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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
Filed by the Registrant: /x/
Filed by a Party other than the Registrant: / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/x/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Materials Pursuant to ss. 240.14a-11(c) or ss. 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 the transaction
applies: common stock, $.01 par value, of ILM II Senior Living,
Inc. (ILM II Common Stock).
2) Aggregate number of securities to which the transaction applies:
5,181,236 shares of ILM II Common Stock.
3) Per unit price or other underlying value of the 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 previously was paid to the Commission in connection
with the filing of the Registrant's initial preliminary proxy
materials on April 26, 1999 (at which time the maximum aggregate
value of the transaction was $74,110,000).
4) Proposed maximum aggregate value of the transaction: $67,571,000.
5) Total fee paid herewith: -0- (previously paid; see item 3).
/x/ Fee previously paid.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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ILM II SENIOR LIVING, INC.
1750 TYSONS BOULEVARD, SUITE 1200
TYSONS CORNER, VIRGINIA 22102
(888) 257-3550
May 18, 2000
Dear ILM II Shareholders:
Your Board of Directors has unanimously approved the merger of ILM II
Senior Living, Inc. into a 100% owned subsidiary of Capital Senior Living
Corporation.
In the merger you will receive $13.04 in cash for each share of ILM II
common stock you own and your former shares of ILM II common stock will be
canceled. Accordingly, by virtue of the merger you no longer will have any
ownership interest in ILM II and you will not participate in the potential
future earnings and growth of ILM II or Capital.
We have described the details of the merger in the accompanying proxy
statement and encourage you to read the proxy statement and the appendices to
that document carefully and in their entirety before deciding how to vote on the
merger.
Before we can complete the merger, you must vote to approve the
transaction. A vote "FOR" the merger by the holders of at least 66- 2/3% of the
outstanding ILM II common stock is required for the merger to occur.
We have studied with our attorneys and financial advisors the terms,
conditions, timing and effects of the merger, and we have reviewed and
considered alternatives to the merger. We have received the written opinion of a
nationally recognized investment banking firm confirming that the $13.04 to be
paid to you in cash in the merger for each share of your ILM II common stock is
fair to you, from a financial point of view. You can find the full text of the
fairness opinion in Appendix B to the proxy statement. Please read the opinion
carefully and in its entirety.
AFTER CAREFUL CONSIDERATION OF A NUMBER OF FACTORS AND CIRCUMSTANCES WHICH
ARE DESCRIBED IN THE ATTACHED PROXY STATEMENT, YOUR BOARD OF DIRECTORS HAS
DETERMINED THAT THE MERGER IS FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT
THE MERGER IS ADVISABLE. YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER
AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
TO PROPERLY VOTE YOUR SHARES you can use the enclosed proxy card or attend
the special meeting that will be held specifically for this very important vote.
The special meeting will be held at 12:30 p.m., local time, on June 22, 2000 at
the Key Bridge Marriott Hotel, 1401 Lee Highway, Arlington, Virginia 22209.
If you use the enclosed proxy card, please complete, sign, date and return
it to us in the enclosed envelope as soon as possible. The envelope requires no
postage if mailed in the United States.
YOUR VOTE IS VERY IMPORTANT. To approve the merger, you must indicate a
"FOR" vote by following the instructions appearing on the enclosed proxy card.
IF YOU DO NOT VOTE, IT WILL COUNT AS A VOTE AGAINST THE MERGER.
Sincerely,
/s/ J. WILLIAM SHARMAN, JR.
----------------------------------
J. William Sharman, Jr.
Chairman of the Board of Directors,
President and Chief Executive
Officer
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE ATTACHED PROXY STATEMENT DATED MAY 18, 2000 IS FIRST BEING MAILED TO
SHAREHOLDERS ON OR ABOUT MAY 18, 2000.
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ILM II SENIOR LIVING, INC.
1750 TYSONS BOULEVARD, SUITE 1200
TYSONS CORNER, 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 12:30 p.m., local time, on June 22, 2000 at
the Key Bridge Marriott Hotel, 1401 Lee Highway, Arlington, Virginia 22209. The
special meeting will be held for the following very important purposes:
1. To consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger dated October 19, 1999, as amended on
April 18, 2000, 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 upon the
terms and subject to the conditions of the merger agreement described in
the attached proxy statement; and
2. To transact such other business as may properly be presented at the
special meeting or any adjournment or postponement of the special meeting.
These items of business are described for you in detail in the attached
proxy statement and in the appendices to the attached document. We encourage you
to read these materials very carefully and in their entirety.
Only holders of record of ILM II common stock at the close of business on
May 16, 2000 are entitled to notice of and to vote at the special meeting or any
adjournment or postponement of the special meeting. A list of holders eligible
to vote at the special meeting will be available for inspection at the special
meeting and for a period of 10 days prior to the special meeting during regular
business hours at ILM 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
Tysons Corner, Virginia
May 18, 2000
IF YOU HAVE ANY QUESTIONS REGARDING THE SPECIAL MEETING, THE ATTACHED PROXY
STATEMENT OR THE PROCEDURES FOR VOTING, PLEASE CALL OUR PROXY SOLICITOR, D.F.
KING & CO. INC., TOLL FREE AT 1-800-735-3591.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
SUMMARY.................................................................................................... 3
The Parties in the Merger............................................................................... 3
Capital Senior Living Corporation.................................................................... 3
ILM II Senior Living, Inc............................................................................ 3
The Merger.............................................................................................. 3
The Payment You Will Receive in the Merger 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..................................................................................... 4
Our Recommendation to You............................................................................... 5
Vote Required........................................................................................... 5
Purposes and Reasons for the Merger..................................................................... 5
Opinion of Our Financial Advisor........................................................................ 6
Payments Previously Made and to be Made to Our Financial Advisors....................................... 6
Conduct of ILM II's Business if the Merger is not Completed............................................. 7
Plans and Proposals of ILM II and Capital if the Merger Occurs.......................................... 7
You Have No Appraisal Rights............................................................................ 7
U.S. Federal Income Tax Consequences.................................................................... 7
Accounting Treatment.................................................................................... 7
Conflicts of Interest of ILM II Management.............................................................. 8
Third Party Financing of the Merger..................................................................... 8
Litigation Pertaining to the Merger..................................................................... 9
Concurrent ILM Merger................................................................................... 9
Merger Procedures....................................................................................... 9
ILM II's CORPORATE STRUCTURE............................................................................... 10
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 11
THERE IS NO ESTABLISHED MARKET FOR ILM II'S COMMON STOCK; DIVIDENDS........................................ 13
THE SPECIAL MEETING........................................................................................ 14
Purpose of Special Meeting........................................................................... 14
Record Date for the Special Meeting.................................................................. 14
Vote Required for Approval of the Merger Agreement................................................... 14
Proxies; Solicitation and Revocation................................................................. 14
Beneficial Ownership by Directors.................................................................... 16
People with Disabilities............................................................................. 16
Confidential Voting.................................................................................. 16
Solicitation of Proxies by Soliciting Agent.......................................................... 16
Annual Meeting....................................................................................... 16
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 17
A Very Important Warning About Our Forward-Looking Statements........................................ 17
SPECIAL FACTORS............................................................................................ 19
</TABLE>
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The Merger.............................................................................................. 19
History................................................................................................. 19
Background of the Merger................................................................................ 26
Recommendation of the ILM II Board...................................................................... 52
Purposes, Alternatives, Timing and Reasons for the Merger............................................... 56
Determination of Merger Consideration................................................................... 57
Opinion of Cohen & Steers............................................................................... 57
Plans and Proposals of ILM II and Capital............................................................... 67
Present Intentions and Recommendations of Certain Persons with Regard to the Merger..................... 67
Conduct of ILM II's Business if the Merger is not Completed............................................. 67
Interests of Certain Persons in the Merger.............................................................. 68
No Independent Committee................................................................................ 69
The Merger Agreement.................................................................................... 69
The Merger........................................................................................... 69
Effective Time....................................................................................... 69
Conversion of Shares................................................................................. 70
Exchange of Certificates............................................................................. 70
Representations and Warranties....................................................................... 70
Conduct of ILM II's Business Prior to the Merger..................................................... 72
Conduct of Capital's Business Prior to the Merger.................................................... 73
Conditions to Completing the Merger.................................................................. 73
No Solicitation of Alternative Transactions.......................................................... 74
Termination of the Merger Agreement.................................................................. 75
Termination Fees; Reimbursement of Expenses.......................................................... 76
Proxy Statement; The Special Meeting.................................................................... 77
Accounting Treatment.................................................................................... 77
Simultaneous ILM Merger................................................................................. 77
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER..................................................... 77
Federal Income Tax Consequences of the Merger........................................................... 78
Tax Characterization of the Merger to ILM II......................................................... 78
Tax Consequences to ILM II Shareholders.............................................................. 78
Back-up Withholding Requirements..................................................................... 78
Alien Holders........................................................................................ 79
ESTIMATED COSTS AND FINANCING OF THE MERGER................................................................ 80
Financing; Source and Amount of Funds................................................................... 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ILM II............ 82
General................................................................................................. 82
Liquidity and Capital Resources......................................................................... 82
Growth Strategies....................................................................................... 84
Year 2000............................................................................................... 85
Results of Operations for ILM II........................................................................ 85
Six Months Ended February 29, 2000 versus Six Months Ended February 28, 1999......................... 85
</TABLE>
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Three Months Ended February 29, 2000 versus Three Months Ended February 28, 1999..................... 86
1999 Compared to 1998................................................................................ 86
1998 Compared to 1997................................................................................ 87
CERTAIN INFORMATION WITH RESPECT TO ILM II................................................................. 88
General................................................................................................. 88
Properties.............................................................................................. 88
Asset Management........................................................................................ 89
Legal Proceedings....................................................................................... 90
Competition............................................................................................. 92
Regulations............................................................................................. 92
Employees............................................................................................... 93
Insurance............................................................................................... 93
DIRECTORS AND EXECUTIVE OFFICERS........................................................................... 94
SHAREHOLDER PROPOSALS...................................................................................... 98
OTHER MATTERS.............................................................................................. 98
EXPERTS.................................................................................................... 98
NO APPRAISAL RIGHTS........................................................................................ 98
</TABLE>
LIST OF APPENDICES
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Appendix A Composite Merger Agreement
Appendix B Opinion of Cohen & Steers Capital Advisors LLC
</TABLE>
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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 the merger agreement so that
ILM II can be merged into a 100% owned subsidiary of Capital Senior Living
Corporation.
3. Q: WHO IS CAPITAL?
A: Capital is one of the largest developers and operators of senior living
communities in the United States, in terms of resident capacity. Capital has
been the manager of ILM 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 $13.04 in cash for each share of your ILM II common
stock. No interest will be paid on this amount.
5. Q: WHERE DOES CAPITAL INTEND TO OBTAIN THE FUNDS WHICH ARE NECESSARY TO PAY
$13.04 PER SHARE IN CASH TO ALL HOLDERS OF ILM II'S COMMON STOCK?
A: Capital has obtained the commitment of GMAC Commercial Mortgage
Corporation to provide to Capital prior to the effective time of the merger
$12.85 of the $13.04 per share in cash required by the merger agreement, and
Capital has segregated in its accounts and reserved for payment to ILM II's
shareholders the remaining $0.19 per share. GMAC's commitment to provide these
funds is, however, subject to a variety of conditions and termination events,
and expires by its terms on July 31, 2000.
6. Q: WHAT DO I NEED TO DO NOW?
A: Please sign, date and complete your proxy card and promptly return it in
the enclosed, self-addressed, prepaid envelope so that your shares of ILM II
common stock can be represented at the special meeting.
7. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will vote your shares for you ONLY if you instruct your broker
how to vote for you. Your broker should mail information to you that will
explain how to give it these instructions.
8. Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. Just send by mail a written revocation or a later-dated, completed
and signed proxy card before the special meeting or simply attend the special
meeting and vote in person. You may not change your vote by facsimile or
telephone.
9. Q: WHAT IF I DON'T SEND BACK A PROXY CARD OR VOTE MY SHARES OF ILM 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 in
person at the special meeting, each share of your stock will be treated as a
vote AGAINST approval of the merger agreement.
10. Q: SHOULD I SEND IN MY CERTIFICATES NOW?
A: No. If the merger is completed, you will receive detailed written
instructions for delivering your ILM II stock physically or electronically.
11. Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER AGREEMENT?
A: A vote by the holders of at least 66- 2/3% of the outstanding ILM II
common stock "FOR" approval of the merger agreement is required to approve the
merger agreement.
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12. Q: WHAT HAPPENS IF THE MERGER IS NOT COMPLETED BY SEPTEMBER 30, 2000?
A: The merger agreement will terminate and the merger of ILM II into
Capital will not occur, unless the September 30, 2000 expiration date is
extended to a subsequent date by the parties. There is no requirement or present
intention to extend the September 30, 2000 expiration date.
13. Q: WILL I HAVE APPRAISAL RIGHTS IN THE MERGER?
A: No. You will not have any right to dissent from the merger and receive a
value for your shares of ILM II common stock determined by a court.
14. Q: WHEN WILL I RECEIVE $13.04 IN CASH FOR EACH SHARE OF MY ILM II COMMON
STOCK?
A: If the merger is completed you will receive $13.04 in cash for each
share of ILM II common stock you own, promptly after we receive from you a
properly completed letter of transmittal together with your stock certificates
or, if you do not own any physical stock certificates, promptly after we receive
your properly completed letter of transmittal and electronic transfer of your
ILM II common stock.
15. Q: HOW WILL I KNOW THE MERGER HAS OCCURRED?
A: If the merger occurs, ILM II and Capital will make a public announcement
and you will receive notice of such fact by mail.
16. Q: ARE THERE ANY SIGNIFICANT RISKS IN THE MERGER THAT I SHOULD BE AWARE OF?
A: Yes. There are significant risks involved with the merger. Before making
any decision on how to vote on the merger or whether to vote, we encourage you
to read carefully and in its entirety the "Special Factors--Interests of Certain
Persons in the Merger" section of this document beginning on page 68.
17. Q: WHAT HAPPENS TO MY ILM II COMMON STOCK DIVIDENDS AFTER THE MERGER?
A: If the merger occurs, you no longer will receive any dividends after the
merger is completed because you no longer will be an ILM II shareholder and you
will not become a Capital shareholder in the merger.
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SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS VERY IMPORTANT INFORMATION CONTAINED
ELSEWHERE IN THIS PROXY STATEMENT BUT DOES NOT CONTAIN ALL OF THE INFORMATION IN
THIS PROXY STATEMENT THAT IS IMPORTANT TO YOUR VOTING DECISION.
YOU SHOULD CAREFULLY READ THIS ENTIRE DOCUMENT AND ALL OF THE ATTACHED
DOCUMENTS BEFORE YOU DECIDE HOW TO VOTE. SEE "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE 17.
THE PARTIES IN THE MERGER
CAPITAL SENIOR LIVING CORPORATION
14160 Dallas Parkway, Suite 300
Dallas, Texas 75240
(972) 770-5600
Capital is one of the largest developers and operators of senior living
communities in the United States, in terms of resident capacity.
Capital Senior Living Acquisition, LLC is a Delaware limited liability
company that is 100% owned by Capital and was formed primarily to effect the
merger.
Capital Acquisition has the same address and phone number as Capital.
ILM II SENIOR LIVING, INC.
1750 Tysons Boulevard, Suite 1200
Tysons Corner, Virginia 22102
(888) 257-3550
ILM II and its subsidiaries own six senior living communities in five
states with a total resident 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 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 no longer will 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 70)
After the merger occurs you will receive $13.04 in cash for each share of
ILM II common stock you own. No interest will be paid on that amount. Under
certain circumstances, this amount could be reduced by stock transfer and
withholding taxes applicable to you.
THE MERGER AGREEMENT (SEE PAGE 69)
A composite version of the merger agreement is attached to this document
as Appendix A. We encourage you to read that document in its entirety because it
is the legal document that governs all of the terms and conditions of the
merger.
THERE ARE CONDITIONS TO COMPLETING THE MERGER (SEE PAGE 73)
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 government
authorities relevant to the business and operations of the parties;
o absence of any government or court order preventing or significantly
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delaying the occurrence of the merger;
o accuracy of the representations and warranties made by the parties in
the merger agreement;
o performance by the parties of their respective obligations under the
merger agreement;
o receipt of all consents and approvals necessary for Capital to become
the owner of and successor to ILM II's business and properties after the
merger; and
o receipt by Capital of all funds necessary to pay to you in the merger
$13.04 in cash for each share of ILM II common stock you own.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 75)
The merger agreement can be terminated:
o by ILM II and Capital if we mutually agree to do so;
o by ILM II or Capital, if:
-- any government 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 its recommendation to you to
approve the merger agreement;
-- the ILM II Board approves or recommends that you vote to approve a
transaction involving the sale of ILM II to a party other than
Capital on terms financially superior to the merger with Capital;
-- ILM II signs an agreement for a transaction to merge ILM II with or
sell ILM II to a party other than Capital;
-- 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 a transaction involving the sale of
ILM II to a party other than Capital on terms financially superior
to the merger with Capital;
-- Capital violates the merger agreement or its representations and
warranties in the merger agreement are inaccurate;
-- Capital fails to complete the merger for any reason after all
conditions to do so are met under the merger agreement; or
-- there has been or there is likely to be a significant negative
change in Capital's business, operations or condition.
TERMINATION FEES (SEE PAGE 76)
ILM II must pay Capital a fee of $1,858,200, plus reimburse Capital for up
to $2.0 million of its expenses incurred in the merger if:
o the merger agreement is terminated by Capital because the ILM II Board
withdraws or changes its
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recommendation to you to approve the merger agreement;
o the merger agreement is terminated by Capital because the ILM II Board
approves or recommends that you vote to approve a transaction involving
the sale of ILM II to a party other than Capital on terms financially
superior to the merger with Capital;
o the merger agreement is terminated by Capital because ILM II signs an
agreement for a transaction to merge ILM II with or sell ILM II to a
party other than Capital;
o the merger agreement is terminated by ILM II because it signs an
agreement for a transaction involving the sale of ILM II to a party
other than Capital on terms financially superior to the merger with
Capital; or
o ILM II violates its obligations under the merger agreement not to
initiate or solicit offers and proposals for corporate transactions with
parties other than Capital and a corporate transaction involving ILM II
and a party other than Capital is completed within 16 months after
Capital terminates the merger agreement because of ILM II's violation.
Capital must pay ILM II a fee of $1,540,000 if ILM II terminates the
merger agreement because Capital fails for any reason to complete the merger
after the conditions for completion of the merger have been met, including
Capital's failure to obtain the cash funds necessary to pay $13.04 per share in
cash to all holders of ILM II's common stock.
Neither Capital nor ILM II is entitled to receive any termination fees or
reimbursement of expenses if they fail to meet their obligations under the
merger agreement or any of their representations or warranties in the merger
agreement are inaccurate.
OUR RECOMMENDATION TO YOU (SEE PAGE 52)
After careful consideration of a number of factors and circumstances which
are described in this proxy statement, your Board of Directors has determined
that the merger is fair to you and in your best interests and that the merger is
advisable.
Your Board of Directors has adopted the merger agreement and we recommend
that you vote "FOR" approval of the merger agreement.
VOTE REQUIRED (SEE PAGE 14)
Approval of the merger agreement requires the affirmative vote of the
holders of not less than 66- 2/3% of the outstanding ILM II common stock.
PURPOSES AND REASONS FOR THE MERGER (SEE PAGE 56)
Your Board of Directors considered a number of factors when it adopted the
merger agreement. Those factors included:
o general economic, industry and market conditions, including the
continued significant deterioration of financial conditions in the
senior living industry during the past 12 months;
o the strategic financial alternatives available to ILM II to maximize the
value of your shares of ILM II common stock;
o the overall consolidation trend in the assisted living industry;
o ILM II's financial condition, liquidity and profitability;
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o the likelihood of completing the merger with Capital;
o the lack of any viable transactions with parties other than Capital
having terms financially superior to the merger with Capital;
o ILM II's finite-life status;
o the opinion of ILM II's financial advisor, Cohen & Steers Capital
Advisors LLC, delivered orally on April 17, 2000 to ILM II's Board,
confirmed in writing on April 18, 2000 and reconfirmed in writing on the
date of this proxy statement, that, as of those dates, the $13.04 in
cash to be paid to you in the merger for each share of your ILM II
common stock was fair to you, from a financial point of view;
o the requirement for approval of the merger agreement by the holders of
at least 66- 2/3% of the outstanding ILM II common stock;
o ILM II's strengths and weaknesses as an independent public company;
o the matters described on page 68 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 fee and expense reimbursement obligations to
Capital;
o the receipt by Capital of GMAC Commercial Mortgage Corporation's written
commitment to provide to Capital $12.85 of the $13.04 in cash to be paid
to you in the merger for each share of your ILM II common stock;
o ILM II's historical commercial arrangements and familiarity with
Capital;
o the lack of any burdensome regulatory requirements for completion of the
merger;
o the simplicity of paying you cash in the merger as opposed to stock or
other property;
o the going-concern and the liquidation value of ILM II's properties; and
o Capital's limited right of first and last offer in the case of
transactions involving the sale or transfer of ILM II's properties.
The purpose of the merger is to sell to Capital 100% of your ILM II common
stock and for Capital to acquire 100% control of ILM II.
OPINION OF OUR FINANCIAL ADVISOR (SEE PAGE 57)
Cohen & Steers delivered on April 17, 2000 to ILM II's Board its oral
opinion, which was confirmed in writing on April 18, 2000, and reconfirmed in
writing on the date of this proxy statement that the $13.04 per share in cash to
be received by you in the merger for each share of your ILM II common stock was
fair to you on such dates, from a financial point of view.
The full text of Cohen & Steers' opinion, which states the assumptions
made, the matters considered and the limitations on Cohen & Steers' review, is
attached as Appendix B to this proxy statement and should be read by you
carefully and in its entirety.
PAYMENTS PREVIOUSLY MADE AND TO BE MADE TO OUR FINANCIAL ADVISORS (SEE PAGE 66)
ILM II and ILM paid $700,000 to Cohen & Steers for certain past services
provided to ILM II and ILM, and an additional $125,000 for its opinion (and a
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similar opinion furnished to the ILM Board) that the $13.04 in cash to be paid
to you in the merger for each share of your ILM II common stock was, on the
dates of such opinion, fair to you, from a financial point of view.
Cohen & Steers will receive an additional $900,000 from ILM II and ILM
upon completion of the merger with Capital. ILM II and ILM will seek from Cohen
& Steers a prorated allocation of that amount if the ILM II merger is
consummated but the ILM merger is not consummated, or vice versa.
CONDUCT OF ILM II'S BUSINESS IF THE MERGER IS NOT COMPLETED (SEE PAGE 67)
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 your common stock.
PLANS AND PROPOSALS OF ILM II AND CAPITAL IF THE MERGER OCCURS (SEE PAGE 67)
If the merger occurs, ILM II's corporate existence will end and all of its
assets and liabilities will be owned by and become the obligations of Capital
Acquisition.
Capital has advised ILM II that it does not have any specific plans,
proposals or agreements involving the liquidation or sale of ILM II's properties
or involving any mergers or reorganizations of ILM II or its assets after the
merger is completed.
Capital also has informed ILM II that it has no specific plans, proposals
or agreements to change the day-to-day management or operation of ILM II's
business after the merger is completed.
Capital may, however, change its intentions and plans at any time and from
time to time in its discretion.
YOU HAVE NO APPRAISAL RIGHTS (SEE PAGE 98)
You will not have any right to object to the merger and receive a
judicially determined value for your shares of ILM II common stock.
U.S. FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 77)
For U.S. federal income tax purposes, the merger will be treated as a sale
of ILM 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) $13.04 for each share of your ILM II common stock
and (ii) the amount of your adjusted cost of each share of your ILM II common
stock as determined under applicable tax laws.
Any gain or loss will be treated as a long-term capital gain or loss if at
the time of the merger you have held your ILM II common stock for more than
12 months. Under U.S. federal income tax law, long-term capital gains are
taxable at a maximum rate of 20% for individuals and 35% for corporations. You
also may be subject to state and local taxes.
DETERMINING THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY DEPEND UPON YOUR
PERSONAL CIRCUMSTANCES. YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR TO
UNDERSTAND HOW THE MERGER MAY AFFECT YOU FROM A TAX POINT OF VIEW.
ACCOUNTING TREATMENT (SEE PAGE 77)
For accounting and financial reporting purposes the merger will be
accounted for in accordance with the "purchase method" of accounting.
7
<PAGE>
CONFLICTS OF INTEREST OF ILM II MANAGEMENT (SEE PAGE 68)
In considering the recommendation of your Board of Directors to vote for
approval of the merger agreement you should know that certain directors of
ILM II have relationships or interests in the merger that are different from or
in addition to your interests as a shareholder:
o After the merger is completed the current directors of ILM II will
become members of a new advisory board of Capital and for seven years
thereafter Capital will indemnify ILM II's officers and directors
against liabilities arising from all claims that may be made against
them in their capacity as officers and directors of ILM II.
o Also, Capital will maintain at its expense liability insurance for the
benefit of ILM II's officers and directors for seven years following the
merger.
o Notwithstanding ILM II's long-standing relationships, familiarity and
commercial dealings with Capital and certain of its executive officers,
directors and controlling shareholders, neither ILM II nor your Board of
Directors appointed or hired a special representative to negotiate the
terms of the merger agreement directly on your behalf.
These interests and financial arrangements described may create
significant actual or potential conflicts with your interests as an ILM II
shareholderand you should evaluate these conflicts carefully before deciding how
to vote on the merger.
THIRD PARTY FINANCING OF THE MERGER (SEE PAGE 80)
Capital has obtained the written commitment of GMAC Commercial Mortgage
Corporation to provide Capital with cash funds to pay to you $12.85 of the
$13.04 payable to you in the merger for each share of ILM II common stock you
own. Capital has segregated in its accounts and reserved the remaining $0.19 per
share necessary to complete the merger.
The GMAC commitment expires on July 31, 2000 and is subject to a number of
closing conditions, including: the negotiation and signing of definitive loan
documents, GMAC's receipt of written third party appraisals confirming the fair
market value of the ILM II properties and certain Capital properties comprising
the collateral for GMAC's loans to Capital, the review by GMAC of environmental
and engineering reports with respect to ILM II's properties, the attainment and
maintenance of minimum loan-to-value requirements for ILM II's properties and
certain of Capital's properties, Capital's satisfaction of certain minimum cash
flow-to-debt service ratios, and there not having occurred any significant
negative changes in the financial condition of Capital.
If GMAC's commitment expires unfunded or is terminated prior to July 31,
2000, Capital will remain contractually obligated to ILM II under the merger
agreement until September 30, 2000, to obtain at its expense all funds necessary
to pay the full $13.04 in cash payable to you in the merger for each share of
your ILM II common stock. If GMAC fails to fund the commitment, Capital has no
alternative source of financing at this time and there can be no assurance that
any alternative financing would be obtained.
8
<PAGE>
LITIGATION PERTAINING TO THE MERGER (SEE PAGE 90)
See the description of "Legal Proceedings" on page 90 for information
concerning the class action litigation commenced against ILM II and its
directors and a certain Capital director regarding litigation claims prior to
and involving the merger, and the terms and conditions of the October 15, 1999
class action settlement of these litigation claims.
CONCURRENT ILM MERGER (SEE PAGE 77)
ILM Senior Living, Inc. is a finite-life and month-to-month corporation
with some shareholders in common with ILM II. On April 18, 2000 ILM signed an
amended merger agreement with Capital very similar to the amended merger
agreement signed by ILM II and Capital. Completion of the merger described in
this proxy statement and completion of the ILM merger are not conditioned upon
one another.
MERGER PROCEDURES (SEE PAGE 70)
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
$13.04 per share in cash.
Please sign, date and complete your proxy card and promptly return it to
us in the enclosed envelope. The envelope requires no postage if mailed in the
United States.
PLEASE DO NOT SEND US ANY OF YOUR ILM II STOCK CERTIFICATES AT THIS TIME.
9
<PAGE>
ILM II'S CORPORATE STRUCTURE
[FLOW CHART]
The chart above illustrates the organizational structure of ILM II, its
affiliated entities and their relationship with Capital. 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.
10
<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, 1999 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 six and three months ended
February 29, 2000 and February 28, 1999 has been derived from ILM II's unaudited
consolidated financial statements for the periods ending February 29, 2000 and
February 28, 1999. The operating results for the three and six months ended
February 29, 2000 are not necessarily indicative of results for the full fiscal
year.
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
February 29, 2000 and for the six and three months ended February 29, 2000 have
been prepared on the same basis as the historical information in the audited
financial statements and, in the opinion of the management of ILM 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>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ---------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -------------------------------------------
2000 1999 2000 1999 1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and other
income............. $ 1,369 $ 1,333 $ 2,721 $ 2,644 $ 5,265 $ 4,988 $ 4,416 $ -- $11,789
Interest income
earned on cash
equivalents........ 11 13 25 31 56 77 99 46 87
------- ------- ------- ------- ------- ------- ------- ------- -------
1,380 1,346 2,746 2,675 5,321 5,065 4,515 46 11,876
Expenses:
Depreciation and
amortization....... 338 332 684 656 1,235 1,285 1,275 -- 1,313
Management fees...... -- -- -- -- 184 -- 103 130 857
Property operating
expenses........... -- -- -- -- -- -- -- -- 7,446
General and
administrative..... 68 76 122 177 344 222 563 246 277
Professional fees.... 279 590 585 762 1,778 540 308 233 528
Director
compensation....... 23 27 43 47 83 111 82 24 24
------- ------- ------- ------- ------- ------- ------- ------- -------
708 1,025 1,433 1,642 3,624 2,158 2,331 633 10,445
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............... 672 321 1,313 1,033 1,697 2,907 2,184 (587) 1,431
Equity in income of
properties securing
mortgage loans(1).... -- -- -- -- -- -- -- 2,674 --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income............. $ 672 $ 321 $ 1,313 $ 1,033 $ 1,697 $ 2,907 $ 2,184 $ 2,087 $ 1,431
======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings per share of
common stock......... $ 0.06 $ 0.13 $ 0.20 $ 0.25 $ 0.32 $ 0.56 $ 0.42 $ 0.40 $ 0.27
======= ======= ======= ======= ======= ======= ======= ======= =======
Cash dividends paid per
share of common
stock................ $ 0.21 $ 0.21 $ 0.43 $ 0.43 $ 0.85 $ 0.73 $ 0.61 $ 0.50 $ 0.43
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -----------------------------------------------
2000 1999 1998 1997 1996 1995
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents...................... $ 965 $ 1,913 $ 1,896 $ 2,361 $ 1,694 $ 2,409
Total assets................................... 29,972 31,376 32,383 33,355 33,976 35,552
Equity......................................... 28,442 29,331 32,038 32,887 33,876 34,881
Book value per share of common stock............. $ 5.78 $ 6.06 $ 6.25 $ 6.44 $ 6.56 $ 6.86
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 29, -----------------------------------------------
2000 1999 1998 1997 1996 1995
------------ ------- ------- ------- ------- -------
<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
control over ILM II Holding in fiscal 1997. As a result, ILM II Holding has
been included in ILM II's consolidated financial statements beginning in
1997. The balance was presented using the equity method of accounting in
1996 because ILM II did not control the majority of the voting common 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,
California senior living community. ILM II owns a 75% undivided ownership
interest in that community.
12
<PAGE>
THERE IS NO ESTABLISHED MARKET FOR ILM II'S
COMMON STOCK; DIVIDENDS
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 aggregate per share
dividends were $.78, and for the fiscal year ended August 31, 1999 aggregate per
share dividends were $.85. For fiscal year ended August 31, 2000, to date,
aggregate per share dividends were $.42.
ILM 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.
13
<PAGE>
THE SPECIAL MEETING
The ILM II Board is using this proxy statement 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 you on or about May 18, 2000.
Purpose of Special Meeting
The special meeting of holders of ILM II common stock will be held on June
22, 2000 at 12:30 p.m., local time, at the Key Bridge Marriott Hotel, 1401 Lee
Highway, Arlington, Virginia 22209 so that you can consider and vote upon a
proposal to approve the merger agreement.
AFTER CAREFUL CONSIDERATION OF A NUMBER OF FACTORS AND CIRCUMSTANCES WHICH
ARE DESCRIBED IN THIS PROXY STATEMENT, YOUR BOARD OF DIRECTORS HAS DETERMINED
THAT THE MERGER IS FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT THE MERGER IS
ADVISABLE. YOUR BOARD HAS ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Record Date for the Special Meeting
The ILM II Board has fixed May 16, 2000 as the record date for the
determination of shareholders entitled to notice of and to vote at the special
meeting. Only shareholders of record at the close of business on the record date
will be entitled to vote at the special meeting. At the close of business on the
record date, there were outstanding 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 2,789 holders of record of
ILM II common stock. ILM II's 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 how to vote, your ILM II common stock represented by that proxy will be
voted "FOR" the approval of the merger agreement.
14
<PAGE>
If signed and returned, the proxy will authorize the persons named as your
appointed proxies to vote on the matters referred to in the proxy.
You may revoke your proxy at any time before its use at the special
meeting. A proxy may be revoked by either (a) submitting to the Secretary of
ILM 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 1750 Tysons Boulevard, Suite 1200, Tysons Corner,
Virginia 22102, Attention: Corporate Secretary, or you may hand deliver your
proxy to the Secretary at the special meeting at or before the taking of the
vote), or (b) attending the special meeting, and voting in person. If you hold
your shares in a brokerage account and have instructed your broker how to vote,
you must follow your broker's instructions regarding how to change your vote.
However, if you hold your shares in a brokerage account, you cannot vote in
person at the special meeting.
The ILM II Board does not know of any matters other than those described in
the notice of the special meeting that will be addressed at the special meeting.
