capital had a good reputation, was capable
and appeared well-suited to assume the role of successor property manager of the
ILM II portfolio.
Considerable discussion ensued as to the merits of Capital as the
replacement manager and its qualifications relative to the other candidates. The
proposals made by each of the candidates also were reviewed and it was noted
that Capital's quoted fees were the lowest of all proposals received from the
other candidates. In particular, the Board noted that all proposals included
customary termination (or "break-up") fees and that in view of the scheduled
liquidation of ILM II in approximately five 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
was more appropriate and communicated to Capital's representatives that it would
not agree to any termination fees, but instead, would grant to Capital a right
of first and last offer in the case of the sale of the ILM II asset portfolio to
an unaffiliated third party. ILM II also informed Capital that any such right
would have to permit ILM II to terminate any pending property sale in its sole
discretion so that ILM II could retain the right not to sell the portfolio to
Capital or any other party.
Thereafter the management agreement with AHC was terminated for cause, and
the ILM Lease II Board resolved to enter into a management agreement with
Capital substantially in accordance with the term sheet previously reviewed by
the Board but subject to Capital's agreement to the inclusion of a right of
first and last offer as described above. The Board instructed PaineWebber to
report directly to Mr. Dwyer regarding direction for further negotiating the
management agreements with Capital. Such negotiations continued and management
agreements ultimately were entered into with Capital's affiliate in July 1996.
The management agreement provides that in consideration for the management
services provided, Lease II agreed to pay Capital Senior Management 2 a base
management fee of 4% of the monthly gross operating revenues plus an incentive
management fee of 25% of the amount by which certain net cash flows of the
senior living properties exceed certain base amounts. The management agreement
is guaranteed by Capital.
At a special meeting of the Board held on May 13, 1996, at which Messrs.
Dwyer, Sharman and Cohen were present, representatives of PaineWebber addressed
the Board concerning possible financial transactions relating to ILM II's
portfolio. The Board reviewed a marketing analysis of the senior living industry
which indicated that portfolio values in the industry were at a near-peak.
PaineWebber again recommended that the Board pursue a current sale of ILM II's
portfolio. PaineWebber's reasons for a current sale included such considerations
as (i) the nature of the investment of ILM II's shareholders had changed
substantially since 1990 because ILM II initially had been organized as a
mortgage REIT (i.e., an investment directly in mortgage loans secured by
properties) and subsequently was reorganized as an equity REIT (i.e., an
investment directly in the senior living properties and the consequent ability
to participate in the appreciation, if any, of the properties), and (ii) ILM
II's common stock was not listed on a national securities exchange or The Nasdaq
Stock Market or traded in any established securities market--thus there was
virtually no liquidity for the ILM II common stock.
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The Board declined at this time to authorize or pursue a sale of its senior
living communities noting, among other reasons, that 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 new management for the properties would
be both disruptive and costly, that it was necessary first to stabilize
occupancy rates and improve net operating income, and that the Board intended to
pursue means to simplify ILM II's corporate ownership structure.
The Board believed that if ILM II remained independent 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, 2001 and the
value of ILM II'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 senior living community portfolio values
reportedly were not at a peak.
No definitive plans were adopted by the Board at this time, although it
resolved to continue to study and receive advice on appropriate strategic
financial alternatives. The Board noted that available sales prices for the ILM
II common stock were less than the book value per share of the stock. Therefore,
it appeared to the Board that, although there could be no assurance and although
the Board did not authorize a sale feasibility study, the hypothetical value (or
premium) that could be obtained pursuant to the sale of ILM II as a
going-concern might be significantly greater than the value that could be
realized for shareholders upon a partial or complete liquidation of the property
portfolio.
Shortly after the May 13th Board meeting, PaineWebber indicated that it
would be interested in conducting a current auction of the ILM II and ILM
portfolios. Due to PaineWebber's sponsorship of the portfolio funds and its
underwriting and other relationships with ILM II and ILM, the Board believed
that PaineWebber had (or reasonably could be deemed to have) a conflict of
interest with respect to its strategic financial advice to the ILM II Board. In
this connection, the Board noted that (i) PaineWebber Properties had been the
sponsor of ILM II's corporate predecessor, (ii) PaineWebber Incorporated was
exclusive underwriter for the initial public offering of ILM II's predecessor
(and that the initial investors in the IPO included a significant number of
customers of PaineWebber), and (iii) PaineWebber had until 1996 one nominee on
the ILM II Board.
PaineWebber was informed of the Board's view and NatWest subsequently was
requested by the Board to provide strategic financial advice based primarily on
NatWest's reputation, its expertise in the representation and valuation of
private and publicly-held corporations, REITs and other participants in the
healthcare and senior living industry, and the fact that NatWest had at that
time no prior relationship to ILM II or ILM (or any of their directors), and did
not own any securities of ILM II or ILM. The Board believed it was incumbent 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 whether commercially
viable strategic alternatives were available to maximize such value.
The Board believed that absent a compelling financial reason (whether of a
general economic, market, industry or corporate nature), liquidating ILM II in
accordance with PaineWebber's recommendation approximately five and one-half
years earlier than
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ILM II's December 31, 2001 scheduled finite-life expiration date would be both
imprudent and premature.
At a meeting of the Board held on January 10, 1997, at which J. William
Sharman, Julien G. Redele, Lawrence A. Cohen, Carl J. Schramm and Jeffry R.
Dwyer were all present, PaineWebber indicated that because a new property
manager (i.e., Capital) had been engaged by ILM II and had been performing with
greater success than AHC, and in view of seemingly improved trends in the real
estate and capital markets, it was an appropriate time for ILM II to dispose of
its portfolio to realize for shareholders the appreciation of ILM II's
portfolio.
PaineWebber expressed its belief that ILM II was not an appropriate vehicle
for long-term investment due to the lack of liquidity of the ILM II common
stock, ILM II's limited access to capital and lack of critical mass, and the
absence, in its view, of more experienced, proactive and entrepreneurial
management. PaineWebber thus reiterated its recommendation for an immediate sale
of the ILM II portfolio by means of auction.
PaineWebber further stated that if the Boards of ILM II and ILM agreed
within 30 days to sell the companies' portfolios pursuant to such an auction,
PaineWebber would participate as opening or "floor" bidder at a guaranteed
aggregate minimum gross 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 portfolio 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 such hypothetical portfolio
liquidations and after payment of transaction expenses, PaineWebber's
$127.0 million guaranteed opening bid, if the successful bid, would result in
net consideration to the ILM II and ILM shareholders of approximately
$120.0 million (representing approximately only three to five million dollars in
excess of the aggregate investment basis of the ILM II and ILM shareholders).
At the meeting, PaineWebber stated that it believed the market for
independent living properties had peaked and that recently completed initial
public offerings of companies in the senior living industry had not been
well-priced. PaineWebber informed the Board that if the Board decided not to
pursue the portfolio sale recommended by PaineWebber, it would resign as ILM
II's advisor.
After further review and consideration of PaineWebber's sale
recommendation, it was the view of the Board that because PaineWebber Properties
repeatedly failed to recommend any alternatives to liquidation of the ILM II
portfolio (well in advance of ILM II's December 31, 2001 scheduled finite-life
termination date) and the reasons stated above, PaineWebber likely was not in a
position to analyze objectively and impartially all strategic financial
alternatives available to ILM II to maximize shareholder value. Accordingly, the
Board sought to engage a nationally recognized investment banking firm with
considerable expertise in the senior living industry regarding the strategic
financial alternatives available to ILM II.
At the request of the Board, Jeffry Dwyer was instructed to obtain
proposals from independent financial advisors of national reputation. Mr. Dwyer
initially contacted Donaldson, Lufkin and Jenrette Securities Corporation, BT
Alex. Brown Incorporated,
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Morgan Stanley & Co. Incorporated and NatWest. ILM II subsequently retained
NatWest as its exclusive financial advisor because of NatWest's ability to
devote significant attention to ILM II, its 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 II with adequate
time for NatWest to complete its investigatory analyses. The Board had
discussions with NatWest during this time to explore a potential corporate
reorganization that would enhance shareholder value and requested NatWest to
report back to the full Board.
Having completed its analyses, at a Board meeting held in March 1997 at
which J. William Sharman, Julien G. Redele, Lawrence A. Cohen, Carl J. Schramm
and Jeffry R. Dwyer all were present, NatWest advised ILM II that the sale of
the ILM II portfolio at that time was not the optimum means to maximize
shareholder value. NatWest expressed its view that, although there could be no
assurance, the senior living market was likely to continue to appreciate for
existing communities and that the ILM II portfolio, including its expansion
capabilities, 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 II should explore a
restructuring which would separate ILM II 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 liquidation of the
portfolio on a property-by-property basis. In addition, NatWest offered that
such a transaction likely would provide ILM II and ILM with the flexibility to
expand or divest either their operating companies or the real estate entities.
After the meeting, the Board informed PaineWebber that based, in part, on
the advice of NatWest, it decided not to liquidate the properties at that time,
that other potential strategic financial alternatives were available and in the
best longer-term interests of ILM II's shareholders, and that the Board was
prepared to accept the resignation of PaineWebber Properties as its advisor.
At a Board meeting held on August 20, 1997 at which J. William Sharman,
Julien G. Redele, Lawrence A. Cohen (who was recused for the Schroders
presentation portion of the meeting), Carl J. Schramm and Jeffry R. Dwyer, were
present, the Board received a presentation from Schroders. Schroders recently
had been retained by the Board to replace NatWest as ILM II's financial advisors
when the individual NatWest investment bankers who worked for NatWest on the ILM
II account resigned from NatWest and joined Schroders. Schroders outlined
alternatives for a restructuring of the combined companies and noted that market
conditions had changed since earlier in the year when NatWest had suggested a
corporate reorganization of ILM II into a real estate 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 II into an independent publicly traded
corporation to own and operate senior living communities while, at the same
time, seeking a strategic financial, merger or business
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combination partner with expertise in managing and operating senior living
communities would be an appropriate strategy to explore to maximize shareholder
value.
As a means of testing the market, the Board asked Schroders to identify
prospective strategic financial and business combination partners. However,
Schroders was not authorized to initiate any specific discussions with these
companies. Schroders did identify approximately 10 senior living companies
(including American Retirement Corporation, Brookdale Living Communities Inc.,
Capital, Sunrise Assisted Living, Inc., Alterra Healthcare Corporation,
previously known as Alternative Living Services, Inc., Assisted Living Concepts,
Inc., CareMatrix Corporation, Balanced Care Corporation, Integrated Living
Communities, Inc. and Emeritus Corporation). ILM II did not seek at this time to
ascertain the terms and value of any prospective transaction with any of the
foregoing companies.
At no time during the foregoing time period did the ILM II Board authorize
or resolve formally to sell ILM II or any of its properties, nor did the Board
actively solicit offers for a merger or other business combination transaction
or instruct its financial or other advisors to do so on its behalf. However, at
all times during the foregoing time period, the ILM II Board continued to
explore, study and receive advice as to all commercially practicable strategic
financial alternatives available to maximize the value of the ILM II common
stock.
Although no Board determination was made to proceed definitively with any
particular transaction or to propose, structure or negotiate the potential terms
thereof, the Board was of the view that of the approximately 10 potential
candidates identified by Schroders, Capital's historical performance as third
party manager of the ILM II properties and, thus, its familiarity with ILM II's
portfolio, made Capital a viable potential strategic merger partner or business
combination candidate if the Board later resolved to pursue and negotiate the
terms of such a transaction. The Board believed that Capital's performance as
property manager was strong and that a second change in property management
(soon after the termination of AHC) would be disruptive to the operation of the
senior living communities, adversely affect the operating results of the
business and the level of services provided to its residents, and potentially
have a negative impact on the value of the ILM II portfolio.
BACKGROUND OF THE MERGER
THE TIMING, STRUCTURE, TERMS AND CONDITIONS OF THE MERGER AND THE MERGER
AGREEMENT ARE THE RESULT OF NEGOTIATIONS BETWEEN REPRESENTATIVES OF ILM II 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 II AND CAPITAL ON
FEBRUARY 7, 1999 (WHICH HAS BEEN TERMINATED), AND CULMINATED WITH THE EXECUTION
AND DELIVERY OF THE AMENDED AND RESTATED MERGER AGREEMENT BETWEEN ILM II AND
CAPITAL ON OCTOBER 19, 1999. SEE APPENDIX A TO THIS PROXY STATEMENT.
When the ILM II Board determined to explore a possible strategic financial
transaction with Capital in August 1997, the Board established a special
committee comprised of Messrs. Dwyer and Sharman--the Board's two most senior
members with
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extensive familiarity with ILM II and its portfolio. Neither Mr. Dwyer nor Mr.
Sharman (i) had any material economic or pecuniary interest in ILM II, ILM or
Capital, (ii) was a participant in any director, executive or employee
compensation plan or arrangement of either ILM II or ILM, or (iii) was party to
any employment, change-in-control or similar agreement, arrangement or
understanding with ILM II or ILM. It was determined that Messrs. Dwyer and
Sharman, therefore, were disinterested directors and the best qualified
candidates to serve on the special committee.
Messrs. Dwyer and Sharman were authorized to approach Capital and ILM II's
financial advisors to discuss the feasibility of a potential merger or business
combination transaction with Capital. The special committee's mandate was to
determine whether a value maximizing transaction was feasible.
The Board decided that prospectively, with respect to all matters
concerning Schroders or any potential extraordinary corporate transactions
involving ILM II or its assets, Mr. Cohen would be required to recuse himself
entirely from all Board discussions, deliberations and presentations. Mr. Cohen
was, in fact, so recused for the remainder of his tenure (through July 1998) at
ILM II. In addition, the minutes of all Board meetings were redacted such that
Mr. Cohen did not receive complete copies of the minutes of the Board or the
special committee with respect to discussions and deliberations with Capital,
ILM II's financial advisors or these potential transactions.
At an August 25, 1997 meeting of the Board at which J. William Sharman,
Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer all were present, Mr.
Dwyer indicated that he had contacted James A. Stroud, the Co-Chairman of
Capital, and informed him that in addition to other financial alternatives ILM
II was exploring the possibility of a merger with an operating senior living
company and was interested in discussing the possibility of such a transaction
with Capital. Mr. Dwyer informed Capital that because Capital was at that time a
private company, ILM II would need relevant financial and operating data for
Schroders to perform an analysis as to whether such a merger was feasible and
could be structured in a manner which was commercially advantageous to ILM II.
Capital indicated its willingness to pursue such a transaction and a bilateral
confidentiality and standstill agreement was entered into with Capital and each
of ILM II and ILM to begin a mutual exploration process, including the
commencement of initial due diligence investigations by each party.
A representative of Capital requested an initial meeting with the ILM II
Board to begin substantive deal discussions and Mr. Dwyer informed him that such
a meeting would be premature until Schroders had completed a preliminary
financial review of Capital and reported their results to the ILM II Board.
On September 18, 1997, Mr. Dwyer reported to the Board that Capital had
provided Schroders with a copy of its Registration Statement on Form S-1 that
recently was filed with the SEC in connection with Capital's planned initial
public offering. However, as a result of its pending registration process,
Capital did not pursue formal merger discussions with ILM II at that time.
Capital subsequently consummated its initial public offering on November 5,
1997.
At a meeting of the ILM II Board convened on December 8, 1997, at which J.
William Sharman, Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer all were
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present, the Board discussed with Schroders a possible merger between ILM II and
Capital. The Board believed that the combined portfolio of ILM II and ILM could
be valued in the approximate range of $160.0 million to $170.0 million, to be
allocated approximately 40% to ILM II and approximately 60% to ILM. 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 II and ILM
portfolios. One Board member asked whether it would be appropriate at this time
for ILM II to actively solicit interest from other companies even though there
had been no formal Board decision to sell ILM II. The Board determined that
because ILM II was not scheduled to liquidate until December 31, 2001, the Board
was not inclined to conduct an auction for the sale of the portfolios or of the
ILM II stock and that ILM II should continue to remain independent.
The Board also determined that, in lieu of actively soliciting proposals at
that time from a variety of potential bidders, there were three primary reasons
for continuing to explore a potential business combination with Capital; namely
because: (i) the due diligence process and costs would be substantially less in
the case of Capital because it was familiar with ILM II's assets as property
manager of the ILM II portfolio, and that any transaction agreements which might
be negotiated were likely to be more simple from an ILM II representation and
warranty perspective as a result; (ii) in lieu of a termination fee, the
management agreements executed by Lease II provided Capital with a right of
first and last offer with respect to the sale of ILM II's properties or of any
interest in ILM II Holding (the direct owner of the ILM II properties and a
wholly owned subsidiary of ILM II); and (iii) Capital, to date, had been a
commercially successful third party manager of the portfolio.
The Board also noted that, although it had not considered specific forms of
merger consideration at the time, if existing shareholders were to receive
common equity or convertible preferred securities in a surviving merger entity,
the Board would need to consider carefully the probability and magnitude of any
potential negative impact on revenues from any disruptions during the period of
transition from one property manager to another. The Board concluded that it was
less likely that consummating a transaction with Capital would adversely affect
occupancy rates and impact future earnings of a successor company because
Capital already was managing with the ILM II portfolio and a prospective
transaction with Capital, pursuant to which ILM II shareholders received non-
cash consideration in the form of common stock or convertible preferred
securities, would provide enhanced liquidity because Capital's common stock was
listed on the New York Stock Exchange, Inc.
The Board realized that ILM II was under a contractual obligation to honor
Capital's right of first and last offer relating to the purchase of ILM II's
assets, but that the terms of such right permitted ILM II 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 II's
independent financial advisors, was fair from a financial point of view and
otherwise in the best interests of ILM II's shareholders, ILM II would pursue
other strategic financial alternatives to maximize shareholder value.
The directors discussed these matters with their outside legal and
financial advisors and it was decided that Capital should be contacted and
ascertain whether Capital would be
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interested in pursuing a merger with ILM II and ILM at an aggregate valuation of
approximately $170.0 million. The Board believed that a widespread solicitation
of potential purchasers or an auction of ILM II, as opposed to focusing on a
particular potential transaction with Capital, would be materially disruptive to
the management and operation of the ILM II portfolio which had only recently
recovered from the termination of AHC as property manager, and could result in
the receipt of artificially lower bids from industry competitors for the purpose
of initiating a protracted auction process.
At a Board meeting held in January 1998, at which J. William Sharman,
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 scenarios involving Capital, using publicly
available financial information. The Board requested Schroders to examine the
prospects of a transaction with Capital and consider the consequences and
potential risks if ILM II 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 offers from other potential merger
candidates because ILM II was not for sale at the time and the Board continued
to believe that Capital was the best potential transaction candidate at the
time.
The Board held a meeting on February 11, 1998, at which J. William Sharman,
Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, and at which
Schroders, Capital, Lehman Brothers (Capital's financial advisor), and ILM II's
legal advisors were present to begin direct discussions regarding a potential
transaction between ILM II and Capital (including a merger or other form of
business combination). At that meeting, representatives of ILM II, Schroders,
Capital and Lehman Brothers discussed the timing for a possible transaction and
how to accelerate completion of their respective financial, business and legal
due diligence investigations. In addition, Mr. Dwyer stated to Capital and
Lehman Brothers that any transaction consideration would need to have a minimum
value of approximately $170.0 million.
