-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VzB+tj05n2r7ZT3S3yXoVGhOVCdqwWBQOonZzbp77GXSTY0iyRj/p70YfomLHpEw NjMfhz0rNkh1a6XXvzm3og== 0000912057-00-018162.txt : 20000417 0000912057-00-018162.hdr.sgml : 20000417 ACCESSION NUMBER: 0000912057-00-018162 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILM SENIOR LIVING INC /VA CENTRAL INDEX KEY: 0000847414 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043042283 STATE OF INCORPORATION: VA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18249 FILM NUMBER: 601720 BUSINESS ADDRESS: STREET 1: 8180 GREENSBORO DRIVE STREET 2: STE 1000 CITY: MCLEAN STATE: VA ZIP: 22102 BUSINESS PHONE: 8883573550 MAIL ADDRESS: STREET 1: 8180 GREENSBORO DRIVE STREET 2: STE 1000 CITY: MCLEAN STATE: VA ZIP: 22102 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER INDEPENDENT LIVING MORTGAGE FUND INC DATE OF NAME CHANGE: 19971103 FORMER COMPANY: FORMER CONFORMED NAME: ILM SENIOR LIVING INC DATE OF NAME CHANGE: 19970905 FORMER COMPANY: FORMER CONFORMED NAME: PAINEWEBBER INDEPENDENT LIVING MORTGAGE FUND INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED FEBRUARY 29, 2000 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____to____. Commission File Number: 0-18249 ILM SENIOR LIVING, INC. (Exact name of registrant as specified in its charter) VIRGINIA 04-3042283 ----------------------- ---------------- (State of organization) (I.R.S. Employer Identification No.) 1750 TYSONS BOULEVARD, SUITE 1200, TYSONS CORNER, VA 22102 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (888) 257-3550 ----------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------- ---------------- None None Securities registered pursuant to Section 12(g) of the Act: SHARES OF COMMON STOCK $.01 PAR VALUE ------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes__X_ No___ Shares of common stock outstanding as of February 29, 2000: 7,520,100. ================================================================================ ILM SENIOR LIVING, INC. INDEX
Part I. Financial Information Page Item 1. Financial Statements Consolidated Balance Sheets February 29, 2000 (Unaudited) and August 31, 1999............................................4 Consolidated Statements of Income For the six months and three months ended February 29, 2000 and February 28, 1999 (Unaudited)..........................................5 Consolidated Statements of Changes in Shareholders' Equity For the six months ended February 29, 2000 and February 28, 1999 (Unaudited)................6 Consolidated Statements of Cash Flows For the six months ended February 29, 2000 and February 28, 1999 (Unaudited)................7 Notes to Consolidated Financial Statements (Unaudited)....................................8-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....13-19 Part II. Other Information Item 5. Other Information...........................................................................20 Item 6. Exhibits and Reports on Form 8-K............................................................20 Signatures....................................................................................................21
-2- ILM SENIOR LIVING, INC PART I. FINANCIAL INFORMATION Item I. Financial Statements (See next page) -3- ILM SENIOR LIVING, INC. CONSOLIDATED BALANCE SHEETS February 29, 2000 (Unaudited) and August 31, 1999 (Dollars in thousands, except per share data) ASSETS
FEBRUARY 29, 2000 AUGUST 31, 1999 ----------------- --------------- Operating investment properties, at cost: Land $ 4,925 $ 4,921 Building and improvements 38,270 38,197 Furniture, fixtures and equipment 4,948 4,948 ---------- ---------- 48,143 48,066 Less: accumulated depreciation (14,061) (13,417) --------- --------- 34,082 34,649 Mortgage placement fees 2,256 2,256 Less: accumulated amortization (2,256) (2,163) --------- ---------- - 93 Loan origination fees 272 272 Less: accumulated amortization (132) (85) --------- ---------- 140 187 Cash and cash equivalents 1,645 2,615 Accounts receivable - related party 314 306 Prepaid expenses and other assets 176 100 Deferred rent receivable - 12 --------- ---------- $ 36,357 $ 37,962 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 237 $ 365 Accounts payable - related party 238 343 Construction loan payable 2,093 2,093 Preferred shareholders' minority interest in consolidated subsidiary 138 134 ---------- ---------- Total liabilities 2,706 2,935 Contingencies Shareholders' equity: Common stock, $0.01 par value, 10,000,000 shares authorized, 7,520,100 shares issued and outstanding 75 75 Additional paid-in capital 65,711 65,711 Accumulated deficit (32,135) (30,759) --------- ---------- Total shareholders' equity 33,651 35,027 --------- ---------- $ 36,357 $ 37,962 ======== =========
See accompanying notes. -4- ILM SENIOR LIVING, INC. CONSOLIDATED STATEMENTS OF INCOME For the six months and three months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands, except per share data)
Six Months Ended Three Months Ended February 29, February 28 February 29 February 28 2000 1999 2000 1999 REVENUES Rental and other income $3,788 $3,761 $1,905 $1,870 Interest income 40 39 18 17 ----- ----- ----- ----- 3,828 3,800 1,923 1,887 EXPENSES Depreciation expense 644 643 322 320 Amortization expense 140 147 60 74 General and administrative 164 256 96 129 Professional fees 1,014 1,044 579 824 Directors' compensation 46 49 24 29 ----- ----- ----- ----- 2,008 2,139 1,081 1,376 ----- ----- ----- ----- NET INCOME $1,820 $1,661 $841 $511 ====== ====== ==== ==== Basic earnings per share of common stock $0.24 $0.22 $0.11 $0.07 ===== ===== ===== ===== Cash dividends paid per share of common stock $0.43 $0.43 $0.21 $0.21 ===== ===== ===== =====