If any other matters are properly presented at the special meeting, including,
among other things, a motion to adjourn or postpone the special meeting to
another time and/or place for the purpose of soliciting additional proxies with
respect to the merger agreement or to permit the dissemination of information
regarding any material developments relating to the merger or otherwise
pertinent to the special meeting, one or more persons named in the ILM 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 approval of the merger
agreement will be voted in favor of any adjournment or postponement to solicit
additional proxies. At any subsequent time of the special meeting, all proxies
will be voted in the same manner as they would have been voted at the original
time of the special meeting (except for any proxies which previously have been
properly revoked or withdrawn), even though they may have been properly voted on
the same or any other matter at a previously held special meeting date.
ILM II and Capital will share the 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 agreement, such as abstentions or "broker
non-votes," will be counted in determining a quorum. A "broker non-vote" means
shares represented at the special meeting in person or by proxy by a broker or
nominee where the broker or nominee fails to vote the shares because it (1) did
not receive voting instructions on a particular matter from the beneficial
owners or persons 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
15
<PAGE>
common stock are held in a brokerage account and you fail to instruct your
broker how to vote your shares, the effect will be a vote against approval of
the merger agreement.
Beneficial Ownership by Directors
On the record date, none of the officers or directors of ILM 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 17.
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 and Capital pursuant to which it will use its best efforts
to solicit ILM II shareholder approval of the merger agreement. D.F. King & Co.
Inc. will receive approximately $6,000 in consideration for its solicitation
services, as well as reimbursement of its reasonable out-of-pocket expenses
(including telephone, mailing and legal expenses), all of which will be shared
by ILM II and Capital.
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 the
merger is not completed and 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 of ILM II's shareholders will be October 15,
2000.
16
<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
1750 Tysons Boulevard, 14160 Dallas Parkway, Suite 300
Suite 1200 Dallas, Texas 75240
Tysons Corner, Virginia 22102 (972) 770-5600
(888) 257-3550 www.capitalsenior.com
</TABLE>
If you would like to request documents, please do so before June 7, 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 entirely by
ILM II and the information in this document regarding Capital is supplied
entirely 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 materials 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.
17
<PAGE>
When words and expressions such as: "believes," "expects," "anticipates,"
"estimates," "plans," "intends," "objectives," "goals," "aims," "projects,"
"forecasts," "possible," "seeks," "may," "could," "should," "might," "likely,"
"enable" or similar words or expressions are used in this proxy statement, as
well as statements beginning or ending with phrases such as "in our view,"
"there can be no assurance," "although no assurance can be given" or "there is
no way to anticipate with certainty," forward-looking statements are being made
in all of these instances.
These forward-looking statements speak as of the date of this proxy
statement.
All subsequent written and oral forward-looking statements regarding the
merger attributable to ILM II or Capital, or any person acting on their behalf,
are expressly qualified in their entirety by the cautionary statements contained
or referred to above. Neither ILM II nor Capital intend to update or revise any
forward-looking statements to reflect any changes in general economic,
competitive or market conditions and developments beyond their control.
18
<PAGE>
SPECIAL FACTORS
THE MERGER
The merger agreement provides for the merger of ILM II into Capital
Acquisition. Capital Acquisition, which is 100% owned by Capital, 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 to
the holders of ILM II's outstanding common stock is $67,571,000 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 $13.04 in cash (less applicable withholding taxes). No
interest will be paid on that amount.
ILM II and Capital intend to complete the merger as soon as possible after
the approval of the merger agreement by ILM II's shareholders and after all of
the conditions contained in the merger agreement have been satisfied or, to the
extent permitted by applicable law, waived. If ILM II's shareholders approve the
merger agreement it is expected that the merger will be completed during the
Summer of calendar year 2000.
HISTORY
In 1990 PaineWebber Independent Living Mortgage Inc. II 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 May 1991 ILM II
completed its initial public offering and invested the net proceeds therefrom in
participating mortgage loans secured by senior housing communities.
The loans originally were made to Angeles Housing Concepts Inc. ("AHC"), a
company specializing in the development, acquisition and operation of senior
housing communities. The properties securing the ILM II mortgage loans did not
generate cash flows from tenant rentals sufficient to service the mortgage
indebtedness and in February 1993 AHC announced that it was experiencing
liquidity problems that subsequently resulted in mortgage payment defaults.
In May 1993 AHC's parent, Angeles Corporation, commenced a bankruptcy case
under Title 11 of the United States Code. Pursuant to a settlement agreement
entered into and approved by the bankruptcy court in April 1994 ILM II's
predecessor became the owner (indirectly through its subsidiaries) of the senior
housing communities presently comprising the ILM II portfolio.
The terms of ILM II's articles of incorporation provide for the liquidation
of ILM II not later than December 31, 2001.
From April 1994 to July 1996, AHC was the property manager for ILM II and
ILM. As described later in this proxy statement, AHC was terminated as 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 properties for $114.0 million, subject to receipt
of financing, the completion of due diligence and other conditions. Shortly
thereafter, ILM II held informal discussions with third parties regarding
possible transactions involving its properties. PaineWebber Properties
Incorporated, the sponsor of ILM II's properties and ILM II's
19
<PAGE>
advisor, approached approximately 10 candidates (which included Holiday
Retirement Corporation, The Forum Group, Inc., Kisco Retirement Communities,
Capital Senior Living Corporation, American Retirement Corporation, The
Fountains Retirement Properties, Inc., Meditrust Corp., Nationwide Health
Properties Inc., and Health Retirement Properties Trust) from whom expressions
of interest were received setting forth their desire to explore the potential
purchase of the ILM II and ILM properties for aggregate amounts which ranged
from approximately $80.0 million to $120.0 million in cash.
In August 1995 the Board was informed by PaineWebber Properties about a
potential corporate level built-in-gains tax liability that would result from
the sale of the ILM II and ILM assets. Accordingly, the Board engaged Senior
Valuation Services, Inc., an independent appraiser specializing in the valuation
of senior living properties, to conduct an appraisal of ILM II's properties.
Senior Valuation reported to the Board that as of October 30, 1995 the appraised
value of the combined ILM II and ILM properties was approximately $108.5
million, of which $44.5 million was attributed to ILM II and $64.0 million was
attributed to ILM.
During the appraisal process the Board suspended its review and
consideration of the foregoing expressions of interest and so informed each of
the candidates named above. PaineWebber Properties was then requested to make an
assessment of the expected returns on investment to shareholders through the
scheduled finite-life terms of ILM II and ILM IIlifesnnn, (i.e., December 31,
2001 and December 31, 1999).
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 properties, which were set
forth in the articles of incorporation for those entities, were not until
December 31, 2001 and December 31, 1999, respectively. Accordingly, the Board
decided not to pursue any specific or formal discussions with any of the named
candidates, but instead, decided to continue to manage and operate the
properties and consider alternative means to maximize the value of the ILM 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
properties. At this meeting AHC stated that it was unwilling to inform
PaineWebber Properties about AHC's strategies to enhance such value and that AHC
was interested in purchasing 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 increased the
consideration referred to in its March 1995 expression of interest to $127.0
million, subject to the same due diligence, financing and other conditions
communicated to ILM II and ILM in March 1995.
At a Board meeting held on February 29, 1996 at which Messrs. J. William
Sharman Jr., Jeffry R. Dwyer and Lawrence A. Cohen were present, the Board
reviewed with PaineWebber and PaineWebber Properties various alternatives to
owning and operating the ILM II properties until December 31, 2001, including a
sale and liquidation analysis, and
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certain corporate restructuring alternatives. The Board determined that in view
of the matters disclosed by AHC to PaineWebber Properties and AHC's
unsatisfactory performance as property manager to date, AHC had a conflict of
interest with respect to its continuing role as property manager and that a
replacement manager should promptly be identified and engaged on commercially
reasonable terms. Accordingly, the Board requested PaineWebber to identify and
contact potential candidates to serve as replacement property manager for the
ILM II properties. Approximately 20 such candidates were contacted.
To assist the Board in its overall strategic financial decisional process,
it invited National Westminster Bank, PLC, New York branch, a nationally
recognized financial advisor with significant expertise in the assisted living
industry, to discuss industry trends and conditions and to provide advice on
possible methods to maximize the value of ILM II's common stock.
At a special meeting of the Board convened on April 29, 1996 at which
Messrs. J. William Sharman, Jr., Jeffry R. Dwyer and Lawrence A. Cohen were
present, NatWest expressed its view that ILM II should consider, among other
means to maximize shareholder value, expansion through the selective acquisition
of other senior living communities, the direct lease of the senior living
communities to a third party operator, listing ILM II's 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 noted that a liquidation or public
auction of the ILM II properties at that time would be premature in view of
ILM II's December 31, 2001 scheduled liquidation date.
In April 1996, of the 20 potential senior living property managers
PaineWebber Properties had contacted, the Board narrowed the field to five
candidates (including Sunrise Assisted Living, Inc., Marriot Corporation, Manor
Care Inc., ARV Assisted Living, Inc. and Capital). Each of these five candidates
was interviewed by PaineWebber Properties.
Following due diligence reviews with respect to the qualifications and
performance history of the five candidates and a review of the proposals
received from each candidate (including fee quotations and termination provision
proposals), the ILM II Board and the boards of directors of Lease I and Lease
II, respectively, met in mid-July 1996 to discuss the prospective engagement of
Capital Senior Management 2, Inc. (a wholly-owned subsidiary of Capital) as
property manager to replace AHC.
At a Board meeting held on July 17, 1996 at which Messrs. Jeffry R. Dwyer,
J. William Sharman Jr. and Lawrence A. Cohen were present, Mr. Cohen, then the
President and a director of ILM II, informed the Board that senior management of
Capital recently had asked him whether he was interested in joining Capital in
an executive capacity. Mr. Cohen indicated that he had no immediate plans to
pursue or accept such a position with Capital or any other entity engaged in the
senior living industry and, although he had no understanding or agreement with
Capital as to any such employment, he wanted to preserve his ability to pursue
such an opportunity in the future and, therefore, believed it was prudent to
disclose these facts to ILM II's Board. Thereafter, Mr. Cohen was recused from
all ILM II Board presentations, discussions and decisions regarding any
commercial relationships or transactions 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 industry reputation, was
experienced in the management, ownership and operation of assisted living
communities, and appeared well-suited to assume the role of successor property
manager of the ILM II properties.
Considerable discussion then ensued among the directors of ILM II as to the
qualifications of Capital relative to the other four candidates. The proposals
made by each of the five candidates were reviewed and it was noted that
Capital's proposed fees were the lowest of all proposals. The Board noted that
all proposals included customary termination (or "break-up") fees and that in
view of the scheduled liquidation of ILM II in approximately three and one-half
years, it would not be commercially prudent to enter into an agreement providing
for the payment of such fees.
Accordingly, the Board determined that an alternative to such fees should
be proposed and in view of Capital's overall lower cost proposal, determined
that Capital was the most attractive replacement property manager. ILM II
communicated to Capital's representatives that it would not agree to any
termination fees, but instead, would grant to Capital a limited right of first
and last offer pertaining to the sale of ILM II's assets to an unaffiliated
third party. ILM II also informed Capital that any such right would have to
permit ILM II to terminate any pending asset sale transaction in its sole
discretion so that ILM II could retain the right not to sell its facilities to
Capital or any other party--irrespective of whether a transaction was solicited
by ILM II or was unsolicited.
Thereafter, the management agreement with AHC was terminated for cause and
the Lease II Board resolved to enter into a management agreement with Capital
substantially in accordance with a draft term sheet previously reviewed by such
board and ILM II's Board, with the exception that a limited right of first and
last offer would be provided for in lieu of Capital's requested termination fee.
The Board instructed PaineWebber to report directly to Mr. Dwyer for further
negotiating instructions regarding the management agreement with Capital.
Negotiations continued and a management agreement was entered into with Capital
Senior Management 2, Inc. in July 1996.
The management agreement provides that in consideration for services
provided, Lease II pays Capital Senior Management 2, Inc. a base management fee
of 4% of the monthly gross operating revenues of the ILM II properties, plus an
incentive management fee of 25% of the amount by which certain net cash flows of
the properties exceed certain base amounts. The management agreement is
guaranteed by Capital.
At a special meeting of the Board held on May 13, 1996 at which Messrs.
Jeffry R. Dwyer, J. William Sharman Jr. and Lawrence A. Cohen were present,
representatives of PaineWebber addressed ILM II's directors concerning possible
financial transactions relating to ILM II's properties. The Board reviewed a
marketing analysis of the assisted living industry which indicated that property
values in the industry were at a near-peak.
PaineWebber again recommended that the Board pursue a current sale of
ILM II's properties. PaineWebber's reasons included that (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 a pool of mortgage loans secured by underlying properties) and
subsequently was reorganized as an equity REIT (i.e., an investment directly in
senior living properties with the consequent ability to
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participate in the appreciation in value, if any, of those properties), and
(ii) ILM II's common stock was neither listed on a national securities exchange
or The Nasdaq Stock Market, nor traded in any established securities
market--thus there was virtually no liquidity for the ILM II common stock.
The Board did not authorize or pursue a sale of its senior living
properties at this time noting, among other reasons, that (i) an asset sale most
likely would not be reflective of the going-concern value of ILM II, (ii) the
transition period associated with the retention of a new manager for the
properties would be disruptive and costly, (iii) it was necessary first to
stabilize occupancy rates and improve ILM II's net operating income, and
(iv) the Board intended to study means to simplify ILM II's corporate ownership
structure.
The Board believed that if ILM II remained an independent corporation and
viable strategic plans were adopted by the Board and implemented by management,
that the objectives stated above could be realized prior to December 31, 2001
(ILM II's scheduled liquidation date) 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
industry property values reportedly were below peak.
No definitive plans were adopted by the Board at this time and it resolved
to continue to study and receive advice on strategic financial alternatives to
maximize shareholder value. The Board noted the overall growth and emergence of
publicly traded assisted living companies and the fact that the mean and median
per share sale prices for ILM II's common stock were increasing and converging
with the book value of the ILM II common stock. The mean and median sales prices
of ILM II common stock had been $5.59 and $5.06 per share respectively. For the
calendar quarter ended June 30, 1996 such values were higher than the book value
of ILM II's common stock which, at May 31, 1996, was $6.51 per share. Although
the Board did not undertake a liquidation or "break-up" analysis at this time,
it believed the purchase price that could be obtained pursuant to a sale of
ILM II as a going-concern would be greater than the purchase price that might be
realized for shareholders upon a partial or complete liquidation of the
properties.
Shortly after the May 13th Board meeting PaineWebber indicated that the
ILM II Board should conduct an immediate auction of the ILM II and ILM
properties. Due to PaineWebber's sponsorship of the property portfolio and its
previous common stock underwriting role for ILM II and ILM, the Board believed
that PaineWebber had an actual or apparent 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 PaineWebber customers),
and (iii) PaineWebber had until 1996 a nominee on the ILM II Board.
PaineWebber was informed of the Board's view and NatWest subsequently was
requested to provide strategic financial advice based primarily on its
reputation and its expertise in the representation and valuation of private and
publicly-held corporations, REITs and other participants in the healthcare and
assisted living industry. The Board noted the fact that NatWest had no prior
relationship to ILM II or ILM (or any of their directors) and did not own any
securities of ILM II or ILM. The Board believed it should seek to maximize
shareholder value and that an independent expert such as NatWest should
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advise the Board so that it could be fully informed as to any commercially
viable strategic alternatives that might be available toward that end.
The Board believed that absent a compelling financial reason (whether of a
general economic, market, industry or corporate nature), liquidating ILM II in
accordance with PaineWebber's recommendation approximately five and a one-half
years earlier than ILM II's December 31, 2001 scheduled finite-life liquidation
date would be both imprudent and premature.
At a meeting of the Board held on January 10, 1997 at which J. William
Sharman, Jr., Julien G. Redele, Lawrence A. Cohen, Carl J. Schramm and Jeffry R.
Dwyer were present, PaineWebber indicated that because Capital had been engaged
by ILM II as the new property manager and had been performing with greater
success than AHC, and because of seemingly improved trends in the real estate
and capital markets, it was an appropriate time for ILM II to sell its
properties to realize for shareholders the appreciation of ILM II's senior
living portfolio.
PaineWebber stated that ILM II was not an appropriate vehicle for long-term
investment due to the illiquid nature of ILM II's common stock, ILM II's limited
access to capital and lack of critical mass, and in its view, the absence at
ILM II of experienced, proactive and entrepreneurial management. PaineWebber
repeated its recommendation for an immediate sale of the ILM II properties by
means of auction.
PaineWebber further stated that if the Boards of ILM II and ILM agreed
within 30 days to sell the combined ILM II and ILM property portfolios in such
an auction, PaineWebber would participate in the auction as the opening or
"floor" bidder at a guaranteed minimum purchase price of $127.0 million (i.e.,
before deductions for the payment of corporate level built-in gains taxes
generated on the sale of the properties and other fees and out-of-pocket
expenses, including professional advisory fees, relating to the transaction).
The Board noted that after deducting up to approximately $5.2 million of
built-in gains taxes payable in connection with a property liquidation and after
paying related transaction expenses, PaineWebber's $127.0 million guaranteed
opening bid, if the successful bid, would result in aggregate net consideration
to ILM II and ILM shareholders of approximately only $120.0 million
(representing approximately three to five million dollars more than the
aggregate investment basis of the ILM II and ILM shareholders). The Board did
not believe this was an attractive return to shareholders on their investment.
At the January 10 Board meeting PaineWebber stated that it believed the
market for assisted living properties had peaked and that recently completed
initial public offerings of companies in the industry had not been well-priced.
PaineWebber stated that if the Board decided not to pursue the property
liquidation, it would resign as ILM II's advisor.
After further review and consideration of PaineWebber's recommendation, it
was the view of the Board that because PaineWebber Properties repeatedly failed
to recommend any alternatives to a liquidation of ILM II's properties (well in
advance of ILM II's December 31, 2001 scheduled finite-life termination date),
PaineWebber probably was not in a position to analyze 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 industry regarding the strategic
financial alternatives available to ILM II.
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At the request of the Board Jeffry R. Dwyer was instructed to obtain
proposals from nationally recognized independent financial advisors. Mr. Dwyer
initially contacted Donaldson, Lufkin and Jenrette Securities Corporation, BT
Alex. Brown Incorporated, Morgan Stanley & Co. Incorporated and NatWest. After
consideration of the proposals received from these financial advisory
candidates, ILM II retained NatWest as its exclusive financial advisor because
of NatWest's ability to devote significant attention to ILM II, NatWest's
industry experience and overall reputation, and its performance on recent
assignments.
In February 1997 the Board requested PaineWebber to extend its 30-day
minimum bid guarantee for an additional 30 days to provide ILM II with
additional time for NatWest to complete its investigatory analyses. PaineWebber
agreed and the Board held discussions with NatWest during this time to explore a
potential corporate reorganization that would enhance shareholder value and
requested NatWest to report its findings to the full Board at the next scheduled
Board meeting.
Having completed its analyses, at a Board meeting held in March 1997 at
which J. William Sharman, Jr., Julien G. Redele, Lawrence A. Cohen, Carl J.
Schramm and Jeffry R. Dwyer were present, NatWest advised ILM II that the sale
of the ILM II properties at that time was not the optimum means to maximize
shareholder value. NatWest expressed its view that the senior living market was
likely to continue to appreciate and that the ILM II property portfolio would
probably increase in value over the next several years.
Moreover, based upon equity valuations in the assisted living and
healthcare REIT industries at that time, NatWest believed that ILM 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 a
direct sale of ILM II's properties. In addition, NatWest believed that such a
transaction was likely to provide ILM II and ILM with the flexibility to expand
or divest either their operating companies or their real estate entities.
After the meeting the Board informed PaineWebber that based, in part, on
the advice of NatWest, it decided not to liquidate its properties at that time,
that other potential strategic financial alternatives were available and in the
best longer-term interests of ILM II's shareholders, and that the Board was
prepared to accept the resignation of PaineWebber Properties as its advisor.
PaineWebber Properties thereupon resigned.
At a Board meeting held on August 20, 1997 at which J. William Sharman,
Jr., Julien G. Redele, Lawrence A. Cohen (who was recused from the Schroders
presentation portion of the meeting), Carl J. Schramm and Jeffry R. Dwyer were
present, the Board received a presentation from Schroder & Co. Inc. which
recently was retained by the Board to replace NatWest as ILM 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 restructuring the combined companies and noted that
market conditions had changed since earlier in 1997 when NatWest had suggested a
corporate reorganization of ILM II into a real estate holding company and an
operating company.
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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 merger or business combination partner with expertise
in managing and operating senior living communities would be an appropriate
strategy to maximize shareholder value.
To passively test the market, the Board asked Schroders to identify
prospective strategic financial and business combination partners. However,
Schroders was not authorized to contact or initiate any discussions with these
companies. Schroders did identify for the ILM II Board approximately 10 senior
living companies (including American Retirement Corporation, Brookdale Living
Communities Inc., Capital, Sunrise Assisted Living, Inc., Alterra Healthcare
Corporation, Assisted Living Concepts, Inc., CareMatrix Corporation, Balanced
Care Corporation, Integrated Living Communities, Inc., and Emeritus
Corporation). ILM II did not seek at this time to formulate the terms or
ascertain the value of any prospective transaction with any of the foregoing
companies.
At no time during the foregoing time period did the ILM II Board authorize
or resolve to recapitalize or reorganize ILM II or sell control of ILM II or any
of its properties, nor did the Board solicit offers for a merger or other
business combination transaction or instruct Schroders to do so on its behalf.
At all times during the foregoing time period, the ILM II Board continued to
receive advice as to the availability of strategic financial alternatives to
maximize the value of ILM II's common stock.
Although no Board determination was made to proceed with any particular
transaction or to propose, structure or negotiate the potential terms thereof,
the Board believed that of the approximately 10 candidates identified to ILM II
by Schroders, Capital's successful performance as manager of the ILM II
properties and, thus, its familiarity with ILM II's business and operations,
made Capital a viable potential merger or business combination partner if the
Board later resolved to pursue and negotiate the terms of such a transaction.
The Board also believed that Capital's performance as property manager was
strong and that a second change in property manager (soon after the termination
of AHC) would be disruptive to ILM II's management and the administration and
operation of ILM II's senior living communities, potentially adversely affect
ILM II's operating results and the level of services provided to its residents,
and have a potentially negative impact on the overall value of ILM II.
BACKGROUND OF THE MERGER
THE TIMING, STRUCTURE, TERMS AND CONDITIONS OF THE MERGER AND THE MERGER
AGREEMENT ARE THE RESULT OF EXTENSIVE NEGOTIATIONS BETWEEN REPRESENTATIVES OF
ILM 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 WAS
TERMINATED ON OCTOBER 19, 1999), AND CULMINATED WITH THE EXECUTION AND DELIVERY
OF THE AMENDED AND RESTATED MERGER AGREEMENT BETWEEN ILM II AND CAPITAL ON
OCTOBER 19, 1999, AS AMENDED BY THE FIRST AMENDMENT THERETO ON APRIL 18, 2000.
SEE APPENDIX A TO THIS PROXY STATEMENT.
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At a meeting of ILM II's Board convened on August 20, 1997 at which
J. William Sharman, Jr., Julien G. Redele, Lawrence A. Cohen, Jeffry R. Dwyer
and Carl J. Schramm were present, the Board determined to explore a potential
strategic financial transaction with Capital and established a special committee
comprised of Messrs. Jeffry R. Dwyer and J. William Sharman, Jr. Messrs. Dwyer
and Sharman were at that time the Board's two most senior members with extensive
familiarity with ILM II and its property portfolio.
Neither Mr. Dwyer nor Mr. Sharman (i) had any material economic or
pecuniary interest in ILM II, ILM, Capital or any of their affiliated companies,
(ii) was a participant in any director, executive or employee compensation plan
or arrangement of either ILM II, ILM or Capital, or (iii) was party to any
employment, change-in-control or similar contract, arrangement or understanding
with ILM II, ILM or Capital. Accordingly, it was determined that Messrs. Dwyer
and Sharman were disinterested directors and the best qualified candidates to
serve on the special committee.
Messrs. Dwyer and Sharman were authorized at the August 20, 1997 meeting to
approach Capital and ILM II's financial advisors to discuss the feasibility of a
merger or business combination transaction with Capital. The special committee's
mandate was to determine whether a transaction which would maximize the value of
ILM II's common stock was feasible.
The Board decided at its August 20th meeting that prospectively, with
respect to all matters concerning Schroders or any potential extraordinary
corporate transactions involving ILM II, ILM or their assets, Mr. Cohen would be
required to recuse himself entirely from all Board discussions, communications,
deliberations and presentations.
Mr. Cohen was, in fact, so recused for the remainder of his tenure (through
July 1998) at ILM II and ILM. In addition, the minutes of all Board meetings
were redacted so that Mr. Cohen would not receive complete copies of the minutes
of the Board or the special committee with respect to discussions,
communications and deliberations with Capital, ILM II's financial advisors or
any potential alternative transactions or financial strategies.
At an August 25, 1997 meeting of the Board at which J. William Sharman,
Jr., Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, Mr.
Dwyer indicated that he had contacted James A. Stroud, then the Co-Chairman of
Capital, and informed him that in addition to other potential strategic
financial alternatives, ILM II was exploring the possibility of a merger with a
senior living operating company and was interested in discussing the possibility
of such a transaction with Capital.
Mr. Dwyer informed Capital that because Capital was a closely-held company,
ILM II would need to obtain all relevant financial and operating data for
Schroders to perform an analysis as to whether such a merger was feasible and
whether a transaction could be structured in a manner which was commercially
advantageous to ILM II. Capital indicated its willingness to pursue exploratory
discussions relating to such a transaction and, shortly thereafter, a reciprocal
confidentiality and standstill agreement was entered into with Capital and each
of ILM II and ILM to begin a preliminary investigatory process, including the
commencement of initial due diligence investigations by each party.
At approximately this time a representative of Capital requested an initial
meeting with the ILM II Board to begin discussions and Mr. Dwyer informed such
representative that such a meeting would be premature until Schroders had
completed its preliminary financial review of Capital and reported its results
to the ILM II Board.
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On September 17, 1997 Mr. Dwyer reported to the Board, at a meeting thereof
at which J. William Sharman, Jr., Jeffry R. Dwyer, Julien G. Redele and Carl J.
Schramm were present, that Capital had provided Schroders with a copy of its
pending Registration Statement on Form S-1 that recently had been filed publicly
with the SEC in connection with Capital's planned initial public offering.
However, as a result of the pending SEC registration process, Capital did not
pursue any transaction discussions with ILM 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, Jr., Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were
present, the Board discussed with Schroders a hypothetical merger between
ILM II and Capital. The Board believed that the combined ILM II and ILM
properties 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 properties. Mr. Redele asked whether it would be
appropriate at this time for ILM II to actively solicit interest from multiple
prospective buyers or potential business combination partners even though there
had been no Board decision to sell ILM II or seek a business combination. The
Board determined that because ILM II was not scheduled to liquidate until
December 31, 2001, it was not in the best interest of ILM II's shareholders at
that time to conduct an auction for the sale of the properties or stock of
ILM II and that ILM II should remain an independent public company.
The Board further believed that in lieu of soliciting proposals from
multiple prospective bidders or initiating a public auction process at that
time, there were three primary reasons for continuing to privately explore a
potential merger or business combination transaction with Capital: (i) the
limited right of first and last offer provided by Lease II to Capital in lieu of
a management agreement termination fee limited ILM II's ability to engage in
transactions involving the sale of its property portfolio even though such right
of first and last offer did not apply to merger transactions; (ii) in view of
Capital's extensive familiarity with ILM II's business and properties, a merger
or other business combination transaction with Capital was likely to involve a
significantly less extensive due diligence process, potentially lower
transaction costs and more simple transaction documentation and a deal with
Capital providing maximum value for ILM II's common stock was likely to be well
received by ILM II's shareholder constituency; and (iii) the process of dealing
with multiple prospective bidders could create a "free-for-all" or "fire sale"
atmosphere and result in considerable management and administrative distraction
at a time when ILM II's properties were being well managed by Capital and
ILM II had just recently recovered from the operational disruption and
transition of replacing AHC with Capital.
The Board also believed that although it had not considered or proposed any
specific forms of merger consideration at the time, if a deal could be
structured in which ILM II's shareholders could receive equity securities in a
surviving merger entity or newly combined company, the Board would need to
consider carefully the probability and magnitude of any potential negative
impact on revenues from any operational and administrative disruptions during
the post-closing transition from one property manager to another.
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Although the ILM II Board acknowledged that if it approached other
potential purchasers they hypothetically could value ILM II's portfolio higher
than the valuation which ultimately might be ascribed to ILM II pursuant to
negotiations with Capital, the Board did not seek to engage in speculation and
continued to believe that privately pursuing a singular transaction with Capital
was the best course of action for ILM II and its shareholders at the time.
The Board further believed that a transaction with Capital would be less
likely to adversely affect occupancy rates and, therefore, earnings of a
successor or newly combined company because Capital already was successfully
managing the ILM II properties and a prospective transaction with Capital,
pursuant to which ILM II's shareholders could receive publicly traded equity
securities, would provide enhanced liquidity to ILM II's shareholders because
Capital's common stock was listed on the NYSE and ILM II's common stock was not
listed or actively traded.
The Board realized that ILM II was under a contractual obligation to honor
Capital's limited right of first and last offer relating to the purchase of
ILM II's properties, but 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 always
have the ability to pursue other strategic alternatives to maximize the value of
ILM II's common stock and would not enter into any contractual obligations to
preclude or restrict its ability to do so.
At the December 8, 1997 meeting the ILM II directors discussed these
matters with Schroders and the Board contacted Capital to ascertain whether
Capital would be interested in pursuing a merger with ILM II and ILM at an
aggregate price of approximately $170.0 million.
The Board continued to believe that a widespread solicitation of potential
purchasers or an auction of ILM II's properties (of the nature previously
recommended by PaineWebber Properties), as opposed to focusing on a specific
transaction with a single potential buyer with whom ILM II had extensive
familiarity and an on-going successful commercial relationship, would be
materially disruptive to the management and administration of ILM II's
day-to-day operations. The Board further believed that dealing with multiple
parties could result in the receipt of artificially lower (or "low ball") bids
from industry competitors for the purpose of initiating a protracted auction
process which would not be in the best interests of ILM II shareholders.
At a Board meeting held in January 1998 at which J. William Sharman, Jr.,
Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, Schroders
reviewed and discussed the historical stock price performance of Capital and
reviewed preliminary merger and business combination scenarios involving
Capital--using publicly available financial information. The Board requested
Schroders to examine the likelihood of a transaction with Capital and to
consider the consequences and potential risks if ILM 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 and Schroders did not
solicit offers from other potential merger
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candidates because ILM II was not held out for sale and the Board believed that
Capital was the best potential transaction candidate at the time. Accordingly,
other than Capital, neither the ILM II Board nor Schroders sought to evaluate
specific alternative transaction candidates at this time and Schroders was not
instructed to identify or contact alternative merger or business combination
partners.
The Board held a meeting on February 10, 1998 at which J. William Sharman,
Jr., Julien G. Redele, Carl J. Schramm, Jeffry R. Dwyer, Schroders, Capital and
Lehman Brothers (Capital's financial advisor) were present, to begin focused
discussions regarding a potential merger or other form of business combination
between ILM II and Capital. At that meeting representatives of ILM II,
Schroders, Capital and Lehman Brothers discussed the structure and timing for a
possible transaction and how to expedite their respective due diligence
investigations in view of the commercial relationship between them, and thus the
familiarity of, the parties. Mr. Dwyer stated to Capital and Lehman Brothers
that any transaction consideration would need to have a minimum or floor value
of approximately $170.0 million. Intermittent discussions ensued between the
parties during the next three months.
In May of 1998 Andrew A. Feldman and Jeri Feldman, as trustees for the
Andrew A. and Jeri Feldman Revocable Trust, commenced a putative class action
lawsuit on behalf of that trust and all similarly situated shareholders of
ILM II (see "Certain Information with Respect to ILM II--Legal Proceedings")
alleging violations by the ILM II directors' of their fiduciary duty to
ILM II's shareholders. The plaintiffs hired E.M. Capital, Inc. as their
financial advisor and authorized E.M. Capital to contact various companies in
the assisted living industry to elicit expressions of interest to acquire
ILM II and ILM.
On June 4, 1998 Redwood Investors LLC commenced an unsolicited tender 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
inadequate and not fair to ILM II's shareholders, from a financial point of
view. Schroders' determination was based primarily on the fact that Redwood's
tender offer price was not reflective of the going-concern value of ILM II that
might be obtained in a negotiated merger or business combination transaction.
Schroders' conclusions were derived from financial analyses which included
median and mean equity values of ILM II's 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 in its Schedule 14D-9 that they reject the Redwood tender offer
because the consideration being offered was inadequate. The Redwood tender offer
subsequently expired without any shares being tendered, accepted for payment or
paid for.
The Board believed that the Redwood offer could spur the commencement of
additional unsolicited offers to buy non-control or "toe-hold" positions in
ILM II at inadequate prices or at prices not reflecting the control premium
which might be paid in a transaction involving the purchase of a substantial
majority or all of ILM II's outstanding common stock. Commencing in 1997 and
continuing periodically in 1998 and in 1999, unsolicited tender offers were
commenced by prospective purchasers for ILM II's outstanding common stock at
prices ranging from $7.00 to $8.90 net per share in cash. The Board believed
that these offers (which involved "mini tender offers" to purchase less
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than 5% of the outstanding ILM II common stock and, therefore, were not subject
to comprehensive SEC disclosure and filing regulations pursuant to Regulation
14D under the Exchange Act) did not represent the fair value of ILM II's common
stock at that time nor the value of the underlying assets of ILM II and did not
offer any control premium to shareholders for their investment in ILM II. To the
Board's knowledge, none of these mini-tenders resulted in the purchase or sale
of any ILM II common stock.
In early June 1998, ILM II received letters of inquiry from Brookdale
Living Communities, Inc., American Retirement Corporation and Sunrise Assisted
Living Inc. Because the Board believed that the pending AHC contract litigation
and Feldman litigation had to be resolved prior to pursuing any transaction to
maximize the value of ILM II's common stock, the Board's attention was focused
on expeditiously resolving such litigation and attending to the day-to-day
operations of ILM II.