In May of 1998, Andrew A. Feldman and Jeri Feldman, as trustees for the
Andrew A. and Jeri Feldman Revocable Trust dated September 18, 1989 commenced a
putative class action lawsuit on behalf of that trust and all similarly situated
shareholders of ILM II (see "Certain Information with Respect to ILM II--Legal
Proceedings"). The plaintiffs hired E.M. Capital, Inc. as their financial
advisor who contacted various companies in the senior living industry requesting
expressions of interest to acquire ILM II and ILM. In June 1998, ILM II received
letters of inquiry from each of Brookdale Living Communities, Inc., American
Retirement Corporation and Sunrise Assisted Living Inc. Because the Board
believed that the pending AHC litigation and Feldman litigation needed to be
resolved prior to pursuing any transaction to maximize the value of the ILM II
common stock, the Board's attention was heavily focused on such litigation as
well as the day-to-day operation of ILM II. Accordingly, ILM II responded to the
letters of inquiry stating that in view of the increasing time expenditures and
the uncertainty created by the pending litigation matters, ILM II no longer was
in a position to pursue any of these letters of inquiry until after a
satisfactory settlement or resolution of the litigation matters. During this
period of time, the Board ceased all discussions regarding a potential strategic
transaction, including those pending with Capital.
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On June 3, 1998, Brookdale Living Communities, Inc. provided ILM II and ILM
with indications of interest to purchase ILM II's and ILM's interest in their
combined portfolios for $165.0 million in cash, subject to execution of
definitive purchase agreements, completion of due diligence, receipt of
requisite approvals, and the termination of the management agreements with
Capital and the leases with ILM II's and ILM's affiliated lease entities.
Brookdale acknowledged Capital's right of first and last offer 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 due diligence review which it anticipated
could be completed within 60 days. Brookdale stated its intention to finance 75%
of the $165.0 million purchase price and that its indication of interest would
expire on June 30, 1998.
The Board regarded Brookdale's June 1998 expression of interest as
incomplete and indefinite. In addition, the ILM II Board did not adopt or
authorize a sale (or hold ILM II out as being for sale), and the Board
increasingly focused its attention on the existing litigation involving AHC.
Several of the directors prepared for depositions and ILM II also became
increasingly focused on the tortious interference suit filed by AHC against
Capital because such litigation involved alleged damages which could have
subjected ILM II 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 special meeting of the Board at which J. William Sharman,
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 assisted living companies, and publicly traded healthcare REITs.
The Board requested from Schroders a more detailed discussion concerning
prospective transactions to be recommended to ILM II and ILM at the next Board
meeting scheduled for September 1998.
The Board believed that because of the large potential claim of AHC against
Capital and ILM II, it would be very difficult to pursue a merger with Capital
or any other merger candidate at that time. The Board also believed that because
an unsolicited tender offer for approximately 9.3% of the outstanding ILM II
common stock at $8.00 net per share recently was announced, other unsolicited
offers from persons interested in acquiring ILM II might ensue and that these
transactions could create potential shareholder confusion. Beginning in 1997 and
continuing periodically in 1998 and in 1999, tender offers were commenced by
prospective purchasers for the outstanding ILM II common stock at prices ranging
from $7.00 to $8.90 net per share in cash. The Board believed that these offers
(many of which involved "mini offers" to purchase less than 5% of the
outstanding ILM II common stock and, therefore, were not subject to SEC
disclosure and procedural regulations) did not represent the fair value of the
stock at that time nor the value of the underlying assets of ILM II.
On June 4, 1998 Redwood Investors, LLC commenced an unsolicited offer to
purchase up to 9.65% of the outstanding ILM II common stock at $8.00 per share,
net in cash. Schroders advised the ILM II Board that Redwood's offer was unfair
to ILM II's shareholders, from a financial point of view. Schroders
determination was based primarily
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on the fact that such offer price was not reflective of the going-concern value
of ILM II that might be obtained in a negotiated merger or business combination
transaction and based upon financial analysis which considered median and mean
equity values of ILM II common stock in comparison to comparable publicly traded
assisted living companies and discounted cash flow analyses of projected free
cash flows of ILM II on a C-corporation basis. Based, in part, on Schroders
determination, the Board recommended to ILM II's shareholders that they reject
the Redwood tender offer because the consideration being offered was inadequate.
The Redwood tender offer expired without any shares being tendered, accepted for
payment or paid for.
On July 28, 1998, Mr. Lawrence A. Cohen and Mr. 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, because he was appointed as an officer of Lease II and
elected as a member of Lease II's board. The new directors which comprised the
Board were Messrs. J. William Sharman, Jr., Jeffry R. Dwyer and Carl J. Schramm.
In August, 1998, the AHC litigation was settled. On September 23, 1998 the
special committee met with Schroders and told them that in view of the recent
settlement of the AHC litigation, Schroders should seek to design a transaction
providing the ILM II shareholders with liquidity and maximum value, although the
Board had not determined to conduct an auction of ILM II. 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 comparable by Schroders to ILM II. 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 earnings
multiple than Capital and might be able to pay more than Capital for ILM II in a
transaction involving a significant stock component--such as a 100% stock
transaction with pooling-of-interests accounting treatment. However, because
Capital had certain rights of first and last offer under their management
agreement with Lease II, the Board instructed Schroders to contact Capital and
its financial advisors to impart the details and structure of a proposed merger
transaction in which ILM II's shareholders would receive a combination of cash
and marketable securities at their election.
A meeting of the special committee was convened on October 29, 1998 with
Schroders and representatives of Capital and Lehman Brothers. Messrs. 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 related
that it had a successful history of operating the ILM II portfolios and noted
that, to its knowledge, no operating company in the senior living industry paid
dividends on its common stock.
The Board reasoned that a cash and stock transaction with Capital, compared
with other hypothetical merger candidates in the senior living industry, could
be advantageous to ILM II'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, they would have an opportunity to continue a portion of their
investment in a successor entity.
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The Board further observed that ILM II currently was paying a cash dividend
of approximately 8% to 8- 1/2% (which exceeded then prevailing interest rates on
certificates of deposit). This was deemed noteworthy by the Board because ILM II
had, since its incorporation in 1990 as a mortgage REIT through and including
its corporate reorganization as an equity REIT, 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 shareholders could elect to receive, in their discretion, a current
dividend or interest paying security if a definitive merger transaction was
pursued with Capital.
During approximately the next two and a half weeks, discussions ensued
between representatives of ILM II and Capital regarding the appropriate
structure for a merger or business combination transaction involving cash and
securities (including dividend or interest paying securities convertible into or
exercisable or exchangeable for shares of Capital common stock). On
November 12, 1998 and on November 23, 1998, the special committee met with
representatives of Schroders to review merger scenarios provided by Schroders
and Lehman Brothers. The Board instructed Schroders to inform Lehman Brothers
that ILM II needed additional due diligence information and financial data from
Capital regarding its analyst's consensus street estimates.
Schroders reported to the special committee that they had received a phone
call from senior management of Sunrise Assisted Living, Inc., a publicly traded
senior living company. Sunrise was generally familiar with the ILM II portfolio
because it was one of the 20 initial and five final candidates that bid for the
ILM II and ILM portfolio management assignment after ILM II terminated AHC in
July 1996. Sunrise initially communicated that because of its relative low cost
of capital, it believed it was well-positioned to buy the ILM II portfolio.
Sunrise, however, never presented a detailed proposal or term sheet and did not
contact ILM II further or initiate any further potential transaction
discussions. ILM II, likewise, did not pursue further communications or
discussions with Sunrise.
On November 17, 1998, Capital provided ILM II with a draft term sheet for a
proposed business combination transaction between subsidiaries of Capital and
ILM II and ILM for a combined value of $160.0 million. The transaction was
structured as a taxable forward triangular merger of ILM II 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 II's shareholders in the form of cash, Capital common stock and convertible
debt securities, ILM II would have the right to designate individuals for
nomination to Capital's board of directors, would include customary "no-shop"
(or non-solicitation) provisions and "break-up" fees, and expressly stated that
Capital would not have any due diligence or financing "outs." In addition, the
draft term sheet provided for cross-option (or "leg up") agreements in favor of
both Capital and ILM II--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.
In late November 1998, representatives of ILM II and Capital negotiated
with respect to the term sheet and discussed the terms of a definitive agreement
and plan of merger for
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the proposed transaction. In particular, during this period of time, ILM II's
counsel, Greenberg Traurig, discussed and negotiated with ILM II and its
representatives the appropriateness and scope of the proposed break-up fees,
cross-option agreements, non-solicitation covenants, pre-closing operating
restrictions, closing conditions, proration requirements, price per share
"collars and caps" and floating exchange ratios.
Based on these negotiations, Greenberg Traurig provided Capital with a
revised term sheet dated December 10, 1998 which provided for total merger
consideration of $170.0 million to be allocated among ILM II and ILM, based upon
the relative net operating income of both entities. The parties discussed
Capital's assumption of an estimated approximate $5.2 million built-in gains tax
associated with ILM II's and ILM's investment in its assets, merger
consideration to be paid 60% in the form of cash and 40% in the form of
convertible trust preferred securities of an affiliated business trust of
Capital, termination fees of $8.0 million to be allocated among the ILM II and
ILM mergers and reimbursement of Capital's expenses not to exceed $2.0 million
in the aggregate if the transaction was not consummated under certain
circumstances.
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 II and published over the internet by Brookdale
on December 4, 1998 wherein Brookdale referred to its June 3, 1998 letter of
inquiry. Mr. Sharman noted that he had responded to Brookdale on several
occasions pursuant to telephone conversations with Brookdale's advisors and that
he told them that ILM II was focused at that time on resolving the AHC
litigation and after such litigation was resolved that ILM II intended to
examine with its advisors methods to maximize the liquidity and value of the ILM
II common stock. Schroders said they would carefully review Brookdale's publicly
available financial statements and be prepared to discuss their findings with
the Board at a special board meeting scheduled to be held on December 8, 1998.
ILM II authorized Greenberg Traurig to prepare drafts of the merger
agreements and on December 4, 1998, ILM II provided Capital with an initial
draft of the proposed agreements and plans of merger in connection with the
contemplated merger transactions for ILM II and ILM.
On December 7, 1998, ILM II responded to Brookdale's letter of December 4,
1998 by indicating that as previously stated with respect to Brookdale's
June 3, 1998 letter of inquiry, ILM II did not desire to sell its properties at
such time but instead wished to pursue means to maximize value for its
shareholders. ILM II indicated that, based upon advice from Schroders, the
liquidation of the senior living portfolio at that time was premature.
At a December 8, 1998 meeting of the ILM II Board at which J. William
Sharman, Carl J. Schramm and Jeffry R. Dwyer all were present, representatives
of Schroders discussed Brookdale's financial profile and market value. In
response to Board inquiries, ILM II's advisors told the Board that, in their
view, the Brookdale letter did not constitute a definitive offer or proposal,
but rather, was an indication of interest. The Board specifically noted that the
Brookdale letter proposed an asset sale transaction rather than a merger
transaction or other form of business combination transaction involving the
purchase of ILM II's common stock and that an asset sale could involve
negotiations and
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protracted due diligence regarding contractual allocations of assumed
liabilities and purchased assets (unlike a merger transaction pursuant to which
the surviving entity would assume all liabilities of ILM II by operation of
law), indemnification, escrows, schedules of assets and liabilities, and the
potential need to obtain and pay for third party consents and approvals.
At this time the terms, conditions and structure of the Capital offer
continued to be negotiated by ILM II and Capital in consultation with their
legal and financial advisors and were predicated upon establishing a minimum
price that would allow ILM II's shareholders to receive an appropriate return on
their investment and represent a premium to the prices generally available to
buyers and sellers in the secondary market, irrespective of the fact that the
ILM II common stock had never been traded on an established market.
On December 18, 1998, Brookdale submitted a revised expression of interest
to acquire the assets and assume the existing liabilities of ILM II and ILM for
aggregate consideration of $170.2 million, of which $74,868,000 would be
allocated to ILM II and $95,332,000 would be allocated to ILM. The proposal
indicated that the transactions contemplated definitive asset purchase
agreements and would be subject to customary closing conditions, including
termination of the management agreements with Capital. As part of its expression
of interest, Brookdale stated its desire to commence a full due diligence review
of ILM II and ILM.
On December 28, 1998, ILM II responded to Brookdale's December 18, 1998
expression of interest indicating that ILM II was pursuing means to enhance
liquidity and maximize the long-term value for ILM II's shareholders. ILM II
also indicated that bona fide offers in the best interests of the ILM II
shareholders were reviewed in due course by the ILM II Board with its
professional legal and financial advisors and, even though the Brookdale letter
lacked specificity, the Brookdale proposal would be presented to the ILM II
Board at its next regularly scheduled board meeting in January 1999.
During the early portion of January 1999, representatives of ILM II and
Capital participated in numerous telephonic and in-person meetings negotiating
the terms of the draft transaction documents prepared by Greenberg Traurig and
other ancillary agreements. Capital's advisors included in the November 17th
term sheet and reiterated in subsequent discussions with ILM II's advisors that
Capital required a "leg-up" option to protect the transaction during the period
following the execution of an agreement and prior to consummation of the merger.
Capital stated that it required at the time the agreements would be entered into
the right to purchase up to 19.9% of ILM II's outstanding common stock at the
merger consideration per share offered by Capital to ILM II's shareholders under
the merger agreement. Such right would become exercisable if ILM II terminated
the merger agreement under certain circumstances or, in any case, if ILM II
entered into a competing transaction.
Capital further requested the alternative right to require ILM II 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 consummated
within a specified time period after any termination of the merger agreement
with Capital. ILM II's advisors related to the Board that such features were
onerous and that, in their view, a "leg-up" was inappropriate for a transaction
such as the merger.
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Discussions continued between legal counsel for Capital and for ILM II,
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%. ILM II
insisted that it would not enter into a "leg-up" arrangement (whether or not
reciprocal) and transaction negotiations were suspended for several days. After
negotiations resumed, Capital withdrew its request for a "leg-up" option, but
noted that it needed deal protection in the form of comprehensive break-up fees
and expense reimbursement.
The ILM II Board stressed the need for a broad-based "fiduciary out" to
enable ILM II to pursue, become fully informed as to and to provide non-public
information to and negotiate with bona fide unsolicited third party alternative
transactions and to enter into a deal that was financially superior to the
Capital deal after allowing Capital a reasonable opportunity to "top" such deal.
In addition, the nature and breadth of the so-called "MAC (or material adverse
change) Out" was discussed, primarily the circumstances under which, in the
event there was a material adverse change with respect to Capital or its
business, ILM II would be permitted to terminate the merger transaction.
Shortly thereafter, "break up" fee negotiations ensued. Capital initially
requested a break-up fee in the amount of approximately $10.0 million, plus the
payment of out-of-pocket expenses. ILM II responded that although it recognized
the appropriateness of deal protection, it would not agree to measures that were
unreasonable in relation to Capital's perceived risks of losing the deal after
signing and that ILM II would not agree to a payment structure which, in itself,
might deter bona fide competing or alternative transactions. After numerous
conversations and negotiations with ILM II on this subject, Capital agreed to a
break-up fee of $2,964,400, plus reimbursement of up to $1.0 million of
Capital's "out-of-pocket" expenses incurred in connection with the merger.
Capital requested a break-up fee if the merger was not consummated by
October 31, 1999 for failure of ILM II to obtain requisite shareholder approval
or for any material breach by ILM II under the merger agreement. ILM II rejected
the proposal, and after further negotiations ensued, it was agreed that a
break-up fee would be payable only if: (i) ILM II 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 II terminated the merger agreement following the execution and
delivery 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 II Board (in a manner adverse to Capital) of its
recommendation to shareholders of the Capital deal, the affirmative
recommendation of a financially superior alternative deal by the ILM II Board,
or the execution and delivery by ILM II of a definitive agreement providing for
the sale of ILM II to third party.
Capital 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 II under the merger agreement and
similarly requested that ILM II maintain at closing certain cash reserves for
purposes of funding Capital's assumption of the estimated $5.2 million of
corporate level "built-in" gains tax, ILM II's other liabilities and ILM II's
scheduled dividend payments. After further negotiations on these points, Capital
withdrew these requests.
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Thereafter, covenants restricting ILM II's and Capital's conduct during the
period between the signing of the merger agreement and the closing of the merger
were also negotiated. Because a portion of the merger consideration then to be
offered included securities (and, therefore, an investment was being made by ILM
II's shareholders in Capital), ILM II and Capital negotiated 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.
During December and January, "collars," "caps," floating exchange periods
and other variable pricing mechanisms were further explored by ILM II and its
financial and legal advisors in the context of the risks associated with
fluctuations in the market price of Capital's common stock. Discussions between
the ILM II Board and ILM II's financial and business advisors ensued regarding
the fixed exchange (or conversion) ratio (the ratio at which the number of
shares of Capital common stock would be issued upon conversion of Capital's then
to be offered trust preferred securities) and whether a floating valuation
period or pricing formula should be included in the merger agreement as proposed
by Capital.
ILM II's financial advisors advised ILM II that an exchange ratio fixed at
the time the merger agreement is signed would be more likely to lock-in
accretion/dilution for all ILM II shareholders and, although there could be no
assurance of appreciation, would enable ILM II shareholders to participate in
any prospective appreciation of Capital's stock price after execution of the
merger agreement. During this time frame, ILM II also negotiated a guarantee
agreement in favor of ILM II shareholders pursuant to which Capital would
guarantee payment of the trust preferred securities so that in the case of a
default relating to such securities, ILM II shareholders would have recourse
against both Capital and the Capital subsidiary intended to be the offeror of
the trust preferred securities.
ILM II then decided to undertake a supplemental due diligence review of
Capital because of the trust preferred securities component of the merger
consideration contained in the draft merger agreement.
At a January 19, 1999 ILM II Board meeting at which J. William Sharman,
Carl J. Schramm and Jeffry R. Dwyer all were present, the ILM II Board reviewed
in detail with Greenberg Traurig and Schroders the terms of the transactions as
then proposed (in which each outstanding share of ILM II common stock would be
exchanged for approximately $14.30 worth of merger consideration). The ILM II
Board noted that the proposed merger consideration of $14.30 represented a
premium of approximately 30% per share over the best available per share sale
price of the ILM II common stock.
On January 20, 1999, ILM II informed Brookdale that based upon its review
of Brookdale's latest expression of interest dated December 18, 1998, ILM II 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 II's built-in gains tax) represented the best
potential transaction for ILM II's shareholders at that time.
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In early February 1999, negotiations transpired regarding the
reconfiguration of the merger consideration in view of a recent decline in the
price of Capital's common stock. Numerous discussions ensued between ILM II's
and Capital's financial advisors 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. ILM II's financial advisors 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 II 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, the ILM II Board extensively reviewed with
Greenberg Traurig the material terms of the revised draft merger agreement,
including the "break-up fee" and termination provisions, the covenants
applicable to ILM II between signing and closing, the so-called "no-shop" and
"fiduciary out" provisions, the representations and warranties of the parties,
the conditions to closing, the director and officer indemnification provisions,
and the procedural mechanics of the merger. Discussions then followed with
respect to the taxable nature of the transaction, 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
II's constituent instruments and federal securities laws), the Board's fiduciary
duties to shareholders, 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
66- 2/3% shareholder approval, the scheduled December 31, 2001 finite-life
liquidation date for ILM II, and the termination provisions.