The above earnings and cash dividends paid per share of common stock are based upon the 7,520,100 shares outstanding during each period. See accompanying notes. -5- ILM SENIOR LIVING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the six months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands, except per share data)
Common Stock Additional $.01 Par Value Paid-In Accumulated Shares Amount Capital Deficit Total Shareholders' equity at August 31, 1998 7,520,100 $75 $ 65,711 $(27,327) $38,459 Cash dividends paid - - (3,196) (3,196) Net income - - - 1,661 1,661 --------- ---- -------- -------- ------- Shareholders' equity at February 28, 1999 7,520,100 $75 $ 65,711 $(28,862) $36,924 ========= === ======== ======== ======= Shareholders' equity at August 31, 1999 7,520,100 $75 $ 65,711 $(30,759) $35,027 Cash dividends paid - - (3,196) (3,196) Net income - - - 1,820 1,820 --------- ---- -------- -------- ------- Shareholders' equity at February 29, 2000 7,520,100 $75 $ 65,711 $(32,135) $33,651 ========= === ======== ======== =======
See accompanying notes. -6- ILM SENIOR LIVING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands)
Six Months Ended February 29, February 28, 2000 1999 Cash flows from operating activities: Net income $ 1,820 $ 1,661 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 784 790 Accrued dividends on subsidiary's preferred stock 45 Changes in assets and liabilities: Accounts receivable - related party (8) 47 Prepaid expenses and other assets (76) 62 Deferred rent receivable 1218 Accounts payable and accrued expenses (128) - Accounts payable - related party (105) 133 ------- ------- Net cash provided by operating activities 2,303 2,716 ------- ------- Cash flows used in investing activities: Additions to operating investment properties (77) (97) ------- ------- Net cash used in investing activities (77) (97) Cash flows used in financing activities: Loan origination fees paid - (168 Cash dividends paid to shareholders (3,196) (3,196) ------- ------- Net cash used in financing activities (3,196) (3,364) ------- ------- Net decrease in cash and cash equivalents (970) (745) Cash and cash equivalents, beginning of period 2,615 2,264 ------- ------- Cash and cash equivalents, end of period $ 1,645 $ 1,519 ======= ======= Cash paid for interest $ 47 $- ======= =======
See accompanying notes. -7- ILM SENIOR LIVING, INC. Notes to Consolidated Financial Statements (Unaudited) 1. GENERAL The accompanying consolidated financial statements, footnotes and discussions should be read in conjunction with the consolidated financial statements and footnotes contained in ILM Senior Living, Inc.'s (the "Company") Annual Report on Form 10-K for the fiscal year ended August 31, 1999. In the opinion of management, the accompanying interim consolidated financial statements, which have not been audited, reflect all adjustments necessary to present fairly the results for the interim periods. All of the accounting adjustments reflected in the accompanying interim consolidated financial statements are of a normal recurring nature. The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles for interim financial information, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of February 29, 2000 and revenues and expenses for each of the six- and three-month periods ended February 29, 2000 and February 28, 1999. Actual results may differ from the estimates and assumptions used. Certain numbers in the prior period's financial statements have been reclassified to conform to the current period's presentation. The results of operations for the six-month period ended February 29, 2000, are not necessarily indicative of the results that may be expected for the year ending August 31, 2000. The Company was incorporated on March 6, 1989 under the laws of the State of Virginia as a Virginia finite-life corporation, formerly PaineWebber Independent Mortgage Fund, Inc. On June 21, 1989, the Company sold to the public in a registered initial offering 7,520,100 shares of common stock, $.01 par value. The Company received capital contributions of $75,201,000, of which $201,000 represented the sale of 20,100 shares to an affiliate at that time, PaineWebber Group, Inc. ("PaineWebber"). For discussion purposes, the term "PaineWebber" will refer to PaineWebber Group, Inc. and all affiliates that provided services to the Company in the past. The Company elected to qualify and be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended, for each taxable year of operations. The Company originally invested the net proceeds of the initial public offering in eight participating mortgage loans secured by senior housing facilities located in seven states ("Senior Housing Facilities"). All of the loans made by the Company were originally to Angeles Housing Concepts, Inc. ("AHC"), as mortgagor, a company specializing in the development, acquisition and operation of Senior Housing Facilities and guaranteed by AHC's corporate parent, Angeles Corporation ("Angeles"). ILM Holding, Inc. ("ILM Holding"), a majority-owned subsidiary of the Company, now holds title to the eight Senior Housing Facilities, which comprise the balance of the operating investment properties on the accompanying consolidated balance sheets, subject to certain mortgage loans payable to the Company. Such mortgage loans and the related interest expense are eliminated in the consolidation of the financial statements of the Company. The Company made charitable gifts of one share of the preferred stock in ILM Holding to each of 111 charitable organizations so that ILM Holding would meet the stock ownership requirements of a REIT as of January 30, 1997. The preferred stock has a liquidation preference of $1,000 per share plus any accrued and unpaid dividends. Dividends on the preferred stock accrue at a rate of 8% per annum on the original $1,000 liquidation preference and