ILM II responded to these letters of inquiry noting that in view of the
uncertainty created by the pending litigation matters and the attendant
disruption and distraction to ILM II's management and business, ILM II was not
inclined to pursue any discussions of the type referred to in the letters of
inquiry until after a satisfactory settlement or resolution of the pending
litigation. The Board then ceased all discussions regarding a potential
strategic transaction with Capital.
Brookdale's June 1998 indication of interest referred to the payment of
$165.0 million in cash, subject to the execution of definitive purchase
agreements, commencement and completion of due diligence, receipt of requisite
approvals, and the termination of the management agreements with Capital and the
leases with Lease I and Lease II. Brookdale acknowledged Capital's right of
first and last offer with respect to the sale of ILM II's assets and indicated
that if Capital did not exercise such right Brookdale would expect to enter into
a 30-day exclusive negotiation period to draft and negotiate definitive purchase
agreements and commence a full due diligence review which it anticipated could
be completed within approximately 60 days. Brookdale expressed its intention to
finance 75% of the $165.0 million purchase price and that its letter of inquiry
would expire on June 30, 1998.
The Board regarded Brookdale's June 1998 correspondence as preliminary and
noted that it failed to set forth a specific transaction structure and lacked
details on its possible methods of financing. Brookdale did not request any
further information or materials from ILM II and did not submit to ILM II any
due diligence request lists or confidentiality agreements related to a potential
due diligence review of ILM II.
During the Summer of 1998 the Board continued to focus on the existing
litigation involving AHC. Several of the directors prepared for depositions and
ILM II also became increasingly focused on the pending tortious interference
suit filed by AHC against Capital because such litigation involved alleged
damages which, if resolved adversely, could have subjected ILM 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 meeting of the Board at which J. William Sharman, Jr.,
Julien G. Redele, Carl J. Schramm and Jeffry R. Dwyer were present, Schroders
addressed the
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performance of the overall capital markets, publicly traded senior health care
and senior living companies, and publicly traded healthcare REITs. The Board
requested from Schroders a more detailed discussion concerning the senior living
industry and strategic courses of action to be presented to ILM II and ILM at
the next Board meeting scheduled for September 1998.
On July 28, 1998 at the annual meeting of ILM II's shareholders, Lawrence
A. Cohen and Julien Redele did not stand for reelection to the Board because the
composition and membership of the Board was being changed largely for
administrative cost savings reasons, and, in the case of Mr. Redele, Mr. Redele
and the ILM II Board believed that because he was appointed as an officer of
Lease II and elected as a member of Lease II's Board he should focus his time
and efforts on the management of Lease II and function as the sole outside
director of Lease II. The remaining directors which comprised the Board were
Messrs. J. William Sharman, Jr., Jeffry R. Dwyer and Carl J. Schramm.
In August 1998 the AHC contract litigation was settled. On September 23,
1998 the ILM II special committee met with Schroders and told them that in view
of the recent settlement of the litigation Schroders should resume seeking to
design a transaction with Capital providing the ILM II shareholders with
liquidity and maximum value. The Board informed Schroders at this time that it
did not intend to conduct an auction of ILM II or initiate discussions with
multiple parties, and that the Board was not interested in pursuing an asset
sale transaction or property liquidation.
For purposes of constructing a "peer group" for various comparable company
analyses, Schroders reviewed the current stock price performance of Capital and
other publicly-traded senior health care and assisted living companies, as well
as publicly-traded healthcare REIT companies deemed by Schroders to be generally
comparable to ILM 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 share price to earnings multiple than Capital. The Board
noted that these companies hypothetically might be able to pay more for ILM II
than Capital in a transaction involving a significant stock component.
Because the Board never put ILM II up for sale or held ILM II out as such,
and did not consider ILM II to be under any obligation to pursue a merger or
business combination with any party, the Board did not contact any of the
foregoing peer group entities, including Sunrise Assisted Living, Inc., American
Retirement Corporation or Brookdale Living Communities, Inc., to ascertain
whether they remained interested in pursuing a transaction with ILM II. Instead,
in view of past discussions with Capital about a potential merger or business
combination transaction and the successful property management relationship with
Capital, ILM II remained focused on resuming discussions with Capital to see if
a deal could be struck. The Board understood that the limited right of first and
last offer in favor of Capital was not applicable to a merger or business
combination transaction involving ILM II's common stock and did not seek to
explore means to effect an asset sale transaction which could avoid triggering
the rights of first and last offer.
The Board instructed Schroders to contact Capital and its financial
advisors to impart the details and structure of a proposed transaction in which
ILM II's shareholders could
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receive a combination of cash and exchange listed dividend-paying or
interest-paying securities at the election of ILM II's shareholders.
A meeting of the special committee of ILM II's Board consisting of Messrs.
Dwyer and Sharman was convened on October 29, 1998 with Schroders and
representatives of Capital and Lehman Brothers. At the meeting Lawrence A.
Cohen, James A. Stroud and Jeffrey L. Beck, respectively, of Capital provided an
overview of Capital's performance noting that in relation to its competitors it
had less leverage and approximately $34.0 million in cash. Capital reminded
ILM II that it had a very successful history of operating the ILM II properties
and noted that to its knowledge no operating company in the senior living
industry currently paid dividends on its common stock.
Based on its continued discussions with Capital the Board believed that
pursuing a cash and convertible stock transaction with Capital was in the best
interests of ILM 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, have an opportunity to continue a portion of their investment in a
successor entity. ILM II also was of the view that a hybrid cash/convertible
stock transaction could be more beneficial than a straight cash transaction
because ILM II proposed merger consideration consisting in part of common stock
and a convertible fixed coupon security of Capital--the dividend or interest
component of which would approximate the 8- 1/2% annual dividend historically
paid by ILM II on its common stock and which, upon conversion into Capital's
common stock, would allow for participation in the potential future growth and
earnings of Capital.
In this connection the Board observed that the 8- 1/2% annual cash dividend
ILM II currently was paying on its common stock exceeded then prevailing annual
interest rates on certificates of deposit. Since its incorporation in 1990 as a
mortgage REIT through and including its corporate reorganization as an equity
REIT, ILM II had sought for its shareholders annualized rates of return on
investment at least equal to prevailing certificate of deposit interest rates.
Because Capital's common stock did not pay any dividends, the Board asked
Schroders to contact Lehman and determine whether a transaction could be
structured to include convertible securities so that ILM II's shareholders could
elect to receive a dividend-paying or interest-paying security. ILM II also
informed Schroders that to enhance liquidity for ILM II's shareholders, any such
security would have to be listed on a national securities exchange.
During approximately the next two and a half weeks discussions ensued
between representatives of ILM II and Capital regarding the appropriate
structure for a merger or business combination transaction involving cash and
securities (including dividend-paying or interest-paying securities convertible
into or exchangeable for shares of Capital's common stock). During this time
ILM II's special committee met with representatives of Schroders to review
merger scenarios provided by Schroders and Lehman Brothers, and Schroders
informed Lehman Brothers that ILM II needed additional due diligence information
and financial data from Capital regarding its analyst's consensus estimates.
In approximately late November 1998 Schroders reported to the special
committee that it recently received a phone call from senior management of
Sunrise Assisted Living, Inc. Sunrise was generally familiar with the ILM II
properties because it was one of the five final candidates that bid for the
ILM II and ILM property management assignment after
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ILM II terminated its relationship with AHC in July 1996 and had expressed an
interest in pursuing discussions with ILM II in June 1998. Sunrise communicated
that because of its relative low cost of borrowing it believed it was
well-positioned to buy the ILM II assets. Sunrise did not submit a specific
proposal or term sheet. ILM II continued its discussions with Capital and did
not pursue communications or discussions with Sunrise. Sunrise did not request
any ILM II information or further seek to initiate a dialogue or to commence a
due diligence process.
On November 17, 1998 Capital provided ILM II with a draft term sheet for a
proposed transaction between subsidiaries of Capital and each of ILM II and ILM
for a combined value of $160.0 million. The proposed 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, the transaction would include "no-shop" or
no-solicitation provisions and "break-up" fees, and Capital would not have any
due diligence "walkaway" rights. The draft term sheet also provided for
cross-option or "leg up" agreements in favor of Capital and ILM 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 and to "step-up"
the basis of its investment in those assets.
In late November 1998 ILM II engaged Greenberg Traurig, as its special
mergers and acquisitions counsel, and 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 the proposed transaction. During
this time, Greenberg Traurig discussed with ILM II and its representatives the
appropriateness and scope of financing commitments, break-up fees, cross-option
agreements, no-solicitation covenants, pre-closing operating restrictions,
closing conditions, termination rights, proration requirements, "collars and
caps," and floating exchange ratios. ILM II directed Greenberg Traurig to
prepare and submit to Capital a revised term sheet based on these discussions.
On December 4, 1998 a meeting of the special committee was held
telephonically with Schroders and Greenberg Traurig to discuss a letter
addressed to the Chairman of ILM II and published over the Internet by Brookdale
on December 4, 1998 wherein Brookdale referred to its June 3, 1998 letter of
inquiry and reiterated its interest to acquire the assets of ILM II. The
December 4, 1998 letter was viewed by the Board as an inquiry and not a
definitive offer or proposal because Brookdale again failed to set forth any
specific terms, structure or acquisition consideration.
Mr. Sharman reminded the ILM II Board that he had spoken in June 1998 with
Brookdale's advisors and that he told such advisors that ILM II was focused at
that time on resolving the AHC litigation and that after such litigation was
resolved, ILM II intended to examine with its advisors methods to maximize the
liquidity and value of ILM II's common stock. Mr. Sharman noted that he never
suggested or committed to Brookdale that he or ILM II would contact Brookdale
about a possible transaction following resolution of the AHC litigation. The
Board chose not to contact Brookdale at the time the AHC
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litigation was settled because the Board believed there was a greater likelihood
of successfully negotiating with Capital and consummating a transaction in the
best interests of ILM II's shareholders.
Schroders said they would review Brookdale's publicly available financial
statements and discuss their findings with the Board at a special meeting
scheduled to be held on December 8, 1998.
Greenberg Traurig delivered to Capital a revised term sheet dated
December 10, 1998 which provided for total merger consideration of
$170.0 million to be allocated among ILM II and ILM based upon the relative net
operating income of both entities. The parties discussed that the
$170.0 million of merger consideration was a net amount to ILM II's and ILM's
shareholders and ILM II reminded Capital that it would be assuming by operation
of law all of ILM II's and ILM's liabilities, including approximately
$5.2 million of built-in gains tax liabilities associated with ILM II's and
ILM's investments in their assets. The parties further discussed that the merger
consideration would be paid 60% in the form of cash and 40% in the form of
dividend-paying convertible trust preferred securities of an affiliated business
trust of Capital, that termination fees of $8.0 million would be allocated
$3.2 million to the proposed ILM II merger and $4.8 million to the proposed ILM
merger (in contrast to the almost $17.0 million of termination fees initially
requested by Capital and its advisors), and that reimbursement of Capital's
expenses would not exceed $2.0 million in the aggregate if the proposed ILM II
and ILM merger transactions were not consummated under certain circumstances.
ILM II had previously authorized Greenberg Traurig to prepare initial
drafts of the ILM II and ILM merger agreements and, on December 4, 1998, ILM II
provided Capital with initial drafts of the proposed agreements and plans of
merger in connection with the proposed transactions.
On December 7, 1998 ILM II responded to Brookdale's letter of December 4,
1998 by indicating that as previously communicated to Brookdale's advisors in
June 1998, ILM II did not desire to sell its assets at such time. In its
December 7th letter ILM II communicated to Brookdale that it would consider bona
fide offers deemed by the ILM II Board to be in the best interests of ILM II's
shareholders, including business combination transactions. The Board did not
suggest to Brookdale which transactions might be optimal and in the best
interests of ILM II's shareholders. Because the Board did not seek to undertake
an asset sale or property liquidation transaction and believed that Capital was
the most viable and attractive potential transaction merger partner at the time,
it did not solicit indications of interest from other parties nor did it
announce its desire to pursue a merger with potential partners providing for a
combination of cash and preferred securities.
At a December 8, 1998 meeting of the ILM II Board at which J. William
Sharman, Jr., Carl J. Schramm and Jeffry R. Dwyer were present, representatives
of Schroders discussed Brookdale's financial profile and market value. In
response to Board inquiries, ILM II's counsel informed the Board that the
Brookdale letter did not constitute a definitive offer or proposal, but rather,
was a letter of inquiry or expression of interest in that it merely proposed to
explore a potential transaction, subject to full due diligence and failed to set
forth specific terms regarding structure, covenants, representations and
warranties, financing, timing, assumption of liabilities, required consents and
approvals,
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termination provisions, closing conditions, fees and expenses, indemnification
provisions, deal protection provisions, accounting and tax treatment, and the
like.
The Board noted that the Brookdale letter referenced an asset sale rather
than a merger transaction or other form of business combination transaction
involving the purchase of ILM II's common stock and that an asset sale could
involve protracted negotiations and due diligence on the part of Brookdale and
its prospective external financing sources, contractual allocations of assumed
liabilities and purchased assets (unlike a merger transaction pursuant to which
the surviving entity would assume all liabilities of ILM II by operation of
law), indemnification arrangements, lease assignments, escrows, schedules of
assets and liabilities, and the potential need to obtain and pay for third party
consents and approvals. The ILM II Board did not suggest to Brookdale a
definitive transaction structure and price because the Board did not believe
this would be an appropriate commercial posture and was already involved in
detailed negotiations with a viable merger partner.
At approximately this time the terms of the Capital offer continued to be
refined by ILM II and Capital in consultation with their respective legal and
financial advisors and the deal was predicated upon establishing a minimum price
that would allow ILM II's shareholders to receive the maximum obtainable return
on their investment and a premium to the prices deemed generally available to
buyers and sellers in the illiquid secondary market for ILM II's common stock.
On December 18, 1998 Brookdale submitted a proposal to acquire the assets
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 asset purchase
agreements and would be subject to customary closing conditions, including
termination of the management agreements with Capital. As part of its proposal,
Brookdale stated its desire to commence a full legal and business due diligence
review of ILM II and ILM.
On December 28, 1998 ILM II responded to Brookdale's December 18, 1998
proposal indicating that ILM II was pursuing means to enhance liquidity and
maximize value for ILM II's shareholders. ILM II also indicated that bona fide
offers in the best interests of the ILM II shareholders would be reviewed in due
course by the ILM II Board with Greenberg Traurig and Schroders, and the
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 several telephonic and in-person meetings negotiating
the terms of draft transaction documents prepared by Greenberg Traurig.
Capital's advisors included in its November term sheet and reiterated in
subsequent discussions with ILM II's advisors that Capital required a "leg-up"
option to protect the transaction during the period following the execution of a
definitive agreement and prior to consummation of a merger. Capital stated that
it required the right to purchase up to 19.9% of ILM II's outstanding common
stock at the merger consideration per share offered by Capital to ILM II's
shareholders under the merger agreement. Capital proposed that such right would
become exercisable by Capital if ILM II terminated the merger agreement under
certain circumstances or, in any case, if ILM II entered into a competing
transaction. Capital requested the right to require
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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.
Greenberg Traurig related to the Board that such features were onerous and
that, in its view, a "leg-up" option was inappropriate for a transaction such as
the proposed merger which involved a sale of control of ILM II thereby
foreclosing, if consummated, any future potential control premium for ILM II's
shareholders.
Discussions continued between legal counsel for Capital and Greenberg
Traurig, whereupon Capital offered to eliminate the "put" option feature of the
"leg-up" option and reduce the percentage of option shares from 19.9% to 9.9%.
Upon advice from Greenberg Traurig ILM II insisted that it would not enter into
a "leg-up" arrangement (whether or not reciprocal) and transaction negotiations
were suspended for the next several days. After further discussions on this
subject, negotiations resumed and Capital withdrew its request for a "leg-up"
option. Capital noted that it still needed deal protection in the form of
comprehensive break-up fees and expense reimbursement provisions.
The ILM II Board and Greenberg Traurig stressed the need for a broad-based
"fiduciary out" to enable ILM II to provide non-public information to, become
fully informed as to the nature of, and negotiate with, unsolicited third party
bidders offering bona fide alternative transactions. The ILM II Board stated
that in all cases it needed to have the contractual freedom to enter into a deal
that was financially superior to the Capital deal after allowing Capital a
reasonable opportunity to "top" such deal.
The parties next discussed and negotiated the nature and breadth of the
so-called "MAC (or material adverse change) Out"; i.e., the circumstances under
which either party would be permitted to terminate the merger transaction in the
case of a material adverse change.
"Break up" fee negotiations then continued. Capital initially requested a
break-up fee of approximately $7.0 million in the case of ILM II (and
approximately $10.0 million in the case of ILM), plus reimbursement of unlimited
out-of-pocket expenses. After discussions with the ILM II Board, Greenberg
Traurig responded that although ILM II recognized the desire for deal
protection, ILM II 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 (or
appear to deter) bona fide competing or alternative transactions in the best
interests of ILM II's shareholders. Capital and ILM II eventually 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 termination
of the merger agreement in certain circumstances.
With respect to the parameters of the break-up fee, Capital proposed that
the fee would be payable if the merger was not consummated by October 31, 1999
for failure of ILM II to obtain requisite shareholder approval or for any
material breach by ILM II under the merger agreement. ILM II rejected this
proposal and, after some negotiations ensued, the parties agreed that a break-up
fee would be payable 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 of a
definitive agreement for a
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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 ILM II's shareholders to vote to
approve the merger agreement, the affirmative recommendation of a financially
superior alternative deal by the ILM II Board, or the execution by ILM II of a
definitive agreement providing for the sale of ILM II to a party other than
Capital.
Capital also requested a "holdback" or escrow of a portion of the cash
component of the merger consideration as security for any obligations payable to
Capital in connection with material breaches by ILM II under the merger
agreement and similarly requested that ILM II maintain at closing cash reserves
to fund Capital's assumption at closing of the estimated $5.2 million of
ILM II's and ILM's corporate level "built-in" gains tax liabilities, dividend
obligations and other liabilities. Following discussions among the ILM II Board,
Greenberg Traurig and Schroders on these points and after further negotiations
between ILM II and Capital, Capital withdrew its request for these provisions.
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 by Greenberg Traurig and Capital's legal advisors. Because
a portion of the merger consideration was proposed to include securities (and,
therefore, an investment was being made by ILM II's shareholders in Capital),
ILM II required restrictions on Capital's ability to operate its business prior
to consummation of the merger. Capital agreed that subject to certain monetary
thresholds, it would continue to operate its business in a manner consistent
with past practices and not issue capital stock, consummate acquisitions, sell
assets, incur debt, or consummate other transactions potentially dilutive to the
earnings per share of Capital's common stock.
In January 1999 "collars," "caps," floating exchange periods and other
variable pricing mechanisms were further explored by ILM II, Schroders and
Greenberg Traurig in view of the risks associated with recent fluctuations in
the market price of Capital's common stock and other public company participants
in the senior living industry. Discussions between the ILM II Board and
ILM II's advisors ensued regarding the conversion ratio (the ratio at which the
number of shares of Capital common stock would be issued upon conversion of
Capital's trust preferred securities) and whether a floating valuation period or
price adjustment formula should be included in the merger agreement.
Schroders advised ILM II that a fixed conversion ratio at the time the
merger agreement was signed would be more likely to lock-in accretion/dilution
for ILM II's shareholders and, although there could be no assurance, a fixed
ratio would enable ILM II's shareholders to participate in any prospective
appreciation of Capital's stock price after execution of the merger agreement.
During this time, ILM II's Board instructed Greenberg Traurig to negotiate and
obtain a guarantee in favor of ILM II's shareholders pursuant to which Capital
guaranteed payment of the trust preferred securities to be offered in the merger
so that in the case of a default relating to such securities, ILM II's
shareholders would have recourse against both Capital and the Capital subsidiary
intended to be the issuer of the trust preferred securities.
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Schroders and Greenberg Traurig were next instructed to undertake a
supplemental due diligence review of Capital because of the securities component
of the merger consideration contained in the draft merger agreement.
At a January 19, 1999 ILM II Board meeting at which J. William Sharman,
Jr., Carl J. Schramm and Jeffry R. Dwyer were present, the ILM II Board reviewed
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 (or aggregate
merger consideration of $170.0 million allocable to ILM II and ILM in the
amounts of $74,840,000 and $95,110,000, respectively) represented a premium of
approximately 30% per share over the best available share price information for
the ILM II common stock as reported to ILM II by Schroders. Next, the terms of
the Brookdale proposal were presented to and discussed by the ILM II Board.
Following discussions with Greenberg Traurig and Schroders the Board determined
that the Brookdale proposal was structurally inferior and uncertain and,
therefore, not a superior offer to acquire ILM II.
Accordingly, the Board believed it would not be prudent to jeopardize the
fully negotiated and viable Capital transaction by delaying the signing of a
deal with Capital and pursuing any further discussions with Brookdale. Further,
the Board noted that although ILM II never undertook a pre-signing auction or
"market check" process, it intended to publicly announce the Capital transaction
and include in its periodic Exchange Act reports statements acknowledging that
ILM II was for sale. Also, the Board was advised by Greenberg Traurig and
Schroders that the merger agreement with Capital contained commercially
reasonable deal protections with broad-based fiduciary outs that would not
operate to unduly "chill" or preclude potential alternative superior bids. For
the foregoing reasons and the fact that no agreement providing for the sale of
control, liquidation, or break-up of ILM II had been entered into, ILM II's
Board was of the view that it was under no present obligation to actively
solicit from other parties, including Brookdale, alternative offers.
On January 20, 1999 ILM II informed Brookdale that based upon its review of
Brookdale's December 18th correspondence 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 and ILM's built-in gains tax) represented the best potential
transaction structure for ILM II's shareholders at that time. The Board did not
expressly indicate to Brookdale at this time that its December 1998
correspondence lacked sufficient specificity to constitute a definitive proposal
or offer. The Board was of the view that although the Brookdale proposal
provided for nominally higher consideration than the consideration in the
Capital transaction, because (i) an asset transaction was not the optimum deal
structure for ILM II and its shareholders (because all of ILM II's known and
unknown liabilities would not be assumed by Brookdale as a matter of law),
(ii) the $200,000 premium was immaterial in the context of pending negotiations
with Capital, and (iii) Brookdale would first need to conduct a due diligence
review, including visitation and inspection of 13 property sites, it would not
be prudent to interrupt or suspend its advanced negotiations with Capital for an
uncertain transaction with
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speculative prospects for consummation. At this time, Brookdale neither
requested, nor did ILM II provide information regarding ILM II to help formalize
Brookdale's proposal.
In early February 1999 final negotiations continued between Capital and
ILM II regarding the reconfiguration of the merger consideration in view of the
recent decline in the price of Capital's common stock. Discussions ensued
between Schroders and Lehman regarding a change in the proposed percentage of
merger consideration payable in cash and the proposed percentage of merger
consideration payable with convertible trust preferred securities. Also
discussed was Capital's proposed increase in the conversion premium from 22.5%
to 25% in relation to the $12.75 closing sale price of Capital's common stock as
reported on the NYSE on February 5, 1999. Schroders indicated that the proposed
change from a 60% cash/40% convertible trust preferred securities deal to a 65%
cash/35% convertible trust preferred securities deal, and a conversion premium
of 25%, would be a good deal for ILM II's shareholders because they would
receive the same aggregate consideration as previously negotiated (in terms of
per share dollar value), except that more cash would be available for
shareholders if they so elected and virtually the same pro forma (i.e.,
"as-converted") diluted common equity ownership of Capital would be available
for shareholder elections as was the case with the previously proposed 40% stock
deal and a hypothetical $14.00 Capital stock price at signing.
At its February 6, 1999 meeting at which Messrs. Jeffry R. Dwyer, J.
William Sharman, Jr. and Carl J. Schramm were present, the ILM II Board reviewed
with Greenberg Traurig the material terms of the revised draft merger
agreements, including the "break-up fee" and termination provisions, the
covenants applicable to ILM II and Capital between signing and closing, the
cash/stock election procedures and proration provisions, the "no-shop" and
"fiduciary out" provisions, the representations and warranties of the parties,
the conditions to closing, the indemnification provisions, and the termination
provisions.
Discussions then followed with respect to the proposed exchange ratio and
the conversion premium for the trust preferred securities, the fact that the
closing sale price of Capital's common stock as reported on the NYSE on the
immediately preceding trading day was $12.75, 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 SEC preliminary proxy
review and registration process, the fact that no other definitive offers from
any bona fide merger or business combination partners were available at the
time, the complexity of the transaction and the likelihood of obtaining the
requisite shareholder approval and, the scheduled December 31, 2001 finite-life
liquidation date for ILM II.
At this time the Board also considered the fact that (i) the proposed
merger consideration and transaction structure was fully taxable to ILM II's
shareholders, (ii) the trading price of Capital's preferred securities would not
be fixed and could decline in value between signing and closing, (iii) the fact
that the rate at which the preferred securities would be converted into shares
of Capital common stock would be fixed, and (iv) the holders of the preferred
securities would be "structurally subordinated" to Capital's creditors.
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Representatives of Schroders then presented their fairness analyses of the
proposed merger consideration to be received by ILM II's shareholders. Upon
conclusion of such analyses Schroders delivered its oral opinion (which opinion
subsequently was confirmed by delivery to ILM II's Board of a written opinion
dated February 7, 1999) to the effect that, as of such date and based upon and
subject to certain matters and assumptions stated in such opinion, the merger
consideration was fair to holders of ILM II common stock, from a financial point
of view.
Greenberg Traurig noted to the ILM II Board that the terms of the merger
agreement with Capital preserved ILM II's ability to accept a superior 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. Based upon the advice of
Greenberg Traurig and Schroders, the ILM II Board determined that because the
termination fee was not commercially excessive, the fee would not be a material
deterrent for other prospective purchasers seeking to make a bona fide competing
offer and that the pending Capital deal was preferable to an indefinite third
party proposal, which was subject to due diligence. Greenberg Traurig also noted
to the Board the absence of stock leg-ups and asset lock-ups which could deter
competing bids and "pooling-of-interest" structures.
Based on the foregoing, including the perceived benefits of the terms of
the proposed merger with Capital in relation to the perceived risks outlined
above and the opinion of Schroders that the merger consideration was fair to the
holders of ILM II common stock, from a financial point of view, the ILM II Board
unanimously approved the merger and authorized the execution of the merger
agreement (with certain further non-substantive modifications to be negotiated
upon the advice of Greenberg Traurig and Schroders). Such Board authorization
was communicated by Greenberg Traurig to Capital's legal counsel late in the
evening of February 6, 1999 and discussions ensued between such counsel into the
early hours of February 7th regarding technical modifications to the transaction
documents.
Greenberg Traurig prepared revised execution copies of the merger
documentation and distributed them to all parties on the morning of February 7,
1999. The merger agreement was signed on the evening of February 7, 1999 and
during the morning of February 8, 1999 ILM II issued a press release reporting
such event. The executed merger agreement provided for 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
Delaware business trust of Capital. The preferred securities were convertible
into shares of Capital common stock at a fixed conversion ratio.
On March 9, 1999, Brookdale revised its December 18, 1999 correspondence by
setting forth its desire to explore a transaction to acquire the assets of
ILM 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 that the convertible securities would be convertible into
shares of Brookdale common stock and provided that shareholders would have the
right to
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elect to receive any combination of cash and convertible securities, subject to
proration in the case of over-subscriptions for convertible securities. After
being told of ILM II's preference for a merger or stock sale, Brookdale's
representatives verbally indicated that the foregoing proposal was intended to
be the functional equivalent of the Capital merger structure at higher aggregate
consideration and that full legal and financial due diligence was required to
confirm Brookdale's willingness to proceed. Under the terms of the merger
agreement with Capital ILM II was required to provide the Brookdale proposal to
Capital.
After discussions with its advisors ILM II's Board instructed Greenberg
Traurig to prepare, and on March 22, 1999 Brookdale, ILM II and ILM entered
into, confidentiality and standstill agreements whereby ILM II and ILM agreed to
make available and made 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 it
would not acquire any shares of ILM II or ILM common 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, Jr.,
Carl J. Schramm and Jeffry R. Dwyer, met with Greenberg Traurig and Cohen &
Steers (Cohen & Steers Capital Management, Inc., together with its affiliate
Cohen & Steers Capital Advisors LLC, recently had been retained by the ILM 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 joined Cohen & Steers) to discuss the status of Brookdale's latest proposal.
The Board was informed by Greenberg Traurig that attorneys from Brookdale were
prepared to conduct a due diligence review of ILM 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 requests.
On April 28, 1999 Brookdale revised its March 9, 1999 letter to propose an
all-cash transaction for total consideration of $185.0 million, to be allocated
$82,787,000 to ILM II and $102,213,000 to ILM. Brookdale stated that prior to
closing it intended to assign all transaction documentation to an unaffiliated
third party leasing company that would lease back the purchased ILM II assets to
Brookdale. Brookdale stated that 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. Brookdale's revised
proposal was subject to satisfactory completion of due diligence, which
Brookdale anticipated it could complete within 30 days after it was afforded
access to certain non-public
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information, ILM II personnel and property sites. A copy of this latest proposal
was delivered by ILM II to Capital.
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 agreement reflected the terms of
Brookdale's April 28, 1999 letter. Brookdale's counsel also referenced
Brookdale's ability to externally finance the proposed transaction, subject to
satisfactory completion of due diligence.
At a July 8, 1999 meeting of the ILM II Board at which J. William Sharman,
Jr., Carl J. Schramm and Jeffry R. Dwyer were present, discussions ensued
regarding the draft asset purchase agreement received from Brookdale. The Board
was informed by Greenberg Traurig and Cohen & Steers that, after careful review,
the proposed agreements were significantly biased in favor of Brookdale.
On July 9, 1999, at the direction of ILM II's Board, Greenberg Traurig
informed Brookdale's counsel that after careful review of the agreement and
deliberation by the full ILM II Board, and based further upon the advice of
Greenberg Traurig and Cohen & Steers, it was the Board's position that the terms
and conditions of the draft asset purchase agreement relating to the transaction
structure, unassumed liabilities, conditions to closing, affirmative and
negative covenants, termination and liquidated damages, and expense allocations,
among other provisions, were commercially unreasonable 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 known and
unknown liabilities of ILM II being assumed at closing by the acquiring entity
and with no survival of representations and warranties, no purchase price
"holdbacks," escrows or adjustments, and no indemnification provisions.
The Board reiterated to Brookdale that any definitive agreement entered
into with a bona fide purchaser would have to be financially superior to the
pending merger transaction with Capital and have a very high likelihood of
consummation, and would need to include remedies in favor of ILM II if Brookdale
failed to consummate the transaction under certain circumstances. The ILM II
Board also advised Brookdale that bona fide agreements consistent with the
foregoing criteria would be considered by the Board in due course. Accordingly,
the ILM 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
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Brookdale's draft asset purchase agreement, Brookdale would pursue available
legal remedies.
The ILM II Board was advised by its legal and financial advisors that such
"threat" did not merit a response because Brookdale had been informed of the
Board's requirement of a superior financial transaction and structure and
ILM II did not act to foreclose such possibility. Furthermore, the ILM II Board
viewed Brookdale's draft agreement as commercially unreasonable in that it: did
not provide for Brookdale's assumption of any of ILM II's liabilities (other
than up to $5.2 million of built-in gains tax liabilities); did not provide for
contractual remedies in favor of ILM II in the event Brookdale breached the
agreements; contained burdensome restrictions on ILM II's ability to manage its
business prior to closing because the agreements did not specify an outside
termination date; would allow Brookdale to conduct unlimited due diligence which
would disrupt the operations of ILM II and distract management due to the lack
of an outside termination date; and contained deal protection provisions and
break-up fees which were more onerous than those negotiated with Capital. The
Board and ILM II's advisors also noted that the agreements further contained
unusual termination events.
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
statement/prospectus submitted to the SEC by the parties in late April 1999, and
the material decline in the closing sale prices of Capital's common stock in
relation to such prices in February 1999 when the original merger transaction
was entered into. These discussions focused primarily on ILM 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 and the lower value of that consideration component.
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 ILM II's shareholders
if conditions in the assisted 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, Cohen &
Steers and Greenberg Traurig were instructed to consider different combinations
or reconfigurations of the cash and stock portions of the merger consideration.
Following several discussions with Capital about ILM II's concerns and in
connection with class action settlement proceedings in the pending Feldman
lawsuit against ILM II and its directors, Capital agreed in a draft stipulation
of settlement relating to such litigation to amend the existing February 7, 1999
merger agreements to provide for increased and restructured merger
consideration.
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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 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, Greenberg Traurig and Cohen & Steers questioned whether the merger
simply should be amended to provide for 100% cash consideration and no stock
election in view of the dramatic decline in the market price for Capital's
common stock. Capital and its advisors stated that they would need some time to
complete their analyses on the impact and post-merger pro forma effect of an
all-cash transaction.
On August 2, 1999 Brookdale submitted yet another revised proposal which
proposed to acquire, by means of tender offer, all of the outstanding shares of
ILM 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 secured by ILM II's properties to fund the
tender offer consideration and that its latest proposal was subject to
satisfactory completion of additional legal and financial due diligence
necessitated by a stock acquisition structure and the negotiation, execution and
delivery of definitive agreements. Brookdale proposed a meeting between
representatives of the companies and their legal and financial advisors to begin
the negotiation process.
Brookdale and ILM 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 clarification and
unequivocal assurances that the proposed $185.0 million of tender offer
consideration was a net amount payable in cash directly to ILM II's shareholders
and ILM's shareholders. Brookdale's legal and financial advisors verbally
acknowledged that Brookdale intended the $185.0 million consideration to be a
net cash amount to shareholders and would not be reduced by any ILM II
liabilities, taxes or merger termination fee and expense reimbursement
obligations to Capital.
At a Board meeting held on August 9, 1999 at which J. William Sharman, Jr.,
Carl J. Schramm and Jeffry R. Dwyer all were present, Greenberg Traurig and
Cohen & Steers presented to the ILM 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 in the form of a term sheet
and to deliver them to Brookdale in anticipation of the upcoming meeting with
Brookdale.