The Board also considered a number of potentially negative factors in the
course of its deliberations, including: (i) the fact that the merger
consideration was fully taxable to ILM II's shareholders, (ii) the fact that the
trading price of the preferred securities would not be fixed and could decline
in value, (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
fact that 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 II's shareholders.
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Upon conclusion of the foregoing analyses, Schroders delivered its oral
opinion (which opinion subsequently was confirmed by delivery to the ILM II
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 stated in such opinion,
the merger consideration was fair to holders of ILM II common stock, from a
financial point of view.
Next, the terms of the Brookdale proposal were presented to and discussed
by the ILM II Board. Following discussion, the Board determined that the
Brookdale proposal was not a bona fide offer or proposal to acquire ILM II
because it lacked sufficient specificity with respect to price, structure,
timing, tax and other factors to allow ILM II properly to evaluate it in a
timely manner and that it would not be prudent to jeopardize the Capital
transaction by pursuing Brookdale's open-ended and indefinite proposal which did
not constitute a definitive competing and financially superior offer.
The Board noted that the proposed terms of the merger agreement with
Capital preserved ILM II's ability to accept a materially higher offer and
terminate the transactions with Capital upon payment of a $2,964,400 termination
fee, plus reimbursement of up to $1.0 million of out-of-pocket expenses incurred
by Capital in connection with the transaction. The ILM II Board, based upon
advice of Schroders, determined that because this termination fee was fair and
not commercially excessive, the fee would not be a material deterrent for other
bona fide 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.
Based on the foregoing, including the 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 II common stock, from a financial point of view, the ILM II Board
unanimously approved the merger and authorized the execution and delivery of the
merger agreement. The merger agreement was signed on February 7, 1999 and on
February 8, 1999, ILM II issued a press release reporting such event. The
executed merger agreement provided for a total merger consideration of
$74,110,000 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 business trust of
Capital, which preferred securities were convertible into shares of Capital
common stock at a fixed exchange rate.
On March 9, 1999, Brookdale revised its December 18, 1999 expression of
interest by setting forth its desire to explore a transaction to acquire the
assets of ILM II and ILM for an aggregate purchase price of $185.0 million, of
which $81,878,000 would be allocated to ILM II and $103,122,000 would be
allocated to ILM. $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 the convertible securities would be
convertible into shares of Brookdale common stock and provided that ILM II and
ILM 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. 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
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that full legal and financial due diligence was required to confirm Brookdale's
willingness to proceed.
To facilitate Brookdale's proposal, on March 22, 1999 Brookdale, ILM II and
ILM entered into separate confidentiality and standstill agreements whereby
ILM II and ILM 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 II and ILM consistent with what
was outlined in Brookdale's March 9, 1999 letter. Brookdale agreed that so long
as such negotiations with ILM II and ILM were pending and for two years
thereafter, Brookdale would not directly or indirectly acquire any shares of
ILM II or ILM capital stock, seek to influence or call for any ILM II or ILM
shareholder votes or consents, or propose to enter into a merger, tender or
exchange offer or similar transaction with ILM II or ILM. In early April 1999,
Brookdale commenced its due diligence review of ILM II.
On April 22, 1999, the ILM II Board (consisting of J. William Sharman,
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 II
Board as ILM II's financial advisors when the individual Schroders investment
bankers who worked for Schroders on the ILM II account resigned from Schroders
and formed Cohen & Steers) to discuss the status of the Brookdale proposal. The
Board was informed by its legal advisors that attorneys from Brookdale were
presently conducting a due diligence review of ILM II.
Approximately at this time legal and financial due diligence lists were
exchanged, together with requests for mutual access to information. ILM II
requested access to certain Brookdale material and non-public information
because of the securities portion of the proposed asset purchase consideration.
ILM II also requested details as to Brookdale's financing sources and
creditworthiness. No due diligence materials were ever provided to ILM II
pursuant to its request lists.
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
$82,787,000 to ILM II and $102,213,000 to ILM. The April 28 correspondence
stated that prior to closing, Brookdale intended to assign all transaction
documentation to an unaffiliated third party leasing company that would lease
the purchased ILM II assets to Brookdale. Brookdale offered that, in its view,
the U.S. federal income tax consequences to ILM II's shareholders under its
proposed asset purchase transaction structure and the payment by ILM II 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. The foregoing 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 material and
non-public information, personnel and ILM II's property sites.
On June 17, 1999, Greenberg Traurig received from Brookdale's counsel a
draft asset purchase agreement. The correspondence accompanying such draft
suggested that ILM II'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
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agreement reflected the terms of Brookdale's April 28, 1999 letter. Brookdale's
counsel also referenced Brookdale's assertion of its ability to finance the
proposed transaction, subject to satisfactory completion of due diligence.
At a July 8, 1999 meeting of the ILM II Board at which J. William Sharman,
Carl J. Schramm and Jeffry R. Dwyer all were present, discussions ensued
regarding the draft asset purchase agreement received from Brookdale in
connection with their April 28, 1999 proposal. 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 II's Board, Greenberg Traurig
responded to Brookdale's draft asset purchase agreement and informed Brookdale
that after careful review of the agreement and deliberation by the full ILM II
Board, and based further upon the advice of ILM II's financial advisors, 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 impracticable and did not represent a transaction in the best
interests of ILM II's shareholders.
The ILM II Board informed Brookdale that a transaction in the best
interests of ILM II's shareholders would more appropriately be structured as, or
would be the functional equivalent of, a statutory merger with all liabilities
of ILM II being assumed at closing by the acquiring entity and with no survival
of remedies, 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, among other
things, have to be fully financed and 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 II if Brookdale failed to
consummate the transaction under certain circumstances. The ILM II Board also
advised Brookdale that appropriately revised bona fide agreements consistent
with the foregoing standard would be considered by the Board in due course.
Accordingly, the ILM II 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 II's July 9, 1999
correspondence, sent a letter to ILM II expressing its disappointment over
ILM II's decision not to negotiate the terms of Brookdale's draft asset purchase
agreement and ILM II's preference for a statutory merger or functionally
equivalent transaction. Brookdale stated that it remained interested in pursuing
an asset purchase transaction with ILM II and that if ILM II 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 II Board was advised that such correspondence did not merit any response.
During this time, ILM II, 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 submissions
of the parties in late April 1999, and the
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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 II'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. ILM II 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 II's shareholders
and, therefore, the ILM II Board might not be in a position to recommend the
transaction to such shareholders if conditions in the senior living industry
and, therefore, Capital's stock price, did not improve.
ILM II 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 II shareholders who would receive Capital's trust
preferred securities to actually obtain the full value of the $14.30 of merger
consideration agreed to by the parties on February 7, 1999. Accordingly,
ILM II's financial advisors were instructed to consider different combinations
or reconfigurations of the cash and stock portions of the merger consideration.
Following discussions with Capital about ILM II's concerns and in
connection with pending class action settlement proceedings in the Feldman
lawsuit, Capital agreed, among other things, in a draft stipulation of
settlement negotiated and prepared by plaintiff's class litigation counsel, to
amend the existing February 7, 1999 merger agreements to provide for increased
and adjusted merger consideration. On July 28, 1999 Capital's advisors delivered
to ILM II and ILM a draft letter agreement which proposed to amend the pending
ILM II and ILM merger agreements to increase the aggregate merger consideration
in those transactions to $172.0 million (from $170.0 million) and to allow the
ILM II and ILM 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. ILM II and its advisors questioned whether the merger
simply should be amended to provide for 100% cash consideration and no stock
election. 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 a revised expression of interest and
at this time proposed to acquire, by means of tender offer, all of the
outstanding shares of ILM II and ILM common stock for aggregate cash
consideration of $185.0 million, to be allocated $82,787,000 to ILM II and
$102,213,000 to ILM. 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 on
ILM II's properties to fund the 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.
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Brookdale and ILM II exchanged various correspondence regarding potential
face-to-face meeting dates. In the meantime, ILM II instructed Greenberg Traurig
and Cohen & Steers to contact Brookdale's advisors and seek both clarification
and unequivocal assurances that the proposed $185.0 million of tender offer
consideration was a net amount payable directly to ILM II's shareholders and
ILM's shareholders in cash. Brookdale's legal and financial advisors verbally
acknowledged that Brookdale intended the $185.0 million consideration to be a
net amount and would not be reduced by any assumed liabilities, taxes or
ILM II's merger termination fee and expense reimbursement obligations to
Capital.
At a Board meeting held on August 9, 1999 at which J. William Sharman,
Carl J. Schramm, and Jeffry R. Dwyer all were present, Greenberg Traurig and
Cohen & Steers presented to the ILM II 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 II Board instructed Greenberg
Traurig to prepare proposed tender offer guidelines and transaction terms and to
deliver them to Brookdale in anticipation of the upcoming meeting with
Brookdale.
On August 12, 1999, pursuant to instructions of ILM II'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 II stated, among other things,
that (i) Brookdale needed to guarantee the performance of its lessor-assignee
under all transaction documents and instruments; (ii) ILM II would not provide
any indemnification agreements; (iii) all of ILM II's representations,
warranties and covenants would need to terminate after the tender offer was
completed and Brookdale acquired functional control of ILM II; (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; (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 II-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 II's existing termination fee and expense
reimbursement obligations to Capital under the February 7, 1999 merger
agreement; (viii) the tender offer would be commenced within 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 II's and ILM'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 to shareholders of ILM II and ILM, less
applicable withholding taxes.
On August 30, 1999, one day prior to Brookdale's scheduled meeting with
ILM II and its advisors at the New York offices of Greenberg Traurig, Brookdale
informed ILM II by
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letter that additional due diligence materials were required, namely with
respect to liabilities, due to the revised structure of Brookdale's most recent
proposal and informed ILM II of its unwillingness to assume at closing or to
otherwise 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 consideration, the ILM II 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 II Board, comprised of J. William Sharman, 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 II 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 II. After further discussions with
Brookdale and conversations with its advisors ILM II concluded that the
Brookdale offer was not functionally equivalent to a "net" offer, in cash, to
ILM II's shareholders.
ILM II then 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 among Brookdale's advisors and ILM II's advisors,
ILM II was confused and uncertain about Brookdale's proposals and intentions to
acquire ILM II. At Brookdale's request, ILM II 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 II approximately three weeks earlier but had not yet had an
opportunity to review them. ILM II then cautioned 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 II 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 various 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 II and ILM. ILM II reiterated its commitment to fully
investigate and negotiate only bona fide, superior offers to maximize
shareholder value and asked Brookdale to submit its final and definitive "best"
offer to acquire the outstanding shares of ILM II's common stock.
In early September 1999, Brookdale received additional materials from
ILM II to complete its due diligence review of ILM II. On September 10, 1999,
Brookdale, by letter to ILM II, 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 II, other than the assumption of up to
$5.2 million of ILM II's and ILM's built-in gains tax liabilities.
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Brookdale reiterated that its offer was subject to continuing 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 II
Board concluded that because Brookdale's transaction was structurally uncertain
and did not represent a definitive offer, and given Brookdale's unwillingness to
propose a commercially practicable transaction structure, further dealings and
communications with Brookdale would be unproductive and unlikely to produce a
superior transaction in the best interests of ILM II's shareholders.
Brookdale has not contacted ILM II since September 10, 1999 and no further
communications between ILM II and Brookdale have ensued through the date of this
proxy statement.
Commencing in late September and continuing through mid-October 1999,
ILM II's and Capital's legal representatives discussed and negotiated various
amendments to the February 7, 1999 merger agreement. ILM II informed Capital
that it would not negotiate or agree to any limitations on the scope of
ILM II's "fiduciary out" because ILM II needed maximum flexibility to pursue and
negotiate unsolicited superior alternative transactions. Also, because the form
of the merger consideration payable in the merger changed from a combination of
cash and trust preferred securities to 100% cash, 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 II requested that full financing commitments should 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 II first
mailed its definitive proxy materials to shareholders.
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 II's shareholders failed to approve the merger agreement. After several
variations of the foregoing concept were discussed, the parties agreed that such
a provision was not appropriate and that receipt of 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 II's director's and officer's liability insurance, and other contractual
matters. ILM II then negotiated and the parties agreed to provisions entitling
ILM II to the payment by Capital of termination fees under certain
circumstances.
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Based on the foregoing agreement-in-principle to modifications of the
February 7, 1999 merger agreement, ILM II's counsel prepared an 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 II Board, consisting of Jeffry R. Dwyer,
J. William Sharman, Jr. and Carl Schramm, met with ILM II's legal and financial
advisors to review the terms of the new merger agreements. Cohen & Steers
provided the Board with an assessment of the proposed Capital merger and a
presentation as to prevailing trends in the senior living industry and Capital's
market performance, financial condition and creditworthiness. Cohen & Steers
next presented to the ILM II Board its fairness analyses and at the conclusion
thereof delivered its oral opinion to the ILM II Board that, based on the
qualifications and assumptions expressed to the ILM II Board, as of October 6,
1999, the payment of $14.47 per share in cash to ILM II's shareholders in the
merger was fair to such holders, from a financial point of view.
Thereafter, Greenberg Traurig presented the ILM II Board with a detailed
description of the terms of the merger outlining the various material
differences between the current draft amended and restated merger agreement and
the February 7, 1999 merger agreement. After further deliberations and a general
discussion of the ILM II Board's 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, and
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 19, 1999, Cohen & Steers confirmed in writing its oral opinion
delivered to the ILM II Board on October 6, 1999. Based upon Cohen & Steers'
opinion that as of October 19, 1999 the $14.47 per share in cash to be received
by ILM II's shareholders in the merger was fair to such holders, from a
financial point of view, and other factors described below under "Recommendation
of the ILM II Board," ILM II and Capital executed the merger agreement.
On October 21, 1999, ILM II 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.
RECOMMENDATION OF THE ILM II 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
had unanimously adopted the merger agreement and recommends that you vote "FOR"
approval of the merger agreement. In voting to adopt the merger agreement, none
of ILM II's directors abstained from voting or voted against adoption.
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In resolving to adopt and recommend to ILM II's shareholders approval the
merger agreement, the ILM II Board considered a number of factors, including the
following which highlights all of the material factors considered:
o the strategic financial alternatives available to ILM II to maximize
shareholder value, such as listing ILM II's common stock on a
national securities exchange or The Nasdaq Stock Market, the
reorganization of Lease II (the lessor of the senior living
communities owned by ILM II Holding) into assisted living community
operating companies, as well as the lease of ILM II's senior living
communities to Capital, all of which were rejected by ILM II's Board
because they would ensure that ILM II's common stock would be
actively traded;
o the trend of continued consolidation in the senior living industry;
o ILM II's financial condition, cash flows and results of operations;
o the continuity of management of ILM II's senior living communities
without material disruption of service;
o the likelihood of the merger with Capital occurring because of
Capital's familiarity with ILM II and the lack of due diligence
"outs" in the merger agreement;
o ILM II's scheduled December 31, 2001 finite-life expiration date;
o ILM II's strengths and weaknesses as an independent company;
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 fixed
conversion ratio trust preferred securities without adjustment
provisions, "collars" or "caps";
o the fact that after the merger, ILM II's current shareholders no
longer will receive any dividends relating to the earnings and growth
of ILM II;
o the simplicity of a single-step all-cash merger compared with a
portfolio liquidation, asset sale or tender offer transaction;
o the belief that the going-concern value of ILM II obtainable in a
merger transaction was greater than the liquidation or "break-up"
value of the ILM II property portfolio;
o the protracted and extensive negotiation process with Capital and its
legal and financial advisors;
o general economic and market trends in the senior living industry and
the U.S. capital and financial markets;
o the belief that Brookdale was not likely to structure, negotiate and
consummate a superior alternative transaction with ILM II that was in
the best interests of ILM II's shareholders;
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o Cohen & Steers' opinion that the $14.47 per share in cash to be
received in the merger by ILM II's shareholders was fair, from a
financial point of view;
o the fact that Capital had obtained an updated "highly confident"
letter from Lehman Brothers with respect to arranging the necessary
cash financing of the merger;
o the lack of any firm competing or alternative offers from bona fide
purchasers, irrespective of the fact that ILM II had, since February
1999, publicly disclosed its intention to consummate a sale or
change-in-control transaction;
o the risks described in this proxy statement under the matters
described in this proxy statement under "Interests of Certain Persons
in the Merger";
o the fact that the merger is structured as a fully taxable transaction
to ILM II's shareholders;
o the fact that the merger structure would allow Capital to realize
certain tax advantages which the ILM II Board believed had resulted
in obtaining a higher price per share for ILM II's shareholders;
o the terms of and conditions to 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 or survival of most representations and
warranties, and the restrictions imposed on the conduct of ILM II's
business and operations in the period prior to closing;
o the agreement of ILM II not to actively solicit alternative
transactions with third parties and the broad "fiduciary out"
exceptions which enable ILM II to terminate the merger agreement and
pursue unsolicited superior alternative transactions; subject to the
payment to Capital of termination fees and expenses under certain
circumstances;
o the potential conflicts of interest of ILM II's officers and
directors with respect to the merger in relation to the interests of
ILM II's shareholders;
o the fact that none of ILM II's officers or directors own any ILM II
common stock or Capital common stock, that they do not participate in
any ILM II 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 II;
o the risks of the merger not being consummated;
o the fact that the property management agreement provides Capital with
a limited right of first and last offer on sales of the ILM II
properties, and that such right of first and last offer did not apply
to mergers or tender offers;
o the fact that Capital agreed to obtain a financing commitment from a
nationally recognized investment banking firm or commercial bank just
prior to the time this proxy statement was mailed to ILM II's
shareholders;
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o the amount and scope of the termination fee payable under the merger
agreement to Capital under certain circumstances;
o the fact that the merger must be approved by the holders of at least
66 2/3% of the outstanding ILM II common stock;
o the lack of burdensome regulatory consents and approvals in
connection with the merger;
o the fact that after the merger Capital will assume and become legally
responsible for all of ILM II's liabilities; and
o the fact that consummation of the ILM merger is not a condition to
consummation of the merger or vice versa.
In view of the variety of factors considered in connection with its
evaluation and deliberations with respect to the merger, the ILM II Board did
not find it practical to and, therefore, did not attempt to rank or assign
relative weight to the above factors. In addition, individual members of the
ILM II Board may have assigned different weights to different factors.
PURPOSES, ALTERNATIVES, TIMING AND REASONS FOR THE MERGER
In the merger, all shares of ILM II common stock will be canceled and
ILM II's separate corporate existence will be terminated upon payment of $14.47.
The purpose of the transaction is to sell to Capital 100% of the ownership
interests in and, therefore, 100% control of, ILM II. The transaction has been
structured as an all-cash merger because of the simplicity of this structure,
the absence of market risk otherwise associated with the receipt of Capital's
securities, and the flexibility afforded ILM II shareholders in an all-cash
merger with respect to future investment decisions.
Structurally, the acquisition of ILM II 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 II'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 II Board, and to enable the transaction to be completed in single unitary
step, rather than a front-end tender offer with a second-step squeeze out
merger. The Board believes that a unitary merger transaction minimized the risk
that the contemplated transaction would not be consummated, reduced overall
transaction costs and increased Capital's willingness and ability to pay a
higher amount of merger consideration to ILM II'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 II and acquisition by Capital followed by
a dissolution of ILM II. This structure allows Capital to receive a higher
deemed original cost of ILM II's assets and a correspondingly greater
recognition by Capital of the depreciation expense of those assets.