are cumulative from the date of issuance. Since ILM Holding is not expected to have sufficient cash flow in the foreseeable future to make the required dividend payments, it is anticipated that dividends will accrue and be paid at liquidation of ILM Holding. Cumulative dividends accrued as of February 29, 2000 on the preferred stock in ILM Holding totaled approximately $27,000. -8- ILM SENIOR LIVING, INC. Notes to Consolidated Financial Statements (Unaudited) (continued) 1. GENERAL (CONTINUED) As part of the fiscal 1994 settlement agreement with AHC, ILM Holding retained AHC as the property manager for all of the Senior Housing Facilities pursuant to the terms of a management agreement. The management agreement with AHC was terminated in July 1996. Subsequent to the effective date of the settlement agreement with AHC, in order to maximize the potential returns to the Company's existing Shareholders while maintaining its qualification as a REIT under the Internal Revenue Code, the Company formed a new corporation, ILM I Lease Corporation ("Lease I"), for the purpose of operating the Senior Housing Facilities under the terms of a facilities lease agreement (the "Facilities Lease Agreement"). All of the shares of capital stock in Lease I were distributed to the holders of record of the Company's common stock and the Senior Housing Facilities were leased to Lease I effective September 1, 1995 (see Note 2 for a description of the Facilities Lease Agreement). Lease I is a public company subject to the reporting obligations of the Securities and Exchange Commission. All responsibility for the day-to-day management of the Senior Housing Facilities, including administration of the property management agreement with AHC, was transferred to Lease I. On July 29, 1996, the management agreement with AHC was terminated and Lease I retained Capital Senior Management 2, Inc. ("Capital") to be the new property manager of its Senior Housing Facilities pursuant to a management agreement (the "Management Agreement"). Lawrence A. Cohen, who, through July 28, 1998, served as President, Chief Executive Officer and Director of the Company and a Director of Lease I, has also served in various management capacities at Capital Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of Capital Senior Living Corporation. As a result, through July 28, 1998, Capital was considered a related party. AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION On February 7, 1999, the Company entered into an agreement and plan of merger, which was amended and restated on October 19, 1999, with Capital Senior Living Corporation, the corporate parent of Capital, and certain affiliates of Capital. If the merger is consummated, the Shareholders of the Company will receive all-cash merger consideration of approximately $12.90 per share. Consummation of this transaction will require, among other things, the affirmative vote of the holders of not less than 66-2/3% of the Company's outstanding common stock. The agreement presently provides that it may be terminated if the merger is not consummated by September 30, 2000. In connection with the merger, the Company has agreed to cause ILM Holding to cancel and terminate the Facilities Lease Agreement with Lease I immediately prior to the effective time of the merger. The Facilities Lease Agreement was extended on a month-to-month basis as of December 31, 1999, beyond its original expiration date of December 31, 1999. Although the pending merger agreement remains operative and in full force and effect, Capital has communicated certain proposed modifications to the pending transaction which have not been agreed to in principle or otherwise by the Company. The Company presently is in discussions with Capital regarding the pending merger transaction and is considering potential modifications thereto including a reduced merger consideration. There can be no assurance as to whether the merger will be consummated or, if consummated, as to the timing thereof. -9- ILM SENIOR LIVING, INC. Notes to Consolidated Financial Statements (Unaudited) (continued) 2. OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT At February 29, 2000, through its consolidated subsidiary, the Company owned eight Senior Housing Facilities. The name, location and size of the properties are as set forth below:
Year Facility Rentable Resident Name Location Built Units (2) Capacities (2) ---- -------- ----- --------- -------------- Independence Village of East Lansing East Lansing, MI 1989 161 162 Independence Village of Winston-Salem Winston-Salem, NC 1989 159 161 Independence Village of Raleigh Raleigh, NC 1991 164 205 Independence Village of Peoria Peoria, IL 1990 166 183 Crown Pointe Apartments Omaha, NE 1984 135 163 Sedgwick Plaza Apartments Wichita, KS 1984 150 170 West Shores Hot Springs, AR 1986 136 166 Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
(1) The acquisition of Villa Santa Barbara was financed jointly by the Company and an affiliated entity, ILM II Senior Living, Inc ("ILM II"). All amounts generated from Villa Santa Barbara are equitably apportioned between the Company, together with its consolidated subsidiary, and ILM II, together with its consolidated subsidiary, generally 25% and 75%, respectively. Villa Santa Barbara is owned 25% by ILM Holding and 75% by ILM II Holding as tenants in common. Upon the sale of the Company or ILM II, arrangements would be made to transfer the Santa Barbara facility to the selling joint tenant (or one of its subsidiaries). The property was extensively renovated in 1995. (2) Rentable units represent the number of apartment units and is a measure commonly used in the real estate industry. Resident capacity equals the number of bedrooms contained within the apartment units and corresponds to measures