On August 12, 1999 pursuant to instructions of ILM 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
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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 legal
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 (limited
essentially only to customary material adverse change and so-called "market
outs"); (vi) the non-solicitation provisions of the transaction documentation
would need to include broad-based "fiduciary outs" and "break-up" fees not
greater in amount or scope than those contained in the existing ILM 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 not later than five business days after entering into definitive
merger agreements and that the preparation and negotiation of such agreements
and all tender offer documentation would need to proceed as expeditiously as
possible; and (ix) prior to commencement of the tender offer Brookdale would
need to obtain and pay for a signed financing commitment letter from a money
center financial institution or nationally recognized investment banking firm
sufficient in amount to pay the $185.0 million of tender offer consideration,
net in cash, to ILM 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 in cash 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 letter that additional due diligence materials were required
with respect to ILM II's liabilities due to the revised structure of Brookdale's
most recent proposal and, in direct contradiction to what had been stated
previously by Brookdale's advisors, Brookdale informed ILM II of its
unwillingness to assume at closing or otherwise to pay any termination fees,
litigation settlement costs or other transaction expenses that may be or become
payable to Capital in connection with the merger and the pending Feldman
litigation. Irrespective of the fact that this latest communication from
Brookdale differed from previous verbal statements of Brookdale's intention as
to the nature and net amount of the proposed tender offer, the ILM 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, Jr.,
Carl Schramm and Jeffry R. Dwyer, together with Greenberg Traurig and Cohen &
Steers, met with Brookdale and its advisors to discuss and negotiate Brookdale's
August 2, 1999 tender offer proposal. At the outset of the meeting Brookdale
informed the ILM II Board that its aggregate $185.0 million proposal (for both
ILM II and ILM) 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 and ILM which, based upon the Board's estimates approximated
at least an aggregate of $9.0 million (for both ILM II and ILM). After further
discussions with Brookdale and its advisors, the ILM II Board concluded that
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Brookdale's offer was not functionally equivalent to a "net" cash offer to
shareholders. Because, other than the assumption of up to an aggregate of $5.2
million of built-in gains tax liability (for both ILM II and ILM), Brookdale
stated that it was not assuming any liabilities (whether known, unknown, fixed
or contingent), ILM II's Board was unable to quantify, and could not quantify,
what Brookdale's net offer was. However, because the ILM II Board had estimated
transaction costs (i.e., legal, accounting, financial advisory, solicitation and
printing) of approximately an aggregate $4.0 million (for both ILM II and ILM)
and did not want to preclude ILM II's ability to pay dividends to shareholders
in the ordinary course (which was expressly negotiated by ILM II and provided
for in the merger agreement), the Board believed that Brookdale's offer was
lower in net value than the $172.0 million face amount of aggregate
consideration (for both ILM II and ILM).
ILM II informed Brookdale that only bona fide, good faith offers on terms
financially superior to the pending Capital merger and with a high likelihood of
closing would be negotiated and that in view of the recent course of dealing
with Brookdale and its advisors, including the inconsistent and indefinite
communications from Brookdale and its advisors, ILM II was suspect about
Brookdale's intentions to acquire ILM II. At Brookdale's request, ILM II
nevertheless agreed to provide Brookdale with the additional due diligence
materials that Brookdale stated it needed to prepare a definitive offer.
Brookdale acknowledged that it had received materials from ILM II approximately
three weeks earlier but had not yet reviewed them. ILM II then reminded
Brookdale and their advisors about their existing confidentiality and
"standstill" obligations and 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 a variety of transaction structures, the most
recent tender offer proposal outlined in Brookdale's August 2, 1999 letter did
not appear to be the functional equivalent of a net cash offer payable to the
shareholders of ILM II and ILM. ILM II reiterated its commitment to fully
investigate and negotiate only superior offers from bona fide parties to
maximize shareholder value and asked Brookdale to promptly submit its final and
definitive "best" offer to acquire the outstanding shares of ILM II's common
stock.
In early September 1999 Brookdale received the additional materials from
ILM II it indicated that it needed to complete its due diligence review of
ILM II. On September 10, 1999, by letter to ILM II, Brookdale indicated that its
August 2, 1999 tender offer proposal remained outstanding but that it would not
pay or assume any contractual or other liabilities of ILM II, other than the
assumption of up to $5.2 million of ILM II's and ILM's built-in gains tax
liabilities. Brookdale reiterated that its offer was subject to satisfactory
completion of continuing legal and financial due diligence in its sole
discretion, and the negotiation and execution of definitive agreements.
After discussions with Greenberg Traurig and Cohen & Steers the ILM II
Board concluded that because Brookdale's transaction was structurally uncertain
and did not represent a definitive offer, due to the fact that the course of
dealing between the parties did not provide the Board with a high degree of
confidence that a transaction with Brookdale could be expeditiously or
successfully consummated, and because of
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Brookdale's repeated failure to propose a bona fide transaction structure which
was superior to the Capital transaction, any further dealings and communications
with Brookdale would be entirely unproductive and unlikely to produce such a
transaction in the best interests of ILM 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.
Against the backdrop of a continued decline in the senior living industry
and a material deterioration of Capital's stock price, commencing in late
September and continuing through mid-October 1999, ILM II's and Capital's legal
representatives discussed and negotiated various proposed amendments to the
February 7, 1999 merger agreement. Greenberg Traurig informed Capital that ILM
II 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 proposed merger consideration payable in the merger changed from a
combination of cash and trust preferred securities to 100% cash (in the amount
of $74,982,000) at Capital's insistence, the parties agreed to delete various
representations, warranties and covenants of Capital relating to the ownership
of its properties and the conduct of its business.
Negotiations ensued with respect to Capital's financing of the merger and
the anticipated timing of Capital's receipt from Lehman Brothers of a currently
dated "highly confident" letter as to Lehman's willingness, intention and
ability to arrange the necessary cash financing for the merger, and the
anticipated timing of definitive financing commitments from Capital's investment
or commercial bankers. Capital declined to seek to obtain a financing commitment
letter at that time. ILM II requested that full financing commitments be
obtained upon entering into the revised merger agreement. After discussions
regarding the prompt need for and costs of such commitments the parties agreed
that Capital would obtain one or more financing commitments from nationally
recognized lenders at least five days prior to the date on which ILM II first
mailed its definitive proxy materials to shareholders. Capital did agree to
obtain a "bring down" of Lehman's "highly confident" letter previously delivered
to Capital in August 1999.
Capital then suggested certain proposed modifications to the tenor and
scope of the existing "break-up" fee provisions in the February 7, 1999 merger
agreement. Capital stated that it required payment of a termination fee if
ILM II's shareholders failed to approve the merger agreement. After several
variations of the foregoing concept were discussed among representatives of
Greenberg Traurig and Capital's legal advisors, ILM II insisted that such a
provision was not appropriate and that receipt of ILM II 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 a limited reverse "break-up" or termination
fee under certain circumstances.
Based on the foregoing negotiations, the parties reached an
agreement-in-principle to modifications of the February 7, 1999 merger
agreement. Greenberg Traurig prepared a
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draft amended and restated merger agreement which was delivered to Capital and
its advisors during the first week of October 1999.
On October 6, 1999 the full ILM II Board, consisting of Jeffry R. Dwyer,
J. William Sharman, Jr., and Carl Schramm, met with Greenberg Traurig and Cohen
& Steers to review the terms of the revised merger agreement. Cohen & Steers
provided the Board with an assessment of prevailing trends in the senior living
industry and Capital's market performance and capitalization, 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.
Greenberg Traurig then presented the ILM II Board with a detailed
description of the terms of the revised merger agreement, outlining the various
material differences between the current draft agreement and the February 7,
1999 merger agreement. After further deliberations and a general discussion with
Greenberg Traurig of the ILM II Board's fiduciary responsibilities, the Board
unanimously adopted the amended and restated merger agreement and the
transactions contemplated thereby, with such non-material modifications thereto
as might be suggested by the parties' advisors in the course of finalizing the
transaction documents. The ILM II Board authorized the prompt execution and
delivery of the merger agreement and the refiling with the SEC of all
appropriate proxy solicitation materials.
On October 15, 1999 a final order approving the stipulation of settlement
in the Feldman class action litigation was entered in the United States District
Court, Southern District of New York.
On October 18, 1999, Capital Senior Living Corporation received from Lehman
Brothers a letter indicating that as of that date and based upon current market
conditions and their present understanding of the proposed merger with ILM II,
Lehman Brothers was "highly confident" of its ability to arrange financing of
the aggregate cash consideration of the merger and the ILM merger.
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, ILM II entered into a revised merger agreement with
Capital and concurrently terminated the February 7, 1999 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.
As noted above, the October 19, 1999 Merger Agreement provided that not
later than the fifth business day next preceding the anticipated date of the
mailing of ILM II's Proxy Statement in definitive form to ILM II's shareholders
in connection with ILM II's solicitation of such holders' approval of the merger
agreement, Capital was required to pay for and receive one or more definitive
commitments from a money center financial
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institution or investment bank, each of national standing, sufficient in the
aggregate to pay at the effective time of the merger the aggregate merger
consideration.
On April 4, 2000, the ILM II and ILM Boards each received a letter from
Capital alleging that since October 19, 1999 there had been material changes in
both the capital and financial markets, in the operations of the ILM II and ILM
facilities, and a significant decline in Capital's stock price. Capital proposed
the following amendments to the merger agreements: the reduction of the
aggregate merger consideration (for ILM II and ILM) from $172.0 million to
$152.0 million in cash; increasing ILM II's and ILM's aggregate expense
reimbursement obligation to Capital from $4.0 to $7.0 million and broadening the
instances in which Capital's transaction expenses would be payable by ILM II and
ILM; ILM II's and ILM's agreement not to draw down or borrow any additional
money under the Fleet Loan Agreement prior to consummation of the mergers; and
ILM II's and ILM's agreement to sell their entire fee interest in the Crown
Pointe and Crown Villa properties if both the merger and the ILM merger are not
consummated. Although ILM II acknowledged that there had been material changes
in both the capital and financial markets and a very material deterioration of
Capital's stock price ($12.90 per share in February 2000 versus approximately
$3.00 per share on April 4, 2000), the operations of ILM II's and ILM's
facilities have remained virtually unchanged and the ILM II Board disagreed
entirely with Capital's assertions in Capital's April 4th correspondence.
On April 5, 2000, ILM II and ILM responded to Capital's April 4th
correspondence by indicating that they might consider modifying the merger
agreements to reflect transactions that would have an aggregate merger
consideration of $156.0 million if Capital agreed to the following amendments to
the merger agreements: an increased cash termination fee (in favor of ILM II and
ILM) of $4.68 million, plus reimbursement of up to $2.0 million of ILM II's and
ILM's out-of-pocket transactional expenses; no broadening of the circumstances
in which termination fees would be payable to Capital; and a reduction in the
amount of Capital's termination fee and transactional expense reimbursement to
$4.68 million and $2.0 million, respectively. ILM II and ILM restated their
commitment to consummate the transactions contemplated by the current merger
agreements, stated their disappointment as to the likelihood of that not
occurring and expressed their general willingness to entertain (without any
commitment to do so) in good faith, a bona-fide proposal to amend the merger
agreements at a price and upon other terms and conditions that are in the very
best interests of their shareholders.
On April 10, 2000, Capital delivered to ILM II and ILM a letter
counterproposing the following amendments to the merger agreements: the total
merger consideration under both of the ILM II and ILM merger agreements be
reduced to $155.0 million in cash; Capital's expense reimbursement of
$4.0 million in the merger agreements would be increased to $5.0 million; and
the Crown Pointe and Crown Villa option would be included in the revised merger
agreements. In addition, Capital expressed both its willingness to accept a
reduction of its $6.8 million termination fee to $6.16 million and its
willingness to increase the $1.7 million termination fee payable to ILM II and
ILM to $3.08 million.
By letter dated April 12, 2000, ILM II and ILM responded to Capital's April
10th correspondence by indicating that, subject to the receipt of fairness
opinions from their financial advisors and upon the advice of counsel, they
would be amenable to aggregate merger consideration of $155.0 million in cash if
Capital would agree to amend the merger
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agreements to provide for: the distribution of identical termination fees
payable to ILM II and ILM (on the one hand) and Capital (on the other hand)
ranging from 1% to 3% of the aggregate merger consideration; reciprocal expense
reimbursements of up to $1.0 million for out-of-pocket expenses; and the receipt
by Capital of a financing commitment in the amount of $155.0 million prior to
the execution and delivery of amended merger agreements.
On April 12, 2000, the full ILM II Board, consisting of Jeffry R. Dwyer,
J. William Sharman, Jr. and Carl Schramm, met with Greenberg Traurig and Cohen &
Steers to consider Capital's latest proposal to reduce the aggregate merger
consideration and ILM II's position with respect to such proposal. Cohen &
Steers provided the Board with the results of updated financial studies and
analyses which had been performed by Cohen & Steers, based upon ILM II's current
operations and financial projections (since October 19, 1999, the date of the
merger agreement and the original fairness opinion rendered to the ILM II Board
by Cohen & Steers). Cohen & Steers advised the Board regarding its updated
review of the financial data relating to ILM II's valuation, as well as Cohen &
Steers' analyses of the recent performance of stock prices of assisted living
industry participants. Cohen & Steers informed the Board that during the past 12
months, although the Standard & Poor's 500 Index of stock prices had risen
13.4%, the senior and assisted living industry stock price index had declined
66.3%, the health care REIT index had declined 35.9%, and the average stock
price of long term care companies had declined 51.1%. Furthermore, Cohen &
Steers observed that during the past 30 days the stocks of a subset peer group
of assisted living industry participants declined over 10%.
Against the backdrop of the recent dramatic decline in the senior living
industry and the continued material deterioration of Capital's common stock
price, the merger consideration was reduced to $155.0 million, allocable to
ILM II and ILM in the amounts of $67,571,000 and $87,429,000 respectively, and
ILM II successfully negotiated an increased break-up fee of $1,540,000 (compared
to the $850,000 break-up fee previously payable) in favor of ILM II, a lower
break-up fee of $1,858,200, (compared to the $2,964,400 break-up fee previously
payable) payable to Capital, Capital's receipt of a GMAC executed financing
commitment in an amount equal to substantially all of the merger consideration
prior to execution of the proposed amendment and Capital's withdrawal of its
request for purchase options regarding the Crown Point/Crown Villa properties.
On April 14, 2000, Capital obtained from GMAC its written commitment,
pursuant to which GMAC agreed, subject to certain conditions and termination
events, to provide Capital with the cash funds sufficient to pay substantially
all of the aggregate cash consideration payable in the merger. See "Estimated
Costs and Financing of the Merger;--Financing; Source and Amount of Funds."
On April 17, 2000 the full ILM II Board, consisting of Jeffry R. Dwyer, J.
William Sharman, Jr., and Carl Schramm, met with Greenberg Traurig and Cohen &
Steers to review the terms of the proposed amendments to the October 19, 1999
ILM II and ILM merger agreements which had been received from Capital's
attorneys and reviewed and rewritten by Greenberg Traurig. Cohen & Steers
provided the Board with an assessment of prevailing trends in the senior living
industry and Capital's recent market performance and capitalization, financial
condition and overall creditworthiness. Cohen & Steers delivered its oral
opinion to the ILM II Board that, based on the qualifications and assumptions
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expressed to the ILM II Board, as of April 17, 2000, the $13.04 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.
Greenberg Traurig then presented the ILM II Board with a detailed
description of the terms of the proposed amendments to the merger agreements,
outlining the various material differences between the proposed amendments and
the pending (October 19, 1999) merger agreements. After further deliberations
and a general discussion with Greenberg Traurig of the ILM II Board's fiduciary
responsibilities, the ILM II Board resolved unanimously to adopt the proposed
amendments to the merger agreement and to execute the same. The ILM II Board
next authorized the prompt execution and delivery of the refiling with the SEC
of all appropriately revised proxy and Schedule 13E-3 materials.
On April 18, 2000, Cohen & Steers confirmed in writing its oral opinion
delivered to the ILM II Board on April 17, 2000. Based upon Cohen & Steers'
opinion that as of April 18, 2000 the $13.04 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 the other factors described elsewhere in this proxy statement
under "Recommendation of the ILM II Board," ILM II entered into the amendment
with Capital and thereafter issued a press release announcing the execution of
the amendment to the restated merger agreement.
On April 24, 2000 ILM II 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
has unanimously adopted the merger agreement and recommends that you vote "FOR"
approval of the merger agreement. In determining to adopt the merger agreement,
none of ILM II's directors abstained from voting or voted against adoption.
In resolving to adopt and recommend to ILM II's shareholders approval of
the merger agreement, the ILM II Board considered a number of factors, including
the following which sets forth all of the material factors considered:
o the Board's belief that because the equity interests in ILM II, a
finite-life entity, are fixed, short-term investments, any proposed
strategic financial transaction should provide ILM II shareholders
with maximum liquidity;
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, and the lease of ILM II's senior living
communities to Capital. The Board was not convinced of the viability
of the alternatives because no one alternative guaranteed the
liquidity of ILM II's common stock;
o the trend of continued consolidation in the senior living industry
and the likelihood that ILM II would not have the financial or
structural ability to be an acquiring entity in a business
combination transaction;
o ILM II's financial condition, cash flows and results of operations;
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o the higher likelihood of the merger with Capital being consummated in
relation to other potential transactions because of Capital's
historical commercial relationship with ILM II and its extensive
familiarity with ILM II's day-to-day operations, and the lack of due
diligence "outs" in the merger agreement;
o ILM II's finite-life status and the Board's belief that a present
liquidation was not likely to capture for ILM II's shareholders
maximum value for their investment;
o ILM II's strengths and weaknesses as an independent public company,
which included ILM II's reputation, market share and financial
resources; ILM II's lack of personnel base and liquidity, and
inability to directly operate an assisted living business due to its
statutory REIT status; and ILM II's inability to expand operations on
a relative debt-free basis because of its statutory obligation as a
REIT to distribute each year 95% of its income to its shareholders;
o the material decline in the market price of Capital's common stock
since February 7, 1999 and the fact that the original merger
agreement and transactions proposed by Capital provided for the
issuance of fixed income trust preferred securities without
adjustment provisions, "collars" or "caps". This factor was a primary
reason for amending the February 7, 1999 and October 19, 1999 merger
agreements to provide for $13.04 of all-cash consideration;
o the fact that after the merger ILM II's current shareholders no
longer would receive any dividends relating to the earnings and
growth of ILM II unless they independently reinvest the cash
consideration to be received by them in the merger in shares of
Capital common stock;
o the simplicity of a unitary, all-cash transaction compared with
either a protracted auction process involving the serial liquidation
of the properties or a singular asset sale transaction without taking
into account a control premium or going-concern valuation for
ILM II's shareholders. The ILM II Board believed that a merger
transaction could be consummated more expeditiously and would
ultimately provide shareholders with greater value;
o the Board's belief that the going-concern value of ILM II obtainable
in the merger into Capital was greater than the present or reasonably
foreseeable liquidation or "break-up" value of the ILM II properties.
This belief was based upon the liquidation valuation analysis
performed by Cohen & Steers refered to in its fairness opinion, in
which capitalization rates ranging from 10.0% to 12.5% were applied
to resident level cash flows after deduction for all operating
expenses, including management fees. The analysis indicated a range
of liquidation values derived by applying such capitalization rates
with an average of $62,087,000 or $11.98 per share of ILM II's common
stock. Cohen & Steers did not make an independent valuation or
appraisal of the ILM II properties and was not furnished with any
such valuation or appraisal. The ILM II Board noted that the value of
Capital's offer was approximately $5.5 million in excess of such
indicated mean liquidation value and concluded
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that the going-concern value of ILM II obtainable in the merger
transaction into Capital exceeded ILM II's liquidation or "break-up"
value;
o the recent dramatic economic and market declines in the senior living
industry, the overall condition of the U.S. capital and financial
markets, and the substantial deterioration of Capital's common stock
price and inability to raise equity capital which led to amending the
merger agreement to provide for all-cash consideration;
o the belief that, after months of dealings and discussions, Brookdale
demonstrated its inability or lack of intention to structure,
negotiate and consummate a superior alternative transaction with ILM
II that was in the best interests of ILM II's shareholders;
o Cohen & Steers' opinion that the $13.04 per share in cash to be
received in the merger by ILM II's shareholders was fair to such
holders, from a financial point of view, and the Board's adoption of
the conclusions set forth in such opinion;
o the lack of any firm competing or alternative offers from bona fide
purchasers, irrespective of the fact that ILM II had, since February
1999, publicly disclosed its intention to consummate a sale or
change-in-control transaction and that from approximately February
1999 through September 1999 ILM II pursued various acquisition
proposals from Brookdale which ultimately did not lead to any
definitive superior alternative offer;
o ILM II's requirement to pay a reduced (in comparison to the
$2,964,400 fee that was payable pursuant to the merger agreement
prior to the current amendment) termination fee of $1,858,200 in the
event a superior offer is accepted by ILM II and the merger agreement
is terminated which, given the amount of the fee and the scope of the
circumstances under which the fee would become payable, was not
commercially unreasonable in the ILM II Board's view or likely to
deter a bona fide, superior competing bid for ILM II;
o the fact that the all-cash merger with Capital is 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 the merger agreement, including the closing conditions,
the termination fees and reimbursement of expenses payable to Capital
under certain circumstances, the absence of indemmification
provisions and lack of survival of most representations and
warranties, and the restrictions imposed on the conduct of ILM II's
business and operations during the period prior to closing--all of
which were extensively negotiated and deemed commercially reasonable
by the ILM II Board;
o the agreement of ILM II not to solicit alternative transactions with
third parties and the broad "fiduciary out" which enables ILM II to
terminate the merger agreement and pursue unsolicited superior
transactions with parties other than
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Capital; subject to the payment to Capital of termination fees and
expenses under certain circumstances;
o the actual and potential conflicts of interest of ILM II's officers
and directors with respect to the merger in relation to the interests
of ILM II's shareholders--which potential conflicts the ILM II Board
viewed as immaterial in relation to the benefits to be received by
ILM II's shareholders in the merger;
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 remuneration or other pecuniary benefits upon a
change-in-control of ILM II; accordingly, the ILM II directors did
not (and do not) have any direct financial interest in the outcome of
the merger;
o the risks of the merger not being consummated--which the ILM II Board
did not consider unreasonable in relation to similar transactions
negotiated at arms'-length;
o the fact that the property management agreement provides Capital with
a limited right of first and last offer on sales of the ILM II
properties, and that such right of first and last offer could have
the effect of deterring prospective purchasers from bidding for
ILM II's assets but did not apply to merger transactions or stock
transactions;
o the fact that Capital has obtained the written financing commitment
from GMAC to provide Capital with substantially all of the necessary
merger financing at closing. This provided the ILM II Board an
additional level of comfort that financing could be obtained at or
before closing assuming the U.S. financial markets or values in the
senior living industry did not substantially decline;
o the amount and scope of the termination fee payable under the merger
agreement to Capital under certain circumstances which the Board did
not consider unusual in relation to similar and customary
transactions negotiated at arms'-length;
o the fact that the merger must be approved by the holders of at least
66- 2/3% of the outstanding ILM II common stock which might require a
lengthy shareholder proxy solicitation period;
o the lack of burdensome regulatory consents and approvals in
connection with the merger which the ILM II Board believed enhanced
the likelihood that the merger could be completed in a reasonable
time frame;
o the fact that after the merger Capital will assume and become legally
responsible for all of ILM II's known and unknown liabilities, which
made a statutory merger the optimum transaction structure compared to
an asset transaction where assumed liabilities and purchased assets
typically are apportioned by the parties by contract pursuant to
extensive due diligence and negotiation; and
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o the fact that consummation of the ILM merger is not a condition to
consummation of the merger or vice versa--so that the closing of one
transaction would not be delayed for any reason relating to the
status of the other transaction.
In view of the variety of factors considered in connection with its
evaluation and deliberations with respect to the merger, the ILM 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, each share of ILM II common stock will be canceled and
ILM II's separate corporate existence will be terminated upon the payment to you
of $13.04 in cash (less applicable stock transfer and withholding taxes). The
purpose of the merger is to sell to Capital 100% of the ownership interests in
and, therefore, 100% control of, ILM II and its businesses and properties. The
merger has been structured as an all-cash transaction because of the simplicity
of this structure, the absence of market risk otherwise associated with the
receipt of securities or other property (particularly in light of the declining
values in the senior living industry), and the flexibility afforded ILM II's
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 a single step,
rather than a front-end purchase of a controlling interest with a second-step
squeeze-out merger. The Board believes that a unitary merger transaction
minimized the risk that the transaction would not be consummated, reduced
overall transaction costs and increased Capital's ability to pay a higher amount
of merger consideration to ILM 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 an 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 Capital would not derive certain tax benefits
which would have resulted in a reduction of the merger consideration Capital
could pay to ILM II's shareholders.
The merger is being entered into by ILM II at this time primarily because
(i) ILM II is a finite-life entity and, as such, its corporate existence is not
intended to continue for the long-term; (ii) the uncertainty of future
appreciation of ILM II's portfolio in the rapidly declining senior living
industry; (iii) the opportunity for ILM II to obtain for its shareholders a sale
price per share based on the going-concern valuation of the company rather than
the liquidation (or break-up) value of the portfolio; (iv) of the lack of any
bona
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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 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 reasonably high
likelihood of completion.
Additionally, the ILM II Board is recommending approval of the merger
because it believes, based upon its adoption of the conclusions set forth in
Cohen & Steers' fairness opinion, that the merger consideration to ILM II's
shareholders is fair from a financial point of view.
DETERMINATION OF MERGER CONSIDERATION
The consideration of $13.04 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 and, under certain
circumstances described elsewhere in this proxy statement, such per share amount
could be reduced by stock transfer and withholding taxes applicable to certain
holders of ILM II's common stock.
The aggregate consideration offered by Capital for ILM II and ILM is
$155.0 million, which amount was allocated to ILM II and ILM based upon their
relative net operating incomes. Applying this agreed upon method of allocation,
of the $155.0 million, $67,571,000 was allocated to ILM II and $87,429,000 was
allocated to ILM.
The merger consideration in the ILM II merger was calculated by dividing
the total merger consideration of $67,571,000 allocated to ILM II, by the
5,181,236 shares of ILM II common stock outstanding at the time of the amended
merger agreement on April 18, 2000. This resulted in an approximate dollar
amount of $13.04 per share. The merger consideration of $67,571,000 exceeds the
book value of ILM II's assets by approximately $39.0 million as of February 29,
2000.
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 April 17, 2000, at a meeting of the board of directors of ILM II (at
which each of J. William Sharman, Jr., Jeffry R. Dwyer and Carl J. Schramm were
present), Cohen & Steers Capital Advisors, LLC delivered to the ILM II Board its
oral opinion, subsequently confirmed in writing on April 18, 2000, to the effect
that, as of the dates of such opinions, the $13.04 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
confirmed such opinion in writing. 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. The principal assumptions made, valuation techniques
employed and analyses performed by Cohen & Steers are described in the
second full paragraph on page 58 through the third full paragraph on page
59, and in the last paragraph on page 65 and the first paragraph on page
66; the principal matters considered by Cohen & Steers are described in
the fourth full paragraph on page 59 and the significant limitations on
the scope of review by Cohen & Steers are described in the last full
paragraph on page 60 through the first full paragraph on page 61.
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 February 29, 2000 of ILM II and the draft financial statements for
the three months ended February 29, 2000 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);
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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 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 February 29, 2000:
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 merger agreement and assumed that the draft
of the merger agreement which Cohen & Steers reviewed would conform
in all material respects to the merger agreement as executed and
delivered (such draft did in fact conform in all material respects to
the definitive merger agreement as executed and delivered by ILM II,
Capital and Capital Acquisition on April 18, 2000);
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, 2000 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;
o the application of the multiples reflected in recently reported
assisted living public mergers and acquisitions for businesses
which Cohen &
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Steers deemed reasonably comparable to ILM 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; and
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.
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;
o The financial and operational projections made by ILM II are
quantified as follows:
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------------------------
(US$ IN THOUSANDS) 1999 ACTUAL 2000 2001 2002
- ----------------------------------------------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues............................................. $16,024.8 $16,651.5 $17,338.9 $18,055.3
EBITDAR.............................................. 6,626.0 6,934.4 7,290.0 7,662.0
Margin............................................. 41.3% 41.6% 42.0% 42.4%
Net Income........................................... 3,171.7 3,344.7 3,545.6 3,756.0
Margin............................................. 19.8% 20.1% 20.4% 20.8%
</TABLE>
o expressed no opinion with respect to such projected financial
statements.
Cohen & Steers' opinion was necessarily based upon financial, economic,
market and other conditions as they existed and that could be evaluated by Cohen
& Steers on the date of its opinion. Cohen & Steers disclaimed any undertaking
or obligation to advise any person of any change in any fact or matter affecting
its opinion which may come or be brought to its attention after the date of its
opinion unless specifically requested by ILM 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
$13.04 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.
Cohen & Steers and ILM II entered into a letter-form agreement dated
April 17, 2000 (the "Agreement"), pursuant to which Cohen & Steers was engaged
to render the fairness opinion to the ILM II Board. The Agreement incorporated
by reference the provisions of the October 6, 1999 Fairness Opinion Engagement
Agreement (the "Fairness Opinion Engagement Agreement") entered into between
Cohen & Steers and ILM II, which provided for Cohen & Steers to set forth in its
letter stating the fairness opinion the limitations on the reliance which may be
placed thereon by ILM II's shareholders, including, among other matters, that
the fairness opinion was provided at the request and for the information of the
ILM II Board in evaluating the merger consideration, that it did not constitute
a recommendation to the shareholders concerning whether or not to vote in favor
of the merger and that it did not confer rights or remedies upon the ILM II
shareholders. The Fairness Opinion Engagement Agreement further provided that
Cohen & Steers was not acting as an agent or fiduciary of and would have no
duties or liabilities to the ILM II shareholders in connection with its
engagement.
Accordingly, the second full paragraph on page 3 of Exhibit B states that
the fairness opinion was provided at the ILM II Board's request and for its use
in connection with evaluating the merger consideration, and for no other
purpose, etc.
By virtue of the foregoing provisions in the Fairness Opinion Engagement
Agreement and the inclusion of such disclaimers in Exhibit B, Cohen & Steers
believes that the ILM II shareholders cannot rely upon the fairness opinion to
support any claims against Cohen & Steers arising under applicable state law.
The availability of such defense would, however, be resolved by a court of
competent jurisdiction and the resolution of the question of the availability of
any such defense would have no effect on the rights and responsibilities of the
ILM II directors under applicable state law. Furthermore, the availability of
such a state law defense to Cohen & Steers would have no effect on the rights
and responsibilities of either Cohen & Steers or the ILM II directors under the
federal securities laws.
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
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capitalization, business focus, revenues, cash flow and resident capacity. These
four companies (the "ILM II Comparable Companies") consisted of:
o American Retirement Corporation;
o Brookdale Living Communities, Inc.;
o Capital Senior Living Corporation; and
o Sunrise Assisted Living, Inc.
Cohen & Steers calculated multiples of Adjusted Enterprise Value (defined
as market value of equity plus the sum of total debt and capitalized rent
payments (i.e., eight times rent expense), less cash and cash equivalents) to
resident capacity (defined as total owned and leased operating beds), to latest
quarter annualized ("LQA") revenues and LQA earnings before interest, taxes,
depreciation, amortization and rent expense ("EBITDAR"). Cohen & Steers also
calculated multiples of the market value of equity to LQA earnings per share
("EPS"), actual calendar year 1999 EPS, projected calendar year 2000 EPS and
projected calendar year 2001 EPS, based on information provided by a variety of
sources, including published consensus street analyst earnings estimates and
reports and information published by First Call (an on-line data service which
compiles estimates developed by research analysts).
The following table sets forth the implied mean values per share of ILM II
common stock based upon the foregoing analysis:
<TABLE>
<CAPTION>
IMPLIED DISCOUNT/ IMPLIED DISCOUNT/
COMPARABLE MEAN (PREMIUM) MEDIAN (PREMIUM)
MULTIPLES VALUES TO 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................................. $ 84,800 $ 91,500 $12.86 $ 0.18 $13.89 $ (0.85)
LQA Revenues...................................... 3.5x 3.7x $11.10 $ 1.94 $11.75 $ 1.29
LQA EBITDAR....................................... 10.9x 11.4x $12.62 $ 0.42 $13.21 $ (0.17)
<CAPTION>
MARKET VALUE OF
EQUITY MULTIPLES
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LQA EPS........................................... 13.9x 10.6x $ 6.97 $ 6.07 $ 5.32 $ 7.72
Actual 1999 EPS................................... 11.3x 13.0x $ 6.92 $ 6.12 $ 7.96 $ 5.08
Projected 2000 EPS................................ 11.6x 12.9x $ 7.49 $ 5.55 $ 8.33 $ 4.71
Projected 2001 EPS................................ 10.3x 10.2x $ 7.05 $ 5.99 $ 6.98 $ 6.06
</TABLE>
In arriving at its opinion, Cohen & Steers noted the following: $13.04 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 EPS, Actual
1999 EPS, Projected 2000 EPS and Projected 2001 EPS. The implied median values
per share based on Resident Capacity and the multiple of LQA EBITDAR exceed the
$13.04 per share, while the $13.04 exceeds the mean value per share based on
Resident Capacity and the multiple of LQA EBITDAR. The range of implied mean
equity values per ILM II share derived from this analysis ranged from a high of
$12.86 to a low of $6.92 with a mean of $9.29 and a median of $7.49 compared
with the $13.04 per share. The range of implied median equity values per ILM II
share derived from this calculation ranged from a high of $13.89 to a low of
$5.32 with a mean of $9.63 and median of $8.33 compared with the $13.04 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
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the $13.04 per share to be paid by Capital with the consideration involved in
such transactions. The six Comparable ILM II Transactions and their pertinent
dates were as follows:
o the acquisition of select assisted living assets of Manor Care, Inc.
by Alterra Healthcare Corporation (completed in July 1999);
o the acquisition by Lazard Freres Real Estate LLC of Atria
Communities, Inc. (completed in September 1999);
o the acquisition by Lazard Freres Real Estate LLC of Kapson Senior
Quarters Corp. (completed in April 1998);
o the acquisition by Lazard Freres Real Estate LLC of a controlling
stake in ARV Assisted Living, Inc. (completed in December 1997);
o The Whitehall Group's acquisition of Integrated Living Communities,
Inc. (completed in July 1997); and
o Host Marriott Corporation's acquisition of certain Forum Group
retirement assets from Marriott International, Inc. (completed in
June 1997).