Although ILM II and Capital considered structural alternatives such as an
acquisition by means of tender offer, ILM II and Capital rejected these
alternatives on the grounds that
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Capital would not derive certain tax benefits which would have resulted in a
reduction of the merger consideration Capital was willing to pay ILM II's
shareholders.
The merger is being entered into by ILM II at this time because
(i) ILM II is a finite-life corporation and, as such, its corporate existence is
not intended to continue indefinitely; (ii) the uncertainty of future
appreciation of ILM II's portfolio; (iii) the opportunity for ILM II to obtain
for its shareholders a sale consideration based on a going-concern valuation of
the company rather than the perceived 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 II 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 II since that date; (v) after almost three years of studying
strategic financial alternatives to maximize shareholder value and, in
particular, the preceding 12 months of extensive negotiations with Capital and
its advisors, the ILM II Board believes it has obtained the best price and the
best transaction structure available for ILM II's shareholders; and (vi) the
ILM II Board's belief that the current merger has a high likelihood of
completion.
DETERMINATION OF MERGER CONSIDERATION
The consideration of $14.47 per share, in cash, to be paid in the merger to
ILM II'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.
The aggregate consideration offered by Capital for ILM II and ILM is
$172.0 million, which amount was allocated to ILM II and ILM based upon their
relative net operating incomes. Applying this method, of the $172.0 million,
$74,982,000 was allocated to ILM II and $97,018,000 was allocated to ILM.
The merger consideration in the ILM II Merger was calculated by dividing
the total merger consideration of $74,982,000 allocated to ILM II, by the
5,181,236 shares of ILM II common stock outstanding. This resulted in an
approximate dollar amount of $14.47 per share. The merger consideration of
$74,982,000 exceeds the book value of ILM's assets by approximately
$45,668,000 as of August 31, 1999.
Because the ILM II Board believes that the fair market value of its
portfolio on a property-by-property basis is less than the value of ILM II as a
going-concern, ILM II 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 October 6, 1999, Cohen & Steers Capital Advisors, LLC delivered to the
ILM II Board its oral opinion, subsequently confirmed in writing on October 19,
1999, to the effect that, as of the dates of such opinions, the $14.47 per share
in cash to be received by ILM II'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 reaffirmed this opinion. If a material amendment is made to the
merger agreement, ILM II will seek a new fairness opinion from Cohen & Steers.
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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.
o Cohen & Steers' opinion was provided at the request and for the
information of ILM II'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.
o Shareholders of ILM II 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 II to other publicly traded assisted living operating
companies and perform various financial analyses and valuation techniques
described herein, ILM II combined the operations of ILM II and an affiliated
entity, ILM II Lease Corporation ("Lease II") and it reviewed the historical and
projected operating data of ILM II on a projected C-corporation basis. ILM II is
structured as a finite-life Real Estate Investment Trust ("REIT") and to
maintain its REIT status, ILM II cannot operate the facilities itself. As such,
ILM II owns the real estate and leases the operations to Lease II, a taxable
C-corporation, under a facilities lease agreement which ILM II may cancel, upon
notice, at any time. ILM II receives lease payments from Lease II 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 II
C-corporation, ILM II combined the actual financial statements for the three
months ended May 31, 1999 of ILM II and the draft financial statements for the
three months ended May 31, 1999 of Lease II and made the following adjustments:
o ILM II eliminated the rental and other income revenues from ILM II
and the master lease rent expense from Lease II (i.e., the lease
payment paid from Lease II to ILM II);
o ILM II decreased the general and administrative expense to be the sum
of (a) 5% of the total rental and other income of Lease II plus
(b) $350,000 per year for public company expenses (the resulting
general and administrative
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expense was management's projection for the stabilized portfolio on a
going-concern basis); and
o ILM II increased the aggregate state and federal tax rate to 40%.
By analyzing ILM II on a C-corporation basis, Cohen & Steers was then able
to compare the portfolio of assets in ILM II to other publicly traded assisted
living companies and perform various financial analyses using the accepted
methodologies described herein.
To compare the finite-life portfolio of assets of ILM II to other publicly
traded healthcare REIT companies and perform some of the financial analyses
using valuation techniques described herein, Cohen & Steers also reviewed at
ILM II's request certain information reflecting ILM II as a going-concern REIT.
To enable Cohen & Steers to do so, ILM II made the following adjustment to its
financial statements for the three months ended May 31, 1999:
o ILM II 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 II as a going-concern REIT, Cohen & Steers was able to
compare the portfolio of assets in ILM II 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 amended and restated merger agreement dated
October 4, 1999, 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 II, Capital and Capital
Acquisition on October 19, 1999);
o reviewed certain publicly available financial statements and other
information of ILM II and Lease II;
o reviewed historical financial information of ILM II on a
C-corporation basis prepared by ILM II, and certain projected
information for ILM II on a C-corporation basis prepared by ILM II
for the calendar years ending December 31, 1999 through December 31,
2002;
o visited certain communities of ILM II and held discussions with
ILM II 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 II, to the financial results of ILM II on a
C-corporation basis;
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o the application of the multiples reflected in recently reported
assisted living public mergers and acquisitions for businesses
which Cohen & Steers deemed reasonably comparable to ILM II, to
the financial results of ILM II on a C-corporation basis;
o a discounted projected cash flow analysis of ILM II on a
C-corporation basis;
o an analysis with respect to liquidation of ILM II's portfolio
assets as a financial alternative to the merger;
o the application of the public trading multiples of health care
REITs which Cohen & Steers deemed reasonably comparable to
ILM II, to the financial results of ILM II as a going-concern
REIT; and
o performed such other analyses, studies, inquiries and
investigations as Cohen & Steers deemed appropriate.
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 II or
obtained by Cohen & Steers from other sources, and upon the assurance
of ILM II 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 II or Capital, nor was
Cohen & Steers furnished with any such appraisals;
o with respect to the financial and operating projections of ILM II
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 II's anticipated
future financial condition and operating results; and
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 II to do so pursuant to an
agreement with ILM II.
Cohen & Steers' opinion does not constitute a recommendation as to any
action any shareholder of ILM II 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 II'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 II's request,
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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 II's shareholders or of any other third party. Cohen & Steers'
opinion related solely to the fairness, from a financial point of view, of the
$14.47 per share in cash to be received by the holders of ILM II 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 II 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 II 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 six companies (the "ILM II Comparable
Companies") consisted of:
o Alterra Healthcare Corporation;
o American Retirement Corporation;
o Brookdale Living Communities, Inc.;
o Capital Senior Living Corporation;
o CareMatrix 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"), projected calendar year 1998 EPS, projected calendar year 1999 EPS and
projected calendar year 2000 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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The following table sets forth the implied mean values per share of ILM II
common stock based upon the foregoing analysis:
<TABLE>
<CAPTION>
DISCOUNT/
IMPLIED (PREMIUM) IMPLIED DISCOUNT/
COMPARABLE MEAN TO MEDIAN (PREMIUM)
MULTIPLES VALUES MERGER VALUE 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................................ $100,500 $102,900 $15.35 $ (0.88) $15.72 $ (1.25)
LQA Revenues..................................... 3.4x 3.5x $10.42 $ 4.05 $10.73 $ 3.74
LQA EBITDAR...................................... 8.7x 10.0x $ 9.47 $ 5.00 $10.89 $ 3.58
<CAPTION>
MARKET VALUE OF
EQUITY MULTIPLES
- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LQA EPS.......................................... 11.4x 11.2x $ 5.41 $ 9.06 $ 5.31 $ 9.16
Projected 1999 EPS............................... 10.7x 10.1x $ 6.88 $ 7.59 $ 6.50 $ 7.97
Projected 2000 EPS............................... 7.9x 7.6x $ 5.43 $ 9.04 $ 5.23 $ 9.24
</TABLE>
In arriving at its opinion, Cohen & Steers noted the following: $14.47 per
share to be paid in the merger to ILM II's shareholders exceeds the implied mean
and median values per share based on multiples of LQA Revenues, LQA EBITDAR, LQA
EPS, Projected 1999 EPS and Projected 2000 EPS. The implied mean and median
value per share based on Resident Capacity exceeds the $14.47 per share. The
range of implied mean equity values per ILM II share derived from this analysis
ranged from a high of $15.35 to a low of $5.41 with a mean of $8.83 and a median
of $8.17 compared with the $14.47 per share. The range of implied median equity
values per ILM II share derived from this calculation ranged from a high of
$15.72 to a low of $5.23 with a mean of $9.06 and median of $8.61 compared with
the $14.47 to be paid in the merger to ILM II'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 II Transactions") and
sought to compare the $14.47 per share to be paid by Capital with the
consideration involved in such transactions. The seven Comparable ILM II
Transactions and their pertinent dates were as follows:
o the Sunrise Assisted Living, Inc. acquisition of senior living assets
of Constellation Health Services, Inc. (announced in August 1999);
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
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o Host Marriott Corporation's acquisition of certain Forum Group
retirement assets from Marriott International, Inc. (completed in
June 1997).
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 $93,400 and $76,600, respectively, implying
a value of $14.26 per share and $11.68 per share, respectively, for ILM II based
upon the mean and median of the values for the companies implied in the
Comparable ILM II Transactions.
In arriving at its opinion, Cohen & Steers noted that the implied mean
value per share based on per bed values of Comparable ILM II Transactions
exceeds the $14.47 per share of merger consideration. However, such amount
exceeds the implied median value per share based on per bed values of Comparable
ILM II 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 II on a C-corporation
basis for the calendar years 1999 through 2003 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 II were determined by:
o adding:
-- the present value of the projected free cash flows of ILM II for
its portfolio of senior living communities over the five-year
period from 1999 to 2003; and
-- the present value of the estimated terminal value of the business
at the end of 2003
o and subtracting therefrom the current net debt outstanding of
ILM II.
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 2003 earnings before interest, taxes, depreciation and
amortization ("EBITDA"). The range of terminal multiples was based on the
current EBITDA multiples of the ILM II 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 II Comparable Companies.
Based on such terminal value multiples and discount rates,
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the derived mean and median equity value for ILM II was approximately $13.05 and
$13.03, respectively. The merger consideration exceeds 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 II portfolio for the three months ended May 31, 1999 annualized.
Resident level current cash flows are defined as EBITDA, less existing
management fees.
The liquidation values of ILM II were determined by:
o dividing:
-- the resident level current cash flows of ILM II for the three
months ended May 31, 1999 annualized; by
-- capitalization rates ranging from 10.0% to 12.5%
o and subtracting therefrom the current net debt outstanding of
ILM II.
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 II 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 was approximately $11.47. In arriving at its opinion, Cohen & Steers
noted that the $14.47 per share to be paid in the merger to ILM II'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 II's REIT structure, Cohen & Steers compared selected projected financial
and operating data of ILM II as a going concern REIT to the corresponding data
of a group of publicly traded healthcare REITs (the "ILM II Comparable REIT
Companies") which Cohen & Steers reasonably deemed comparable to ILM II. 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
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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").
The following table sets forth the implied mean values per share of ILM II
common stock based upon the foregoing analysis:
<TABLE>
<CAPTION>
DISCOUNT/
IMPLIED (PREMIUM) IMPLIED DISCOUNT/
COMPARABLE MEAN TO MEDIAN (PREMIUM)
MULTIPLES VALUES MERGER VALUE TO MERGER
ENTERPRISE ------------- PER CONSID- PER CONSID-
VALUE MULTIPLES MEAN MEDIAN SHARE ERATION SHARE ERATION
- ---------------------------------------------------- ---- ------ ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
LQA Revenues........................................ 8.5x 8.7x $ 8.50 $ 5.97 $ 8.70 $ 5.77
LQA EBITDAR......................................... 10.4x 9.4x $ 9.60 $ 4.87 $ 8.66 $ 5.81
<CAPTION>
MARKET VALUE OF
EQUITY MULTIPLES
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LQA FFO............................................. 6.7x 7.1x $ 6.28 $ 8.19 $ 6.67 $ 7.80
</TABLE>
The range of implied mean equity values per ILM II share derived from this
analysis ranged from a high of $9.60 to a low of $6.28, with a mean of $8.12 and
a median of $8.50. The range of implied median equity value per ILM II share
derived from the analysis ranged from a high of $8.70 to a low of $6.67, with a
mean of $8.01 and a median of $8.66. In arriving at its opinion, Cohen & Steers
noted that the $14.47 per share to be paid in the merger to ILM II'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 $14.47 per share
to be paid in cash in the merger to ILM II'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 made numerous assumptions with
respect to:
o the assisted living industry performance;
o general business, U.S. capital market and economic conditions; and
o other matters, many of which are beyond control of ILM II or Capital.
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<PAGE>
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.
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 II'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 II and ILM 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 II and ILM have paid to Cohen & Steers aggregate fees of
$250,000 for Cohen & Steers' opinion and a similar opinion addressed to the
Board of Directors of ILM. ILM II and ILM have agreed to pay Cohen & Steers an
additional $200,000 fee, if the merger and the ILM merger are completed. ILM II
and ILM have also agreed to reimburse Cohen & Steers against 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 merger. Except as expressly set forth above, no limitation
was imposed by ILM II on the nature or scope of, or methodologies and procedures
used in, Cohen & Steers' financial analysis.
PLANS AND PROPOSALS OF ILM II AND CAPITAL
Upon the occurrence of the merger, ILM II will be merged into Capital
Acquisition and, pursuant to applicable law, ILM II's separate corporate
existence will terminate. Consequently, ILM II's common stock will become
eligible for termination of registration under the Exchange Act (pursuant to
application to the SEC on Form 15) and ILM II no longer will be subject to the
periodic reporting requirements of the Exchange Act.
Capital has advised ILM II that it presently has no plans or proposals that
relate to or which would impact ILM II'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 II and its subsidiary and make such changes as
are then deemed appropriate.
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PRESENT INTENTIONS AND RECOMMENDATIONS OF CERTAIN PERSONS WITH REGARD TO THE
MERGER
No executive officer or director of ILM II or Capital owns shares of
ILM II'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 II's or Capital's board, no executive officer of ILM II 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 II'S BUSINESS IF THE MERGER IS NOT COMPLETED
If the merger is not completed, ILM II 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 II'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.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the recommendations of ILM II's Board, you should be aware
that the directors of ILM II will be directors of a newly created advisory board
of Capital after the merger, for which they will receive customary directors
fees. The directors of ILM II 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 II directors as described
below. The ILM II directors are currently indemnified by ILM II and are covered
by directors' and officers' insurance paid for by ILM II.
Pursuant to the merger agreement, all rights to indemnification existing in
favor of present or former directors, officers and employees of ILM II 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 shall survive and continue
for a period of not less than the statutes of limitations applicable to such
matters, and Capital shall 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, 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 shall advance
expenses, to the fullest extent permitted under applicable law, each director,
officer, employee, fiduciary or agent of ILM II or its subsidiaries against any
costs, expenses, amounts paid in settlement or other liabilities in connection
with any claims relating to the merger.
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In consideration for their services during the course of several months
preceding the execution of the merger agreement, the ILM II directors received
on average $29,000 for participating in ILM II special Board meetings.
The ILM II Board and the ILM Board are comprised of the same directors and
each of the ILM II Board, the Lease I Board and the Lease II Board have a
majority of the same directors. The interest of ILM II's shareholders may be
different from or in addition to the interest of the shareholders of ILM,
Lease I and Lease II. Accordingly, the directors of ILM II may have potential or
actual conflicts of interest in connection with the merger.
No pension, profit sharing or similar plan of ILM II or Capital or their
respective subsidiaries, beneficially owns any of ILM II'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 II's common stock.
As of the date of this proxy statement, neither the officers or directors
of ILM II nor the officers or directors of Capital own any shares of the issued
and outstanding ILM II common stock or any stock options to acquire such stock.
As of the date of this proxy statement, ILM II is not aware of any ILM II
shareholder who beneficially owns 5% or more of ILM II's common stock.
For a list of the directors and executive officers of ILM II and Capital,
see "Directors and Executive Officers of ILM II and Capital."
NO INDEPENDENT COMMITTEE
The terms of the merger were negotiated by the entire ILM II Board. An
independent committee consisting only of non-employee directors was not
established to represent ILM II'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 INCORPORATED HEREIN BY REFERENCE. ALL HOLDERS OF ILM II
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 II
common stock, ILM II will be merged with 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
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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 II 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 II)
will, by virtue of the merger and without any action on the part of any holder
thereof, be converted into the right to receive $14.47 in cash. No interest will
be paid on such amount. At the effective time of the merger, each share of
ILM II 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 II common
stock, will receive: (i) a letter of transmittal and (ii) instructions to effect
the surrender of the shares of ILM II common stock in exchange for $14.47 per
share in cash (less any applicable withholding taxes). No interest will be paid
on that amount.
Upon surrender of shares of ILM II 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 II common stock will receive $14.47
per share in cash (less any applicable withholding taxes). Upon surrender, the
shares of ILM II common stock will be canceled. No dividends or other
distributions with respect to ILM II 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 II common stock and
from and after the effective time of the merger the ILM II common stock will
represent only the right to receive $14.47 per share in cash. (Section 2.2 and
2.3 of the merger agreement).
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Representations and Warranties
Representations and Warranties of ILM II. The merger agreement contains
representations and warranties of ILM II, the material ones of which relate to:
o ILM II's proper organization, qualification, good standing and other
corporate organizational matters;
o ILM II's capital structure, and the number of its authorized and
outstanding shares of ILM II common stock;
o ILM II'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 II;
o the valid title of ILM II to all assets which are material to its
business, free and clear of liens or conflicting ownership rights;
o ILM II's compliance with applicable environmental laws;
o maintenance of proper accounting controls and accurate books and records
by ILM II;
o the absence of any significant negative change or event relating to the
business, properties and condition of ILM II, its capital stock, or its
accounting principles, practices or methods;
o the absence of anti-takeover or similar laws applicable to ILM II 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 II in the merger agreement; and
o other representations and warranties relating to due authorization of the
merger and the merger agreement by ILM II and the validity and
enforceability thereof.
(Section 3.1 of the merger agreement).
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;
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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 Capital's receipt of Lehman's "highly confident" letter dated
October 13, 1999 regarding Lehman Brothers' ability to arrange the
necessary cash financing for the merger;
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 II's Business Prior to the Merger
ILM II has agreed that prior to the effective time of the merger, it will
and will cause Holding II 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 II and Holding II, in
each case in all significant respects; provided that ILM II and Holding II must
conduct their respective businesses substantially in accordance with the
operating and capital budgets approved by ILM II's Board. In addition, ILM II
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 II 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 II's common stock in any calendar
year--subject to ILM II's reasonable best efforts to maintain reserves
consistent with past practices and as required to preserve and maintain
ILM II's status as a REIT until the effectiveness of the merger;
o redeem, repurchase or acquire any securities, including ILM II'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 II's capital stock;
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
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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 II, 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 II's capital stock or voting debt
securities;
o sell or dispose of its or Holding II'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 II 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 II, Capital and Capital Acquisition to complete the
merger are 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 approval of the merger agreement by the holders of at least 66-2/3% of
the outstanding ILM II common stock;
o receipt of all authorizations, consents, and approvals from any
governmental authorities, the failure of which is material to ILM II 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 II
preferred stock; and
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o inapplicability of state takeover laws.
(Section 6.1 of the merger agreement).