commonly used in the healthcare industry. Subsequent to the effective date of the Settlement Agreement with AHC, in order to maximize the potential returns to the existing Shareholders while maintaining the Company's qualification as a REIT under the Internal Revenue Code, the Company formed a new corporation, Lease I, for the purpose of operating the Senior Housing Facilities under the terms of a Facilities Lease Agreement dated September 1, 1995 between the Company's consolidated affiliate, ILM Holding, as owner of the properties and lessor (the "Lessor"), and Lease I as lessee (the "Lessee"). The facilities lease is a "triple-net" lease whereby the Lessee pays all operating expenses, governmental taxes and assessments, utility charges and insurance premiums, as well as the costs of all required maintenance, personal property and non-structural repairs in connection with the operation of the Senior Housing Facilities. ILM Holding, as the Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. During the term of the Facilities Lease Agreement, which was extended on a month-to-month basis as of December 31, 1999, beyond its original expiration date of December 31, 1999, Lease I pays annual base rent for the use of all of the Senior Housing Facilities in the aggregate amount of $6,364,800 per year. Lease I also pays variable rent, on a quarterly basis, for each facility in an amount equal to 40% of the excess of aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $16,996,000. Variable rent was $615,000 and $313,000 for the six- and three-month periods ended February 29, 2000, respectively, compared to $564,000 and $288,000 for the six- and three-month periods ended February 28, 1999, respectively. -10- ILM SENIOR LIVING, INC. Notes to Consolidated Financial Statements (Unaudited) (continued) 3. RELATED PARTY TRANSACTIONS Lease I has retained Capital to be the property manager of the Senior Housing Facilities and the Company has guaranteed the payment of all fees due to Capital pursuant to the Management Agreement which commenced on July 29, 1996. Lawrence A. Cohen, who, through July 28, 1998, served as President, Chief Executive Officer and Director of the Company and a Director of Lease I, has also served in various management capacities at Capital Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of Capital Senior Living Corporation. As a result, through July 28, 1998, Capital was considered a related party. For the six-month periods ended February 29, 2000 and February 28, 1999, Capital earned property management fees from Lease I of $547,000, and $537,000, respectively. For the three-month periods ended February 29, 2000 and February 28, 1999, Capital earned property management fees from Lease I of $271,000 and $277,000, respectively. On September 18, 1997, Lease I entered into an agreement with Capital Senior Development, Inc., an affiliate of Capital, to manage the development process for the potential expansion of several of the Senior Housing Facilities. Capital Senior Development, Inc. will receive a fee equal to 7% of the total development costs of these expansions if they are pursued. The Company will reimburse Lease I for all costs related to these potential expansions, including fees to Capital Senior Development, Inc. During fiscal 2000 and 1999, Capital Senior Development, Inc. earned no fees from Lease I for managing pre-construction development activities for potential expansions of the Senior Housing Facilities. Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the six-month periods ended February 29, 2000 and February 28, 1999, Greenberg Traurig earned fees from the Company of $593,000 and $375,000, respectively. For the three-month periods ended February 29, 2000 and February 28, 1999, Greenberg Traurig earned fees from the Company of $483,000 and $287,000, respectively. Accounts receivable - related party at February 29, 2000 and August 31, 1999, represent amounts due from an affiliated company, Lease I, principally for variable rent. Accounts payable - related party at February 29, 2000 and August 31, 1999, represent accrued legal fees due to Greenberg Traurig, Counsel to the Company and its affiliates and a related party, as described above. -11- ILM SENIOR LIVING, INC. Notes to Consolidated Financial Statements (Unaudited) (continued) 4. LEGAL PROCEEDINGS AND CONTINGENCIES FELDMAN LITIGATION On May 8, 1998 Andrew A. Feldman and Jeri Feldman, as Trustees for the Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990, commenced a purported class action on behalf of that trust and all other shareholders of the Company and ILM II in the Supreme Court of the State of New York, County of New York naming the Company, ILM II and their Directors as defendants. The class action complaint alleged that the Directors engaged in wasteful and oppressive conduct and breached fiduciary duties in preventing the sale or liquidation of the assets of the Company and ILM II, diverting certain of their assets. The complaint sought compensatory damages in an unspecified amount, punitive damages, the judicial dissolution of the Company and ILM II, an order requiring the Directors to take all steps to maximize Shareholder value, including either an auction or liquidation, and rescinding certain agreements, and attorney's fees. On October 15, 1999, the parties entered into a Stipulation of Settlement and filed it with the Court, which approved the settlement, by order dated October 21, 1999. In issuing that order the Court entered a final judgment dismissing the action and all non-derivative claims of the settlement class against the defendants with prejudice. This litigation was settled at no cost to the Company and ILM II. As part of the settlement, Capital Senior Living Corporation increased its proposed merger consideration payable to the Company and ILM II shareholders to all-cash amounts of $12.90 and $14.47 per share, respectively, and is also responsible for a total of approximately $1.1 million in plaintiffs' attorneys fees and expenses if the proposed merger is consummated. If the proposed merger is not consummated and if the Company and ILM II were to consummate an extraordinary transaction with a third party, then the Company and ILM II would be responsible for the plaintiffs' attorneys fees and expenses. 