In considering the preceding transactions, and taking into account the
start-up nature of the industry, Cohen & Steers determined that with the
exception of per bed values there is a significant lack of meaningful multiples
based on comparable transactions. To calculate operating per bed values, Cohen &
Steers calculated multiples of Adjusted Transaction Value (defined as equity
value of the transaction plus the sum of total assumed debt and capitalized rent
payments (i.e., eight times rent expense), less cash and cash equivalents) to
resident capacity (defined as total owned and leased operating beds). The mean
and median operating bed values were $92,500 and $73,600, respectively, implying
a value of $14.04 per share and $11.13 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 $13.04 per share of merger consideration. However, the $13.04 per
share 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 2000 through 2004 based on projections prepared by
management for the existing portfolio of assets. 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 2000 to 2004; and
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<PAGE>
-- the present value of the estimated terminal value of the business
at the end of 2004;
o and subtracting therefrom the current net debt outstanding of
ILM 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 2004 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, the derived mean and
median equity value for ILM II was approximately $11.33 and $11.31,
respectively. The $13.04 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 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 February 29, 2000 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 February 29, 2000 annualized; by
-- capitalization rates ranging from 10.0% to 12.5%
o and subtracting therefrom the current net debt outstanding of
ILM 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 II were $11.98. In arriving at its opinion, Cohen & Steers noted that
the $13.04 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.;
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<PAGE>
o LTC Properties, Inc.;
o National Health Investors, Inc.;
o Nationwide Health Properties, Inc.;
o National Health Realty, Inc.;
o Omega Health Investors, Inc.; and
o Universal Health Realty Income Trust.
Cohen & Steers calculated multiples of Enterprise Value (defined as market
value of equity plus total debt, less cash and cash equivalents) to LQA revenues
and LQA EBITDA. Cohen & Steers also calculated multiples of the market value of
equity to LQA funds from operations ("FFO").
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........................................ 7.4x 8.1x $ 7.70 $ 5.34 $ 8.45 $ 4.59
LQA EBITDAR......................................... 8.2x 8.5x $ 7.88 $ 5.16 $ 8.17 $ 4.87
<CAPTION>
MARKET VALUE OF
EQUITY MULTIPLES
- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LQA FFO............................................. 5.2x 5.4x $ 5.11 $ 7.93 $ 5.33 $ 7.71
</TABLE>
The range of implied mean equity values per ILM II share derived from this
analysis ranged from a high of $7.88 to a low of $5.11, with a mean of $6.90 and
a median of $7.70. The range of implied median equity values per ILM II share
derived from the analysis ranged from a high of $8.45 to a low of $5.33, with a
mean of $7.32 and a median of $8.17. In arriving at its opinion, Cohen & Steers
noted that the $13.04 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 $13.04 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 assumed the political, economic,
regulatory, monetary and U.S. capital market conditions affecting the assisted
living industry would remain generally stable.
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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
$825,000, of which $250,000 related to certain fairness opinions furnished by
Cohen & Steers to the ILM II Board on October 19, 1999 in connection with the
ILM II and ILM Amended and Restated Agreements and Plans of Merger dated
October 19, 1999, $300,000 related to calendar year 1999 advisory fees, $100,000
related to calendar year 2000 advisory fees, $50,000 related to retainer fees,
and $125,000 related to Cohen & Steers' opinion rendered on April 18, 2000 and a
similar opinion addressed to the Board of Directors of ILM. ILM II and ILM have
agreed to pay Cohen & Steers an additional $900,000 fee if the merger and the
ILM merger are completed. ILM II and ILM have also agreed to reimburse Cohen &
Steers for certain expenses and liabilities in connection with its engagement.
The fee for Cohen & Steers' opinion was not conditioned upon the conclusion
reached by Cohen & Steers as to the fairness of the merger consideration, nor
upon the ultimate consummation of the merger or the ILM 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
analyses.
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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 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 or its consolidated assets, including any
merger, reorganization, share exchange, business combination, recapitalization,
liquidation or sale of assets. However, Capital intends, from time to time, to
evaluate and review its plans and strategy for ILM II's properties, business and
assets.
PRESENT INTENTIONS AND RECOMMENDATIONS OF CERTAIN PERSONS WITH REGARD TO THE
MERGER
Other than Lawrence A. Cohen, the Chief Executive Officer of Capital, no
executive officer or director of ILM II or Capital owns shares of ILM II's
common stock. Mr. Cohen has indicated to ILM II that he intends to vote his
shares in favor of the merger. 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,
corporate structure, dividend policy and capitalization, and make such changes
as are deemed appropriate, and continue to seek to identify strategic financial
alternatives to maximize shareholder value. In addition, if the merger is not
completed but the ILM merger is completed, ILM II will be obligated to sell its
interest in the Santa Barbara facility to Capital at an amount equal to the fair
market value of the property as determined by two appraisers, one of whom would
be chosen by ILM II and the other of whom would be chosen by Capital. If the two
appraisers cannot agree on a fair market value and the difference between the
two appraisals is within 10% of the higher appraisal, then the fair market value
will be deemed to be an average of the two appraisals. If the difference between
the two appraisals is greater than 10% of the higher appraisal, then the two
appraisers would select a third appraiser whose determination of fair market
value would be final and binding.
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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 members of a newly created advisory board
of Capital after the merger, for which they will receive customary 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 the 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 will survive and continue
for a period of not less than the statutes of limitations applicable to such
matters, and Capital will comply fully with its obligations thereunder.
In addition, pursuant to the merger agreement, Capital will maintain in
full force and effect, for a seven-year period of time commencing on the
effective time of the merger, officers' and directors' liability insurance and
fiduciary liability insurance on terms no less advantageous to the indemnified
parties than insurance existing prior to the effective time of the merger.
Capital is also required to indemnify and hold harmless, and will advance
expenses, to the fullest extent permitted under applicable law, to 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.
In consideration for their services during the course of calendar year
1999, Jeffry R. Dwyer received $20,500, Carl J. Schramm received $19,500 and J.
William Sharman, Jr. received $35,500 for participating in special ILM II Board
meetings. In addition, each current ILM II Board member, in consideration for
his service on Capital's advisory board, will receive a $7,000 annual retainer
fee and a $200 fee for each advisory board meeting attended as well as the right
to participate in the same stock options and similar programs offered by Capital
to its directors.
The ILM II Board and the ILM Board are comprised of the same directors and
each of the ILM II Board, the Lease II Board and the Lease I 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, other than Lawrence Cohen, the vice
chairman and chief executive officer of Capital who presently owns approximately
600 shares of ILM II's common stock, neither the officers or directors of
ILM II nor the officers or
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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, based upon ILM II's review of
reports filed with the SEC pursuant to the Securities Exchange Act of 1934,
ILM II is not aware of any ILM II shareholder, other than Redwood Investors,
LLC, 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."
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 into Capital Acquisition, and Capital
Acquisition will be the surviving entity in the merger. At the effective time of
the merger, the Certificate of Formation of Capital Acquisition in effect
immediately prior to such time will become the Certificate of Formation of the
surviving entity, and the Operating Agreement of Capital Acquisition in effect
immediately prior to such time will become the Operating Agreement of the
surviving entity, in each case until such documents are amended or restated.
(Sections 1.1, 1.3 and 1.4 of the merger agreement).
Effective Time
The merger agreement provides that, the merger will become effective
following the filing of the Articles of Merger and Certificate of Merger with
the Secretary of State of the State of Delaware and with the Secretary of the
Commonwealth of Virginia, respectively. (Section 1.1 of the merger agreement).
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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 $13.04 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 $13.04 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 $13.04
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 $13.04 per share in cash. (Sections 2.2 and
2.3 of the merger agreement).
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;
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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;
o the conduct of the businesses of Capital and Capital Acquisition are not
conducted in violation of any applicable laws where it is foreseeable
that such violation may prevent or materially impair Capital's completion
of the merger;
o the absence of any pending or threatened lawsuit or proceeding which, if
determined adversely, would prevent or materially impair Capital's
completion of the merger;
o Capital's 100% ownership of Capital Acquisition;
o the absence of any untrue statements of a material fact or any omission
of a material fact relating to the representations and warranties made by
Capital and Capital Acquisition in the merger agreement; and
o other representations and warranties relating to due authorization of the
merger and the merger agreement by Capital and Capital Acquisition, and
the validity and enforceability thereof.
(Section 3.2 of the merger agreement).
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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 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).
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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 waiveable under applicable law
as set forth below), at or prior to the effective time of the merger, of the
following conditions:
o approval of the merger agreement by the holders of at least 66-2/3% of
the outstanding ILM 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 (which is waiveable by Capital); and
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 waiveable under applicable law), at or prior
to the effective time of the merger, of the following conditions:
o the accuracy of Capital's representations and warranties (which is
waiveable by ILM II);
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 (which is waiveable by ILM II); and
o performance by Capital and Capital Acquisition of their obligations under
the merger agreement (which is waiveable by ILM II).
(Section 6.3 of the merger agreement).
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Additionally, the obligation of Capital and Capital Acquisition to complete
the merger is subject to satisfaction or waiver (if waiveable 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 (which is
waiveable by Capital);
o the performance by ILM II of its obligations under the merger agreement
(which is waiveable by Capital);
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 (which is waiveable by Capital); 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 (which is waiveable
by Capital).
(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.
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).
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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;
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.
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Termination Fees; Reimbursement of Expenses
ILM II must pay Capital a termination fee of $1,858,200, 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
superior 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 $1,858,200
termination fee, together with Capital's out of pocket expenses incurred in
connection with the merger, but not to exceed $2.0 million.
Provided all of Capital's closing conditions have either been satisfied or
waived, ILM 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, for any reason, fails to
consummate the merger and the transactions contemplated by the merger agreement,
Capital is obligated to pay ILM II a termination fee of $1,540,000.
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.
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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 $87,429,000 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 similar to the merger
of ILM II into 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 Capital (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.
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
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only and is not intended to be a complete description of all of the tax
consequences of the merger.
BECAUSE DETERMINING THE TAX CONSEQUENCES OF THE MERGER MAY DEPEND UPON YOUR
PERSONAL CIRCUMSTANCES, YOU ARE URGED TO CONSULT WITH YOUR TAX ADVISOR TO
UNDERSTAND HOW THE MERGER MAY AFFECT YOU.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
Tax Characterization of the Merger to ILM 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 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
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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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ESTIMATED 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)........................................................................... $ 561,000
Financial Advisory Fees and Expenses and Fairness Opinion -- Lehman Brothers (Capital
Expense)....................................................................................... 500,000
Financing Commitment Fees and Expenses (Capital Expense).......................................... 923,632
Proxy Solicitation Fees and Expenses -- D.F. King & Co. Inc. (shared equally by ILM II and
Capital)....................................................................................... 10,000
Legal Fees and Expenses (ILM II Expense).......................................................... 1,000,000
Legal Fees and Expenses (Capital Expense)......................................................... 325,000
Accounting Fees and Expenses (ILM II Expense)..................................................... 135,000
Accounting Fees and Expenses (Capital Expense).................................................... 50,000
Financial Printer Fees and Expenses (shared equally by ILM II and Capital)........................ 325,000
SEC Filing Fees................................................................................... 15,808
Miscellaneous..................................................................................... 20,000
----------
Total Fees and Expenses............................................................... $3,865,440
==========
</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. All other costs and expenses will be borne as indicated in the
table above.
Approximately $68.0 million will be required to pay the aggregate cash to
be received by ILM II's shareholders in the merger.
FINANCING; SOURCE AND AMOUNT OF FUNDS
Capital's source of funds to pay substantially all of the merger
consideration is intended to be provided by mortgage loans collateralized by
ILM II's and ILM's properties and certain of Capital's properties. Capital has
received the written commitment of GMAC Commercial Mortgage Corporation, dated
April 14, 2000 to provide Capital with loans aggregating $152,726,447 to finance
Capital's acquisition of ILM II and ILM pursuant to the merger and the ILM
merger. The remaining funds necessary to complete the merger and the ILM merger
(or $2,273,553) are intended to be derived from available cash of Capital, which
Capital has segregated in accounts and reserved on its balance sheet in
accordance with generally accepted accounting principles. The GMAC commitment
expires on July 31, 2000. If the GMAC commitment expires unfunded or is
terminated, Capital remains contractually obligated under the merger agreement
until September 30, 2000 to obtain the funds necessary to complete the merger.
The GMAC commitment provides for loans of $152,726,447 to be made to
Capital. Following completion of the merger (and the merger with ILM) Capital
will own all of the properties currently owned by ILM II and ILM. The loans will
be secured with a first lien and security interest on the properties, on the
leases and rents of the properties and on accounts receivable from the
properties as well as in the licenses, permits and contracts relating to the
properties. The loans also will be secured by an assignment of the management
agreement for each property with an affiliate of Capital. The loans will be
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non-recourse subject to customary exceptions and will be guaranteed by Capital.
The loans will be cross-collateralized among the various properties owned by
each entity.
The GMAC commitment provides that each of the loans will have a variable
interest rate calculated at the one month London Inter-Bank Offered Rate (LIBOR)
plus 2.4% (for example, the interest rate would be 8.82625% based on the one
month LIBOR rate of 6.42625% announced on May 4, 2000). The interest rate will
be determined and adjusted monthly. Capital will be required to purchase
interest rate protection (or "hedge") agreements to protect against significant
interest rate increases. The loans will have a five-year term, with monthly
payments based on a 25-year amortization schedule which will result in a balloon
payment at the maturity of the loans of approximately $143.0 million depending
on prevailing interest rates.
The GMAC commitment is subject to customary conditions, the material
conditions of which include the negotiation, execution and delivery of
definitive loan documents and collateral security instruments and mortgages.
Funding of the GMAC commitment is subject to the following additional material
conditions: receipt by GMAC of written third party appraisal reports which
confirm oral appraised values already received by GMAC, review by GMAC of
environmental reports and engineering reports with respect to the ILM II
properties and certain Capital properties comprising the mortgage collateral
pool, achievement and maintenance of loan-to-value ratios and debt service
coverage ratios of 1:15 to 1:0 or 1:10 to 1:0 depending on the mortgaged
properties and to there being no material adverse change occurring in the
financial condition of Capital.
Capital expects that the loan documents with GMAC will contain
representations, events of default, affirmative and negative covenants,
maintenance of financial ratios, financial reporting requirements and other
covenants customary for credit facilities of similar size and type.
Capital expects to repay the GMAC debt incurred in connection with the
merger from cash flow from its operations and/or proceeds from later debt or
equity financings. There can be no assurance that Capital will be able to
refinance the GMAC loan on commercially reasonable terms, if at all. Although,
as indicated above, Capital would remain contractually obligated to ILM II to
obtain all necessary funds to complete the merger, no alternative financing
arrangements or plans exist if the GMAC commitment expires unfunded or is
otherwise terminated or withdrawn.
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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 six- and three-month periods ended
February 29, 2000 was $719,000 and $368,000, respectively, as compared to
$642,000 and $332,000 for the six- and three month periods ended February 28,
1999, respectively. Variable rental income related to fiscal years 1999 and 1998
was $1,261,000 and $984,000.
LIQUIDITY AND CAPITAL RESOURCES
At February 29, 2000, ILM II had cash and cash equivalents of $965,000
compared to $1,193,000 at August 31, 1999. Such amounts will be used for the
working capital requirements of ILM II, along with the possible investment in
the properties owned by
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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 ILM II'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 $13.04 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, 1999. 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 92% and 95% for the three-month periods ended February 29, 2000 and
February 28, 1999, respectively. Occupancy levels for fiscal year 1999 and 1998
averaged 94% and 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 1999 and 1998 in the amounts
of $1,261,000 and $984,000, 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 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.
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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 will become liable for the obligations related to 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.
Once the pre-construction design process is complete and projected
expansion construction costs are determined, ILM II will carefully evaluate the
costs and benefits before proceeding with the construction of any of these
expansions. Depending on the extent of any expansions deemed appropriate, such
plans would result in the need for substantial capital.
ILM II secured a construction loan facility with a major bank that provides
ILM II with up to $8.8 million to fund the capital costs of the potential
expansion programs. The construction loan facility is secured by a first
mortgage of the senior living communities and collateral assignment of ILM II's
leases of such senior living communities. The loan
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expires December 31, 2000, with possible extensions through September 29, 2003.
Principal is due at expiration. Interest is payable at a rate equal to LIBOR
plus 1.10% or Prime plus 0.5%. Loan origination costs in connection with this
loan facility are being amortized over the life of the loan.
On June 7, 1999, ILM II borrowed approximately $1.2 million under the
construction loan facility to fund the pre-construction capital costs incurred
through April 1999, of the potential expansions of the Senior Housing
Facilities. As of February 29, 2000 and August 31, 1999, approximately
$7.6 million of the construction loan facility is unused and available.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of ILM 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.
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. ILM II has contacted its only material external agent (Capital) and
has received assurances from Capital that it is Year 2000 compliant.
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
completed all necessary phases of its Year 2000 program. However, disruptions in
the economy generally resulting from Year 2000 issues could 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 facility 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.
RESULTS OF OPERATIONS FOR ILM II
Six Months Ended February 29, 2000 versus Six Months Ended February 28, 1999
Net income increased $280,000 or 27.1% to $1,313,000 for the six-month
period ended February 29, 2000 compared to $1,033,000 for the six-month period
ended February 28, 1999. Total revenue was $2,746,000 representing an increase
of $71,000, or 2.7%, compared to the same period of the prior year. Rental and
other income increased $77,000
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or 2.9% to $2,721,000 for the six-month period ended February 29, 2000, compared
to $2,644,000 for the six-month period ended February 28, 1999 due to increased
rental income earned pursuant to the terms of the Facilities Lease Agreement.
Total expenses decreased $209,000, or 12.7% to $1,433,000 for the six-month
period ended February 29, 2000, compared to $1,642,000 for the six-month period
ended February 28, 1999. This overall decrease in expenses is primarily
attributable to a $177,000 or 23.2% decrease in professional fees due to a
decrease in the use of financial and advisory professionals who were engaged to
assist ILM II with the agreement and plan of merger with Capital (as discussed
in Note 1 to the financial statements) as well as decreased legal fees
associated with the construction loan facility. The $55,000 or 31.1% decrease in
general and administrative expenses to $122,000 for the six-month period ended
February 29, 2000, from $177,000 for the same period last year, is due to a
variety of factors including decreased Director and Officer insurance costs of
$12,000 or 17.3%; decreased printing costs of $25,000 or 78.9% for the annual
and quarterly reports which were completed timely, distributing incurred costs
more evenly when compared to the previous year and a $23,000 or 58.8% decrease
in state tax payments; and minor increases and decreases in other general and
administrative costs.
Three Months Ended February 29, 2000 versus the Three Months Ended February
28, 1999
Net income increased $351,000 or 109.3% to $672,000 for the second quarter
ended February 29, 2000 compared to $321,000 for the second quarter ended
February 28, 1999. Total revenue was $1,380,000 representing an increase of
$34,000 or 2.5%, compared to the same period of the prior year. Rental and other
income increased $36,000 or 2.7%, to $1,369,000 for the quarter ended February
29, 2000, compared to $1,333,000 for the quarter ended February 28, 1999, due to
increased rental income earned pursuant to the terms of the Facilities Lease
Agreeement. Total expenses decreased $317,000, or 30.9%, to $708,000 for the
three-month period ended February 29, 2000, compared to $1,025,000 for the
three-month period ended February 28, 1999. This decrease in expenses is
primarily attributable to a $311,000 or 52.7% decrease in professional fees due
to a decrease in the use of financial and advisory professionals who were
engaged to assist ILM II with the agreement and plan of merger with Capital (as
discussed in Note 1 to the financial statements) as well as decreased legal fees
associated with the construction loan facility. The $8,000 or 10.5% decrease in
general and administrative expenses to $68,000 for the quarter ended February
29, 2000, compared to $76,000 for the same period last year, is due to a variety
of factors including decreased printing costs of $15,000 or 71.5% for the annual
and quarterly reports which were completed timely, distributing incurred costs
more evenly when compared to the previous year, and a $13,000 or 85% decrease in
state tax payments which were offset by minor increases and decreases in other
general and administrative costs.
1999 Compared to 1998
Net income decreased $1,210,000, or 41.6%, to $1,697,000 for the fiscal
year ended August 31, 1999, compared to $2,907,000 for the fiscal year ended
August 31, 1998. Total revenue was $5,321,000 for fiscal year 1999, representing
an increase in revenue of
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$256,000, or 5.1%, compared to total revenue of $5,065,000 for fiscal year 1998.
Rental and other income increased $277,000, or 5.6%, to $5,265,000 from
$4,988,000 last year, due to increased rental income earned pursuant to the
terms of the Facilities Lease Agreement. Interest income decreased $21,000, or
27.3%, to $56,000 for the year ended August 31, 1999, compared to $77,000 for
the same period last year, primarily due to a decrease in cash and cash
equivalents throughout most of fiscal year 1999. Total expenses increased
$1,466,000, or 67.9%, to $3,624,000 for the fiscal year ended August 31, 1999,
compared to $2,158,000 for the fiscal year ended August 31, 1998. This increase
in expenses is primarily attributable to increased professional fees of
$1,238,000, or 229.3%, 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 1 to the financial statements,
and increased legal fees associated with finalizing the construction loan
facility. General and administrative expenses increased $122,000 to $344,000, or
55.0%, for the fiscal year ended August 31, 1999, compared to $222,000 for the
same period last year, due to a variety of factors including increased Director
and Officer insurance costs of $87,000; increased printing costs of $58,000
primarily due to the potential merger transaction with Capital offset by a
$58,000 decrease in postage and mailing costs and minor increases and decreases
in other general and administrative costs. Directors' compensation decreased
$28,000, or 25.2%, 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 fees.
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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 10.
PROPERTIES
ILM II's investments as of February 29, 2000 are described below:
<TABLE>
<CAPTION>
YEAR
PROPERTY NAME FACILITY DATE OF RENTABLE RESIDENT
AND LOCATION TYPE OF PROPERTY BUILT INVESTMENT UNITS CAPACITIES
- ------------------------------ ----------------- -------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
The Palms Senior Living 1988 7/18/90 205 255
Fort Myers, FL Community
Crown Villa Senior Living 1992 4/25/91 73 73
Omaha, NE Community
Overland Park Place Senior Living 1984 4/9/92 141 153
Overland Park, KS Community
Rio Las Palmas Senior Living 1988 5/14/92 164 190
Stockton, CA Community
The Villa at Riverwood Senior Living 1986 5/29/92 120 140
St. Louis County, MO Community
Villa Santa Barbara (1) Senior Living 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.
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The assisted living industry is a hybrid of both the commercial real estate
industry and the non-regulated health care services industry. Information
regarding rentable units and resident capacities have been included in this
proxy statement and ILM II's periodic reports filed with the SEC because ILM II
earns revenue based upon a flat fee per unit plus an additional fee per
resident. As resident occupancy in a unit increases, ILM II's expenses increase
as well. Accordingly, in considering the income potential of ILM II, knowledge
of both the number of rentable units and resident capacities of each senior
living community has been deemed relevant.
The above referenced properties have been leased to Lease 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.
Average occupancy levels, calculated as the percentage arrived at by
dividing actual revenues received from residents for a particular period of time
by the maximum potential revenue to be generated by a facility if the facility
was fully occupied for that same period of time, for each fiscal quarter during
1999 and the first fiscal quarter during 2000 along with an average are, for
each property presented below:
<TABLE>
<CAPTION>
AVERAGE QUARTERLY OCCUPANCY
-----------------------------------------------------------
11/30/98 2/28/99 5/31/99 8/31/99 11/30/99 2/29/00 AVERAGE
-------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
The Palms............................... 94% 93% 91% 89% 89% 92% 91%
Crown Villa............................. 96% 97% 93% 94% 95% 90% 94%
Overland Park Place..................... 98% 97% 95% 95% 94% 93% 95%
Rio Las Palmas.......................... 92% 92% 91% 92% 94% 92% 92%
The Villa at Riverwood.................. 97% 93% 86% 87% 88% 88% 90%
Villa Santa Barbara..................... 97% 99% 97% 97% 98% 98% 98%
</TABLE>
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
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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.
Defendants removed the action to the United States District Court for the
Southern District of New York. 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 that were derivative in nature
were filed improperly. In addition, the Court dismissed stand alone claims for
punitive damages, but allowed plaintiffs to amend their complaint to assert
claims alleging that the defendants injured shareholders. On January 22, 1999,
the Feldman plaintiffs filed an amended complaint, again as a purported class
action, and added claims under Sections 10(b) and 20(a) of the Exchange Act and
Rule 10b-5 promulgated thereunder. Even before ILM 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 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.
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On June 21, 1999, ILM II, ILM and each of their directors answered the
second amended complaint and denied any and all liability to plaintiffs or the
putative class, and moved for reconsideration of the portion of the Court's
June 7, 1999 order denying their motion to dismiss. In response to discovery
requests, ILM II, ILM and other defendants and non-party witnesses produced
documents to the plaintiffs and the depositions of both current and former
directors as well as others were taken. As of July 1, 1999, all discovery had
been completed in this action.
On July 2, 1999, the parties to this action came to an
agreement-in-principle to settle the action. On August 3, 1999, the parties
entered into a Stipulation of Settlement (the "Stipulation") and on August 11,
1999, the Court signed an order preliminarily approving the Stipulation and
providing for notice of the Stipulation to the proposed settlement class.
On September 30, 1999, following notice to the proposed settlement class,
the Court conducted a hearing and on October 4, 1999 issued an Order certifying
a settlement class and approving the proposed settlement as fair, reasonable and
adequate, subject to the condition that certain modifications be made to the
Stipulation and any related documents filed with the Court on or before
October 15, 1999. In its October 4th Order, the Court also denied the
application by plaintiffs' counsel for payment of attorneys' fees and expenses,
without prejudice to renewal within 14 days upon reapplication therefor.
On October 15, 1999, the parties entered into a revised Stipulation of
Settlement and filed it with the Court, which approved the Settlement by order
dated October 21, 1999. In issuing that order, the Court entered a final
judgment dismissing the action (and all non-derivative claims of the settlement
class against the defendants) with prejudice. On or about October 14, 1999,
plaintiffs' counsel reapplied to the Court for fees and expenses.
The revised Stipulation of Settlement approved by the Court provided that
in consideration for the settlement class plaintiffs' release of their claims,
ILM II, ILM and each of their directors would (a) cause ILM II and ILM to make
available to Brookdale all information reasonably requested by Brookdale to
enable Brookdale to finalize its offer for an extraordinary transaction
involving ILM II and ILM; (b) inform class plaintiffs' counsel on a timely basis
of all material developments of the negotiations; (c) provide copies of all
material documents concerning bidding and negotiations of an extraordinary
transaction to class counsel and consult with class counsel prior to and
regarding any and all material decisions of ILM II's or ILM's Board relating to
a proposed extraordinary transaction; (d) ensure that neither ILM II, ILM nor
their boards would approve an extraordinary transaction which would provide the
class plaintiffs with aggregate consideration that is less than $172.0 million,
unless there were any material adverse changes or unless it was in the best
interests of ILM II or ILM or their shareholders to do otherwise or unless
Capital refused to close on the revised acquisition proposal; and (e) ensure
that ILM II and ILM would pay the costs of printing and sending notice of
settlement to class plaintiffs. In addition, the Stipulation of Settlement
provided that Capital would cause Capital Acquisition to increase the merger
consideration payable upon consummation of the merger to $172.0 million,
provided that such merger consideration would be payable exclusively in cash,
that the merger agreement would be amended to provide for the new form of merger
consideration and termination dates of September 30, 2000, and that certain
disclosures
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would be made in the proxy statement including, if relevant, disclosures
regarding the preferred securities previously contemplated by the original
merger agreement dated February 7, 1999. Under the Stipulation of Settlement,
Capital is responsible for payment of attorneys' fees and expenses sought under
the application as long as a merger with Capital is consummated. If ILM II and
ILM consummated an extraordinary transaction with any other party, ILM II and
ILM would be responsible for such payment. On November 5, 1999, the court
awarded plaintiffs $950,000 in attorneys fees and $182,000 in expenses.
The Stipulation of Settlement remains in full force and effect and has not
been modified or amended in the context of the amended merger transactions.
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 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.
92
<PAGE>
EMPLOYEES
As of February 29, 2000, all of ILM II's properties are managed by Capital
and ILM II retains one 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.
93
<PAGE>
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>
James A. Stroud............................. 49 Chairman of the Board, Chairman and
Secretary
Lawrence A. Cohen........................... 46 Vice Chairman and Chief Executive Officer
Keith N. Johannessen........................ 43 President, Chief Operating Officer and
Director
Ralph A. Beattie............................ 50 Executive Vice President
and Chief Financial Officer
Dr. Gordon I. Goldstein..................... 63 Director
James A. Moore.............................. 65 Director
Dr. Victor W. Nee........................... 64 Director
</TABLE>
J. WILLIAM SHARMAN, JR. has served as a director of ILM 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
94
<PAGE>
University in Austin, Texas. Mr. Sharman also has served as President and
Director of 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 Bachelors 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 the Georgetown University Law
Center. 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 boards 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. Mr. Stroud also serves as an Advisory
Group member to the National Investment Conference. Mr. Stroud was the past
President and Member of the Board of Directors of the National Association for
Senior Living Executives. 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. Mr. Stroud has had positions with businesses involved in senior
living for 15 years.
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
95
<PAGE>
portfolio having a cost basis of approximately $3.0 billion, including senior
living facilities of approximately $110.0 million. From April 1991 to May 1998,
Mr. Cohen was President and a member of the boards of directors of ILM 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 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 15 years.
KEITH N. JOHANNESSEN is President and Chief Operating Officer of Capital.
He has served as President of Capital and its predecessors since March 1994, and
previously served as Executive Vice President from May 1993 to February 1994.
From 1992 to 1993, Mr. Johannessen served as Senior Manager in the health care
practice of Ernst & Young. From 1987 to 1992, Mr. Johannessen was Executive Vice
President of Oxford Retirement Services, Inc. Mr. Johannessen has served on the
State of the Industry and Model Assisted Living Regulations Committees of the
American Seniors Housing Association. Mr. Johannessen has been active in
operational aspects of senior housing for 21 years.
RALPH A. BEATTIE joined Capital as Executive Vice President and Chief
Financial Officer in May 1999. From 1997 to 1999, he served as an Executive Vice
President and the Chief Financial Officer of Universal Sports America, Inc. For
the eight years prior to that, he was an Executive Vice President and the Chief
Financial Officer for Haggar Clothing Company, during which time Haggar
successfully completed its initial public offering. Mr. Beattie has earned his
Masters of Business Administration and is both a certified management accountant
and a Certified Financial Planner.
DR. GORDON I. GOLDSTEIN is a director of Capital. Dr. Goldstein was an
attending anesthesiologist at Presbyterian Hospital in Dallas, Texas from 1967
through 1998 and at the Surgery Center Southwest since 1990. He is currently
emeritus staff at Presbyterian Hospital of Dallas. He is board certified by the
American Board of Anesthesiology and has been a Fellow of the American College
of Anesthesiology since 1996. Dr. Goldstein has published Diagnosis and
Treatment of Reactions of Chymopapain and Successful Treatment of Cafe Coronary.
Dr. Goldstein received his undergraduate degree in biology and chemistry from
East Tennessee State University, his M.D. from the University of Tennessee
Medical School and has served in the medical profession in the northeast and
currently in the southwest. Dr. Goldstein served as the Chairman of the
Department of Anesthesiology at Presbyterian Hospital in Dallas, Texas from 1994
to 1997. He is currently managing director of GF Holdings and a director of Sage
Medical Experts.
JAMES A. MOORE is a director of Capital. He is currently President of Moore
Diversified Services, Inc., a senior living consulting firm engaged in market
feasibility studies, investment advisory services and marketing and strategic
consulting in the senior living industry, which has its principal offices in
Fort Worth, Texas. Mr. Moore has held this position since May 1971. Mr. Moore
has 35 years of industry experience and has conducted over 1,600 senior living
consulting engagements in approximately 475 markets, in 46 states and six
countries. Mr. Moore has authored numerous senior living and health
96
<PAGE>
care industry technical papers and trade journal articles, as well as the books
Assisted Living--Pure & Simple Development and Operating Strategies and Assisted
Living 2000, which are required assisted living certification course material
for the American College of Health Care Administrators. Mr. Moore holds a
Bachelors of Science degree in Industrial Technology from Northeastern
University in Boston and an MBA in Marketing and Finance from Texas Christian
University in Fort Worth, Texas.
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.
97
<PAGE>
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 October 15,
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, 1999 and 1998
and for each of the three years in the period ended August 31, 1999, included in
this document have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere in this proxy statement.
The financial statements referred to above are included in reliance upon such
report given on the authority of Ernst & Young LLP as experts in accounting and
auditing.
NO APPRAISAL RIGHTS
Because ILM II has at least 2,000 shareholders of record and neither ILM
II's Articles of Incorporation nor its 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.