Additionally, the obligation of ILM II 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;
o receipt by Capital of funds in an amount sufficient to pay the aggregate
merger consideration to all ILM II shareholders;
o receipt by Capital of all consents or approvals that are necessary to
permit Capital to become the owner of ILM II after the merger, except for
those consents which in the reasonable opinion of ILM II would not have a
material adverse effect on Capital or materially affect completion of the
merger; and
o performance by Capital and Capital Acquisition of their obligations under
the merger agreement.
(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 II's representations and warranties;
o the performance by ILM II of its obligations under the merger agreement;
o receipt by ILM II of all consents necessary to allow Capital to acquire
all contractual rights, interests and obligations of ILM II, except for
those which if not obtained would not have or be likely to have a
significant negative effect on ILM II or, which would prevent or delay
completion of the merger; and
o receipt by Capital of evidence that ILM II is not a "foreign person" for
United States income tax purposes and that ILM II is a domestically
controlled REIT for United States income tax purposes.
(Section 6.2 of the merger agreement).
No Solicitation of Alternative Transactions
ILM II 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 II in connection with an acquisition proposal of 20% or more of the
consolidated assets of ILM II or 20% or more of any class or series of equity
securities of ILM II 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 II or any of its subsidiaries,
or any merger, consolidation, business combination, sale or other transfer of
assets, recapitalization, exchange, liquidation, dissolution, divestiture,
reorganization or other extraordinary corporate transaction involving ILM II or
any of its subsidiaries.
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However, if ILM II's Board determines with the advice of counsel that it is
required to do so in the exercise of its fiduciary duties to ILM II or its
shareholders, the ILM II 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 II or the ILM II Board
may take and disclose to the shareholders of ILM II a position with respect to
any acquisition proposal referred to above that, in the judgment of the ILM II
Board, as determined in good faith by the Board based upon the advice of
counsel, is required by applicable law. ILM II 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 II and Capital;
o by either Capital or ILM II if:
o any injunction or other court or governmental order prevents the
completion of the merger;
o ILM II'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 II Board withdraws or modifies in a manner unfavorable to
Capital its recommendation to ILM II's shareholders of the merger or
the merger agreement.
o ILM II approves or recommends an alternative transaction involving
the sale of ILM II to a third party on terms financially superior to
the merger;
o ILM II 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 II's business, operations
or its financial condition; and
o ILM II is in material breach of any representation, warranty, or
covenant in the merger agreement which ILM II has not cured after its
receipt of notice of such breach.
o by ILM II if:
o ILM II enters into an alternative transaction involving the sale of
ILM II to a third party on terms financially superior to the merger;
provided the failure to do so is determined by ILM II's Board to be a
violation by it of applicable law, ILM II pays Capital a termination
fee and ILM II 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 II 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 II must pay Capital a termination fee of $2,964,400, 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 II's Board withdraws,
modifies or changes (in a manner adverse to Capital) its recommendation of the
merger to ILM II's shareholders, recommends to ILM II's shareholders a
transaction involving the sale of ILM II 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 II's common stock then outstanding or 50% or more of the consolidated
assets of ILM II, upon terms and subject to conditions which ILM II'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 II'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 II'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 II'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 II shall pay to Capital a $2,964,400
termination fee, together with Capital's out of pocket expenses, to the extent
they do not exceed $2.0 million.
Provided all of Capital's closing conditions have either been satisfied or
waived, ILM II is not in material breach of the merger agreement and neither
ILM II nor Capital has terminated the merger agreement because of a material
adverse change with respect to the other, and Capital fails to consummate the
merger and the transactions contemplated by the merger agreement, Capital is
obligated to pay ILM II a termination fee of $850,000.
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Such termination fees and out-of-pocket expenses are payable to Capital by
ILM II only if the merger agreement is terminated by either ILM II or Capital
upon ILM II'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 II 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 II and Capital. (Sections 4.1(e), 5.6 and 7.1 of the merger agreement).
PROXY STATEMENT; THE SPECIAL MEETING
ILM II 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 II (through the ILM II Board), has agreed
to recommend to ILM II 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 II 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 II'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 II will be recorded on Capital's books at their estimated fair market values
with the remaining purchase price reflected as goodwill.
SIMULTANEOUS ILM MERGER
Simultaneously with entering into the merger agreement, ILM entered into an
amended and restated agreement and plan of merger with Capital and Capital
Acquisition providing for the merger of ILM into Capital Acquisition, for an
aggregate merger consideration of $97,018,000 payable in cash. Consummation of
the ILM merger is not a condition to consummation of the ILM II and Capital
merger. The ILM merger has been structured substantially similarly to the merger
of ILM II with Capital. If the ILM merger is consummated, but the ILM II and
Capital merger is not consummated, ILM II has agreed to cause ILM II Holding to
transfer its 75% interest in the Villa Santa Barbara property to ILM (or one of
its wholly owned subsidiaries) at the fair market value of such property. ILM
has made the reciprocal agreement (with respect to its 25% 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 II 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 SHOULD 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 II. The merger will be treated
for federal income tax purposes as a taxable deemed sale of assets by ILM II to
Capital followed by a taxable deemed liquidation of ILM II. The merger will not
qualify as a "reorganization" within the meaning of Section 368(a) of the Code.
ILM II decided to elect under IRS Notice 88-19 to defer the built-in gains tax
attributable to the period when ILM II was a C corporation until the date the
assets were sold. ILM II will recognize a built-in gains corporate-level tax of
approximately $2.3 million on the deemed sale of its assets resulting from the
merger. ILM II 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 II shareholders exceeds ILM II's real estate
investment trust taxable income for the current taxable year. ILM II management
has represented that the amount of the deemed liquidating distribution to the
ILM II shareholders will exceed ILM II's real estate investment trust taxable
income for the current taxable year.
Tax Consequences to ILM II Shareholders. The ILM II shareholders will be
deemed to receive a liquidating distribution from ILM II equal to the cash they
received for their ILM II common stock pursuant to the merger. The ILM II
shareholders will recognize gain or loss upon the receipt of the cash in
exchange for their ILM II common stock equal to the difference between (i) the
amount of cash received and (ii) their tax basis in the ILM II common stock.
Gain or loss will be capital gain or loss if the ILM II common stock was a
capital asset in the hands of the ILM II shareholder and will be a long-term
capital gain or loss, if at the time of the merger, the ILM II 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 II 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 II with his 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 II has represented that ILM II 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 II common 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 II common stock, and no
United States withholding tax will be imposed on the payment of the cash to
Alien Holders of ILM II common 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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COSTS AND FINANCING OF THE MERGER
<TABLE>
<S> <C>
Financial Advisory Fees and Expenses and Fairness Opinion -- Cohen & Steers Capital Advisors,
LLC (ILM II Expense)............................................................................. $
Financial Advisory Fees and Expenses and Fairness Opinion -- Schroder & Co. Inc. (ILM II
Expense)......................................................................................... $
Financial Advisory Fees and Expenses and Fairness Opinion -- Lehman Brothers........................ $
"Highly Confident Letter"--Lehman Brothers.......................................................... $
Financing Commitment Fees and Expenses.............................................................. $
Litigation Defense and Settlement Fees and Expenses................................................. $
Proxy Solicitation Fees and Expenses -- D.F. King & Co. Inc......................................... $
Legal Fees and Expenses (ILM II Expense)............................................................
Legal Fees and Expenses (Capital Expense)........................................................... $
Accounting Fees and Expenses (ILM II Expense)....................................................... $
Accounting Fees and Expenses (Capital Expense)...................................................... $
Financial Printer Fees and Expenses (shared equally by ILM II and Capital).......................... $
SEC Filing Fees (shared equally by ILM II and Capital).............................................. $
Miscellaneous....................................................................................... $
--------
Total Fees and Expenses................................................................. $
--------
--------
</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
II and Capital.
Approximately $75.0 million will be required to pay the aggregate cash to
be received by ILM II's shareholders in the merger.
Capital has agreed that not later than the fifth business day prior to the
date on which ILM II's proxy materials are first mailed in connection with the
solicitation of ILM II's shareholders of approval of the merger agreement, it
will obtain from a nationally recognized investment banking firm or commercial
bank a written commitment to provide on or prior to the closing date of the
merger funds sufficient in amount to pay to ILM II's shareholders the aggregate
cash payments required by the merger.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ILM II
The following is a discussion and analysis of ILM II's financial and
certain statistical data that ILM II believes is important to your understanding
of ILM II's financial condition and results of operations. This section should
be read in conjunction with ILM II's consolidated financial statements beginning
on Page F-1 of this proxy statement.
GENERAL
ILM II holds mortgages on six senior living communities located in five
different states. ILM II Holding, a majority owned subsidiary of ILM II, holds
title to the six senior living communities.
The principal balance of each of ILM II'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 II Holding. The modified loans
require interest-only payments on a monthly basis at a rate of 7% per year for
the period of April 1 through December 31, 1994, 9% per year for the period of
January 1 through December 31, 1995, 11% for the period January 1 through
December 31, 1996, 12% for the period January 1 through December 31, 1997, 13%
for the period January 1 through December 31, 1998, 13.5% for the period
January 1 through December 31, 1999 and 14% for the period January 1, 2000
through maturity. Since ILM II Holding is consolidated in ILM II's financial
statements, the mortgage loans and related interest expense have been eliminated
through the consolidation.
The Facilities Lease Agreement is between ILM II's consolidated affiliate,
ILM II Holding, as owner of the senior living communities and Lessor, and
Lease II as Lessee. The facilities lease is a "triple-net" lease whereby the
Lessee pays all operating expenses, governmental taxes and assessments, utility
charges and insurance premiums, as well as the costs of all required
maintenance, personal property and non-structural repairs in connection with the
operation of the senior living communities. ILM II 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
expires on December 31, 2000, Lease II pays annual base rent for the use of all
of the senior living communities in the aggregate amount of $4,035,600.
Lease II 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
$13,021,000. Variable rental income for the nine- and three-month periods ended
May 31, 1999 was $943,000 and $301,000, respectively, compared to variable
rental income of $697,000 and $261,000 for the nine- and three-month periods
ended May 31, 1998, respectively. Variable rental income related to fiscal years
1998 and 1997 was $984,000 and $412,000, respectively and for the six
month-periods ended February 28, 1999 and 1998 was $642,000 and $456,000,
respectively.
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LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1999, ILM II had cash and cash equivalents of $651,000 compared
to $1,896,000 at August 31, 1998. Such amounts will be used for the working
capital requirements of ILM II, along with the possible investment in the
properties owned by ILM II Holding for certain capital improvements and for
dividends to the ILM II shareholders. Future capital improvements could be
financed from operations or through borrowings, depending on the magnitude of
the improvements, the availability of financing and the Company's incremental
borrowing rate. The source of future liquidity and dividends to the ILM II
shareholders is expected to be through facilities lease payments from Lease II,
interest income earned on invested cash reserves and proceeds from the future
sales of the underlying operating investment properties. Such sources of
liquidity are expected to be adequate to meet ILM II's operating requirements on
both a short-term and long-term basis. ILM II 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 II shareholders will receive the
merger consideration of approximately $14.47 per share.
Because the ownership of the senior living communities was expected to be
transferred to ILM II or its wholly-owned subsidiary, ILM II Holding was
capitalized with funds to provide it with working capital for only a limited
period of time. At the present time, ILM II 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 II Holding is not expected to fully fund its scheduled debt service payments
to ILM II, the current values of the senior living communities are well in
excess of the mortgage principal amount plus accrued interest thereon at
August 31, 1998. As a result, ILM II 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 94% and 92% for the nine- and three-month periods ended May 31, 1999,
respectively, compared to 94% and 95% for the nine- and three-month periods
ended May 31, 1998, respectively. Occupancy levels for fiscal year 1998 averaged
96%. Because of the master lease structure, ILM II's net operating cash flow is
expected to be relatively stable and predictable. The annual base rental
payments owed to ILM II Holding is $4,035,600 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 II Holding received variable
rent payments in fiscal 1998 and 1997 in the amounts of $984,000 and $412,000,
respectively. As a result of ILM II's net operating cash flow under the current
master lease arrangement, ILM II increased its quarterly dividend payment from
$0.1625 per share to $0.1875 per share effective with the dividend
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paid in January 1998 for the quarter ended November 30, 1997. Subsequent to
fiscal year end, ILM II 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 II
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 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 II Holding as a REIT. However,
because the end of ILM II's original anticipated holding period is within two
years and the transaction with Capital is anticipated to be consummated prior to
such time, the properties are not expected to be held for an additional ten
years. 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 II Holding as a REIT could
result in a Built-in Gains Tax of as much as $2.3 million. If the merger is
consummated, Capital is obligated to pay ILM II the amount of the Built-in Gains
Tax, up to a maximum of $2.3 million.
GROWTH STRATEGIES
ILM II has been pursuing the potential for future expansion of several of
the communities which are located in areas that have particularly strong senior
housing markets. Potential expansion candidates include the communities located
in Omaha, Nebraska; St. Louis County, Missouri and Ft. Myers, Florida. As part
of this expansion program, approximately one acre of land located adjacent to
the Omaha community was acquired in the first quarter of fiscal year 1998 for
approximately $135,000. During the second quarter of fiscal year 1998, a
one-half acre parcel of vacant land adjacent to the Stockton community was
purchased for approximately $136,000. Although no expansion of the Stockton
community is being considered at this time, the additional land will provide
needed parking spaces and improved access to the existing community as well as
future expansion potential. The Fort Myers community includes a vacant land
parcel of approximately one and one-half acres, which could accommodate an
expansion of the existing community. Preliminary feasibility evaluations have
been completed for all of these potential expansions and pre-construction design
and construction-cost evaluations are underway for expansions of the communities
located in Omaha and Fort Myers.
ILM II has finalized negotiations with a major bank to provide a
construction loan facility that will provide ILM II with up to $8.8 million of
funds to finance the capital costs of these potential expansion programs. The
construction loan facility will be secured by a first mortgage on ILM II's
properties and the collateral assignment of ILM II's interest in the leases of
such properties. The loan will have a three-year term with interest accruing at
a rate equal to "LIBOR" plus 1.10% or "Prime" plus 0.5%. The loan term
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provides that it may be extended for an additional two years beyond its maturity
date with monthly payments of principal and interest set on a 25-year
amortization schedule.
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 II'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.
Based on ongoing assessments, ILM II has developed a system to modify or
replace portions of its software and certain hardware, which are generally
PC-based systems, so that those systems will properly recognize and utilize
dates beyond December 31, 1999. ILM II has substantially completed software
upgrades and software and hardware replacement as of December 31, 1998. ILM II
presently believes that these modifications and upgrades of existing software
and certain hardware will mitigate the Year 2000 issue. However, if such
modifications and replacements are not completed timely, the Year 2000 issue
could have an impact on the operation of ILM II. The costs of Year 2000
remediation are not expected to be material based on ILM II's operations.
ILM II has assessed its exposure to operating equipment, and such exposure
is not significant due to the nature of ILM II's business.
ILM II is not aware of any external agent with a Year 2000 issue that would
materially impact ILM II's results of operations, liquidity, or capital
resources. However, ILM II has no means of determining whether or ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolution process in a timely fashion could impact ILM
II.
Management of ILM II believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, ILM II has
substantially completed all necessary phases of its Year 2000 program. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could also adversely affect ILM II. Although the amount of potential liability
and lost revenue cannot be reasonably estimated at this time, in a worst case
situation, if Capital, ILM II's most significant third party contractor, were to
experience a Year 2000 problem, it is likely that Lease II would not receive
rental income as it became due from senior living community residents. Lease II
in turn would fail to pay ILM II Holding lease payments as they arise under the
master lease, and ILM II Holding in turn may fail to pay ILM II mortgage
payments due it. However, if this were to occur, ILM II believes that given the
nature of its business, such a problem would be temporary and easily remediable
with a simple accounting.
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<PAGE>
RESULTS OF OPERATIONS FOR ILM II
For the Nine Months Ended May 31, 1999 versus the Nine Months Ended May 31, 1998
Net income decreased $948,000 or 41.4%, to $1,342,000 for the nine-month
period ended May 31, 1999 compared to $2,290,000 for the nine-month period ended
May 31, 1998. Total revenue was $3,985,000 representing an increase of $228,000,
or 6.1%, compared to $3,757,000 for the same period of the prior year. Rental
and other income increased $246,000, to $3,946,000 for the nine-month period
ended May 31, 1999, compared to $3,700,000 for the nine-month period ended
May 31, 1998, due to increased rental income earned pursuant to the terms of the
Facilities Lease Agreement. Total expenses increased $1,176,000, or 80.2%, to
$2,643,000 for the nine-month period ended May 31, 1999, compared to $1,467,000
for the nine-month period ended May 31, 1998. This increase in expenses is
primarily attributable to increased professional fees due to increased legal,
financial and advisory professionals who were engaged to assist ILM II with the
proposed agreement and plan of merger with Capital, as discussed in Note 2 to
the financial statements, and increased legal fees associated with the
construction loan facility. The $167,000 increase in general and administrative
expenses to $255,000 for the nine-month period ended May 31, 1999, compared to
$88,000 for the same period last year, is due to a variety of factors including
increased Director and Officer insurance costs of $84,000; increased printing
costs of $37,000 for the annual and quarterly reports which were completed
earlier in the current year when compared to the previous year; and minor
increases and decreases in other general and administrative costs. Directors'
Compensation decreased $20,000, or 23.3%, due to a decrease in the number of
Board members.
1998 Compared to 1997
Net income increased $723,000 for fiscal year 1998 compared to fiscal year
1997. Total revenue was $5,065,000 representing an increase in revenue of
$550,000 when compared to the prior fiscal year. Rental and other income
increased by $572,000 from $4,416,000 in fiscal year 1997 to $4,988,000 in
fiscal year 1998 as a result of increased rental income earned pursuant to the
terms of the master lease agreement. Interest income decreased $22,000 as a
result of a decrease in the average balances of cash and cash equivalents in
fiscal year 1998 versus fiscal year 1997. Total expenses decreased $173,000 when
compared to 1997. General and administrative expenses decreased $341,000 due, in
part, to reimbursable costs and ILM II Holding restructuring costs of the prior
year. This decrease in expenses in fiscal year 1998 was offset by a $232,000
increase in professional fees associated with restructuring advice provided by
the independent investment banking firm and increased legal fees as well as a
$29,000 increase in Director's compensation as a result of more frequent Board
of Directors meetings.
1997 Compared to 1996
Net income increased by $97,000 for fiscal year 1997 when compared to
fiscal year 1996. Revenue increased by $4,469,000 of which $4,416,000 was due to
the consolidation of ILM II Holding in fiscal year 1997 including an improvement
in master lease rentals of $412,000 from the property leases owing to improved
overall occupancies and revenues of
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the lessee. Interest income increased $53,000 as a result of an increase in the
average balances of cash and cash equivalents in fiscal year 1997 versus fiscal
year 1996. General and administrative and professional fee expenses increased
$392,000 of which $242,000 of the increase was due, in part, to expenses
associated with purchasing the remaining controlling interest in ILM II Holding,
increased expenses associated with higher legal expenses and the expense of
restructuring cost studies carried out by the independent investment banking
firm. The remaining $151,000 increase in general and administrative and
professional fee expenses is due to the consolidation of ILM II Holding in
fiscal year 1997 which includes $116,000 associated with the charitable
contribution of ILM II Holding's preferred stock. Director's compensation also
increased in the current year by $58,000, due to an increase in the number of
directors and meetings. Depreciation and amortization expense increased
$1,275,000 due to the consolidation of ILM II Holding in fiscal year 1997.