5. CONSTRUCTION LOAN FINANCING During 1999, the Company secured a construction loan facility with a major bank that provides the Company with up to $24.5 million to fund the capital costs of potential expansion programs. The construction loan facility is secured by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such properties. The loan expires on December 31, 2000, with possible extensions through September 29, 2003. Principal is due at expiration. Interest is payable monthly at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. Amounts outstanding under the loan at February 29, 2000, were approximately $2.1 million. Loan origination fees of $272,000 were paid in connection with this loan facility and are being amortized over the term of the loan. Capitalized interest at February 29, 2000, and August 31, 1999, was $104,205 and $31,233. 6. SUBSEQUENT EVENT On March 20, 2000, the Company's Board of Directors declared a quarterly dividend for the three-month period ended February 29, 2000. On April 17, 2000, a dividend of $0.2125 per share of common stock, totaling approximately $1,598,000, will be paid to Shareholders of record as of March 31, 2000. -12- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company offered shares of its common stock to the public from June 21, 1989 to July 21, 1989 pursuant to a Registration Statement filed under the Securities Act of 1933. Capital contributions of $75,201,000 were received by the Company (including $201,000 contributed by PaineWebber) and, after deducting selling expenses and offering costs and allowing for adequate cash reserves, approximately $62.8 million was available to be invested in participating first mortgage loans secured by Senior Housing Facilities. The Company originally invested the net proceeds of the initial public offering in eight participation mortgage loans secured by Senior Housing Facilities located in seven different states. All of the loans made by the Company were originally with AHC. As previously reported, AHC defaulted on the scheduled mortgage loan payments due to the Company on March 1, 1993. Its parent company, Angeles, subsequently filed for bankruptcy. In fiscal 1994, a Settlement Agreement was executed whereby ownership of the properties was transferred from AHC to certain designated affiliates of the Company which were majority owned by the Company. Subsequently, these affiliates were merged into ILM Holding, which is majority owned by the Company. ILM Holding holds title to the eight Senior Housing Facilities which comprise the balance of operating investment properties in the accompanying consolidated balance sheets, subject to certain mortgage loans payable to the Company. As part of the fiscal 1994 Settlement Agreement with AHC, ILM Holding retained AHC as the property manager for all of the Senior Housing Facilities pursuant to the terms of the Agreement. As discussed further below, the Agreement with AHC was terminated in July 1996. Subsequent to the effective date of the Settlement Agreement with AHC, in order to maximize the potential returns to the Company's existing Shareholders while maintaining its qualification as a REIT under the Internal Revenue Code, the Company formed a new corporation, Lease I, for the purpose of operating the Senior Housing Facilities under the terms of a Facilities Lease Agreement. As of August 31, 1995, Lease I, which is taxable as a so-called "C" corporation and not as a REIT, was a wholly-owned subsidiary of the Company. On September 1, 1995 the Company, after receiving the required regulatory approval, distributed all of the shares of capital stock of Lease I to the holders of record of the Company's common stock. One share of common stock of Lease I was issued for each full share of the Company's common stock held. Prior to the distribution, the Company capitalized Lease I with $700,000 from existing cash reserves, which was an amount estimated to provide Lease I with necessary working capital. The Facilities Lease Agreement is between the Company's consolidated affiliate, ILM Holding, as owner of the Senior Housing Facilities and Lessor, and Lease I as Lessee. The facilities lease is a "triple-net" lease whereby the Lessee pays all operating expenses, governmental taxes and assessments, utility charges and insurance premiums, as well as the costs of all required maintenance, personal property and non-structural repairs in connection with the operation of the Senior Housing Facilities. ILM Holding, as the Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Pursuant to the Facilities Lease Agreement, which expired on December 31, 1999, but has been extended on a month-to-month basis, Lease I pays annual base rent for the use of all of the Senior Housing Facilities in the aggregate amount of $6,364,800. Lease I also pays variable rent, on a quarterly basis, for each Senior Housing Facility in an amount equal to 40% of the excess, if any, of the aggregate total revenues for the Senior Housing Facilities, on an annualized basis, over $16,996,000. Variable rental income for the six- and three-month periods ended February 29, 2000 was $615,000 and $313,000, respectively, compared to variable rental income of $564,000 and $288,000 for the six- and three-month periods ended February 28, 