May 18, 2000
98
<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--February 29, 2000 (Unaudited) and August 31, 1999 and 1998.............. F-3
Consolidated Statements of Income--Six and three months ended February 29, 2000 and February 28,
1999 (Unaudited) and Years ended August 31, 1999, 1998, and 1997................................... F-4
Consolidated Statements of Changes in Shareholders' Equity--Six months ended February 29, 2000
(Unaudited) and Years ended August 31, 1999, 1998, and 1997........................................ F-5
Consolidated Statements of Cash Flows--Six months ended February 29, 2000 and February 28, 1999
(Unaudited) and Years ended August 31, 1999, 1998, and 1997........................................ F-6
Notes to Consolidated Financial Statements........................................................... F-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, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended August 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ILM II Senior Living, Inc. and subsidiary, at August 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1999, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
October 22, 1999
except for Note 5, as to which the date is
November 5, 1999
F-2
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
FEBRUARY 29, 2000 1999 1998
----------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Operating investment properties, at cost:
Land........................................................... $ 5,777 $ 5,664 $ 5,518
Building and improvements...................................... 27,998 27,957 27,726
Furniture, fixtures and equipment.............................. 3,815 3,815 3,815
--------- -------- --------
37,590 37,436 37,059
Less: accumulated depreciation................................. (9,429) (8,834) (7,599)
--------- -------- --------
28,161 28,602 29,460
Mortgage placement fees.......................................... 1,425 1,425 1,425
Less: accumulated amortization................................... (1,179) (1,108) (966)
--------- -------- --------
246 317 459
Loan origination fees............................................ 144 144 72
Less: accumulated amortization................................. (59) (42) --
--------- -------- --------
85 102 72
Cash and cash equivalents........................................ 965 1,193 1,896
Accounts receivable--related party............................... 388 337 273
Prepaid expenses and other assets................................ 105 68 154
Deferred rent receivable......................................... 22 37 69
--------- -------- --------
$ 29,972 $ 31,376 $ 32,383
========= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses............................ $ 97 $ 219 $ 220
Accounts payable--related party.................................. 130 527 --
Construction loan payable........................................ 1,165 1,165 --
Preferred shareholders' minority interest
in consolidated subsidiary..................................... 138 134 125
--------- -------- --------
Total liabilities................................................ 1,530 2,045 345
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............................................ (16,433) (15,544) (12,837)
--------- -------- --------
Total shareholders' equity....................................... 28,442 29,331 32,038
--------- -------- --------
$ 29,972 $ 31,376 $ 32,383
========= ======== ========
</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>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- -------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29 FEBRUARY 28 FEBRUARY 29 FEBRUARY 28 --------------------------
2000 1999 2000 1999 1999 1998 1997
----------- ----------- ----------- ----------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and other income..... $ 1,369 $ 1,333 $ 2,721 $ 2,644 $5,265 $4,988 $4,416
Interest income earned on
cash equivalents......... 11 13 25 31 56 77 99
------- ------- ------- ------- ------ ------ ------
1,380 1,346 2,746 2,675 5,321 5,065 4,515
Expenses:
Depreciation................ 298 283 595 566 1,235 1,142 1,132
Amortization................ 40 49 88 90 184 143 143
Management fees............. -- -- 103
General and
administrative........... 68 76 122 177 344 222 563
Professional fees........... 279 590 585 762 1,778 540 308
Director compensation....... 23 27 43 47 83 111 82
------- ------- ------- ------- ------ ------ ------
708 1,025 1,433 1,642 3,624 2,158 2,331
------- ------- ------- ------- ------ ------ ------
Net income.................... $ 672 $ 321 $ 1,313 $ 1,033 $1,697 $2,907 $2,184
======= ======= ======= ======= ====== ====== ======
Earnings per share of common
stock....................... $ 0.13 $ 0.06 $ 0.25 $ 0.20 $ 0.32 $ 0.56 $ 0.42
======= ======= ======= ======= ====== ====== ======
Cash dividends paid per share
of common stock............. $ 0.21 $ 0.21 $ 0.43 $ 0.43 $ 0.85 $ 0.73 $ 0.61
======= ======= ======= ======= ====== ====== ======
</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, 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.................... -- -- -- (4,404) (4,404)
Net income............................. -- -- -- 1,697 1,697
---------- ---- -------- --------- -------
Shareholders' equity at August 31, 1999... 5,181,236 52 44,823 (15,544) 29,331
Cash dividends paid.................... -- -- -- (2,202) (2,202)
Net income............................. -- -- -- 1,313 1,313
---------- ---- -------- --------- -------
Shareholders' equity at November 30, 1999
(Unaudited)............................ 5,181,236 $ 52 $ 44,823 $ (16,433) $28,442
========== ==== ======== ========= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------- YEAR ENDED AUGUST 31,
FEBRUARY 29, FEBRUARY 28, ---------------------------
2000 1999 1999 1998 1997
------------ ------------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 1,313 $ 1,033 $ 1,697 $ 2,907 $ 2,184
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................ 683 656 1,419 1,285 1,275
Charitable contribution of subsidiary's
preferred stock and accrued dividends...... 2 2 9 9 116
Changes in assets and liabilities:
Interest and other receivables............. -- -- -- -- 178
Accounts receivable--related party......... (51) (46) (64) (122) 74
Prepaid expenses and other assets.......... (37) 42 86 (77) (68)
Deferred rent receivable................... 15 16 32 31 31
Accounts payable--related party............ (397) -- 478 (205) 173
Accounts payable and accrued expenses...... (122) 127 48 73 82
Preferred shareholders' minority interest.. 4 5 -- -- --
-------- -------- ------- ------- -------
Net cash provided by operating
activities............................... 1,408 1,833 3,705 3,901 4,045
-------- -------- ------- ------- -------
Cash flows (used in) provided by investing
activities:
ILM II Holding acquired cash balance.............. -- -- 245
Additions to operating investment properties...... (154) (194) (377) (538) (205)
-------- -------- ------- ------- -------
Net cash (used in) provided by investing
activities............................... (154) (194) (377) (538) 40
-------- -------- ------- ------- -------
Cash flows used in financing activities:
Loan origination fees paid........................ -- (71) (72) (72) --
Proceeds from construction loan facility.......... 1,165 -- --
Cash dividends paid to shareholders............... (2,202) (2,202) (4,404) (3,756) (3,173)
-------- -------- ------- ------- -------
Net cash used in financing activities...... (2,202) (2,273) (3,311) (3,828) (3,173)
-------- -------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (948) (634) 17 (465) 912
Cash and cash equivalents, beginning of year........ 1,913 1,896 1,896 2,361 1,449
-------- -------- ------- ------- -------
Cash and cash equivalents, end of year.............. $ 965 $ 1,262 $ 1,913 $ 1,896 $ 2,361
======== ======== ======= ======= =======
Cash paid for state income taxes.................... $ $ $ 42 $ -- $ --
======== ======== ======= ======= =======
Cash paid for interest.............................. $ $ $ 11 $ -- $ --
======== ======== ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION
ILM 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.
During the quarter ended February 28, 1993, Angeles announced that it was
experiencing liquidity problems that resulted in the inability to meet its
obligations. Subsequent to such announcements, AHC defaulted on the regularly
scheduled mortgage loan payments due to the Company on March 1, 1993. Subsequent
to March 1993, payments toward the debt service owed on the Company's loans were
limited to the net cash flow of the operating investment properties. On May 3,
1993, Angeles filed for reorganization under a Chapter 11 Federal Bankruptcy
petition filed in the state of California. AHC did not file for reorganization.
The Company retained special counsel and held extensive discussions with AHC
concerning the default status of its loans. During the fourth quarter of fiscal
1993, a non-binding settlement agreement between the Company, AHC and Angeles
was reached whereby ownership of the properties would be transferred from AHC to
the Company or its designated affiliates. Under the terms of the settlement
agreement, the Company would release AHC and Angeles from certain obligations
under the loans. On April 27, 1994, each of the properties owned by AHC and
securing the loans was transferred (collectively, "the Transfers") to
newly-created special purpose corporations affiliated with the Company
(collectively, "the Property Companies"). The Transfers had an effective date of
April 1, 1994 and were made pursuant to the settlement agreement entered into on
February 17, 1994 ("the Settlement Agreement") between the Company and AHC which
had previously been approved by the bankruptcy court handling the
F-7
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
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 representing a $35,000
increase in fair value. This increase in fair value is based on the increase in
values of the Senior Housing Facilities which occurred between April 1994 and
January 1996, as supported by independent appraisals.
With this transfer completed, effective January 23, 1997 ILM II Holding
recapitalized its common stock and preferred stock by replacing the outstanding
shares with 50,000 shares of new common stock and 275 shares of 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
F-8
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
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, 1999 and 1998 on the preferred stock in ILM
II Holding totaled approximately $23,000 and $14,000, 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 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.
On February 7, 1999, the Company entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999 and further amended
on April 18, 2000, with Capital Senior Living Corporation, the corporate parent
of Capital, and certain affiliates of Capital. If the merger is consummated, the
Shareholders of the Company will receive all-cash merger consideration of
approximately $13.04 per share. Consummation of this transaction will require,
among other things, the affirmative vote of the holders of not less than 66 2/3%
of the Company's outstanding common stock. The agreement presently provides that
it may be terminated if the merger is not consummated by September 30, 2000. In
connection with the merger, the Company has agreed to cause ILM II Holding to
cancel and terminate the Facilities Lease Agreement with Lease II immediately
prior to the effective time of the merger. 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. Although the
pending merger agreement remains operative and in full force and effect, Capital
has communicated certain proposed modifications to the pending transaction which
have not been agreed to in principle or otherwise by the Company. The Company
presently is in discussions with Capital regarding the pending merger
transaction and is considering potential
F-9
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
1. NATURE OF OPERATIONS, RESTRUCTURING, AND BASIS OF PRESENTATION--(CONTINUED)
modifications thereto including a reduced merger consideration. There can be no
assurance as to whether the merger will be consummated or, if consummated, as to
the timing thereof.
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities as of August 31, 1999 and 1998 and revenues and expenses for
each of the three years in the period ended August 31, 1999. Actual results
could differ from the estimates and assumptions used.
The Company's significant accounting policies are summarized as follows:
A. BASIS OF PRESENTATION
The operating cycle in the real estate industry is longer than one year and
the distinction between current and non-current is of little relevance.
Accordingly, the accompanying consolidated balance sheet is presented in an
unclassified format.
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 include the financial statements of
the Company and ILM II Holding. All intercompany balances and transactions have
been eliminated in consolidation.
B. INCOME TAXES
The Company has elected to qualify and to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended, for each taxable year of operations.
As a REIT, the Company is allowed a deduction for the amount of dividends paid
to its shareholders, thereby effectively subjecting the distributed net taxable
income of the Company to taxation at the shareholder level only, provided it
distributes at least 95% of its taxable income and meets certain other
requirements for qualifying as a real estate investment trust. In connection
with the settlement agreement described in Note 1, the Company, through ILM 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
F-10
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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
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 which could be reduced by
approximately $1.4 million using available net operating loss carryforwards of
ILM II Holding of approximately $4.2 million.
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 other
than the built-in gain tax above. Accordingly, no income tax benefit is
reflected in these consolidated financial statements.
F-11
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The Company reports on a calendar year basis for income tax purposes. All
distributions during calendar years 1999, 1998 and 1997 were ordinary taxable
dividends.
C. CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include all
highly liquid investments with original maturities of 90 days or less.
D. OPERATING INVESTMENT PROPERTIES
Operating investment properties are carried at the lower of cost, reduced
by accumulated depreciation, or net realizable value. The net realizable value
of a property held for long-term investment purposes is measured by the
recoverability of the owner's investment through expected future cash flows on
an undiscounted basis, which may exceed the property's current market value. The
net realizable value of a property held for sale approximates its current market
value, as determined on a discounted basis. None of the operating investment
properties were held for sale as of August 31, 1999 or 1998. Depreciation
expense is provided on a straight-line basis using an estimated useful life of
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, 1999.
Mortgage 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, 1999 and 1998 is $1,108,000 and $966,000,
respectively. At August 31, 1999 and 1998, loan origination fees of $144,000 and
$72,000 relating to the construction loan facility (see Note 6) are included on
the accompanying consolidated balance sheet. These fees are being amortized to
expense on a straight-line basis over the term of the loan. Accumulated
amortization at August 31, 1999 and 1998 was $42,000 and $0, respectively.
Capitalized interest at August 31, 1999 and 1998 was $17,000 and $0,
respectively.
F-12
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
E. RENTAL REVENUES
In fiscal years 1999 and 1998, 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, 1999 and 1998 represents the difference between rental income on a
straight-line basis and rental income received under the terms of the master
lease.
F. FAIR VALUE DISCLOSURES
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107"), requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. SFAS 107 excludes certain financial instruments and
all nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates its fair value due to the
short-term maturities of such instruments.
Accounts receivable--related party: The carrying amount reported on the
balance sheet for accounts receivable--related party approximates its fair value
due to the short-term maturity of such instrument.
G. INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying interim consolidated
financial statements, which have not been audited, reflect all adjustments
necessary to present fairly the results for the interim periods. All of the
accounting adjustments reflected in the accompanying interim consolidated
financial statements are of a normal recurring nature. The accompanying
consolidated financial statements have been prepared on the accrual basis of
accounting in accordance with U.S. generally accepted accounting principles for
interim financial information, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of February 29, 2000 and
revenues and expenses for each of the six and three-month periods ended
February 29, 2000 and February 28, 1999. Actual results could differ from the
estimates and assumptions used. The results of operations for the six and
three-month
F-13
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
periods ended February 29, 2000, are not necessarily indicative of the results
that may be expected for the year ended August 31, 2000.
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, $0 and $103,000
for the years ended August 31, 1999, 1998 and 1997, respectively. Payment
of incentive management fees was suspended effective April 15, 1993 in
conjunction with a reduction in the Company's quarterly dividend payments.
(ii) For its services in finding and recommending investments,
PaineWebber received mortgage placement fees equal to 2% of the capital
contributions. Mortgage placement fees 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
F-14
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS--(CONTINUED)
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, 1999, 1998 and 1997 is $0, $0 and $118,000, respectively,
representing reimbursements to PaineWebber for providing certain financial,
accounting and investor communication services to the Company.
Mitchell Hutchins Institutional Investors, Inc. ("Mitchell Hutchins")
provided cash management services with respect to the Company's cash assets.
Mitchell Hutchins is a subsidiary of Mitchell Hutchins Asset Management, Inc.,
an independently operated subsidiary of PaineWebber. Mitchell Hutchins earned
$0, $0 and $5,000 (included in general and administrative expenses) for managing
the Company's cash assets during fiscal years 1999, 1998 and 1997, 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 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 in various management
capacities of Capital Senior Living Corporation, an affiliate of Capital, since
1996. Mr. Cohen currently serves as Chief Executive Officer of Capital Senior
Living Corporation. As a result, through July 28, 1998, Capital was considered a
related party. Capital earned property management fees from Lease II of $98,000
and $899,000 for the years ended August 31, 1999 and 1998, respectively. For the
six- and three-month periods ended February 29, 2000, Capital earned property
management fees from the Company of $526,000 and $272,000, respectively as
compared to $547,000 and $323,000 for the six- and three-month periods ended
February 28, 1999, 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
F-15
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
3. RELATED PARTY TRANSACTIONS--(CONTINUED)
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, 1999. Legal fees paid
by Lease I and Lease II on behalf of Mr. Cohen totaled $229,000 as of
February 29, 2000. The Company's Board also concluded that, subject to certain
conditions, the Company or its affiliates should pay reasonable legal fees and
expenses incurred by Capital in the California litigation. At February 29, 2000,
the amount advanced to Capital by Lease I and Lease II for legal fees 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, 1999 and
1998, Capital Senior Development, Inc. earned fees from the Company of $15,000
and $73,000, respectively, for managing pre-construction development activities
for potential expansions of the Senior Housing Facilities. For the three-month
periods ended February 29, 2000 and February 28, 1999, Capital Senior
Development, Inc. earned fees from the Company of $0 and $0, respectively, for
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 $1,168,000 and $224,000 for the years ended August 31, 1999 and 1998,
respectively. For the three-month periods ended February 29, 2000 and
February 28, 1999, Greenberg Traurig earned fees from the Company of $220,000
and $172,000, respectively.
Accounts receivable--related party at February 29, 2000, August 31, 1999
and 1998 represents amounts due from Lease II for variable rent. Accounts
payable--related party at August 31, 1999, includes $50,000 of expense
reimbursements payable to Lease II; $194,000 in variable rent received from
Lease II in advance; and $283,000 in unbilled legal fees due to Greenberg
Traurig, Counsel to the Company and its affiliates and a related party, as
described above. Accounts payable--related party at August 31, 1998 includes
$49,000 in unbilled legal fees that were due to Greenberg Traurig and
subsequently paid during fiscal year 1999.
F-16
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE
As of August 31, 1999, the Company, through its consolidated affiliate,
owned 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(3) CAPACITIES(3) 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.
(3) Rentable units represent the number of apartment units and is a measure
commonly used in the real estate industry. Resident capacity equals the
number of bedrooms contained within the apartment units and corresponds to
measures commonly used in the healthcare industry.
The cost basis of the operating investment properties reflects amounts
funded under the Company's participating mortgage loans less certain guaranty
payments received from AHC in excess of the net cash flow of the Facilities
under the terms of the Exclusivity Agreement with the Company. The transfer of
ownership of the Senior Housing Facilities from AHC in fiscal 1994 resulted in
no gain or loss recognition by the Company for financial reporting purposes. In
accordance with generally accepted accounting principles, the Company had always
accounted for its investments in acquisition and construction loans under the
equity method, as if such investments were equity interests in a joint venture.
F-17
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
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
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
F-18
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
from its existing cash reserves, which was an amount estimated to provide Lease
II with necessary working capital.
The Facilities Lease Agreement is between the Company's consolidated
subsidiary, ILM II Holding, as owner of the Senior Housing Facilities and
lessor, and Lease II as lessee. The lessor has the right to terminate the
Facilities Lease Agreement as to any property sold by the lessor as of the date
of such sale. The Facilities Lease Agreement is a "triple-net" lease whereby the
Lessee pays all operating expenses, governmental taxes and assessments, utility
charges and insurance premiums, as well as the costs of all required
maintenance, personal property and non-structural repairs in connection with the
operation of the Senior Housing Facilities. ILM 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), unless earlier terminated at the
election of the Lessor in connection with the sale by the Lessor of the Senior
Housing Facilities to a non-affiliated third party upon 30 days' notice to the
Company. Lease II pays annual base rent for the use of all of the Senior Housing
Facilities in the aggregate amount of $4,035,600. Lease II also pays variable
rent on a quarterly basis, for each Senior Housing Facility in an amount equal
to 40% of the excess of the aggregate total revenues for the Senior Housing
Facilities, on an annualized basis, over $13,021,000. Variable rental income
related to fiscal years 1999 and 1998 was $1,261,000 and $984,000, respectively.
Variable rent was $719,000 and $368,000 for the six- and three-month periods
ended February 29, 2000, respectively as compared to $642,000 and $332,000 for
the six- and three-month periods ended February 28, 1999, respectively.
F-19
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
4. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE--(CONTINUED)
Condensed balance sheets as of August 31, 1999 and 1998, and condensed
statements of operations for the years ended August 31, 1999 and 1998 of Lease
II are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets................................................... $ 1,990 $ 1,896
Furniture, fixtures, and equipment, net.......................... 617 558
Other assets..................................................... 163 279
------- -------
$ 2,770 $ 2,733
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities.............................................. $ 1,467 $ 1,960
Other liabilities................................................ 37 76
Shareholders' equity............................................. 1,266 697
------- -------
$ 2,770 $ 2,733
======= =======
STATEMENT OF OPERATIONS
Revenues......................................................... $16,250 $15,524
Operating expenses............................................... 15,339 15,560
Income tax benefit............................................... 342 (14)
------- -------
Net loss......................................................... $ 569 $ (22)
======= =======
</TABLE>
5. LEGAL PROCEEDINGS AND CONTINGENCIES
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.
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
F-20
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
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 $229,000 as of August 31, 1999 and November 30, 1999 respectively.
The Company's Board also concluded that, subject to certain conditions, the
Company or its affiliates should advance reasonable legal fees and expenses
incurred by Capital in the California litigation. At August 31, 1999 and
November 30, 1999, the amount of legal fees advanced to Capital by Lease I and
Lease II totaled approximately $563,000.
On August 18, 1998, the Company and its affiliates along with Capital and
its affiliates entered into a settlement agreement with AHC. Lease I and Lease
II agreed to pay $1,625,000 and Capital and its affiliates agreed to pay
$625,000 to AHC in settlement of all claims, including those related to the
Virginia litigation and the California litigation. The Company and its
affiliates also entered into an agreement with Capital and its affiliates to
mutually release each other from all claims that any such parties may have
against each other, other than any claims under the property management
agreements. On September 4, 1998, the full settlement amounts were paid to AHC
and its affiliates with Lease II paying $650,000 and Lease I paying $975,000.
F-21
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (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.
On December 8, 1998, the Court granted the Company's dismissal motion in
part but afforded the plaintiffs leave to amend their complaint. In doing so,
the Court accepted the Company's position that all claims relating to derivative
actions were filed improperly. In addition, the Court dismissed common law
claims for punitive damages, but allowed plaintiffs to amend their claims
alleging that the defendants injured shareholders without injuring the Company
as a whole.
On January 22, 1999, the Feldman plaintiffs filed an amended complaint,
again purporting to commence a class action, and adding claims under
Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 and Rule
10b-5 promulgated thereunder. Even before the Company and the Board of Directors
responded to that amended complaint, the Feldman plaintiffs moved for leave to
file a second amended complaint to add claims directed at enjoining the
announced potential merger with Capital Senior Living Corporation and,
alternatively, for compensatory and punitive damages. At a hearing held on
March 4, 1999 relating to the motion for leave to file that second amended
complaint and to expedite discovery, the Court granted leave to amend and set a
schedule for discovery leading to a trial (if necessary) in 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 on June 7, 1999, the Court issued an order dismissing the
plaintiffs' federal security claims, but denying the motion to dismiss
plaintiffs' claims for breach of fiduciary duty and judicial dissolution, which
motion was addressed to the pleadings and not to the merits of the action.
On June 21, 1999, ILM II, ILM and each of its directors answered the second
amended complaint and denied any and all liability and moved for reconsideration
of the portion of the Court's June 7, 1999 order denying their motion to
dismiss. In response to discovery requests,
F-22
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
5. LEGAL PROCEEDINGS AND CONTINGENCIES--(CONTINUED)
ILM II, ILM and others produced documents to the plaintiffs and the depositions
of current and former directors and others were taken. Discovery was completed
as of July 1, 1999.
On July 2, 1999, the parties to this action came to an
agreement-in-principle to settle the action. On August 3, 1999, the parties
entered into a Stipulation of Settlement (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 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 was held November 5,
1999, in which the Court granted the application for attorney's fees in the
amount of $950,000 and costs in the amount of $182,000. Under the Stipulation,
if the proposed merger is consummated, Capital Senior Living Corporation is
responsible for payment of such attorney's fees and expenses sought under this
application, and if the proposed merger with Capital Senior Living Corporation
is not consummated and ILM I and the Company enter into a transaction having
similar effect to the merger with a third party, then ILM I and the Company are
responsible for such fees and expenses.
6. CONSTRUCTION LOAN FINANCING
During 1999 the Company secured a construction loan facility with a major
bank that provides the Company with up to $8.8 million to fund the capital costs
of the potential expansion programs. The construction loan facility is secured
by a first mortgage of the Senior Housing Facilities and collateral assignment
of the Company's leases of such properties. The loan expires December 31, 2000,
with possible extensions through September 29, 2003. Principal is due upon
expiration. Interest is payable monthly at a rate equal to LIBOR plus 1.10% or
Prime plus 0.5%. Amounts outstanding under the loan at both November 30, 1999
and August 31, 1999, were approximately $1.2 million. Loan origination fees of
$144,000 were paid at August 31, 1999, in connection with this loan facility and
are being amortized over the life of the loan.
F-23
<PAGE>
ILM II SENIOR LIVING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1999 AND FEBRUARY 29, 2000 (UNAUDITED)
7. SUBSEQUENT EVENTS
On March 20, 2000, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended February 29, 2000. On April 17, 2000,
a dividend of $0.2125 per share of common stock, totaling approximately
$1,101,000, will be paid to Shareholders of record as of March 31, 2000.
On September 15, 1999, the Company's Board of Directors declared a
quarterly dividend for the quarter ended August 31, 1999. On October 15, 1999, a
dividend of $0.2125 per share of common stock, totaling $1,101,000, will be made
to the shareholders of record as of September 30, 1999.
On December 15, 1999, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended November 30, 1999. On January 15,
2000, a dividend of $0.2125 per share of common stock, totaling approximately
$1,101,000, was paid to Shareholders of record as of December 31, 1999.
F-24
<PAGE>
APPENDIX A
================================================================================
COMPOSITE* AGREEMENT AND PLAN OF MERGER
among
CAPITAL SENIOR LIVING CORPORATION,
CAPITAL SENIOR LIVING ACQUISITION, LLC
and
ILM II SENIOR LIVING, INC.
================================================================================
- --------
* Composite Agreement reflecting the terms of the October 19, 1999 Amended and
Restated Agreement and Plan of Merger as amended by a First Amendment on April
18, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER
SECTION 1.1 Effective Time of the Merger ........................... 2
SECTION 1.2 Closing ................................................ 2
SECTION 1.3 Effects of the Merger .................................. 2
SECTION 1.4 Organizational Instruments ............................. 3
SECTION 1.5 Member ................................................. 3
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK AND
MEMBERSHIP INTERESTS OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
SECTION 2.1 Effect on Capital Stock and Membership Interests ....... 3
SECTION 2.2 Letters of Transmittal ................................. 4
SECTION 2.3 Exchange Procedures .................................... 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of the Company .......... 6
SECTION 3.2 Representations and Warranties of CSLC and Sub ......... 16
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Covenants of the Company CSLC and Sub .................. 19
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 Preparation of the Company Proxy Statement and the
Schedule 13E-3 ......................................... 25
SECTION 5.2 Access to Information .................................. 25
SECTION 5.3 Stockholder's Meeting .................................. 26
SECTION 5.4 Consents and Approvals ................................. 27
SECTION 5.6 Expenses; Liquidated Damages ........................... 27
SECTION 5.7 Brokers or Finders ..................................... 29
SECTION 5.8 CSLC Advisory Board .................................... 29
SECTION 5.9 Indemnification; Directors' and Officers' Insurance .... 29
SECTION 5.10 Proposed Simultaneous Acquisition ..................... 31
(i)
<PAGE>
SECTION 5.11 Additional Agreements; Best Efforts ................... 32
SECTION 5.12 Conveyance Taxes ...................................... 32
SECTION 5.13 Public Announcements .................................. 33
SECTION 5.14 Notification of Certain Matters ....................... 33
SECTION 5.15 Company Taxes ......................................... 33
SECTION 5.16 Original Agreement .................................... 33
SECTION 5.17 Financing Commitments ................................. 34
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the
Merger ................................................. 34
SECTION 6.2 Conditions of Obligations of CSLC and Sub .............. 34
SECTION 6.3 Conditions of Obligations of the Company ............... 35
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.1 Termination ............................................ 36
SECTION 7.2 Effect of Termination .................................. 37
SECTION 7.3 Amendment .............................................. 38
SECTION 7.4 Extension; Waiver ...................................... 38
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties and
Agreements ............................................. 38
SECTION 8.2 Notices ................................................ 38
SECTION 8.3 Interpretation ......................................... 40
SECTION 8.4 Counterparts ........................................... 40
SECTION 8.5 Entire Agreement; No Third Party Beneficiaries ......... 40
SECTION 8.6 Governing Law .......................................... 40
SECTION 8.7 No Remedy in Certain Circumstances ..................... 40
SECTION 8.8 Assignment ............................................. 41
SECTION 8.9 Gender and Number Classification ....................... 41
SECTION 8.10 Knowledge ............................................. 41
(ii)
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated October 19,
1999 (this "Agreement"), among CAPITAL SENIOR LIVING CORPORATION, a Delaware
corporation ("CSLC"); CAPITAL SENIOR LIVING ACQUISITION, LLC, a Delaware limited
liability company, all of the outstanding membership interests in which are
wholly-owned by CSLC ("Sub"); and ILM 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 $13.041483 in cash (the
"Merger Consideration"). All such shares of Company Common Stock, when converted
as provided in this Section 2.1(c), no longer shall be outstanding and
automatically shall be canceled and retired and shall cease to exist, and each
certificate previously evidencing such shares of Company Common Stock thereafter
shall represent only the right to receive the Merger Consideration. The holders
of certificates previously evidencing such shares of Company Common Stock
outstanding immediately prior to the Effective Time shall cease to have any
rights of beneficial ownership or otherwise with respect to such shares except
as otherwise provided in this Agreement or by law and upon the surrender of
certificates therefor in accordance with the provisions of Section 2.3 shall
only represent the right to receive the Merger Consideration, without any
interest thereon.
SECTION 2.2 Letters of Transmittal. On such date on which the Company
Proxy Statement (as defined in Section 3.1(c)) is mailed to holders of the
Company Common Stock, the Company shall mail to each such holder on the record
date established for such holders entitled to notice of and to vote at the
Company Stockholders' Meeting (as defined in Section 3.1(c)), a form of letter
of transmittal, and other appropriate materials instructing each such holder on
the procedures required to receive the Merger Consideration in respect of each
share of Company Common Stock.
SECTION 2.3 Exchange Procedures (a) Exchange Agent; Exchange Funds.
Immediately prior to the Effective Time, CSLC shall deposit (or cause to be
deposited) with ChaseMellon Shareholder Services, L.L.C., or such other bank or
trust company designated by CSLC and having net capital in excess of
$250,000,000 and reasonably acceptable to the Company (the "Exchange Agent"),
for the benefit of the holders of the Company Common Stock, for exchange in
accordance with this Article II, the aggregate Merger Consideration payable by
CSLC in the Merger to all holders of the Company Common Stock (the "Exchange
Funds").
(b) Surrender of Certificates. Promptly after the Effective
Time, the Exchange Agent shall distribute to each holder of the Company Common
Stock, upon surrender to the Exchange Agent of the certificate(s) for
cancellation in exchange for the Exchange Funds in accordance with this Article
II, the aggregate Merger Consideration to which each such holder is entitled to
receive in the Merger. In the event of a transfer of ownership of the Company
Common Stock which is not registered in the transfer records of the Company, a
certificate representing the proper number of shares of the Company Common Stock
may be issued to a transferee if certificate(s) representing such Company Common
Stock are presented to the Exchange Agent, accompanied by all documents required
to evidence and effect such transfer and to evidence that all applicable stock
4
<PAGE>
transfer taxes have been paid. Until surrendered as contemplated by this Section
2.3, each certificate shall be deemed from and after the Effective Time to
represent only the right to receive upon such surrender the Exchange Funds in
accordance with this Article II, without any interest thereon.
(c) No Further Ownership Rights in the Company Common Stock.
All Exchange Funds issued and paid upon the surrender for exchange of shares of
the Company Common Stock in accordance with the terms hereof shall be deemed to
have been issued and paid in full satisfaction of all rights pertaining to such
shares, subject, however, to the Surviving Entity's obligation to pay any
dividends and make any other distributions having a record date prior to the
Effective Time which may have been declared or made by the Company on such
shares of Company Common Stock after the date hereof and otherwise in accordance
with the terms of this Agreement and which remain unpaid at the Effective Time,
and there shall be no further registration of transfers on the stock transfer
books of the Surviving Entity of the shares of the Company Common Stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificate(s) representing shares of the Company Common Stock
are presented to the Surviving Entity for any reason, they shall be canceled and
exchanged as provided in this Article II.
(d) Termination of Exchange Funds. Any portion of the Exchange
Funds which remains undistributed to the holders of the Company Common Stock on
the first anniversary of the Effective Time shall be delivered to CSLC or the
Surviving Entity, upon demand by CSLC, and any holders of the Company Common
Stock who have not theretofore surrendered their shares (in accordance with this
Article II and the instructions set forth in the letter of transmittal received
by such holders) thereafter shall look only to CSLC and the Surviving Entity for
payment of the aggregate Merger Consideration to which they are entitled in the
Merger.
(e) No Liability. Neither CSLC, Sub, nor the Company shall be
liable to any holder of Company Common Stock for any cash or property in respect
thereof delivered to a public official pursuant to any applicable abandoned
property, escheat or other similar law.
(f) Lost or Stolen, etc. Certificates. If any certificate
evidencing shares of the Company Common Stock shall have been lost, stolen or
destroyed, then in such event, upon the submission of a duly notarized affidavit
of that fact by the person claiming such certificate(s) to be lost, stolen or
destroyed and, if required by the Surviving Entity, the posting by such person
of a bond, indemnity or similar surety in such reasonable amount as the
Surviving Entity may direct as indemnity against any claim that may be made
against it with respect to such certificate(s), the Exchange Agent shall issue
in exchange for such lost, stolen or destroyed certificate the applicable Merger
Consideration.
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(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.
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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.
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No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency,
commission or other public or governmental authority (a "Governmental Entity")
is required by or with respect to the Company or any of its Subsidiaries in
connection with the execution and delivery by the Company of this Agreement or
the consummation by the Company of the transactions contemplated hereby, the
failure to obtain which insofar as reasonably can be foreseen would have a
Material Adverse Effect, except for (i) the filing with the Securities and
Exchange Commission ("SEC") of a proxy statement (the "Company Proxy Statement")
in definitive form on Schedule 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), relating to the special meeting (the "Company
Stockholders' Meeting") of holders of the Company Common Stock to be convened as
required by the Va Act and in accordance with the Company's Articles of
Incorporation and By-laws to vote upon the adoption and approval of this
Agreement and the Merger and the transactions contemplated hereby and thereby,
the related Transaction Statement of the Company and CSLC on Schedule 13E-3 (the
"Schedule 13E-3"), and such reports and other transaction statements under the
Exchange Act as may be required in connection with this Agreement, the Merger
and the transactions contemplated hereby and thereby, (ii) the filing of the
Articles of Merger, the Certificate of Merger and such other appropriate
documents with the Virginia Secretary and the Delaware Secretary, as applicable,
and relevant authorities of other jurisdictions in which the Company or any of
its Subsidiaries is qualified to do business, (iii) all applicable filings, if
any, with, and submissions of information to, the United States Federal Trade
Commission ("FTC") and the United States Department of Justice, Antitrust
Division ("DOJ"), pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act"), and (iv) such other filings,
authorizations, orders and approvals as may be required and which heretofore
have been made or obtained.