Equity in income of properties securing mortgage loans decreased by $2,674,000
as a result of the consolidation of ILM II Holding in fiscal year 1997.
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CERTAIN INFORMATION WITH RESPECT TO ILM II
The following is a general description of the business of ILM II, its
properties, and certain other matters.
GENERAL
ILM II is a finite-life corporation organized on February 5, 1990 in the
Commonwealth of Virginia for the purpose of making construction and
participating mortgage loans secured by its senior living communities. ILM II
has elected to qualify and be taxed as a REIT under the Code for each taxable
year of its operations. As a REIT, ILM II is allowed a deduction for the amount
of dividends it pays to its shareholders, thereby effectively subjecting the
distributed net income of ILM II to taxation at the shareholder level only. In
order to qualify as a REIT, among other things, ILM II must distribute at least
95% of its taxable income on an annual basis and meet certain other
requirements.
ILM II Holding holds title to the senior living communities which comprise
the balance of operating investment properties on ILM II's consolidated balance
sheet subject to certain mortgage loans payable to ILM II. Such mortgage loans
and the related interest expense is eliminated on ILM II's consolidated
financial statements.
For a complete corporate organization chart, see "ILM II Entities
Organization Chart" at page 9.
PROPERTIES
ILM II's investments as of May 31, 1999 are described below:
<TABLE>
<CAPTION>
YEAR
PROPERTY NAME FACILITY DATE OF RENTABLE RESIDENT
AND LOCATION TYPE OF PROPERTY BUILT INVESTMENT UNITS(2) CAPACITIES(3)
- ------------------------------ ----------------- -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
The Palms Senior Housing 1988 7/18/90 205 255
Fort Myers, Fl Community
Crown Villa Senior Housing 1992 4/25/91 73 73
Omaha, NE Community
Overland Park Place Senior Housing 1984 4/9/92 141 153
Overland Park, KS Community
Rio Las Palmas Senior Housing 1988 5/14/92 164 190
Stockton, CA Community
The Villa at Riverwood Senior Housing 1986 5/29/92 120 140
St. Louis County, MO Community
Villa Santa Barbara (1) Senior Housing 1979 7/13/92 125 125
Santa Barbara, CA Community
</TABLE>
- ------------------
(1) The acquisition of Villa Santa Barbara was financed jointly by ILM II and
ILM. All amounts generated from Villa Santa Barbara are equitably
apportioned between ILM II, together with its consolidated subsidiary, and
ILM, together with its consolidated subsidiary (generally 75% and 25%,
respectively). Villa Santa Barbara is owned 75% by ILM II Holding and 25% by
ILM Holding.
(Footnotes continued on next page)
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(Footnotes continued from previous page)
(2) Information regarding rentable units has been disclosed in this proxy
statement and ILM II's periodic reports filed with the SEC because such
information is deemed relevant in the real estate industry.
(3) Information regarding resident capacities has been disclosed in this proxy
statement and ILM II's periodic reports filed with the SEC because such
information is deemed relevant in the health care industry.
The above referenced properties have been leased to Lease II by ILM II
Holding pursuant to a master lease. This master lease is a "triple-net" lease
whereby the lessee (Lease II) 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 II 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, 2000, Lease II is obligated to pay annual base
rent for the use of all of the facilities in the aggregate amount of $4,035,600.
Lease II 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 $13,021,000. Variable rental income
for the years ended August 31, 1998 and 1997 was $984,000 and $412,000,
respectively and for the six months ended February 28, 1999 and 1998 was
$642,000 and $436,000, respectively.
ILM II originally expected to liquidate its investments after a period of
approximately 10 years, although under the terms of its charter and by-laws,
property sales may occur at earlier dates. The net proceeds of any sale
transaction are expected to be distributed to ILM II's shareholders, so that ILM
II will, in effect, be self-liquidating.
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
1998 and the first two fiscal quarters during 1999 along with an average for the
year are, for each property presented below:
<TABLE>
<CAPTION>
AVERAGE QUARTERLY OCCUPANCY
--------------------------------------------------------------------
11/30/97 2/28/98 5/31/98 8/31/98 2/28/99 5/31/99 AVERAGE
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
The Palms................................ 92% 97% 97% 97% 93% 90% 94%
Crown Villa.............................. 97% 98% 97% 97% 96% 85% 95%
Overland Park Place...................... 99% 99% 99% 99% 97% 95% 98%
Rio Las Palmas........................... 88% 90% 89% 90% 92% 93% 90%
The Villa at Riverwood................... 94% 93% 95% 94% 95% 88% 93%
Villa Santa Barbara...................... 96% 97% 95% 96% 98% 97% 97%
</TABLE>
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ASSET MANAGEMENT
Through June 18, 1997 and subject to the supervision of ILM II's Board,
assistance in the management of the business of ILM II 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 II and its affiliates through August 31, 1997. Through the date of its
resignation, PaineWebber performed the day-to-day operations of ILM II and acted
as the investment advisor for, and consultant to, ILM II. PaineWebber provided
cash management, accounting, tax preparation, financial reporting, investor
communications and relations as well as asset management services to ILM II.
These services are now being provided to ILM II, subject to the supervision of
ILM II'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 II until the date of
PaineWebber's resignation and a Vice President of PaineWebber through
October 1997, now serves as a consultant to ILM II.
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 II and ILM shareholders
naming ILM II, ILM 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 II and ILM, and diverted certain of the corporate assets. The complaint
sought compensatory damages in an unspecified amount, punitive damages, the
judicial dissolution of ILM II and ILM, an order requiring the ILM II and ILM
Boards 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, ILM II and its other co-defendants moved to dismiss the
complaint on all counts.
On December 8, 1998, the court granted ILM II's dismissal motion in part
but afforded the plaintiffs leave to amend their complaint. By doing so, the
court accepted ILM II's position that all claims relating to the derivative
actions were filed improperly. In addition, the court dismissed common law
claims for punitive damages, but allowed plaintiffs to amend their claims to
assert claims alleging that the defendants injured shareholders without injuring
ILM II 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 Exchange Act and Rule 10b-5 promulgated
thereunder. Even before ILM II and the ILM II 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
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second amended complaint which included claims for injunctive relief and, in the
alternative, damages in an unspecified amount. In response to ILM II's motion to
dismiss the 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. The
plaintiffs have requested documents and depositions of certain current and
former directors.
On June 21, 1999, ILM II, ILM and each of its 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
II, ILM and other defendants 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, 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 is scheduled for
November___, 1999. Under the Stipulation of Settlement, Capital is responsible
for payment of attorneys' fees and expenses sought under the application as long
as the proposed merger is consummated.
COMPETITION
In general, ILM II 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 II while others are non-profit or charitable
organizations. ILM II 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 II also believes
that ILM II's communities compete on a local and regional basis, rather than on
a national basis. As a result, ILM II 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
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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 II's business and could prevent the location involved
from offering services to patients. ILM II believes it is currently in
substantial compliance with licensing requirements; however, there can be no
assurance that ILM II will be able to maintain such licenses for its communities
or that ILM II will not be required to expend significant funds in order to meet
such requirements.
Of the states in which ILM II 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 II's operations, such expansion may
be delayed or otherwise affected. Furthermore, certain states have now or in the
past imposed moratoriums on the development of new facilities.
EMPLOYEES
As of October 31, 1999, all of ILM II's properties are managed by Capital
and ILM II retains one full-time, independent consultant, David Carlson, to
oversee the operations of ILM II's business.
INSURANCE
ILM II 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
II 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
II or Capital, for the past five years, has been the principal executive office
of ILM II or Capital, as the case may be.
ILM II
<TABLE>
<CAPTION>
NAME AGE
- ------ ------
<S> <C> <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> <C>
James A. Stroud............................. 49 Chairman of the Board, Chairman and
Secretary
Lawrence A. Cohen........................... 45 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..................... 62 Director
James A. Moore.............................. 65 Director
Dr. Victor W. Nee........................... 64 Director
</TABLE>
J. WILLIAM SHARMAN, JR. has served as a director of ILM II since its
inception in 1990 and has been ILM II'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
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ILM since 1989, and Director of Lease I and Lease II. Each of ILM, Lease I and
Lease II is an affiliate of ILM II. 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 II. He
has served as a director of ILM II since its inception in 1990. 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 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 II 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.
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
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and a member of the boards of directors of ILM II and ILM. From April 1991 to
July 7, 1998 Mr. Cohen was a member of the board of directors of Lease I and
Lease II. Mr. Cohen serves as a member of the Corporate Finance Committee and
chairman of the Direct Participation Programs Subcommittee 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 March 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 20 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 where he has been since 1998.
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.
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
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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 is the immediate past
president of The National Association for Senior Living Industries and is the
current chairman of The National Foundation for Retirement Living.
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 II 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.
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SHAREHOLDER PROPOSALS
If the merger is not completed, ILM II 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 II's
proxy statement for the calendar year 2000 annual meeting will be
, 2000.
OTHER MATTERS
The ILM II 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 II at August 31, 1998 and 1997
and for each of the three years in the period ended August 31, 1998, 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 as experts in accounting and
auditing.
NO APPRAISAL RIGHTS
Because ILM II has at least 2,000 shareholders of record and neither ILM
II's articles of incorporation nor by-laws provide for any appraisal rights, ILM
II's shareholders will not have any right to object to the merger and have the
value of their shares of ILM II common stock determined by a court. Accordingly,
ILM II's shareholders will not be afforded these dissenter's rights.
ILM II SENIOR LIVING, INC.
December , 1999
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of ILM II Senior Living, Inc.:
Report of Ernst & Young LLP, Independent Auditors.................................................... F-2
Consolidated Balance Sheets--May 31, 1999 (Unaudited) and August 31, 1998 and 1997................... F-3
Consolidated Statements of Income--Three months and nine months ended May 31, 1999 and 1998
(Unaudited) and Years ended August 31, 1998, 1997, and 1996........................................ F-4
Consolidated Statements of Changes in Shareholders' Equity--Nine months ended February 28, 1999
(Unaudited) and Years ended August 31, 1998, 1997, and 1996........................................ F-5
Consolidated Statements of Cash Flows--Nine months ended February 28, 1999 and 1998 (Unaudited) and
Years ended August 31, 1998, 1997, and 1996........................................................ F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders of
ILM II Senior Living, Inc.
We have audited the accompanying consolidated balance sheets of ILM II
Senior Living, Inc. and subsidiary, as of August 31, 1998 and 1997, 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, 1998.
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 II Senior Living, Inc. and subsidiary, at August 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
October 13, 1998
F-2
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
MAY 31, 1999 1998 1997
----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Operating investment properties, at cost:
Land.................................................................. $ 5,567 $ 5,518 $ 5,030
Building and improvements............................................. 27,910 27,726 27,726
Furniture, fixtures and equipment..................................... 3,815 3,815 3,765
--------- -------- --------
37,292 37,059 36,521
Less: accumulated depreciation........................................ (8,448) (7,599) (6,457)
--------- -------- --------
28,844 29,460 30,064
Real estate investments:
Unamortized mortgage fees............................................. 1,425 1,425 1,425
Less: accumulated amortization........................................ (1,073) (966) (823)
--------- -------- --------
352 459 602
Loan origination fees, net.............................................. 112 72 --
Cash and cash equivalents............................................... 651 1,896 2,361
Accounts receivable--related party...................................... 308 273 151
Prepaid expenses and other assets....................................... 185 154 77
Deferred rent receivable................................................ 45 69 100
--------- -------- --------
$ 30,497 $ 32,383 $ 33,355
--------- -------- --------
--------- -------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses................................... $ 288 $ 220 $ 147
Accounts payable--related party......................................... -- -- 205
--------- -------- --------
288 220 352
Preferred shareholders' minority interest in consolidated subsidiary.... 132 125 116
--------- -------- --------
Total liabilities....................................................... 420 345 468
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 12,500,000 shares authorized, 5,181,236
shares issued and outstanding...................................... 52 52 52
Additional paid-in capital............................................ 44,823 44,823 44,823
Accumulated deficit................................................... (14,798) (12,837) (11,988)
--------- -------- --------
Total shareholders' equity.............................................. 30,077 32,038 32,887
--------- -------- --------
$ 30,497 $ 32,383 $ 33,355
--------- -------- --------
--------- -------- --------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
MAY 31, MAY 31, YEAR ENDED AUGUST 31,
---------------- ---------------- --------------------------
1999 1998 1999 1998 1998 1997 1996
------ ------ ------ ------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and other income.......... $3,946 $3,700 $1,302 $1,262 $4,988 $4,416 $ --
Interest income earned on cash
equivalents................... 39 57 8 13 77 99 46
------ ------ ------ ------ ------ ------ ------
3,985 3,757 1,310 1,275 5,065 4,515 46
Expenses:
Depreciation..................... 849 849 283 283 1,142 1,132 --
Amortization..................... 138 107 48 36 143 143 --
Management fees.................. -- -- -- -- -- 103 130
General and administrative....... 255 88 78 31 222 563 246
Professional fees................ 1,335 337 573 147 540 308 233
Director compensation............ 66 86 19 28 111 82 24
------ ------ ------ ------ ------ ------ ------
2,643 1,467 1,001 525 2,158 2,331 633
------ ------ ------ ------ ------ ------ ------
Operating income (loss)............ 1,342 2,290 309 750 2,907 2,184 (587)
Equity in income of properties
securing mortgage loans.......... -- -- -- -- -- -- 2,674
------ ------ ------ ------ ------ ------ ------
Net income......................... $1,342 $2,290 $ 309 $ 750 $2,907 $2,184 $2,087
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Earnings per share of common
stock............................ $ 0.26 $ 0.44 $ 0.06 $ 0.14 $ 0.56 $ 0.42 $ 0.40
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
Cash dividends paid per share of
common stock..................... $ 0.64 $ 0.54 $ 0.21 $ 0.19 $ 0.73 $ 0.61 $ 0.50
------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------
</TABLE>
The above earnings and cash dividends paid per share of common stock are
based upon the 5,181,236 shares outstanding during the year.
See accompanying notes.
F-4
<PAGE>
ILM II 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, 1995............... 5,181,236 $ 52 $ 44,823 $ (9,995) $34,880
Cash dividends paid................................. -- -- -- (2,591) (2,591)
Distribution of stock in ILM II Lease Corporation... -- -- -- (500) (500)
Net income.......................................... -- -- -- 2,087 2,087
--------- ---- -------- --------- -------
Shareholders' equity at August 31, 1996............... 5,181,236 52 44,823 (10,999) 33,876
Cash dividends paid................................. -- -- -- (3,173) (3,173)
Net income.......................................... -- -- -- 2,184 2,184
--------- ---- -------- --------- -------
Shareholders' equity at August 31, 1997............... 5,181,236 52 44,823 (11,988) 32,887
Cash dividends paid................................. -- -- -- (3,756) (3,756)
Net income.......................................... -- -- -- 2,907 2,907
--------- ---- -------- --------- -------
Shareholders' equity at August 31, 1998............... 5,181,236 52 44,823 (12,837) 32,038
Cash dividends paid................................. -- -- -- (3,303) (3,303)
Net income.......................................... -- -- -- 1,342 1,342
--------- ---- -------- --------- -------
Shareholders' equity at May 31, 1999 (Unaudited)...... 5,181,236 $ 52 $ 44,823 $ (14,798) $30,077
--------- ---- -------- --------- -------
--------- ---- -------- --------- -------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MAY 31, YEAR ENDED AUGUST 31,
------------------ -----------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 1,342 $ 2,290 $ 2,907 $ 2,184 $ 2,087
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Equity in income of properties securing mortgage
loans.............................................. -- -- -- -- (2,674)
Depreciation and amortization......................... 987 956 1,285 1,275 --
Charitable contribution of subsidiary's preferred
stock and accrued dividends........................ -- -- 9 116 --
Changes in assets and liabilities:
Interest and other receivables........................ -- -- -- 178 (318)
Accounts receivable--related party.................... (35) (1,105) (122) 74 156
Prepaid expenses and other assets..................... (31) (128) (77) (68) 7
Deferred rent receivable.............................. 24 24 31 31 --
Accounts payable--related party....................... -- (98) (205) 173 (25)
Accounts payable and accrued expenses................. 68 (3) 73 82 (50)
Preferred shareholder's minority interest............. 7 6 -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities....................................... 2,362 1,942 3,901 4,045 (817)
------- ------- ------- ------- -------
Cash flows (used in) from investing activities:
Initial investment in ILM II Lease Corporation............. -- -- -- -- (500)
Additional fundings of construction loans.................. -- -- -- -- (320)
Contractual payments received on mortgage loans............ -- -- -- -- 3,998
ILM II Holding acquired cash balance....................... -- -- -- 245 --
Additions to operating investment properties............... (233) (385) (538) (205) --
------- ------- ------- ------- -------
Net cash (used in) provided by investing
activities....................................... (233) (385) (538) 40 3,178
------- ------- ------- ------- -------
Cash flows used in financing activities:
Loan origination fees...................................... (71) -- (72) -- --
Cash dividends paid to shareholders........................ (3,303) (2,785) (3,756) (3,173) (2,591)
------- ------- ------- ------- -------
Net cash used in financing activities.............. (3,374) (2,785) (3,828) (3,173) (2,591)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents......... (1,245) (1,228) (465) 912 (230)
Cash and cash equivalents, beginning of year................. 1,896 2,361 2,361 1,449 1,679
------- ------- ------- ------- -------
Cash and cash equivalents, end of year....................... $ 651 $ 1,133 $ 1,896 $ 2,361 $ 1,449
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Cash paid for state income taxes............................. $ -- $ -- $ -- $ -- $ 3
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION
ILM II Senior Living, Inc. (the "Company"), formerly PaineWebber
Independent Mortgage Fund, Inc. II, was organized as a corporation on
February 5, 1990 under the laws of the State of Virginia. On September 12, 1990,
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. 33-33857), (the
"Prospectus"). The public offering terminated on May 10, 1991 with a total of
5,181,236 shares issued. The Company received capital contributions of
$51,812,356, of which $200,000 represented the sale of 20,000 shares to an
affiliate at that time, PaineWebber Group, Inc. ("PaineWebber"). For discussion
purposes, 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 six participating mortgage loans secured by senior housing
facilities located in five different states ("Senior Housing Facilities"). All
of the loans made by the Company were originally to Angeles Housing Concepts,
Inc. ("AHC"), a company specializing in the development, acquisition and
operation of senior housing facilities.
The Company entered into an exclusivity agreement, (as amended), with AHC
and its parent company, Angeles Corporation ("Angeles"), which required AHC to
provide the Company with certain specific opportunities to finance senior
housing facilities and set forth the terms and conditions of the loans which
were made. The loan documents under the aforementioned exclusivity agreement
called for interest to be paid on construction loans at the rate of 13.3% per
annum during the construction period and for base interest to be paid on the
permanent loans at the rate of 10.3% per annum. In addition to the base
interest, additional interest was to be paid on the permanent loans in an amount
equal to 10% of the gross revenues of the Senior Housing Facilities, as defined.
Under the terms of the amended exclusivity agreement, additional interest was to
be no less than 3% of the aggregate principal amount of all permanent loans
outstanding for the entire term of the investments. In the aggregate, the
properties securing loans from the Company did not generate sufficient cash flow
to cover the debt service payments owed to the Company under the amended terms
of the exclusivity agreement. To the extent that the properties did not generate
sufficient cash flow to make the full payments due under the loan documents, the
shortfall was funded by AHC through December 1992. The source of cash to make up
these shortfalls was from specified deficit reserve accounts, which had been
funded from the proceeds of the mortgage loans, and from contributions by
Angeles.