1999, respectively. The Company completed its restructuring plans by qualifying ILM Holding as a REIT for Federal tax purposes. In connection with these plans, on November 21, 1996, the Company requested that PaineWebber sell all of its stock in ILM Holding to the Company for a price equal to the fair market value of the 1% economic interest in ILM Holding represented by the common stock. On January 10, 1997, this transfer of the common stock of ILM Holding was completed at an agreed upon fair value of $46,000, representing a $39,000 increase in fair value. This increase in fair value is based on the increase in values of the Senior Housing Facilities which occurred between April 1994 and January 1996, as supported by independent appraisals. With this transfer completed, effective January 23, 1997, ILM -13- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL (CONTINUED) Holding recapitalized its common stock and preferred stock by replacing the outstanding shares with 50,000 shares of new common stock and 275 shares of non-voting, 8% cumulative preferred stock issued to the Company (the "Preferred Stock"). The number of authorized shares of preferred stock and common stock in ILM Holding were also increased as part of the recapitalization. Following the recapitalization, the Company made charitable gifts of one share of the Preferred Stock in ILM Holding to each of 111 charitable organizations so that ILM Holding would meet the stock ownership requirements of a REIT as of January 30, 1997. The Preferred Stock has a liquidation preference of $1,000 per share plus any accrued and unpaid dividends. Dividends on the Preferred Stock accrue at a rate of 8% per annum on the original $1,000 liquidation preference and are cumulative from the date of issuance. It is anticipated that dividends will accrue and be paid at liquidation. Cumulative dividends accrued as of February 29, 2000 on the Preferred Stock in ILM Holding totaled approximately $27,000. The assumption of ownership of the Senior Housing Facilities through ILM Holding, which was organized as a so-called "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 Senior Housing Facilities (the "built-in gain tax"). The amount of such tax would be calculated based on the lesser of the total net gain realized from the sale transaction or the portion of the net gain realized upon a final sale which is attributable to the period during which the properties were held in a C corporation. Any future appreciation in the value of the Senior Housing Facilities subsequent to the conversion of ILM Holding to a REIT would not be subject to the built-in gain tax. The built-in gain tax would most likely not be incurred if the properties were to be held for a period of at least ten years from the date of the conversion of ILM Holding to a REIT. Although the Company originally anticipated holding the properties through December 31, 1999, pursuant to the Articles of Incorporation, the Board of Directors may defer the Company's scheduled liquidation date if in the opinion of a majority of the Directors the disposition of the Company's assets at such time would result in a material under-realization of the value of such assets; provided, however, that no such deferral may extend beyond December 31, 2014 absent amendment of the Company's Articles of Incorporation. The Company's Board of Directors voted to extend the term of the Company and the Facilities Lease Agreement with Lease I on a month-to-month basis commencing December 31, 1999. Based on management's estimate of the increase in values of the Senior Housing Facilities which occurred between April 1994 and January 1996, as supported by independent appraisals, ILM Holding would incur a sizeable tax if the Senior Housing Facilities were sold. Based on this increase of values during the time that ILM Holding was operated as a regular C corporation, a sale within ten years of the date of the conversion of ILM Holding to a REIT could result in a built-in gain tax of as much as $2.9 million, which could be reduced by $2.45 million using available net operating loss carryforwards of ILM Holding of approximately $7.2 million. Because the ownership of the assets of ILM Holding was expected to be transferred to the Company or its wholly-owned subsidiary, ILM Holding was capitalized with funds to provide it with working capital only for a limited period of time. At the present time, ILM Holding is not expected to have sufficient cash flow during fiscal year 2000 to (i) meet its obligations to make the debt service payments due under the loans and (ii) pay for capital improvements and structural repairs in accordance with the terms of the Facilities Lease Agreement. Although ILM Holding is not expected to fully fund its scheduled debt service payments to the Company, the current values of the Senior Housing Facilities are well in excess of the mortgage principal amounts plus accrued interest at February 29, 2000. As a result, the Company is expected to receive the full amount that would be due under the loans upon sale of the Senior Housing Facilities. -14- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL (CONTINUED) AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION On February 7, 1999, the Company entered into an agreement and plan of merger, which was amended and restated on October 19, 1999, with Capital Senior Living Corporation, the corporate parent of Capital, and certain affiliates of Capital. If the merger is consummated, the Shareholders of the Company will receive all-cash merger consideration of approximately $12.90 per share. Consummation of this transaction will require, among other things, the affirmative vote of the holders of not less than 66-2/3% of the Company's outstanding common stock. The agreement presently provides