The Board of Directors of the Company (the "Company Board")
has unanimously approved this Agreement, the Merger and all of the transactions
contemplated hereby and thereby and has resolved unanimously to recommend that
holders of the Company Common Stock approve and adopt this Agreement and the
Merger; provided that the Company Board may withdraw, modify or change such
recommendation (including in a manner adverse to CSLC) under the circumstances
set forth in the second sentence of Section 4.1(e)(ii).
(d) SEC Documents. The Company has made available to CSLC a
true and complete copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the SEC since September 1,
1997 (as such documents have been amended to date, the "Company SEC Documents")
which constitute all the documents (other than preliminary material) that the
Company was required to file with the SEC since such date. As of their
respective dates, the Company SEC Documents complied in all material respects
with the requirements of the Securities Act of 1933, as
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amended (the "Securities Act"), the Exchange Act and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"), as the case may be, and the rules
and regulations of the SEC thereunder applicable thereto (other than with
respect to the timely filing thereof), and none of the Company SEC Documents
contained, at the time they were filed, any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements of the Company
included in the Company SEC Documents comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with U.S.
generally accepted accounting principles ("GAAP") applied on a consistent basis
during the periods involved (except as may be indicated in the notes thereto or,
in the case of unaudited or interim statements, as permitted by the SEC's
Quarterly Report on Form 10-Q) and fairly present (subject, in the case of the
unaudited or interim statements, to normal and recurring audit adjustments) the
consolidated financial position of the Company and its Subsidiaries at the dates
thereof and the consolidated results of their operations and cash flows for the
periods then ended. Since November 30, 1998, neither the Company nor any of its
Subsidiaries has incurred any liabilities, except for (i) liabilities or
obligations incurred in the ordinary course of business consistent with past
practice, including the Company's obligations under the "Fleet Agreement" (as
hereinafter defined), (ii) liabilities incurred in connection with or as a
result of this Agreement and the Merger and the transactions contemplated
thereby, and (iii) such other liabilities and obligations which, individually or
in the aggregate, are de minimis.
(e) Information Supplied. None of the information supplied or
to be supplied by the Company expressly for inclusion or (to the extent
permitted by applicable rules of the SEC) incorporated by reference in the
Company Proxy Statement and/or the Schedule 13E-3 shall, on the date the same is
filed with the SEC in definitive form, on each date on which the Company Proxy
Statement is mailed to holders of the Company Common Stock, and on the date of
the Company Stockholders' Meeting, as applicable, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Company Proxy
Statement shall, on each date mailed to holders of Company Common Stock in
connection with the Company Stockholders' Meeting and at all times thereafter to
the Closing Date, comply in all material respects with the provisions of
Regulation 14A under the Exchange Act.
(f) Compliance with Applicable Laws. The Company and its
Subsidiaries hold all permits, licenses, variances, exemptions, orders,
authorizations and approvals of all Governmental Entities which are material to
the operation of their respective businesses (the "Company Permits"). The
Company and its Subsidiaries are in
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compliance with the terms of the Company Permits, except where the failure so to
comply insofar as reasonably can be foreseen would not have a Material Adverse
Effect. Except as disclosed in the Company SEC Documents, the respective
businesses of the Company and its Subsidiaries are not being conducted in
violation of any law, ordinance or regulation of any Governmental Entity, except
for violations which do not, and insofar as reasonably can be foreseen would
not, have a Material Adverse Effect. As of the date of this Agreement, no
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending or, to the knowledge of the Company,
threatened, nor has any Governmental Entity indicated an intention to conduct
the same other than those the outcome of which, insofar as reasonably can be
foreseen, would not have a Material Adverse Effect.
(g) Litigation. Except as disclosed in the Company SEC
Documents, there is no suit, action or proceeding pending or, to the knowledge
of the Company, threatened, against or affecting the Company or any of its
Subsidiaries which, if determined adversely to the Company or any of its
Subsidiaries, would insofar as reasonably can be foreseen, have a Material
Adverse Effect, nor is there any judgment, decree, writ, injunction, rule or
order of any Governmental Entity or arbitrator outstanding against the Company
or any of its Subsidiaries of the Company having, or which insofar as reasonably
can be foreseen would have, a Material Adverse Effect.
(h) Taxes. (i) The Company and each of its Subsidiaries has
filed all material tax returns required to be filed by any of them and has paid
(or the Company has paid on its behalf) all taxes required to be paid as shown
on such returns, and all such tax returns are complete and accurate in all
material respects. The most recent financial statements contained in the Company
SEC Documents reflect an adequate reserve for all taxes payable by the Company
and its Subsidiaries accrued through the date of such financial statements.
Since November 30, 1998, neither the Company nor any of its Subsidiaries have
incurred any liability for taxes under Sections 857(b), 860(c) or 4981 of the
Internal Revenue Code of 1986, as amended (the "Code"), and neither the Company
nor any of its Subsidiaries has incurred any liability for taxes other than in
the ordinary course of business. No event has occurred and no condition exists
which presents a material risk that any material tax liability described in the
preceding sentence will be imposed upon the Company and its Subsidiaries. No
material deficiencies for any taxes have been proposed, asserted or assessed by
any Governmental Entity against the Company or any of its Subsidiaries. No
requests for waivers of the time to assess taxes are pending and no tax returns
of the Company or any of its Subsidiaries has been or are currently being
audited by any applicable taxing authority. There are no tax liens on any asset
of the Company or its Subsidiaries other than liens for current taxes not past
due and payable.
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For purposes of this Agreement, the term "tax" (including,
with correlative meaning, the terms "taxes" and "taxable") includes all Federal,
state, local and foreign income, profits, franchise, gross receipts, payroll,
sales, windfall profits, ad valorem, stamp, severance, occupation, premium,
customs duties, commercial rent, capital stock, paid-up capital, value added,
unemployment, disability, alternative or add-on minimum, single business, social
security, registration, estimated, environmental, employment, use, real or
personal property, withholding, excise and other taxes, imposts, duties or
assessments of any nature whatsoever, together with all interest, penalties,
charges and additions to tax imposed with respect to such amounts.
(ii) The Company (A) for all taxable years commencing
with the tax year which began January 1, 1996 through its most recent taxable
year end has been subject to taxation as a real estate investment trust (a
"REIT") within the meaning of Section 856 of the Code, has not been subject to
Section 269B(a) of the Code, and has satisfied all requirements to qualify as a
REIT for such periods, (B) has operated since its most recent tax year end in
such a manner so as to qualify as a REIT for the taxable year ending through the
Closing Date, and (C) has not taken (or omitted to take) any action which
reasonably would be expected to (1) result in any rents paid by the tenants of
the "Senior Housing Facilities" (as such term is defined in the Company SEC
Documents) to be excluded from the definition of "rents from real property"
under Section 856(d)(2) of the Code or (2) otherwise result in a challenge to
its status as a REIT, and no such challenge is pending or, to the Company's
knowledge, threatened, by or before any Governmental Entity.
(iii) ILM 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
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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 any Subsidiary of the Company the benefits of
which are contingent or the terms of which would be materially altered upon the
occurrence of a transaction involving the Company of the nature contemplated by
this Agreement, or agreement with respect to any executive officer of the
Company providing any term of employment or compensation guarantee or (iii)
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
would be increased or the vesting of the benefits of which would be accelerated
upon consummation of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which would be calculated by reference to
any of the transactions contemplated by this Agreement.
(j) Benefit Plans. (i) Neither the Company nor any other
member of a "Company Controlled Group" (as hereafter defined) maintains,
contributes to or participates in, or has any obligation to maintain, contribute
to or participate in, any employee benefit plan (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), retirement or deferred compensation plan, incentive compensation
plan, consulting agreement, unemployment compensation plan, vacation pay plan,
severance plan, retiree medical plan, bonus plan, stock compensation plan or any
other type of employee-related arrangement, program, policy, plan or agreement
(all of such plans being hereinafter referred to as "Company Benefit Plans").
For purposes of this Section 3.1(j), the term "Company Controlled Group" means
the Company and each other corporation or other entity which has at any other
time been under common control with the Company pursuant to Sections 414(b),
(c), (m) or (o) of the Code.
(ii) With respect to each Company Benefit Plan, (A)
there has been no material violation of any applicable provision of ERISA which
could result in a material liability being imposed upon the Company; (B) each
Company Benefit Plan intended to qualify under Section 401(a) of the Code has
received (or prior to the Effective Time shall have received) a favorable
determination letter with respect to such qualification and, to the knowledge of
the Company, nothing has occurred (or prior to the Effective Time shall occur)
which could reasonably be expected to jeopardize such favorable determination;
(C) neither the Company nor any other member of the Company Controlled Group is
subject to any material outstanding liability or obligation relating to any such
Company Benefit Plan (other than the obligation to make contributions to, or pay
benefits with respect to, any such Company Benefit Plan, such contributions
and/or
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benefits being made or paid no later than the date(s) required by law or the
terms of such Company Benefit Plan); and (D) to the knowledge of the Company
there are no actual or pending claims or actions (other than claims for benefits
in the ordinary course) relating to any such Company Benefit Plan.
(iii) There are no unfunded and accrued benefit
obligations for which contributions have not been properly accrued to the extent
required by GAAP, on the consolidated financial statements of the Company and
its Subsidiaries, which obligations reasonably are likely to have a Material
Adverse Effect.
(k) Title to and Sufficiency of Assets. The Company directly,
or indirectly through a wholly-owned Subsidiary, owns, and as of the Effective
Time the Company shall own, valid title to all of its assets constituting the
Senior Housing Facilities and personal property which is material to the
businesses of the Company and its Subsidiaries taken as a whole, free and clear
of any and all Liens, except as set forth in the Company SEC Documents. Such
assets include all tangible and intangible real or personal property, contracts
and rights necessary or required for the operation of the business of the
Company and its Subsidiaries.
(l) Absence of Certain Changes or Events. Except as disclosed
in the Company SEC Documents, since November 30, 1998, the Company and its
Subsidiaries have conducted their respective businesses in the ordinary course
and, there has not been (i) any damage, destruction or loss, whether covered by
insurance or not, which has, or insofar as reasonably can be foreseen would
have, a Material Adverse Effect; (ii) any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property) with
respect to any of the Company's or its Subsidiaries' capital stock, except for
cash dividends in respect of the Company's or its Subsidiaries' taxable income,
the declaration and payment of which is necessary to preserve the Company's or
its Subsidiaries' REIT status; (iii) any change in the Company's significant
accounting policies; or (iv) any transaction, commitment, dispute or other event
or condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) having, or which insofar as reasonably can be
foreseen would have, a Material Adverse Effect.
(m) Opinion of Financial Advisor. The Company has received the
written opinion of Cohen & Steers Capital Advisors LLC dated April 17, 2000 a
true and complete copy of which has been delivered (but not addressed) to CSLC,
to the effect that as of the date of such opinion the Merger Consideration to be
paid by CSLC in the Merger is fair to the holders of Company Common Stock, from
a financial point of view.
(n) Virginia Anti-takeover Statutes Not Applicable. The
Company has taken or caused to have been taken (or prior to the Effective Time
shall have taken or cause to have been taken) and has done or caused to have
been done (or prior to the
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Effective Time shall do or cause to have been done) all things necessary to make
inapplicable to this Agreement, the Merger and the transactions contemplated
hereby and thereby, all "change-in-control," "fair price," "interested
stockholder," "business combination," "control share acquisition," "merger
moratorium," "voting sterilization" and all other anti-takeover and stockholder
protection laws enacted under the Va Act or any other internal laws of the
Commonwealth of Virginia (collectively, "State Takeover Laws").
(o) Vote Required. The affirmative vote of the holders of not
less than 66-2/3% of the outstanding shares of the Company Common Stock is the
only vote of the holders of any class or series of capital stock of the Company
necessary to approve this Agreement, the Merger and the transactions
contemplated hereby and thereby.
(p) Environmental Matters. The operations of the Company and
its Subsidiaries are in compliance with all applicable "Environmental Laws" (as
defined herein) and all of the Company Permits issued pursuant to Environmental
Laws, except where the failure so to comply insofar as reasonably can be
foreseen would not have a Material Adverse Effect. The Company and its
Subsidiaries have obtained all of the Company Permits under all applicable
Environmental Laws necessary to operate their businesses. Neither the Company
nor any of its Subsidiaries have received any written notification from any
Governmental Entity asserting that the Company or any of its Subsidiaries is in
violation of any the Company Permits issued pursuant to any Environmental Law.
There are no investigations of the business, operations or Senior Housing
Facilities, pending or, to the Company's or any of its Subsidiaries' knowledge,
threatened, by any Governmental Entity which violation, insofar as reasonably
can be foreseen, would result in the imposition of material liability on the
Company or any of its Subsidiaries (or any successor-in-interest thereto)
pursuant to any Environmental Law. There is not located at any of the Senior
Housing Facilities any underground storage tanks ("USTs") or asbestos -
containing or polychlorinated biphenyls ("PCBs").
For purposes of this Agreement, "Environmental Law" means any
foreign, Federal, state or local statute, regulation, ordinance or rule of
common-law as now or hereafter in effect in any way relating to the protection
of human health and safety or the environment, including, without limitation,
the Comprehensive Environmental Response, Compensation and Liability Act (42
U.S.C.ss.9601 et. seq.), the Hazardous Materials Transportation Act (49
U.S.C.ss.1801 et. seq.), the Resource Conservation and Recovery Act (42
U.S.C.ss.6901 et. seq.), the Clean Water Act (33 U.S.C.ss.1251 et. seq.), the
Clean Air Act (42 U.S.C.ss.7401 et. seq.), the Toxic Substances Control Act (15
U.S.C.ss. 2601 et. seq.), the Federal Insecticide, Fungicide and Rodenticide Act
(17 U.S.C.ss.136 et. seq.), and the Occupational Safety and Health Act (29
U.S.C.ss.651 et. seq.), and the rules and regulations promulgated thereunder.
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(q) Insurance. The properties, buildings, fixtures, equipment
and machinery of the Company and its Subsidiaries are adequately insured by
financially sound and reputable insurers in adequate amounts and against such
risks and contingencies as are insured against by persons customarily owning,
operating and leasing properties, buildings, fixtures, equipment and machinery
in substantially the same manner and in the same locations as the Company and
its Subsidiaries. All insurance policies of the Company and its Subsidiaries
relative to the foregoing are in full force and effect and, to the Company's
knowledge, neither the Company nor any of its Subsidiaries is in default of any
provision thereof, except for such defaults which insofar as reasonably can be
foreseen would not have a Material Adverse Effect.
(r) FCPA. Neither the Company or any of its Subsidiaries nor,
to the Company's knowledge, any of its or any of its Subsidiaries' directors or
officers, has (i) used any Company or such Subsidiary funds for any unlawful
contribution, endorsement, gift, entertainment or other unlawful expense
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from any
Company or such Subsidiary funds; (iii) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended ("FCPA"); or (iv) made any bribe,
rebate, payoff, influence payment, "kickback" or other unlawful payment to any
person or entity with respect to any Company or any of its Subsidiaries'
matters.
(s) Company Affiliate Transactions. Except as disclosed in the
Company SEC Documents, from September 1, 1997 to the date hereof, there have
been no transactions, agreements or understandings between the Company or any of
its Subsidiaries on the one hand, and the Company's or any of its Subsidiaries'
affiliates, officers or directors on the other hand, that would be required to
be disclosed pursuant to Item 404 of Regulation S-K under the Securities Act.
(t) Company Internal Controls. The Company maintains accurate
books and records reflecting its assets and maintains proper and adequate
internal accounting controls which provide assurance that (i) transactions are
executed with management's authorization; (ii) transactions are recorded as
necessary to permit preparation of the consolidated financial statements of the
Company and to maintain accountability for the assets of the Company; (iii)
access to the assets of the Company is generally permitted only in accordance
with management's authorization; (iv) the reported accountability of the assets
of the Company is compared with existing assets at regular intervals; and (v)
accounts, notes and other receivables and inventory are recorded accurately, and
proper and adequate procedures are implemented to effect the collection of such
receivables on a current and timely basis. The books of account, stock records,
minute books and other records of the Company and its Subsidiaries are complete
and correct in all material respects.
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(u) Investment Company Act. The Company is not (and
immediately after consummation of the Merger and the other transactions
contemplated by this Agreement shall not be) an investment company within the
meaning of, or a company controlled by an investment company within the meaning
of, or otherwise subject to any provisions of, the Investment Company Act of
1940, as amended (the "Investment Company Act") and the rules and regulations of
the SEC thereunder.
(v) Articles of Incorporation and Bylaws. The Company
heretofore has furnished to CSLC complete and correct copies of the Articles of
Incorporation and the Bylaws (or equivalent organizational documents), in each
case as amended or restated to the date hereof, of the Company and each of its
Subsidiaries. Neither the Company nor any of its Subsidiaries is in violation of
any provisions of its Articles of Incorporation or Bylaws (or equivalent
organizational documents).
(w) Disclosure. No representation or warranty made by the
Company in this Agreement and no statement of the Company contained in the
Schedules hereto or in any certificate delivered by the Company pursuant to this
Agreement, contains any untrue statement of a material fact or omits any
material fact necessary to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading; it being hereby
agreed and understood that for purposes of this Section 3.1(w) the term
"material" shall be measured by reference to the Company and its Subsidiaries,
considered as an entirety.
SECTION 3.2 Representations and Warranties of CSLC and Sub. CSLC and
Sub jointly and severally hereby represent and warrant to the Company as
follows:
(a) Organization; Standing and Power. Each of CSLC, Sub, and
CSLC's other Subsidiaries is a corporation, limited partnership, limited
liability company or trust, as the case may be, duly organized, validly existing
and in good standing under the laws of its respective jurisdiction of
incorporation or organization and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted, and is duly qualified and in good standing to transact business in
each jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification necessary, except where the
failure to be in good standing or so to qualify would not have a material
adverse effect on the properties, assets, financial condition or operations of
CSLC and its Subsidiaries, taken as a whole (a "CSLC Material Adverse Effect").
(b) Authority. CSLC and Sub have all requisite corporate and
limited liability company authority, as applicable, to enter into this Agreement
and to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement by CSLC and Sub have been duly authorized by all
necessary corporate and limited liability company action, as applicable, on the
part of CSLC and Sub, and the
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consummation by CSLC and Sub of the transactions contemplated hereby and thereby
has been duly authorized by all necessary corporate, and limited liability
company action, as applicable, on the part of CSLC and Sub. This Agreement has
been duly executed and delivered by CSLC and Sub, as applicable, and, this
Agreement constitutes the valid and binding obligations of CSLC and Sub, as
applicable, enforceable against them in accordance with their terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally.
The execution and delivery of this Agreement does not result in any Violation
pursuant to (i) any provision of the Certificate of Incorporation, Certificate
of Formation, Operating Agreement, By-laws or analogous instruments of formation
or governance of CSLC, Sub, or any of CSLC's Subsidiaries presently in effect
or, (ii) any loan or credit agreement, note, mortgage, indenture, lease,
employee benefit plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, writ, order, decree, statute, law,
ordinance, rule or regulation applicable to CSLC or any of its Subsidiaries or
their respective properties or assets, except in the case of this clause (ii),
for any such Violation which insofar as reasonably can be foreseen would not
have a CSLC Material Adverse Effect. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity, is required by, or with respect to CSLC or any of its Subsidiaries in
connection with the execution and delivery of this Agreement, or the
consummation by CSLC or Sub of the transactions contemplated hereby and thereby,
the failure to obtain which insofar as reasonably can be foreseen would have a
CSLC Material Adverse Effect, except for (i) the filing with the SEC of the
Schedule 13E-3 and such other reports and transaction statements under the
Exchange Act as may be required in connection with this Agreement, the Merger
and the transactions contemplated hereby and thereby, (ii) the filing of the
Articles of Merger, the Certificate of Merger and such other appropriate
documents with the Virginia Secretary and the Delaware Secretary, as applicable,
and other relevant authorities of jurisdictions in which CSLC is qualified to do
business, (iii) all applicable filings with, and submissions of information to,
the FTC and DOJ pursuant to the HSR Act, and (iv) such other filings,
authorizations, orders and approvals as may be required and which heretofore
have been made or obtained.
(c) Information Supplied. None of the information supplied or
to be supplied by CSLC or Sub for inclusion or (to the extent permitted by
applicable rules of the SEC) incorporated by reference in the Company Proxy
Statement and/or the Schedule 13E-3 shall, on the date the same is filed with
the SEC in definitive form, on each date on which the Company Proxy Statement is
mailed to holders of the Company Common Stock, and on the date of the Company
Stockholders' Meeting, as applicable, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
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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 review, insofar as reasonably can be
foreseen, would prevent or materially impair the consummation by CSLC of the
Merger and the transactions contemplated thereby and hereby.
(e) Capital Structure. All of the limited liability member
interests of Sub have been duly authorized and are validly issued, fully paid
and nonassessable and owned by CSLC.
(f) Litigation. There is no suit, action or proceeding pending
or, to the knowledge of CSLC, threatened against or affecting CSLC or any of its
Subsidiaries, which, if determined adversely to CSLC or any of the Subsidiaries
and insofar as reasonably can be foreseen, would prevent or materially impair
the consummation by CSLC of the Merger and the transactions contemplated thereby
and hereby; nor is there any judgment, decree, writ, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against CSLC or any of its
Subsidiaries which judgment, decree, writ, injunction, rule or order, insofar as
reasonably can be foreseen, would prevent or materially impair the consummation
by CSLC of the Merger and the transactions contemplated thereby and hereby.
(g) Ownership and Interim Operations of Sub. The Sub was
formed solely for the purpose of engaging in the transactions contemplated
hereby and has engaged in no other business activities and has conducted its
operations only as contemplated by this Agreement. The Sub is, and at the
Effective Time will be directly and wholly owned by CSLC. Sub does not own, and
at all times from and after the date hereof and prior to the Effective Time will
continue not to own, any asset other than an amount of cash necessary for its
due incorporation and good standing and to pay the fees and expenses of the
Merger attributable to it if the Merger is consummated.
(h) Organizational Instruments. CSLC heretofore has furnished
to the Company complete and correct copies of the respective organizational and
constituent instruments and documents of CSLC, Sub, and each other Subsidiary of
CSLC, in each case as amended or restated to the date hereof. None of CSLC, Sub,
or any other
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Subsidiary of CSLC is in violation of any provisions of its respective
organizational and constituent instruments and documents.
(i) Disclosure. No representation or warranty made by any of
CSLC or Sub in this Agreement and no statement of any of CSLC or Sub contained
in any certificate delivered by any of CSLC or Sub pursuant to this Agreement,
contains any untrue statement of a material fact or omits any material fact
necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading; it being hereby agreed
and understood that for purposes of this Section 3.2(i), the term "material"
shall be measured by reference to CSLC and its Subsidiaries, considered as an
entirety.
(j) Receipt of Financing Commitment. CSLC has paid for and
obtained, and heretofore has provided the Company with true and complete
executed copies of, that certain commitment letter of GMAC Commercial Mortgage
Corporation ("GMAC") dated April 14, 2000 and addressed to CSLC, pursuant to
which GMAC has committed, upon the terms and subject to the conditions specified
therein, to provide to CSLC an aggregate sum in cash which, together with funds
segregated by CSLC, will be sufficient in amount to pay, in full at the
Effective Time, but not later than July 31, 2000, to the holders of Company
Common Stock, the Exchange Funds (the "Financing Commitment").
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 Covenants of the Company CSLC and Sub. During the period
from the date of this Agreement and continuing until the Effective Time, to the
extent expressly indicated herein, the Company, CSLC and Sub, as applicable,
each agrees as to itself and its respective Subsidiaries that (except as
otherwise expressly contemplated or permitted by this Agreement, or to the
extent that the other party shall consent in writing):
(a) Ordinary Course. Each of the Company and its Subsidiaries
shall conduct its business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted. Each of the Company, and
its Subsidiaries shall use its reasonable best efforts to preserve intact its
present business organizations, keep available the services of its present
officers and employees and preserve satisfactory relationships with customers,
suppliers and others having business dealings with it to the end that its
goodwill and on-going businesses shall not be impaired in any material respect
at the Effective Time; provided, however, that without limiting the generality
of the foregoing, the Company and its Subsidiaries shall conduct their business
substantially in accordance
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with the operating budgets heretofore approved and presently in effect for the
Senior Housing Facilities and the capital budgets as approved by the Company
Board.
(b) Dividends; Changes in Stock. The Company shall not, nor
shall the Company permit any of its Subsidiaries to, nor shall the Company or
any of its Subsidiaries propose to, (i) declare or pay any dividends (whether of
cash, stock or other property) on or make any other distributions in respect of
its capital stock, (ii) split, combine or reclassify, or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for, any shares of its capital stock, or (iii) redeem, repurchase
or otherwise acquire for value, or permit any of its Subsidiaries to redeem,
repurchase or otherwise acquire for value, any shares of its capital stock,
except in the case of clause (i) above, ordinary cash dividends declared and
paid in respect of the Company Common Stock not in excess of 8.5% of the
original issue price per share in any calendar year (subject to the Company's
reasonable best efforts to maintain reserves therefor consistent with past
practices) and as otherwise required to preserve and maintain the Company's
status as a REIT through the Effective Time, and except, in the case of clause
(iii) above, in connection with the redemption of the Holding Preferred Stock as
contemplated by this Agreement.
(c) Issuance of Securities. The Company shall not, nor shall
the Company permit any of its Subsidiaries to, issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any shares of any class
or series of its capital stock, any voting debt securities or any securities
convertible into, or exchangeable or exercisable for, any such shares of capital
stock or voting debt securities.
(d) Governing Documents. Neither the Company, CSLC, Sub, nor
any of the Company's Subsidiaries, shall amend or restate (or propose to amend
or restate) its Articles of Incorporation, limited liability company operating
agreement, partnership agreement, By-laws or any analogous organizational or
constituent instruments, except to the extent necessary to facilitate
consummation of the Merger.
(e) No Solicitation. (i) Until the termination of this
Agreement in accordance with Article VII hereof, the Company and its
Subsidiaries shall not, directly or indirectly, and the Company shall use its
best efforts to ensure that the respective officers, directors and employees of
the Company and its Subsidiaries, and its best efforts to ensure that any
investment banker, financial advisor, attorney, accountant, broker or other
representative or agent retained by or authorized to act on behalf of it or any
of its Subsidiaries shall not, directly or indirectly (A) solicit, initiate,
facilitate or encourage (including by way of furnishing information or
assistance) the submission or receipt of any "Acquisition Proposal" (as defined
below) or (B) participate or engage in negotiations or discussions, disclose any
material non- public information relating to the Company or any of its
Subsidiaries, or afford access to the properties, books or records of the
Company or any of its Subsidiaries, in connection with any Acquisition Proposal
(or
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propose or agree to do any of the foregoing); provided that if the Company Board
determines, based upon the advice of outside legal counsel, that the failure to
engage in such negotiations or discussions, furnish or disclose such information
or afford such access would be inconsistent with the fiduciary duties of the
Company Board under applicable law, then the Company, in response to an
Acquisition Proposal, may furnish and disclose such material non-public
information and afford such access with respect to the Company and its
Subsidiaries and may fully participate in discussions and negotiations regarding
such Acquisition Proposal and conduct all such due diligence and do all acts and
things and incur all such expenses necessary to become deliberately and fully
informed as to the nature, material terms and likelihood of consummation of the
Acquisition Proposal; provided, further, however, that, in connection therewith,
the Company and the potential acquiring party shall enter into a customary
confidentiality and "standstill" agreement of not less than two years' duration
and such agreement otherwise shall be no less restrictive in tenor or scope than
that certain Letter Agreement dated March 9, 1998, among the Company, CSLC and
the other parties signatory thereto (the "CSLC Letter Agreement").
For purposes of this Section 4.1(e), "Acquisition Proposal"
means any inquiry, expression of interest, letter of intent, memorandum of
understanding, term sheet, offer or proposal from any person or entity
(including any "group" within the meaning of Rule 13d-5 under the Exchange Act)
relating to any direct or indirect acquisition, lease, sale or other similar
transaction (whether in a single transaction or series of related transactions)
of 20% or more of the consolidated assets of the Company or 20% or more of any
class or series of equity securities of the Company or any of its Subsidiaries,
any tender offer or exchange offer which, if consummated, would result in any
person or entity (including any "group" referred to above) beneficially owning
20% or more of any class or series of equity securities of the Company or any of
its Subsidiaries, and any merger, consolidation, business combination, sale or
other transfer of assets substantially as an entirety, recapitalization,
exchange, liquidation, dissolution, divestiture, reorganization or other
extraordinary corporate transaction involving the Company or any of its
Subsidiaries, other than the transactions contemplated by this Agreement and the
Merger.
Anything to the contrary in this Section 4.1(e)
notwithstanding, nothing contained in this Section 4.1(e) shall prohibit the
Company or the Company Board from taking and disclosing to the holders of
Company Common Stock pursuant to Rules 14d-9 and 14e-2(a) and Regulations 14A
and 14C under the Exchange Act, a position with respect to a tender or exchange
offer or solicitation of proxies conducted by a third party or from making such
disclosure to holders of the Company Common Stock, or otherwise, as may be
required by applicable law (including, without limitation, requirements of the
Exchange Act and the regulations promulgated thereunder, the regulations of any
national securities exchange registered pursuant to Section 6 of the Exchange
Act or U.S. inter-
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dealer quotation system of a registered national securities association, or
Sections 13.1-770 through and including 13.1-775 of the Va Act); provided that
neither the Company nor the Company Board (or any special or other committee
thereof) shall, except as set forth in Sections 4.1(e)(ii) or 5.3, withdraw,
modify or change (or propose to withdraw, modify or change) its recommendation
of approval of this Agreement and the Merger or approve or recommend (or propose
to approve or recommend) an Acquisition Proposal.
(ii) Except as provided in the next sentence of this
Section 4.1(e)(ii) and in Section 5.3, neither the Company nor the Company Board
(or any special or other committee thereof) shall (A) withdraw, modify or change
(or propose to withdraw, modify or change) in a manner adverse to CSLC, the
recommendation by the Company Board (or any such committee) of the approval of
this Agreement and the Merger, (B) approve or recommend (or propose to approve
or recommend) an Acquisition Proposal, or (C) cause the Company to enter into a
definitive agreement with respect to an Acquisition Proposal. Notwithstanding
the immediately preceding sentence, if the Company Board determines, based upon
the advice of outside legal counsel, that the failure to take any of the actions
contemplated by the immediately preceding sentence would be inconsistent with
the fiduciary duties of the Company Board under applicable law, then the Company
Board may withdraw, modify or change its recommendation of approval of this
Agreement and the Merger, affirmatively approve or recommend a "Superior
Proposal" (as defined below), or cause the Company to enter into an agreement
with respect to a Superior Proposal; provided, that, in the case of approving,
recommending or causing the Company to enter into an agreement with respect to a
Superior Proposal, such approval, recommendation or execution and delivery shall
occur not earlier than the seventh day next following CSLC's receipt of written
notice (by facsimile) advising CSLC that the Company Board has received a
Superior Proposal, specifying the material terms and conditions thereof
(including, without limitation, the price, structure, tax and accounting
treatment, financing requirements (if any), requisite regulatory consents and
approvals (if any) and the anticipated timing of receipt of such approvals and,
if then known, the approximate anticipated date of consummation thereof) and
identifying the person(s) making such Superior Proposal.
For purposes of this Agreement, a "Superior Proposal"
means any written Acquisition Proposal to acquire, directly or indirectly
(whether in a single transaction or series of related transactions), for
consideration consisting of cash, securities and/or other property, 50% or more
of the Company Common Stock then outstanding or 50% or more of the consolidated
assets of the Company, upon terms and subject to conditions which the Company
Board determines in its good faith judgment (based upon the advice of an
investment banking firm of nationally recognized reputation) to be more
favorable from a financial point of view to the holders of the Company Common
Stock than the Merger, and in respect of which external financing, if required
to be obtained by the acquiring person or entity, either then is fully committed
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(pursuant to a customary commitment letter) or, in the good faith judgment of
the Company Board (based upon the advice of said investment banking firm),
obtainable by the acquiring person or entity based upon the creditworthiness of
such person or entity.
(iii) In addition to the obligations of the Company
set forth in Sections 4.1(e)(i) and (ii), the Company shall notify CSLC in
writing (by facsimile) within three days of the Company's receipt of any request
for information or of the receipt of any Acquisition Proposal, or any
communication with respect to (or which reasonably would be expected to result
in) an Acquisition Proposal, and the material terms and conditions of such
request, Acquisition Proposal or communication (to the same extent set forth
parenthetically in the proviso to the second sentence of Section 4.1(e)(ii)).
The Company shall inform CSLC of the status and details of (including amendments
or proposed amendments to) any such request, Acquisition Proposal or
communication. In addition, the Company promptly shall provide to CSLC any due
diligence information in respect of the Company furnished to the party making
the Acquisition Proposal.
(iv) In the event that the Company releases any third
party from its obligations under any standstill agreement or arrangement
relating to an Acquisition Proposal or otherwise under any confidentiality or
other similar agreement relating to information material to the Company or any
of its Subsidiaries, the Company shall simultaneously release CSLC from its
obligations and restrictions under the CSLC Letter Agreement.
(f) No Acquisitions. The Company shall not, nor shall it
permit any of its Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business or
corporation, partnership, limited liability entity, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets, in each case, which are material, individually or in the
aggregate, to the Company and its Subsidiaries taken as a whole.
(g) No Dispositions. The Company shall not, nor shall the
Company permit any of its Subsidiaries to sell, lease, encumber or otherwise
dispose of or agree to sell, lease, encumber or otherwise dispose of, any of its
assets, which are material to the Company and its Subsidiaries taken as a whole.
(h) Indebtedness. Other than the indebtedness and the
transactions contemplated by that certain Term Loan Agreement dated September
29, 1998, between the Company, ILM 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
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Company permit any of its Subsidiaries to, incur, assume or guarantee any
indebtedness for borrowed money.
(i) Other Actions. Neither the Company, CSLC, or Sub shall,
nor shall the Company, CSLC, or Sub permit any of its Subsidiaries to, take any
action that would or reasonably would be likely to result in any of its
representations and warranties set forth in this Agreement being untrue as of
the date made (to the extent so limited) or any of the conditions to the Merger
set forth in Article VI hereof not being satisfied.