During the quarter ended February 28, 1993, Angeles announced that it was
experiencing liquidity problems that resulted in the inability to meet its
obligations. Subsequent to such announcements, AHC defaulted on the regularly
scheduled mortgage loan payments due to the Company on March 1, 1993. Subsequent
to March 1993, payments toward the debt service owed on the Company's loans were
limited to the net cash flow of the operating investment properties. On May 3,
1993, Angeles filed for reorganization under a Chapter 11 Federal Bankruptcy
petition filed in the state of California. AHC did not file for reorganization.
The Company retained special counsel and held extensive discussions with AHC
concerning the default status of its loans. During the fourth quarter of fiscal
1993, a non-binding settlement agreement between the Company, AHC and Angeles
was reached whereby ownership of the 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
F-7
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
handling the bankruptcy case of Angeles. All of the capital stock of each
Property Company was held by ILM II Holding, Inc. ("ILM II Holding"), a Virginia
corporation. In August 1995, each of the Property Companies merged into ILM II
Holding which is majority owned by the Company. As a result, ownership of the
Senior Housing Facilities is now held by ILM II Holding, and the Property
Companies no longer exist as separate legal entities.
ILM II Holding holds title to the six 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 II Holding was originally owned by the
Company and PaineWebber. ILM II Holding had issued 100 shares of Series A
Preferred Stock to the Company in return for a capital contribution in the
amount of $495,000 and had issued 10,000 shares of common stock to PaineWebber
in return for a capital contribution in the amount of $5,000. The common stock
represented approximately 99 percent of the voting power and 1 percent of the
economic interest in ILM II Holding, while the preferred stock represented
approximately 1 percent of the voting power and 99 percent of the economic
interest in ILM II Holding.
The Company completed its restructuring plans by converting ILM II 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
II Holding to the Company for a price equal to the fair market value of the 1%
economic interest in ILM II Holding represented by the common stock. On
January 10, 1997, this transfer of the common stock of ILM II Holding was
completed at an agreed upon fair value of $40,000. With this transfer completed,
effective January 23, 1997 ILM II Holding recapitalized its common stock and
preferred stock by replacing the outstanding shares with 50,000 shares of new
common stock and 275 shares of 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 II Holding were also increased as part of the
recapitalization. Following the recapitalization, the Company made charitable
gifts of one share of the preferred stock in ILM II Holding to each of 111
charitable organizations so that ILM II Holding would meet the stock ownership
requirements of a REIT as of January 30, 1997. The preferred stock has a
liquidation preference of $1,000 per share plus any accrued and unpaid
dividends. Dividends on the preferred stock 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 II Holding is not expected to have sufficient
cash flow in the foreseeable future to make the required dividend payments, it
is anticipated that dividends will accrue and be paid at liquidation. The
Company recorded the contribution of the preferred stock in ILM II Holding to
the charitable organizations at the amount of the initial liquidation preference
of $111,000. Such amount is included in general and administrative expense on
the accompanying income statement for the year ended August 31, 1997. Cumulative
dividends accrued as of August 31, 1998 and 1997 on the preferred stock in ILM
II Holding totaled approximately $14,000 and $5,000, respectively. Cumulative
dividends accrued as of May 31, 1999 on the preferred stock in ILM II Holding
totaled approximately $20,720.
As part of the fiscal 1994 Settlement Agreement with AHC, ILM II Holding
retained AHC as the property manager for all of the Senior Housing Facilities
pursuant to the terms of a management agreement. 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 II Lease
Corporation ("Lease II"), 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 II to the holders of record of the Company's common stock. The Senior
Housing Facilities were
F-8
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
leased to Lease II effective September 1, 1995 (see Note 4 for a description of
the master lease agreement). Lease II is a public company subject to the
reporting obligations of the Securities and Exchange Commission.
At a meeting of the Company's Board of Directors on January 10, 1997,
PaineWebber recommended the immediate sale of the Senior Housing Facilities held
by the Company and an affiliated entity, ILM Senior Living, Inc. ("ILM I"), by
means of a controlled auction to be conducted by PaineWebber with PaineWebber
offering to purchase the properties for $127 million, thereby guaranteeing the
shareholders a "floor" price. The Senior Housing Facilities held by the Company
would represent approximately $52 million of this amount. After taxes and
closing costs, net proceeds to the Company would equal approximately
$48 million or approximately $9.36 per share. PaineWebber also stated that if it
purchased the properties at the specified price and were then able to resell the
properties at a higher price, PaineWebber would pay any "excess profits" to the
Shareholders. To assist the Company in evaluating PaineWebber's proposal, a
disinterested, independent investment banking firm with expertise in healthcare
REITs and independent/assisted living financings was engaged by the Company and
Lease II, as well as ILM I and its affiliates. Following a comprehensive
analysis, the investment banking firm recommended that PaineWebber's proposal
should be declined and that, instead, investigations of expansion and
restructuring alternatives should be pursued. After analyzing PaineWebber's
proposal and the recommendations and other information provided by the
independent investment banking firm, the Boards of the Company and ILM I voted
unanimously to decline PaineWebber's proposal and to explore the alternatives
recommended by the independent investment banking firm. The Boards declined to
seek an immediate sale of the properties because, in the Boards' view, the
liquidation price would not reflect the "going concern" values of the Company
and ILM I and, therefore, would not maximize Shareholder value. In addition, the
Boards did not consider it advisable to liquidate the Company and ILM I on the
suggested terms several years prior to their scheduled termination date.
PaineWebber had indicated to the Board in its January 10, 1997, proposal
that it would not wish to continue to serve as advisor to the Company and its
affiliates if the Company declined to accept PaineWebber's proposal. The Company
accepted the resignation of PaineWebber, effective as of June 18, 1997.
PaineWebber agreed to continue to provide certain administrative services to the
Company and its affiliates through August 31, 1997, pursuant to the terms of a
transition services agreement entered into with the Company and its affiliates.
The Company and its affiliates also accepted, effective as of June 18, 1997, the
resignations of those Officers and Directors who were employees of or otherwise
affiliated with PaineWebber.
The Company and Lease II are continuing to review various strategic
alternatives to maximize shareholder value and liquidity and have engaged
professional financial and legal advisors to formulate and present plans and
proposals for consideration by the Board. Although no definitive plans,
arrangements or understandings have been agreed to at this time, the Company is
actively reviewing the feasibility of a variety of financial transactions and
proposals, including the reorganization of the ownership of the Senior Housing
Facilities, business combinations and the sale of the Company by means of cash
and or stock-for-stock merger. There can be no assurance that any definitive
transaction will be formulated, agreed to or consummated.
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1998 and 1997 and revenues and expenses for
each of the three years in the period ended August 31, 1997. Actual results
could differ from the estimates and assumptions used.
F-9
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
The accompanying financial statements include the financial statements of
the Company and ILM II Holding. All intercompany balances and transactions have
been eliminated in consolidation.
Effective January 10, 1997, the Company purchased the remaining common
shares held by PaineWebber of ILM II Holding which provided the Company with
100% majority voting control, for $40,000 which is included in general and
administrative expense for the year ended August 31, 1997. Accordingly, the
accounts of ILM II 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 for fiscal year 1996 account for the Company's
investment in ILM II Holding using the equity method. Under the equity method,
the Company's investment in ILM II Holding is carried at cost, including the
face amount of the mortgage loans, adjusted for the Company's share of ILM II
Holding's earnings, losses and distributions.
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 II
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 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 II, for
the purpose of operating the Senior Housing Facilities. The Senior Housing
Facilities were leased to Lease II effective September 1, 1995 (see Note 4 for a
description of the master lease agreement).
The assumption of ownership of the properties through ILM II Holding, which
was a regular C corporation for tax purposes at the time of assumption, has
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 II
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
F-10
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
conversion of ILM II Holding to a REIT would not be subject to the built-in gain
tax. The built-in gain tax would most likely not be incurred if the properties
were to be held for a period of at least 10 years from the date of the
conversion of ILM II Holding to a REIT. However, since the end of the Company's
original anticipated holding period as defined in the Articles of Incorporation
is December 31, 2001, the properties might not be held for an additional
10 years. Based on management's estimate of the increase in the values of the
properties which occurred between April 1994 and January 1996, as supported by
independent appraisals, a sale of the Senior Housing Facilities within ten years
of the date of the conversion of ILM II Holding to a REIT could result in a
built-in gain tax of as much as $2.3 million. To avoid this built-in gain tax,
the directors are prepared at the appropriate time to recommend to the
shareholders an amendment to the Articles of Incorporation to extend the
Company's scheduled liquidation date.
The Company's consolidated subsidiary, ILM II Holding, has incurred losses
for tax purposes since inception. Neither the Company nor ILM II Holding is
likely to be able to use these losses to offset future tax liabilities.
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 1998, 1997 and 1996 were ordinary taxable
dividends.
C. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include all
highly liquid investments with original maturities of 90 days or less.
D. OPERATING INVESTMENT PROPERTIES
Operating investment properties are carried at the lower of cost, reduced
by accumulated depreciation, or net realizable value. The net realizable value
of a property held for long-term investment purposes is measured by the
recoverability of the owner's investment through expected future cash flows on
an undiscounted basis, which may exceed the property's current market value. The
net realizable value of a property held for sale approximates its current market
value, as determined on a discounted basis. None of the operating investment
properties were held for sale as of August 31, 1998 or 1997. Depreciation
expense is provided on a straight-line basis using an estimated useful life of
40 years for the buildings and improvements and five 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, 1998.
Loan placement fees of $1,425,000 were incurred by the Company and are
included in operating investment properties in the accompanying balance sheet.
Accumulated amortization at August 31, 1998 and 1997 is $966,000 and $823,000,
respectively. Loan origination fees relating to the construction loan financing
(see Note 6.) will be amortized on the straight-line method.
F-11
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
E. RENTAL REVENUES
In fiscal years 1998 and 1997, rental revenues consist of payments due from
Lease II 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 on the balance sheet as of
August 31, 1998 and 1997 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 maturity of such instrument.
G. NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income and Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information all effective for fiscal 1998.
Statement No. 130 requires reporting and display of comprehensive income and its
components in the financial statements. Statement No. 131 requires reporting
about operating segments and other disclosures about the business in its annual
and interim financial statements. The Company does not believe adoption of these
new Statements will have a material impact on its financial statements.
H. 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 financial statements have been prepared on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles for
interim financial information, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of May 31, 1999 and revenues
and expenses for each of the nine- and three-month periods ended May 31, 1999
and 1998. Actual results could differ from the estimates and assumptions used.
The results of operations for the nine- and three-month periods ended May 31,
1999, are not necessarily indicative of the results that may be expected for the
year ended August 31, 1999.
F-12
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors, the
business of the Company was managed by PaineWebber. As previously discussed in
Note 1, PaineWebber resigned effective as of June 18, 1997.
PaineWebber and its affiliates received fees and compensation determined on
an 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 advisory agreement, PaineWebber has specific management
responsibilities; to perform day-to-day operations of the Company and to
act as the investment advisor and consultant for the Company in connection
with general policy and investment decisions. PaineWebber received an
annual base fee and an incentive fee of 0.25% and 0.25%, respectively, of
the capital contributions of the Company, as defined, as compensation for
such services. Incentive fees are subordinated to shareholders' receipt of
distributions of net cash sufficient to provide a return equal to 10% per
annum. PaineWebber earned base management fees totaling $0, $103,000 and
$130,000 for the years ended August 31, 1998, 1997 and 1996, 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 of approximately $1,000,000 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 the loan amounts.
Loan administration and due diligence fees totaling $425,000 were earned by
PaineWebber during the Company's investment due diligence period. Such fees
have been capitalized and are included in the cost of the operating
investment properties on the accompanying consolidated balance sheets.
(iv) PaineWebber was entitled to receive 1% of disposition proceeds,
as defined, until the shareholders have received dividends of net cash
equal to their adjusted capital investments, as defined, plus a 12% non-
compounded annual return on their adjusted capital investments; all
disposition proceeds thereafter until PaineWebber has received an aggregate
of 5% of disposition proceeds; and, thereafter, 5% of disposition proceeds.
PaineWebber was reimbursed for its direct expenses relating to the offering
of shares, the administration of the Company and the acquisition and operations
of the Company's real estate investments. Included in general and administrative
expenses on the accompanying statements of income for the years ended
August 31, 1998, 1997 and 1996 is $0, $118,000 and $107,000, 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, $5,000 and $6,000 (included in general and administrative expenses) for
managing the Company's cash assets during fiscal years 1998, 1997 and 1996,
respectively.
Lease II 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
F-13
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS--(CONTINUED)
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 II, has also served as Vice
Chairman and Chief Financial Officer of Capital Senior Living Corporation, an
affiliate of Capital, since November 1996. As a result, through July 28, 1998,
Capital was considered a related party. Capital earned property management fees
from Lease II of $899,000 and $707,000 for the years ended August 31, 1998 and
1997, respectively. For the nine- and three-month periods ended May 31, 1999,
Capital earned property management fees from the Company of $773,000 and
$225,000, respectively, compared to $684,000 and $240,000, for the nine- and
three-month periods ended May 31, 1998, respectively.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against an affiliate of Capital, the new property manager;
Lawrence A. Cohen, who, through July 28, 1998, was President, Chief Executive
Officer, and 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
$227,000 as of August 31, 1998. Legal fees paid by Lease I and Lease II on
behalf of Mr. Cohen totaled $239,000 as of May 31, 1999. The Company's Board
also concluded that, subject to certain conditions, the Company or its
affiliates should advance up to $20,000 to pay reasonable legal fees and
expenses incurred by Capital in the California litigation. Subsequently, the
Boards of Directors of Lease I and Lease II voted to increase the maximum amount
of the advance to Capital to $100,000. By the end of November 1997, Capital had
incurred $100,000 of legal expenses in the California litigation. On
February 2, 1998, the amount to be advanced was increased to include 75% of the
California litigation legal fees and costs incurred by Capital for December 1997
and January 1998, plus 75% of such legal fees and costs incurred by Capital
thereafter, not to exceed $500,000. At August 31, 1998, the amount of legal fees
either advanced to Capital or accrued on the financial statements of Lease I and
Lease II totaled approximately $519,000, although the final amount to be
reimbursed to Capital has not yet been determined. At May 31, 1999, the amount
of legal fees either advanced to Capital or accrued on the financial statements
of Lease I and Lease II totaled approximately $563,000.
On September 18, 1997, Lease II entered into an agreement with Capital
Senior Development, Inc., an affiliate of Capital, to manage the development
process for the potential expansion of several of the Senior Housing Facilities.
Capital Senior Development, Inc. will receive a fee equal to 7% of the total
development costs of these expansions if they are pursued. The Company will
reimburse Lease II for all costs related to these potential expansions including
fees to Capital Senior Development, Inc. For the years ended August 31, 1998 and
1997, Capital Senior Development, Inc. earned fees from the Company of $73,000
and $0, respectively, for managing pre-construction development activities for
potential expansions of the Senior Housing Facilities. For the nine- and
three-month periods ended May 31, 1999, Capital Senior Development, Inc. earned
no fees from the Company compared to $73,000 and $14,000, for the nine- and
three-month periods ended May 31, 1998, 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 received fees from the
Company of $224,000 and $57,000 for the years ended August 31, 1998 and 1997,
respectively. For the nine- and three-month periods ended May 31, 1999,
Greenberg Traurig earned fees from the Company of
F-14
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS--(CONTINUED)
$795,000 and $487,000, respectively. For the nine- and three-month periods ended
May 31, 1998, Greenberg Traurig earned fees from the Company of $197,000 and
$43,000, respectively.
Accounts receivable--related party at May 31, 1999, August 31, 1998 and
1997 represents amounts due from Lease II for variable rent.
Accounts payable--related party at August 31, 1997 represents amounts owed
to Lease II for property improvements made on the Company's behalf; there were
no accounts payable--related party at May 31, 1999 and August 31, 1998.
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE
As of August 31, 1998, the Company, through its consolidated affiliate,
owned six 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 CAPACITIES INVESTMENT(1)
- -------------------------------- -------------------------------- -------- ---------- -------------
<S> <C> <C> <C> <C>
The Palms Fort Myers, FL 205 255 7/18/90
Crown Villa Omaha, NE 73 73 4/25/91
Overland Park Place Overland Park, KS 141 153 4/9/92
Rio Las Palmas Stockton, CA 164 190 5/14/92
The Villa at Riverwood St. Louis County, MO 120 140 5/29/92
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 I. All amounts generated from the
operations of Villa Santa Barbara are equitably apportioned between the
Company, together with its consolidated subsidiary, and ILM I, together with
its consolidated subsidiary, generally 75% and 25%, respectively. The
financial position, results of operations and cash flows presented in these
consolidated financial statements include only the 75% allocable portion of
the Company's interest in the Santa Barbara Facility. Villa Santa Barbara is
owned 75% by ILM II Holding and 25% by ILM I Holding, Inc. as tenants in
common.
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 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 investments 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
F-15
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
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 7% from April 1, 1994 through
December 1, 1994, 9% for the period from January 1 through December 31, 1995,
11% for the period January 1 through December 31, 1996, 12% for the period
January 1 through December 31, 1997, 13% for the period January 1 through
December 31, 1998, 13.5% for the period January 1, 1999 through December 31,
1999 and 14% for the period January 1, 2000 through maturity. In August 1995,
each of the Property Companies was merged into ILM II Holding. As a result,
ownership of the Senior Housing Facilities, as well as the obligation under the
loans, is now held by ILM II Holding, and the Property Companies no longer exist
as separate legal entities. Since ILM II Holding is consolidated with the
Company in the accompanying financial statements for fiscal 1998 and 1997, 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 II, for the purpose of
operating the Senior Housing Facilities under the terms of a master lease
agreement. As of August 31, 1995, Lease II, 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 II to the holders of
record of the Company's common stock. One share of common stock of Lease II was
issued for each full share of the Company's common stock held. Prior to the
distribution, the Company capitalized Lease II with $500,000 from its existing
cash reserves, which was an amount estimated to provide Lease II with necessary
working capital. The master lease agreement, which commenced on September 1,
1995, is between the Company's consolidated subsidiary, ILM II Holding, as owner
of the properties and lessor, and Lease II 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 II Holding, as the lessor, is responsible for
all major capital improvements and structural repairs to the Senior Housing
Facilities, which expires on December 31, 2000 (December 31, 1999 with respect
to the Santa Barbara Facility). During the initial term of the master lease,
Lease II is obligated to pay annual base rent for the use of all of the Senior
Housing Facilities in the aggregate amount of $4,035,600 for calendar year 1996
and each subsequent year. Beginning in January 1997 and for the remainder of the
lease term, Lease II is also obligated to pay variable rent for each Senior
Housing Facility. Such variable rent is payable quarterly and is equal to 40% of
the excess, if any, of the aggregate total revenues for the Senior Housing
Facilities, on an annualized basis, over $13,021,000. Variable rental income
related to fiscal years 1998 and 1997 was $984,000 and $412,000, respectively.
Variable rent was $943,000 and $301,000 for the nine- and three-month periods
ended May 31, 1999, respectively, compared to $697,000 and $261,000, for the
nine- and three-month periods ended May 31, 1998, respectively.