(j) Advice of Changes; SEC Filings. Each of the Company and
CSLC shall confer on a regular basis with the other, report on operational
matters and promptly advise the other orally and in writing of any change or
event having, or which insofar as reasonably can be foreseen would have, a
Material Adverse Effect or a CSLC Material Adverse Effect. Each of the Company
and CSLC promptly shall provide the other with true and complete copies of all
filings made by it with any Governmental Entity in connection with this
Agreement, the Merger and the transactions contemplated hereby and thereby.
(k) Certain Other Actions.
(i) The Company shall, and shall cause each of its
Subsidiaries to, duly and timely file all reports, Federal, state and local tax
returns and other documents required to be filed with Federal, state, local and
other authorities, subject to extensions permitted by applicable law; provided
that, in the case of the Company and ILM 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
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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 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
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Time, to all of its properties, books, contracts, commitments and records
(including, without limitation, using its best efforts to afford access to, the
audit work papers of the independent auditor of each of the Company and CSLC)
and, during such period, the Company and CSLC each shall (and shall cause each
of its Subsidiaries to) furnish promptly to the other (a) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the Securities Act, the Exchange Act and the
Trust Indenture Act and (b) all other information concerning its business,
properties and personnel as such other party reasonably may request. Each of the
Company and CSLC shall waive any accountant/client privilege that may exist, and
take all other necessary action, to ensure the delivery by the independent
auditor of the Company and CSLC of audit work papers to the party requesting
such information. Unless otherwise required by law, the parties shall hold all
such information which is non-public or otherwise proprietary in confidence
until such time as such information otherwise becomes publicly available through
no wrongful act of either party. In the event of termination of this Agreement
for any reason, each party promptly shall return all non-public and proprietary
information obtained from any other party, and any copies made of (and other
extrapolations from or work product or analyses based on) such documents, to
such other party.
SECTION 5.3 Stockholder's Meeting. The Company shall duly notice and
convene as promptly as practicable after the date hereof the Company
Stockholders' Meeting for the purpose of voting upon the adoption of this
Agreement and the Merger (and the transactions contemplated hereby and thereby).
The Company (through the Company Board) shall recommend to the holders of
Company Common Stock the approval and adoption of all such matters; and shall
use its best efforts to solicit and, if necessary, resolicit the vote of the
holders of not less than 66-2/3% of the Company Common Stock in favor of
adoption of this Agreement and the Merger (including, if necessary, adjourning
or postponing, and subsequently reconvening, the Company Stockholders' Meeting
for the purpose of obtaining such votes and engaging proxy solicitation firms
and other "street" professionals); provided, however, that notwithstanding
anything to the contrary contained in this Agreement, the Company Board may
withdraw, modify or change such recommendation (including in a manner adverse to
CSLC) under the circumstances set forth in the second sentence of Section
4.1(e)(ii) without any liability or obligation to CSLC (except as set forth in
Section 5.6(b)).
The Company may, if it withdraws, modifies or changes its
recommendation under the circumstances set forth in the second sentence of
Section 4.1(e)(ii), delay the filings or mailing, as the case may be, of the
Company Proxy Statement or the convening of the Company Stockholders' Meeting,
in each case to the extent necessary to revise the Company Proxy Statement to
reflect such withdrawal,
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modification or change and to provide the minimum notice thereof required under
applicable law or the Company's Articles of Incorporation or By-laws.
SECTION 5.4 Consents and Approvals. Each of the Company and CSLC shall
take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger (including
furnishing all information in connection with approvals of or filings with any
Governmental Entity) and shall cooperate with and furnish information to each
other in connection with any such requirements imposed upon it or any of its
Subsidiaries in connection with the Merger. Each of the Company and CSLC shall,
and shall cause its Subsidiaries to, take all reasonable actions necessary to
obtain (and shall cooperate with the other in obtaining) each consent,
authorization, order or approval of, and each exemption by, each Governmental
Entity and other person or entity, required to be obtained or made by the
parties hereto or any of their respective Subsidiaries in connection with this
Agreement and the Merger or the taking of any action contemplated hereby or
thereby.
SECTION 5.5 Intentionally omitted
SECTION 5.6 Expenses; Liquidated Damages. (a) Except as hereinafter
provided in this Section 5.6, all fees and expenses incurred in connection with
the preparation, execution and delivery of this Agreement (including all
instruments and agreements prepared and delivered in connection herewith), the
Merger and the transactions contemplated hereby and thereby shall be paid by the
party incurring such fees or expenses, whether or not the Merger is consummated
or abandoned.
(b) Provided that neither CSLC nor Sub then is in material
breach of any of its representations, warranties or agreements under this
Agreement, the Company shall pay or cause to be paid to CSLC all of "CSLC's
Expenses" (as hereinafter defined) if this Agreement shall be terminated
pursuant to Section 7.1(e).
Provided that neither CSLC nor Sub then is in material breach
of any of its representations, warranties or agreements under this Agreement, if
this Agreement shall be terminated pursuant to Sections 7.1(f) or 7.1(g), then
the Company shall pay (or cause to be paid) to CSLC by wire transfer of same day
funds to an account designated in writing by CSLC to the Company a termination
fee in the amount of $1,858,200, together with CSLC's Expenses, which fee and
expenses shall be payable by the Company not later than the third business day
next following the date of termination of this Agreement pursuant to either
Section 7.1(f) or 7.1(g).
In addition, provided that neither CSLC nor Sub then is in
material breach of any of its representations, warranties or agreements under
this Agreement, if this Agreement shall be terminated pursuant to Section
7.1(b)(i) due to a material breach by the Company of Section 4.1(e) (and not in
respect of any other material breach by the
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Company of any other provision of this Agreement) and prior to the expiration of
the 16-month period next following the date of such termination, a "Third Party
Acquisition" (as hereinafter defined) is consummated, then the Company shall pay
or cause to be paid to CSLC by wire transfer of same day funds to an account
designated in writing by CSLC to the Company, a termination fee in the amount of
$1,858,200, together with CSLC's Expenses which fee and expenses shall be
payable by the Company on the date of consummation of such Third Party
Acquisition (if and only if such Third Party Acquisition shall be consummated
prior to the expiration of the 16-month period next following the date of such
termination).
It is expressly agreed that the amounts to be paid pursuant to
this Section 5.6(b) and Section 5.6(e) constitute liquidated damages negotiated
at arm's-length and do not constitute, and are not intended by the parties to
operate as, a penalty.
(c) Intentionally Omitted.
(d) The Company shall promptly pay or cause to be promptly
paid (not later than 10 days after submission of reasonably itemized invoices or
other reasonable documentary evidence therefor) by wire transfer of same day
funds to CSLC, CSLC's Expenses if this Agreement shall be terminated under any
of the circumstances set forth in this Section 5.6(b).
(e) Subject to the provisions of Sections 7.1(d) and 7.1(e)
and provided that the Company is not then in material breach of any of its
representations, warranties or agreements under this Agreement, the conditions
set forth in Sections 6.1 and 6.2 have been satisfied or (to the extent
waiveable under applicable law) waived, and this Agreement has not been
terminated by CSLC or Sub pursuant to Section 7.1 (i)(i), if the Merger and the
transactions contemplated by this Agreement shall not, for any reason, be
consummated by CSLC and Sub, then CSLC and Sub shall pay (or cause to be paid)
to the Company by wire transfer of same day funds to an account designated in
writing by Company to CSLC, a termination fee in the amount of $1,540,000 not
later than the third business day next following the termination of this
Agreement pursuant to Section 7.1(h).
(f) For purposes of this Section 5.6, (i) "Third Party
Acquisition" means the occurrence of any of the following events: (A) the
acquisition of the Company by means of merger, business combination or otherwise
by any person or entity (including any "group" within the meaning of Rule 13d-5
under the Exchange Act) other than CSLC, Sub, or any Subsidiary or affiliate
thereof ("Third Party"), (B) the transfer, lease, sale or other similar
disposition to or acquisition by a Third Party of 20% or more of the
consolidated assets of the Company, or (C) the transfer to or acquisition by a
Third Party of 20% or more of the outstanding shares of Company Common Stock;
and (ii) "CSLC's Expenses" means fees and out-of-pocket expenses reasonably and
actually incurred and paid by or on behalf of CSLC in connection with this
Agreement, the Merger and the
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consummation of the transactions contemplated hereby or thereby, including all
financing commitment fees and expenses, reasonable fees and expenses of outside
legal counsel, accountants, experts, financial advisors and consultants to CSLC,
in an aggregate amount not to exceed $2,000,000.
SECTION 5.7 Brokers or Finders. Each of CSLC and the Company covenants
as to itself, its Subsidiaries and its affiliates, that no agent, broker,
investment banker, financial advisor or other person or entity is or will be
entitled to receive any broker's or finder's fee or any other commission or
similar fee in connection with any of the transactions contemplated by this
Agreement, except for Schroder & Co. Inc. and Cohen & Steers, Inc., whose fees
and expenses shall be fully paid for by the Company in accordance with the
Company's agreement with such firms (true and complete copies of which have been
delivered by the Company to CSLC), and Lehman Brothers, whose fees and expenses
shall be fully paid for by CSLC in accordance with CSLC's agreement with such
firm (true and complete copies of which have been delivered by CSLC to the
Company). Each of CSLC and the Company hereby agrees to indemnify and hold
harmless the other from and against any and all claims, liabilities or
obligations with respect to any other fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such party or its affiliate.
SECTION 5.8 CSLC Advisory Board . Prior to the Effective Time, CSLC
shall have taken all requisite corporate action (i) to authorize the creation of
and to establish an advisory board (the " CSLC Advisory Board"), the members of
whom, from time to time after the Effective Time, shall be invited to attend,
but not to vote at, meetings of the CSLC Board of Directors (at the pleasure and
discretion of such Board) and (ii) to cause three nominees designated by the
Company (as set forth in that certain Letter Agreement dated February 7, 1999,
as amended on the date hereof, between CSLC and the Company) to serve as members
of the CSLC Advisory Board, for an initial term commencing at the Effective Time
and expiring on the third anniversary thereof, until their successors are duly
appointed by the CSLC Board of Directors. Each member of the Advisory Board
shall receive a $7,000 annual retainer fee for membership on the Advisory Board
and a fee of $200 for attendance or participation at each meeting of the
Advisory Board and shall be entitled to participate in the same stock option and
similar programs made available by CSLC to CSLC's directors (provided that each
member of the Advisory Board otherwise satisfies the eligibility requirements
thereof).
SECTION 5.9 Indemnification; Directors' and Officers' Insurance. (a)
The Company shall, and from and after the Effective Time, CSLC and the Surviving
Entity shall, indemnify, defend and hold harmless each person who is now, or at
any time prior to the date hereof has been or who becomes prior to the Effective
Time, an officer, director or employee of the Company or any of its Subsidiaries
(the "Indemnified Parties") from and against (i) all losses, claims, damages,
costs, expenses, liabilities or
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judgments or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not unreasonably be withheld) of or in
connection with any claim, action, suit, proceeding, case or investigation
("Action") based in whole or in part on or arising in whole or in part out of or
in connection with the fact that such person is or was a director, officer or
employee of the Company or any Subsidiary, whether pertaining to any matter
existing or occurring at or prior to the Effective Time and whether asserted or
claimed prior to, at or after the Effective Time ("Indemnified Liabilities") and
(ii) all Indemnified Liabilities based in whole or in part on, or arising in
whole or in part out of or in connection with this Agreement, the Merger or any
of the transactions contemplated hereby or thereby, in each case to the fullest
extent a corporation is permitted under applicable law to indemnify its own
directors, officers and employees, as the case may be and CSLC and the Surviving
Entity, as the case may be, shall pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
fullest extent permitted under applicable law upon receipt of any undertaking
contemplated by applicable law. Without limiting the foregoing, if any such
claim, action, suit, proceeding or investigation is commenced or instituted
against any Indemnified Party (whether arising before or after the Effective
Time), (i) the Indemnified Parties may retain counsel satisfactory to them and
the Company (or satisfactory to them and CSLC and the Surviving Entity after the
Effective Time); (ii) the Company (or after the Effective Time, CSLC and the
Surviving Entity) shall pay all reasonable fees and expenses of such counsel for
the Indemnified Parties promptly as reasonably itemized statements therefor are
received; and (iii) the Company (or after the Effective Time, CSLC and the
Surviving Entity) shall use best efforts to assist in the vigorous defense of
any such matter, provided that neither the Company, CSLC nor the Surviving
Entity shall be liable for any settlement of any claim effected without its
written consent (which consent shall not unreasonably be withheld). Any
Indemnified Party electing to claim indemnification under this Section 5.9, upon
learning of any such Action, shall promptly notify the Company, CSLC or the
Surviving Entity of such election (but the failure so to notify the Company
shall not relieve it from any liability which it may have under this Section
5.9, except to the extent such failure materially prejudices it or if it
otherwise forfeits substantive rights and defenses as a result of such failure),
and shall deliver to the Company (or after the Effective Time, to CSLC and the
Surviving Entity) the undertaking contemplated by applicable law. The
Indemnified Parties as a group may retain only one firm of legal counsel to
represent them with respect to each such matter unless there is, under
applicable standards of professional conduct, a conflict in respect of any
significant issue between the positions of any two or more Indemnified Parties.
(b) For a period of seven years after the Effective Time, CSLC
shall cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company and its Subsidiaries
(provided that CSLC may substitute therefor policies of at least the same
coverage and amounts containing terms
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and conditions which are no less advantageous) with respect to claims arising
from facts or events which occurred before the Effective Time to the extent
available on commercially reasonable terms; provided, however, that CSLC shall
not be obligated to incur in excess of $400,000 in the aggregate under this
Section 5.9(b).
(c) The provisions of this Section 5.9 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party, his heirs
and his representatives.
SECTION 5.10 Proposed Simultaneous Acquisition.
(a) The Company hereby acknowledges that it has been advised
by CSLC that CSLC, substantially simultaneously with the execution and delivery
of this Agreement, is entering into an Agreement and Plan of Merger (the "ILM
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").
(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
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percentage ownership of the Santa Barbara Property held by the Company or its
Subsidiary.
(ii) The closing of the sale of the Santa Barbara Property
shall occur at such time and place as shall be mutually agreed upon by the
parties; but in no event later than 90 days subsequent to the consummation of
the ILM 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 between
the appraisals is 10% or less of the amount of the higher appraisal, then the
appraisals shall be averaged and that average shall be the fair market value of
the Santa Barbara Property. If the difference between the appraisals is greater
than 10% of the higher appraisal, such two appraisers shall then mutually
appoint a third independent nationally recognized asset appraisal firm and the
amount designated by such mutually selected appraiser shall be the fair market
value of the Santa Barbara Property.
SECTION 5.11 Additional Agreements; Best Efforts. Upon the terms and
subject to the conditions of this Agreement, each of the Company, CSLC and Sub
agrees to use its best efforts to take (or cause to be taken or cause to be
done), all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, subject to the receipt of the Company Stockholder Approval
Condition, including, without limitation, cooperating fully with the other
party, including by provision of information and making all necessary filings in
connection with, among other things, any Governmental Entity approval. In case
at any time after the Effective Time any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Entity with full title to all properties, assets, rights, approvals, immunities
and franchises of either of the Constituent Corporations, the proper officers
and directors of each party to this Agreement shall promptly take all such
necessary action.
SECTION 5.12 Conveyance Taxes. CSLC and the Company shall cooperate in
the preparation, execution and filing of all tax returns, questionnaires,
applications or other documents regarding any conveyance taxes which become
payable in connection
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with the transactions contemplated by this Agreement that are required to be
filed prior to the Effective Time.
SECTION 5.13 Public Announcements. The Company and CSLC shall consult
with each other prior to issuing any press release or making any public
statement or announcement (whether or not jointly made) with respect to this
Agreement and the transactions contemplated hereby and, except as may be
required by applicable regulations of any national securities exchange
registered pursuant to Section 6 of the Exchange Act or U.S. inter-dealer
quotation system of a registered national securities association, the Company or
CSLC, as the case may be, shall not issue any such press release or make any
such public statement or announcement prior to such consultation.
SECTION 5.14 Notification of Certain Matters. The Company shall give
prompt notice to CSLC and Sub, and CSLC and Sub shall give prompt notice to the
Company, of (i) the occurrence or nonoccurrence of any event the occurrence or
nonoccurrence of which would be likely to cause any representation or warranty
given by them and contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time, (ii) any material failure of
the Company, CSLC, or Sub, as the case may be, to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it hereunder, (iii) any notice of, or other communication relating
to, a default (or an event which with notice, lapse of time or both, would
become a default) received by it or any of its Subsidiaries subsequent to the
date hereof and prior to the Effective Time, under any material agreement or
instrument, (iv) any notice or other communication from any person or entity
alleging that the consent of such person or entity is or may be required in
connection with the transactions contemplated by this Agreement, or (v) any
Material Adverse Effect or CSLC Material Adverse Effect (other than changes
resulting from general economic conditions or conditions relating generally to
the senior living industry) shall have occurred or reasonably be likely to
occur; provided, however that the delivery of any notice pursuant to this
Section 5.14 shall not cure any breach or noncompliance under this Agreement or
limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
SECTION 5.15 Company Taxes. The actual distributions from the Company
to its shareholders following its most recent taxable year end through the
Closing Date plus its deemed liquidating distribution of the Company resulting
from the Merger for federal income tax purposes will eliminate its "REIT taxable
income" (as that term is defined in Section 857(b)(2)) from its most recent
taxable year end through the Closing Date, including, without limitation, gain
from the deemed sale of assets by the Company to CSLC for federal income tax
purposes.
SECTION 5.16 Original Agreement. As of the date hereof, this Agreement
amends and restates the Original Agreement in its entirety.
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SECTION 5.17 Intentionally Omitted.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to consummate the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall
have been adopted by the affirmative vote of the holders of not less than
66-2/3% of the outstanding Company Common Stock.
(b) Other Approvals. All authorizations, consents, orders or
approvals of, or declarations or filings with, any Governmental Entity the
failure to obtain which insofar as reasonably can be foreseen would have a
Material Adverse Effect or a CSLC Material Adverse Effect, shall have been duly
and timely filed and obtained and all applicable waiting periods, if any,
pursuant to the HSR Act shall have expired or been early terminated.
(c) The Company Proxy Statement on Schedule 14A and the
Schedule 13E-3 shall be filed in definitive form with the SEC and shall not be
the subject of any stop order or similar proceeding.
(d) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other similar order issued by any
court of competent jurisdiction or Governmental Entity preventing, materially
delaying or impairing consummation of the Merger shall be in effect.
(e) Redemption of Holding Preferred Stock. All shares of
Holding Preferred Stock shall have been redeemed at a price per share not to
exceed the stated liquidation preference thereof, together with all unpaid
dividends thereon accrued through the date next preceding the Closing Date.
(f) State Takeover Laws. Consummation of the transactions
contemplated by this Agreement and the Merger shall not be subject to the
provisions of any State Takeover Laws.
SECTION 6.2 Conditions of Obligations of CSLC and Sub. The obligations
of CSLC and Sub to consummate the Merger are subject to the satisfaction at or
prior to the Effective Time of the following conditions, unless waived in
writing by CSLC and Sub (to the extent waiveable under applicable law):
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(a) Representations and Warranties. All of the representations
and warranties of the Company set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time (except for
representations and warranties that (i) expressly speak only as of a specific
date or time which need only be true and correct as of such date and time and
(ii) by their terms are qualified by materiality or any analogous limitation on
scope which, for purposes of this Section 6.2(a), shall have to be true and
correct in all respects), and CSLC shall have received a certificate signed on
behalf of the Company by its chief executive officer or the chief financial
officer to such effect.
(b) Performance of Obligations of the Company. The Company
shall have performed all obligations required to be performed by it under this
Agreement at or prior to the Effective Time, and CSLC shall have received a
certificate signed on behalf of the Company by its chief executive officer or
chief financial officer to such effect.
(c) Consents. The Company shall have obtained the consent or
approval of each person or entity whose consent or approval shall be required to
permit the succession by the Surviving Entity to any obligation, right or
interest of the Company or any Subsidiary of the Company under any agreement or
instrument, except for those the failure of which so to obtain would not in the
reasonable opinion of CSLC have a Material Adverse Effect or upon consummation
of the transactions contemplated by the Agreement and the Merger, a CSLC
Material Adverse Effect.
(d) Nonforeign Status. The Company shall have delivered a
certificate of Non-Foreign Status which meets the requirements of Treasury
Regulation Section 1.1445-2, duly executed and acknowledged, certifying that the
Company is not a foreign person for United States income tax purposes.
(e) Domestically Controlled Status Certificate. The Company
shall have delivered a certificate certifying that the Company is a domestically
controlled REIT within the meaning of Section 897(h)(4)(B).
SECTION 6.3 Conditions of Obligations of the Company. The obligation of
the Company to consummate the Merger is subject to the satisfaction at or prior
to the Effective Time of the following conditions, unless waived in writing by
the Company (to the extent waiveable under applicable law):
(a) Representations and Warranties. The representations and
warranties of CSLC and Sub set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time as though made on and as of the Effective Time (except for
representations and warranties that (i) expressly speak only as of a specific
date or time which need only be true and correct as of such
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date and time and (ii) that, by their terms are qualified by materiality or any
analogous limitation on scope which, for purposes of this Section 6.3 (a), shall
have to be true and correct in all respects) and the Company shall have received
a certificate signed on behalf of CSLC by its chief executive officer or the
chief financial officer to such effect.
(b) Performance of Obligations of CSLC and Sub. CSLC and Sub
shall have performed all obligations required to be performed by them under this
Agreement at or prior to the Effective Time, and the Company shall have received
a certificate signed on behalf of CSLC by its chief executive officer or chief
financial officer to such effect.
(c) Consents. CSLC shall have obtained the consent or approval
of each person whose consent or approval shall be required in connection with
the transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease or other agreement or instrument, except those for
which failure to obtain such consents and approvals would not, in the reasonable
opinion of the Company, individually or in the aggregate, have a CSLC Material
Adverse Effect, or materially affect the consummation of the transactions
contemplated hereby.
(d) Payment of Exchange Funds. CSLC shall have received the
proceeds of the Financing Commitment, or otherwise shall have obtained and
segregated for payment to the Company sufficient cash funds, to pay in full at
the Effective Time to the holders of the Company Common Stock, the Exchange
Funds.
ARTICLE VII
TERMINATION AND AMENDMENT
SECTION 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the holders of Company Common Stock
or by the holders of CSLC Common Stock:
(a) by the mutual written consent of CSLC and the Company;
(b) by (i) CSLC, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the Company set
forth in this Agreement which has not been cured within 20 business days next
following receipt by the Company of notice of such breach, or (ii) the Company,
if there has been a material breach of any representation, warranty, covenant or
agreement on the part of CSLC or Sub set forth in this Agreement which has not
been cured within 20 business days next following receipt by CSLC of notice of
such breach;
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(c) by either CSLC or the Company if any permanent injunction
or other order of a court, Governmental Entity or other competent authority
preventing consummation of the Merger shall have been issued;
(d) by either CSLC or the Company if the Merger shall not have
been consummated at or prior to 5:00 p.m., Eastern time, on September 30, 2000;
(e) by CSLC or the Company, if the Company Stockholder
Approval Condition shall not have been satisfied by September 29, 2000.
(f) by CSLC or Sub if (i) the Company Board (or any special or
other committee thereof) shall have withdrawn, modified or changed in a manner
adverse to CSLC its recommendation of approval (by the holders of Company Common
Stock) of this Agreement or the Merger, or shall have approved or recommended
(to the holders of Company Common Stock) a Superior Proposal or (ii) the Company
shall have entered into a definitive agreement with respect to an Acquisition
Proposal;
(g) by the Company, upon entering into a definitive agreement
in respect of a Superior Proposal pursuant to Section 4.1(e) hereof; provided
that the Company has complied with all provisions of Section 4.1(e), including
the notice provisions thereof, and satisfies its payment obligations as provided
in Section 5.6;
(h) by the Company if the Merger and the transactions
contemplated by this Agreement shall not, for any reason, be consummated by CSLC
and Sub; provided that the Company is not then in material breach of any of its
representations, warranties or agreements under this Agreement, the conditions
set forth in Sections 6.1 and 6.2 have been satisfied or (to the extent
waiveable under applicable law) waived, and this Agreement has not been
terminated by CSLC or Sub pursuant to Section 7.1(i)(i); or
(i) (i) by CSLC or Sub if there shall have occurred or there
shall exist any events, changes, set of circumstances or conditions having or
which reasonably could be likely to have a Material Adverse Effect or (ii) the
Company, if there shall have occurred or there shall exist any events, changes,
set of circumstances or conditions having or which reasonably could be likely to
have a CSLC Material Adverse Effect.
SECTION 7.2 Effect of Termination. If this Agreement is terminated
either by the Company or CSLC as provided in Section 7.1, this Agreement
forthwith shall become null and void and there shall be no liability or
obligation on the part of CSLC, Sub, or the Company, or any of their respective
officers or directors, except (a) with respect to the last sentence of Section
5.2, and Sections 5.6, 5.7 and 5.9 and (b) to the extent that such termination
results from the willful breach by a party hereto of any of its representations,
warranties, covenants or agreements set forth in this Agreement, except as
provided in Section 8.7.
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SECTION 7.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective boards of directors,
at any time before or after approval of the matters presented in connection with
the Merger by the holders of Company Common Stock or by the holders of CSLC
Common Stock, but, after any such approval, no amendment shall be made which by
law requires further approval by such holders without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of all of the parties hereto.
SECTION 7.4 Extension; Waiver. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective board of
directors, may, to the extent legally permissible, (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Article II and Sections 5.6, 5.7,
5.9, 5.10 and 5.11, the last sentence of Section 7.3 and this Article VIII in
its entirety which shall survive termination indefinitely.
SECTION 8.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given upon receipt if delivered
personally, telecopied (with confirmation) or mailed by registered or certified
mail (return receipt requested) to the parties at the following addresses (or at
such other address for a party as shall be specified in a notice given in
accordance with this Section 8.2):
(a) if to CSLC or Sub, to:
Capital Senior Living Corporation
237 Park Avenue, 21st Floor
New York, New York
(212) 551-1770 (telephone)
(212) 551-1774 (facsimile)
Attention: Lawrence A. Cohen,
Vice Chairman and Chief Executive Officer,
with copies (which shall not constitute
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notice pursuant to this Section 8.2) to:
Capital Senior Living Corporation
14160 Dallas Parkway
Suite 300
Dallas, Texas 75240
(972) 770-5600 (telephone)
(972) 661-5403 (facsimile)
Attention: James A. Stroud, Chairman of the Company
- and -
Jenkens & Gilchrist, P.C.
1445 Ross Avenue, Suite 2900
Dallas, Texas 75202
(214) 855-4500 (telephone)
(214) 855-4300 (facsimile)
Attention: Winston W. Walp, II, Esq.
- and -
(b) if to the Company, to:
ILM 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)
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Attention: Clifford E. Neimeth, Esq.
SECTION 8.3 Interpretation. When a reference is made in this Agreement
to Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not in any way affect the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement," "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to
October 19, 1999.
SECTION 8.4 Counterparts. This Agreement may be executed in one or more
counterparts (including by facsimile transmission), all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by all of the parties hereto and delivered to
the other parties; it being hereby understood that all parties need not sign the
same counterpart.
SECTION 8.5 Entire Agreement; No Third Party Beneficiaries. This
Agreement (including the documents and the instruments referred to herein, which
are hereby incorporated herein and made a part hereof for all purposes as if
fully set forth herein), the Management Agreement between ILM 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.
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SECTION 8.8 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Sub may assign, in its sole
discretion, any or all of its rights, interests and obligations hereunder to
CSLC or to any direct or indirect wholly-owned Subsidiary of CSLC; provided that
no such assignment shall change the amount or nature of the Merger Consideration
or relieve the assigning party of its obligations hereunder if such assignee
does not perform such obligations. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective successors and assigns.
SECTION 8.9 Gender and Number Classification. All words used herein,
irrespective of the number and gender specifically used, shall be deemed and
construed to include or mean any other number, singular or plural, and any other
gender, masculine, feminine or neuter, as the context requires.
SECTION 8.10 Knowledge. For purposes of this Agreement, "knowledge" "to
its knowledge", or analogous expressions, when used with reference to the
Company, CSLC and/or any of their respective Subsidiaries, means knowledge of a
particular fact or set of circumstances, events or conditions by any executive
officer (or employee acting in an analogous capacity) or director of the
Company, CSLC or any of their respective Subsidiaries, as applicable, to the
extent actually known by any one or more of such persons or, after due inquiry
and reasonable investigation by one or more of such persons, should have been
known.
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IN WITNESS WHEREOF, CSLC, Sub, and the Company have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, all on this 19th day of October 1999.
CAPITAL SENIOR LIVING CORPORATION
By: /s/ James A. Stroud
--------------------------------------------
Name: James A. Stroud
Title: Chairman of the Company
CAPITAL SENIOR LIVING ACQUISITION, LLC
By: /s/ Lawrence A. Cohen
--------------------------------------------
Name: Lawrence A. Cohen
Title: Chief Executive Officer
ILM 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>
May 18, 2000
Board of Directors
ILM II Senior Living, Inc.
1750 Tysons Boulevard; Suite 1200
Tysons Corner, Virginia 22102
Members of the Board of Directors:
On April 17, 2000, Cohen & Steers Capital Advisors LLC ("Cohen &
Steers") delivered to you its oral opinion as of said date, confirmed in writing
by Cohen & Steers' letter to you dated April 18, 2000 (the "April 18 Letter")
that, subject to the matters stated below, the merger consideration of
$13.041483 per share in cash (the "Merger Consideration") provided for in the
then proposed First Amendment to be dated as of April 18, 2000 (the "First
Amendment") to the Amended and Restated Agreement and Plan of Merger among ILM
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, a Delaware limited liability company ("Sub"),
dated October 19, 1999 (as amended, the "Merger Agreement") was fair to the
stockholders of the Company, from a financial point of view.
We understand that the Company, CSLC and Sub, entered into the First
Amendment on April 18, 2000. 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 $13.041483 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 at the date hereof 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 First Amendment and the Merger Agreement;
<PAGE>
(2) reviewed certain publicly available historical
consolidated financial and operating data with respect to the Company
and ILM 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.
We were not requested to and, therefore, did not verify independently
the accuracy or completeness of any information furnished by the Company or any
publicly available information which we reviewed in arriving at our opinion
expressed herein. With the permission of the Board, we assumed and relied,
without independent verification, upon the accuracy and completeness of all such
information and upon the assurance of the Company that it was not aware of any
information or facts that would make the information provided to us materially
incomplete or misleading. With the permission of the Board, we assumed further
that the financial and operating forecasts of the Company reviewed by us were
reasonably prepared on a basis reflecting the best current estimates and good
faith judgment of management as to its anticipated future financial condition
and operating results, and we express no opinion with respect to such forecasts.
We were not engaged to conduct a physical inspection of any properties or make
an independent valuation or appraisal of any assets or liabilities, contingent
or otherwise, of the Company and we were not furnished with any such valuations
or
2
<PAGE>
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") agreed to pay Cohen &
Steers fees in the total amount of $125,000 at the time we rendered the opinion
expressed in the April 18 Letter 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 $900,000 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
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with the Securities Exchange Commission in connection with its review of
the Merger, and may be reproduced without alteration in the definitive proxy
statement disseminated to the Stockholders relating to the Merger and referred
to in such proxy statement if reproduced without alteration therein.
Based upon and subject to the foregoing, we are of the opinion that as
of the date hereof the Merger Consideration is fair to the Stockholders, from a
financial point of view.
Very truly yours,
Cohen & Steers Capital Advisors LLC
4
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[FACE SIDE OF PROXY] 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
MAY 18, 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 12:30 p.m., local time, on
July 22, 2000, at the Key Bridge Marriott Hotel, 1401 Lee Highway, Arlington,
Virginia 22209, and at any adjournment or postponement of the special meeting.
The undersigned hereby instructs and authorizes these attorneys-in-fact to vote
the shares as indicated on the reverse side of this proxy.
The shares represented by this proxy will be voted in accordance with the
instructions contained on the reverse side. If no instructions are given, the
shares will be voted "FOR" approval of the merger agreement as fully described
in the notice of special meeting of shareholders and accompanying proxy
statement, which the undersigned has received together with this proxy.
If there is proposed any adjournment or postponement of the special meeting
to permit further solicitation of proxies with respect to approval of the merger
agreement, the shares will be voted "FOR" adjournment or postponement if the
shares represented by this proxy were to be voted "FOR" approval of the merger
agreement (including if there were no specifications), and "AGAINST" adjournment
sor postponement if the shares represented by this proxy were to be voted
"AGAINST" approval of the merger agreement.
(Continued and to be signed on reverse side)
...............................................................................
FOLD AND DETACH HERE
<PAGE>
Please mark /X/
[REVERSE SIDE OF PROXY] your vote as
indicated in
the example
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C>
/ / / / / / 1. Approval of the Amended and Restated Agreement and Plan of Merger, dated October 19,
1999, as amended on April 18 , 2000, 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; 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 OF FACTORS AND CIRCUMSTANCES DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE MERGER IS
FAIR TO YOU AND IN YOUR BEST INTERESTS AND THAT THE MERGER IS ADVISABLE.
YOUR BOARD OF DIRECTORS HAS ADOPTED THE MERGER AGREEMENT AND RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
WHETHER OR NOT YOU INTEND TO COME TO THE SPECIAL MEETING YOU ARE URGED TO COMPLETE,
DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED SELF-ADDRESSED, PREPAID
RETURN ENVELOPE SO THAT YOUR SHARES CAN BE REPRESENTED AT THE SPECIAL MEETING.
</TABLE>
THIS PROXY MAY BE REVOKED PRIOR TO ITS USE. PLEASE DATE, SIGN AND MAIL THIS
PROXY IN THE ENCLOSED ENVELOPE.
SIGNATURES OF SHAREHOLDER(S) _______________ DATED _____________
Please sign exactly as name appears hereon. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by president or
other authorized officer. If a partnership, please sign in partnership
name by authorized person.