F-16
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
Condensed balance sheets as of August 31, 1998 and 1997, and condensed
statements of operations for the years ended August 31, 1998 and 1997 of Lease
II are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets.......................................................... $ 1,896 $ 1,454
Furniture, fixtures, and equipment, net................................. 558 416
Other assets............................................................ 279 256
------- -------
$ 2,733 $ 2,126
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................................................... $ 1,960 $ 1,307
Other liabilities....................................................... 76 100
Shareholders' equity.................................................... 697 719
------- -------
$ 2,733 $ 2,126
------- -------
------- -------
STATEMENT OF OPERATIONS
Revenues................................................................ $15,524 $14,433
Operating expenses...................................................... 15,560 14,500
Income tax benefit...................................................... (14) (27)
------- -------
Net loss................................................................ $ (22) $ (40)
------- -------
------- -------
</TABLE>
5. LEGAL PROCEEDINGS AND CONTINGENCIES
Angeles Corporation Litigation
Angeles had guaranteed certain of the obligations of AHC under the terms of
the Exclusivity Agreement described in Note 1. Under the terms of the Settlement
Agreement discussed in Note 1, the Company retained a general unsecured claim
against Angeles in the amount of $1,201,000 as part of the bankruptcy
proceedings, but waived all other claims against Angeles, including any amounts
of base and additional interest owed. In addition, the Company maintained a
claim for approximately $408,000 against an affiliate of Angeles which had made
a separate guaranty to the Company. On March 17, 1995, the Bankruptcy Court
handling the Angeles bankruptcy proceedings approved a final settlement of the
Company's outstanding claims against Angeles and its affiliates. Pursuant to the
terms of this settlement, the Company received a cash payment of $1 million on
April 14, 1995 in full satisfaction of the claims, which totaled approximately
$1.6 million. This amount, net of certain related legal expenses, was recorded
as a reduction in the carrying values of the Company's operating investment
properties.
Termination of Management Contract with AHC
On July 29, 1996, Lease II and ILM II Holding ("the Companies") terminated
a property management agreement with AHC covering the six Senior Housing
Facilities leased by Lease II from ILM II Holding. The management agreement was
terminated for cause pursuant to Sections 1.05 (a) (i), (iii) and (iv) of the
agreement. Simultaneously with the termination of the management agreement, the
Companies, together with certain affiliated entities, filed suit against AHC in
the United States District Court for the Eastern District of Virginia for breach
of contract, breach of fiduciary duty and fraud. The Companies alleged that AHC
willfully performed actions specifically in violation of the management
agreement and that such actions caused damages to the Companies.
F-17
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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 II
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 $750,000, payment of management fees pursuant
to the contract from August 1, 1996 through October 15, 1996, which is the
earliest date that the management agreement could have been terminated without
cause, and recovery of attorneys' fees and expenses.
The aggregate amount of damages against all parties as requested in AHC's
counterclaim exceeded $2,000,000. On June 13, 1997 and July 8, 1997, the court
issued orders to enter judgment against the Company and ILM I in the amount of
$1,000,000. The orders did not contain any findings of fact or conclusions of
law. On July 10, 1997, the Company, ILM I, 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 in the amount of at least $2,000,000.
On March 4, 1997, the defendants removed the case to Federal District Court for
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
$227,000 and $239,000 as of August 31, 1998 and May 31, 1999 respectively. The
Company's Board also concluded that, subject to certain conditions, the Company
or its affiliates should advance up to $20,000 to pay reasonable legal fees and
expenses incurred by Capital in the California litigation. Subsequently, the
Boards of Directors of Lease I and Lease II voted to increase the maximum amount
of the advance to $100,000. By the end of November 1997, Capital had incurred
$100,000 of legal expenses in the California litigation. On February 2, 1998,
the amount to be advanced to Capital was increased to include 75% of the
California litigation legal fees and costs incurred by Capital for December 1997
and January 1998, plus 75% of such legal fees and costs incurred by Capital
thereafter, not to exceed $500,000. At August 31, 1998 and May 31, 1999, the
amount of legal fees either advanced to Capital or accrued on the financial
statements of Lease I and Lease II totaled approximately $519,000 and $563,000
respectively.
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. The Company's Board of Directors believed that settling the AHC
litigation was a prudent course of action because the settlement amount
represented a small percentage of the increases in cash flow and value achieved
for the Company and its affiliates over the past two years.
On September 4, 1998, the full settlement amounts were paid to AHC and its
affiliates with Lease II paying $650,000 and Lease I paying $975,000.
F-18
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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 I in the Supreme Court of the State of New York, County of New
York against the Company, ILM I 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 I, diverting certain of their
assets and changing the nature of the Company and ILM I. The complaint sought
damages in an unspecified amount, punitive damages, the judicial dissolution of
the Company and ILM I, an order requiring the directors to take all steps to
maximize shareholder value, including either an auction or liquidation, and
rescinding certain agreements, and attorney's fees. On July 8, 1998, the Company
joined with all other defendants to dismiss the complaint on all accounts.
In an oral ruling from the bench on December 8, 1998, the Court granted the
Company's dismissal motion in part and gave the plaintiffs leave to amend their
complaint. In sum, the Court accepted the Company's position that all claims
relating to so-called "derivative" actions were filed improperly and were
dismissed. In addition, the Court dismissed common law claims for punitive
damages, but allowed plaintiffs 30 days to allege any claims, which may have
injured shareholders without injuring the Company as a whole.
On January 22, 1999, the Feldman plaintiffs filed an amended complaint,
again purporting to commence a class action, and adding claims under
Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. Even before the Company and the Board of Directors
responded to that amended complaint, the Feldman plaintiffs moved for leave to
file a second amended complaint to add claims directed at enjoining the
announced potential merger with Capital Senior Living Corporation and,
alternatively, for compensatory and punitive damages. At a hearing held on
March 4, 1999 relating to the motion for leave to file that second amended
complaint and to expedite discovery, the Court granted leave to amend and set a
schedule for discovery leading to a trial (if necessary) in Summer 1999.
On March 9, 1999, the Feldman plaintiffs filed a second amended complaint
which included claims for injunctive relief and, in the alternative, damages in
an unspecified amount. In response to the Company's motion to dismiss the second
amended complaint filed by the plaintiffs, the court hearing the motion issued
an order dismissing the plaintiffs' federal security claims. The plaintiffs have
requested documents and depositions of certain current and former directors. The
Company and the Board of Directors is continuing to contest the action
vigorously.
On June 21, 1999, ILM II, ILM and each each of its 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 II, ILM and other defendants 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, 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.
F-19
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1998 AND MAY 31, 1999 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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
attorney's 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 is scheduled for
November , 1999. Under the Stipulation of Settlement, Capital is responsible
for payment of attorneys' fees and expenses sought under the application as long
as the proposed merger is consummated. The Company is unable to estimate a range
of loss, if any, that may arise from this matter.
6. CONSTRUCTION LOAN FINANCING
The Company has finalized negotiations with a major bank to provide a
construction loan facility that will provide the Company with up to $8.8 million
to fund the capital costs of these potential expansion programs. The
construction loan facility will be secured by a first mortgage of the Company's
properties and collateral assignment of the Company's leases of such properties.
The loan will have a three-year term with interest accruing at a rate equal to
LIBOR plus 1.10% or Prime plus 0.5%. The loan term could be extended for an
additional two years beyond its maturity date with monthly payments of principal
and interest on a 25-year amortization schedule. Loan origination costs in
connection with this loan facility are being amortized over the life of the
loan.
On June 7, 1999, the Company borrowed $1,165,000 under the construction
loan facility to fund the pre-construction capital costs, incurred through April
1999, of the potential expansions of the Senior Housing Facilities, leaving
approximately $7.6 million unused and available.
7. SUBSEQUENT EVENTS
On February 7, 1999, the Company entered into an agreement and plan of
merger with Capital Senior Living Corporation, the corporate parent of Capital,
and certain affiliates of Capital. Consummation of the merger is presently
anticipated in October 1999. In connection with the merger, the Company has
agreed to cause ILM II Holding to cancel and terminate the Facilities Lease
Agreement with Lease II immediately prior to the effective time of the merger.
There can be no assurance as to whether the merger will be consummated or, if
consummated, as to the timing thereof. As noted above, the Facilities Lease
Agreement, which is scheduled to expire on December 31, 2000, may be terminated
earlier at the election of the Lessor in connection with the sale by the Lessor
of the Senior Housing Facilities to a non-affiliated third party. As a result,
Lease II would have little "going concern" value. There can be no assurance as
to whether the merger will be consummated or, if consummated, as to the timing
thereof.
On September 15, 1998, the Company's Board of Directors declared a
quarterly dividend for the quarter ended August 31, 1998. On October 15, 1998, a
dividend of $0.2125 per share of common stock, totaling $1,598,000, will be made
to the shareholders of record as of September 30, 1998.
On March 15, 1999, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended February 28, 1999. On April 15, 1999,
a dividend of $0.2125 per share of common stock, totaling approximately
$1,101,000, was paid to Shareholders of record as of March 31, 1999.
On June 15, 1999, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended May 31, 1999. On July 15, 1999, a
dividend of $0.2125 per share of common stock, totaling approximately
$1,101,000, was paid to Shareholders of record as of June 30, 1999.
F-20
<PAGE>
Appendix A
================================================================================
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
among
CAPITAL SENIOR LIVING CORPORATION,
CAPITAL SENIOR LIVING ACQUISITION, LLC
and
ILM II SENIOR LIVING, INC.
October 19, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
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...................................17
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Covenants of the Company CSLC and Sub............................................20
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Preparation of the Company Proxy Statement and the
Schedule 13E-3...................................................................26
SECTION 5.2 Access to Information............................................................26
SECTION 5.3 Stockholder's Meeting............................................................27
SECTION 5.4 Consents and Approvals...........................................................27
SECTION 5.6 Expenses; Liquidated Damages.....................................................28
SECTION 5.7 Brokers or Finders...............................................................29
SECTION 5.8 CSLC Advisory Board..............................................................30
SECTION 5.9 Indemnification; Directors'and Officers'Insurance................................30
SECTION 5.10 Proposed Simultaneous Acquisition................................................32
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 5.11 Additional Agreements; Best Efforts..............................................33
SECTION 5.12 Conveyance Taxes.................................................................33
SECTION 5.13 Public Announcements.............................................................34
SECTION 5.14 Notification of Certain Matters..................................................35
SECTION 5.15 Company Taxes....................................................................35
SECTION 5.16 Original Agreement...............................................................35
SECTION 5.17 Financing Commitments............................................................35
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger.......................36
SECTION 6.2 Conditions of Obligations of CSLC and Sub........................................36
SECTION 6.3 Conditions of Obligations of the Company.........................................37
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.1 Termination......................................................................38
SECTION 7.2 Effect of Termination............................................................39
SECTION 7.3 Amendment........................................................................40
SECTION 7.4 Extension; Waiver................................................................40
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties and Agreements........................40
SECTION 8.2 Notices..........................................................................40
SECTION 8.3 Interpretation...................................................................42
SECTION 8.4 Counterparts.....................................................................42
SECTION 8.5 Entire Agreement; No Third Party Beneficiaries...................................42
SECTION 8.6 Governing Law....................................................................43
SECTION 8.7 No Remedy in Certain Circumstances...............................................43
SECTION 8.8 Assignment.......................................................................43
SECTION 8.9 Gender and Number Classification.................................................43
SECTION 8.10 Knowledge........................................................................43
</TABLE>
(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 II 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 $14.471836 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 transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.3,
4
<PAGE>
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 12,500,000 shares of the Company Common Stock, $.01 par
value. At the close of business on the date hereof, 5,181,236 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 II Holding, Inc. ("ILM II
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.
No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency,
commission or other public or
7
<PAGE>
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 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
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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 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
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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, 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.
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,
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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 II 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 II Holding's knowledge, threatened, by or before any
Governmental Entity.
(iv) Each of the Company and ILM II 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 that certain consulting agreement between the Company,
ILM 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
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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 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
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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
October 6, 1999 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 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").
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(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. Section 9601 et. seq.), the Hazardous Materials Transportation Act (49
U.S.C. Section 1801 et. seq.), the Resource Conservation and Recovery Act (42
U.S.C. Section 6901 et. seq.), the Clean Water Act (33 U.S.C. Section 1251 et.
seq.), the Clean Air Act (42 U.S.C. Section 7401 et. seq.), the Toxic Substances
Control Act (15 U.S.C. Section 2601 et. seq.), the Federal Insecticide,
Fungicide and Rodenticide Act (17 U.S.C. Section 136 et. seq.), and the
Occupational Safety and Health Act (29 U.S.C. Section 651 et. seq.), and the
rules and regulations promulgated thereunder.
(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
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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.
(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
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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 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
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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 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
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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 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.
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(j) "Highly Confident Letter". CSLC has obtained and
delivered to the Company a complete and correct copy of the letter dated October
13, 1999 of Lehman Brothers and addressed to the Board of Directors of CSLC
stating that, subject to the qualifications specified therein, Lehman Brothers
is "highly confident" of its ability to raise the Exchange Funds necessary to
consummate the Merger.
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 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
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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 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").
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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-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
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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
(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
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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 II Holding, ILM II Lease Corporation ("ILM II
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 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.
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(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 II Holding, such extensions do
not adversely affect the status of the Company or ILM II 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 II Holding, it is
required by law or necessary to preserve the status of the Company or ILM II
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 II
Holding to, take (or refrain from taking, as applicable) such action(s) as are
necessary to maintain the status of each of the Company and ILM II 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 II Holding and ILM
II Lease Co. to be terminated without any cost or expense to any of the Company,
ILM II 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 II 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 II Holding and all receivables due
to ILM II Holding from
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any person or entity, in each case shall be transferred, contributed and
assigned to the Company, and immediately prior to the Merger, ILM II 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 II Holding shall have been
terminated and the Company thereupon shall own all of the assets of ILM II
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 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'
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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, 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
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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 $2,964,400, 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 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 $2,964,400,
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) The costs of filing with the SEC, printing (including
financial printer document production costs) and mailing to the holders of
Company Common Stock the Company Proxy Statement and the Schedule 13E-3, shall
be borne equally by the Company and CSLC. As of the date hereof, each of the
Company and CSLC acknowledges that such costs approximate $65,000 in the
aggregate and each of CSLC and the Company agrees to pay 50% of such costs in
accordance with this Section 5.6.
(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
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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 $850,000 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 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
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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 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
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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 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 Merger Agreement") of even date herewith, among CSLC, Sub, and ILM
Senior Living, Inc. ("ILM"), pursuant to which, upon the terms and subject to
the conditions thereof, ILM will merge with and into Sub and Sub will be the
surviving corporation in such merger (the "ILM Merger").
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(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 Merger Agreement shall have been approved by the
stockholders of ILM or CSLC, as applicable, or that the ILM 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 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
stockholders meeting or any other matters related to the ILM 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 Merger.
(d) (i) If this Agreement is terminated and the ILM
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 25% in fee
by ILM II Holding and situated in Santa Barbara, California (the "Santa Barbara
Property") to the surviving entity (or its designee) in the ILM 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
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 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
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
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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 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
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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.
SECTION 5.17 Financing Commitments. Not later than the fifth business
day next preceding the anticipated date of the mailing of the Company Proxy
Statement in definitive form to holders of the Company Common Stock in
connection with the Company's solicitation of such holders' approval and
adoption of this Agreement and the Merger, CSLC shall have paid for and received
and shall provide the Company with true and correct copies of one or more
definitive commitments (the "Financing Commitments") from a money center
financial institution or investment bank, each of national standing, sufficient
in the aggregate to pay at the Effective Time the Exchange Funds.
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:
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(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):
(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.
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(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 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
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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) Receipt by CSLC of Proceeds of the Financing
Commitments. CSLC shall have received the proceeds of the Financing Commitments
sufficient in the aggregate to pay 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;
(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
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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.
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
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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 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
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- 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 II 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)
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
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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 II 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.
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
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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 II 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
<PAGE>
Appendix B
[LETTERHEAD OF COHEN & STEERS]
October 19, 1999
Board of Directors
ILM II Senior Living, Inc.
8180 Greensboro Drive, Suite 850
McLean, VA 22102
Members of the Board of Directors:
On October 6, 1999, Cohen & Steers Capital Advisors LLC ("Cohen & Steers")
delivered to you its oral opinion as of said date that, subject to the matters
stated below, the merger consideration of $14.471836 per share in cash (the
"Merger Consideration") provided for in the proposed Amended and Restated
Agreement and Plan of Merger (the "Merger Agreement") among ILM II Senior
Living, Inc. (the "Company"), Capital Senior Living Corporation ("CSLC") and
Capital Senior Living Acquisition, LLC ("Sub"), was fair to the stockholders of
the Company, from a financial point of view. We hereby advise you of our further
opinion as at the date herof, as follows.
We understand that ILM II Senior Living, Inc., a Virginia finite life
corporation (the "Company"), Capital Senior Living Corporation, a Delaware
corporation ("CSLC"), and Capital Senior Living Acquisition, LLC ("Sub" or the
"Surviving Entity"), a Delaware limited liability company, propose to enter into
the Merger Agreement 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 $14.471836 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 form of the Merger Agreement;
(2) reviewed certain publicly available historical consolidated
financial and operating data with respect to the Company and ILM II Lease
Corporation;
(3) reviewed certain internal business plans and financial and
operating forecasts with respect to the Company and ILM II 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.
<PAGE>
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 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 Senior Living, Inc. ("ILM") have agreed to pay Cohen &
Steers fees in the total amount of $250,000 at the time we render the opinion
expressed herein and a similar opinion addressed to the Board of Directors of
ILM in connection with the merger involving ILM (the "ILM Merger"). In addition,
the Company and ILM have agreed to pay us a $200,000 cash success fee
conditional upon consummation of the Merger and the ILM 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 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
Capital Advisors LLC
2
<PAGE>
Appendix C
Form of Solicitation Agreement
(to be provided by amendment)
<PAGE>
PRELIMINARY COPY APPENDIX D
FORM OF PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF ILM II SENIOR
LIVING, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY , 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 II 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 II, to be held at 10:00 a.m., local time, on
February , 2000, at the Key Bridge Marriott Hotel, Arlington, Virginia, 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" PROPOSAL 1 which is more fully described in the
notice of special meeting of shareholders and accompanying proxy statement,
which the undersigned has received.
If there is any adjournment or postponement of the special meeting to
permit further solicitation of proxies with respect to PROPOSAL 1, the shares
will be voted "FOR" adjournment or postponement with respect to such proposal if
the shares were to be voted "FOR" such proposal (including if there were no
specifications), and "AGAINST" adjournment or postponement if the shares were to
be voted "AGAINST" PROPOSAL 1.
(Continued and to be signed on reverse side)
<PAGE>
<TABLE>
<S> <C> <C>
Please mark
your vote as
indicated in /X/
the example
FOR AGAINST ABSTAIN
/ / / / / /
1. Proposal to approve the Amended and Restated Agreement and Plan of Merger, dated
October 19, 1999, among ILM II 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 II will be merged with Capital Acquisition; 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
PROXY STATEMENT WHICH YOU RECEIVED PRIOR TO OR TOGETHER WITH THIS PROXY, 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 RETURN ENVELOPE SO THAT YOUR
SHARES CAN BE REPRESENTED AT THE SPECIAL MEETING.
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.
</TABLE>