that it may be terminated if the merger is not consummated by September 30, 2000. IN connection with the merger, the Company has agreed to cause ILM Holding to cancel and terminate the Facilities Lease Agreement with Lease I immediately prior to the effective time of the merger. As of December 31, 1999, the Board of Directors voted to defer the Company's scheduled liquidation date on a month-to-month basis and to extend the Facilities Lease Agreement on a month-to-month basis beyond the original expiration dates of December 31, 1999. Although the pending merger agreement remains operative and in full force and effect, Capital has communicated certain proposed modifications to the pending transaction which have not been agreed to in principle or otherwise by the Company. The Company presently is in discussions with Capital regarding the pending merger transaction and is considering potential modifications thereto including a reduced merger consideration. There can be no assurance as to whether the merger will be consummated or, if consummated, as to the timing thereof. -15- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Occupancy levels for the eight properties in which the Company has invested averaged 90% for the three-month period ended February 29, 2000, compared to 95% for the three-month periods ended February 29, 1999. The Company's net operating cash flow is expected to be relatively stable and predictable due to the structure of the Facilities Lease Agreement. The annual base rental payments owed to ILM Holding are $6,364,800 and will remain at that level for the remainder of the lease term. In addition, the Senior Housing Facilities are currently generating gross revenues which are in excess of the specified threshold in the variable rent calculation, as discussed further above, which became effective in January 1997. The Company and Lease I have been pursuing the potential for future expansion of several of the Senior Housing Facilities which are located in areas that have particularly strong markets for senior housing to increase cash flow and shareholder value. Potential expansion candidates include the facilities located in Raleigh, North Carolina, East Lansing, Michigan, Omaha, Nebraska, Peoria, Illinois and Hot Springs, Arkansas. Approximately two acres of land located adjacent to the East Lansing facility and approximately two-and-one-half acres of land located adjacent to the Omaha facility were acquired by ILM Holding during the quarter ended November 30, 1997. In addition, an agreement has been obtained by ILM Holding to purchase approximately five acres of land located adjacent to the Peoria facility. The Hot Springs facility already includes a vacant land parcel of approximately two acres which could accommodate an expansion of the existing facility or the construction of a new free-standing facility. Preliminary feasibility evaluations have been completed for all of these potential expansions and pre-construction design and construction-cost evaluations are underway for expansions of the facilities located in Raleigh and Omaha. The Company secured a construction loan facility with a major bank that provides the Company with up to $24.5 million to fund the capital costs of the potential expansion programs. The construction loan facility is secured by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such Senior Housing Facilities. The loan expires December 31, 2000, with possible extensions through September 29, 2003. Principal is due at expiration. Interest is payable monthly at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. Loan origination costs in connection with this loan facility are being amortized over the life of the loan. On June 7, 1999, the Company borrowed approximately $2.1 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, approximately $22.4 million of the construction loan facility is unused and available. At February 29, 2000, the Company had cash and cash equivalents of $1,645,000 compared to $2,615,000 at August 31, 1999. Remaining cash will be used for the working capital requirements of the Company, along with the investment in the properties owned by ILM Holding for certain capital improvements and for dividends to the Shareholders. Future capital improvements could be financed from operations or through borrowings, depending on the magnitude of the improvements, the availability of financing and the Company's incremental borrowing rate. The source of future liquidity and dividends to the Shareholders is expected to be through facilities lease payments from Lease I, interest income earned on invested cash reserves and proceeds from the future sales of the underlying operating investment properties. Such sources of liquidity are expected to be adequate to meet the Company's operating requirements on both a short-term and long-term basis. The Company generally will be obligated to distribute annually at least 95% of its taxable income to its shareholders in order to continue to qualify as a REIT under the Internal Revenue Code. While the Company has potential liabilities pending due to ongoing litigation against the Company, the eventual outcome of this litigation cannot presently be determined. The Company will vigorously defend against all claims made against it and, at this time, it is not certain that the Company will have ultimate responsibility for any such claims. -16- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 the Company'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. The Company has assessed its exposure to operating equipment, and such exposure is not significant due to the nature of the Company's business. The Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity or capital resources. However, the Company has no means of determining whether or ensuring those external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could impact the Company. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company believes that it has completed all necessary phases of its Year 2000 program. However, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Company. Although the amount of potential liability and lost revenue cannot be reasonably estimated at this time, in a worst case situation, if Capital, Lease I's only significant and material third-party contractor, were to experience a Year 2000 problem, it is likely that Lease I would not receive rental income as it became due from Senior Living Facility residents. Lease I in turn would fail to pay ILM Holding lease payments as they arise under the master lease, and ILM Holding in turn would fail to pay the Company mortgage payments due it. However, the Company believes that given the nature of its business, such problem would be temporary and easily remedied with a simple accounting. MARKET RISK The Company believes its market risk is immaterial. -17- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SIX MONTHS ENDED FEBRUARY 29, 2000 VERSUS SIX MONTHS ENDED FEBRUARY 28, 1999 Net income increased $159,000 or 9.6% to $1,820,000 for the six-month period ended February 29, 2000 compared to $1,661,000 for the six-month period ended February 28, 1999. Total revenue was $3,828,000 representing an increase of $28,000 or 0.7%, compared to $3,800,000 for the same period of the prior year. Rental and other income increased $27,000, or 0.7%, to $3,788,000 from $3,761,000, due to increased rental income earned pursuant to the terms of the Facilities Lease Agreement. Total expenses decreased $131,000 or 6.1%, to $2,008,000 for the six-month period ended February 29, 2000, compared to $2,139,000 for the six-month period ended February 28, 1999. This overall decrease in expenses is primarily attributable to a $92,000 or 36.0% decrease in general and administrative costs due to decreased insurance costs of $52,000 or 42.3% and decreased printing costs of $31,000 or 79.5% as well as a $30,000 or 2.9% decrease in the use of legal, financial and advisory professionals who were engaged to assist the Company with the agreement and plan of merger with Capital Senior Living Corporation (as discussed in Note 1 to the financial statements). In addition, legal fees associated with the construction loan facility, also an expense of the prior year, were not repeated this year contributing to the overall decrease in professional fees when compared to 1999. THREE MONTHS ENDED FEBRUARY 29, 2000 VERSUS THREE MONTHS ENDED FEBRUARY 28, 1999 Net income increased $331,000 or 64.8%, to $842,000 for the second quarter ended February 29, 2000 compared to $511,000 for the second quarter ended February 28, 1999. Total revenue was $1,923,000 representing an increase of $36,000 or 1.9%, compared to $1,887,000 for the same period of the prior year. Rental and other income increased $35,000 or 1.9%, to $1,905,000 from $1,870,000, due to increased rental income earned pursuant to the terms of the Facilities Lease Agreement. Total expenses decreased $295,000, or 21.4%, to $1,081,000 for the quarter ended February 29, 2000 compared to $1,376,000 for the quarter ended February 28, 1999. This decrease in expenses is primarily attributable to a decrease of $245,000 or 29.7% in professional fees due to legal, financial and advisory professionals who were engaged to assist the Company with the agreement and plan of merger with Capital Senior Living Corporation (as discussed in Note 1 to the financial statements). In addition, legal fees associated with the construction loan facility, an expense of the prior year, were not repeated this year, contributing to the overall decrease in professional fees when compared to 1999. The $33,000 or 25.6% decrease in general and administrative expenses to $96,000, for the second quarter ended February 29, 2000, compared to $129,000 for the same period last year, was due to a variety of factors including decreased Director and Officer insurance costs of $11,000 or 23.9%; decreased postage and mailing costs of $5,000 or 20.0%; decreased printing costs of $16,000 or 69.6% for the annual and quarterly reports which were completed timely, distributing incurred costs more evenly when compared to the previous year; and a $14,000 or 18.9% decrease in amortization expense as a result of mortgage placement fees becoming fully amortized during the quarter ended February 29, 2000. -18- ILM SENIOR LIVING, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q ("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD," "MAY," "SHOULD," "ENABLE," "LIKELY," "PROSPECTS," "SEEK," "PREDICTS," "POSSIBLE," "FORECASTS," "PROJECTS," "ANTICIPATES," "EXPECTS" AND WORDS OF ANALOGOUS IMPORT AND CORRELATIVE EXPRESSIONS THEREOF, AS WELL AS STATEMENTS PRECEDED OR OTHERWISE QUALIFIED BY: "THERE CAN BE NO ASSURANCE" OR "NO ASSURANCE CAN BE GIVEN." SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES, STRATEGIES OR GOALS ALSO ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS MAY ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING, AMONG OTHER THINGS, THE COMPANY'S CASH FLOWS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION; THE CONSUMMATION OF ACQUISITION AND FINANCING TRANSACTIONS AND THE EFFECT THEREOF ON THE COMPANY'S BUSINESS, ANTICIPATED CAPITAL EXPENDITURES, PROPOSED OPERATING BUDGETS AND ACCOUNTING RESERVES; LITIGATION; PROPERTY EXPANSION AND DEVELOPMENT PROGRAMS OR PLANS; REGULATORY MATTERS; AND THE COMPANY'S PLANS, GOALS, STRATEGIES AND OBJECTIVES FOR FUTURE OPERATIONS AND PERFORMANCE. ANY SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF ASSUMPTIONS REGARDING, AMONG OTHER THINGS, GENERAL ECONOMIC, COMPETITIVE AND MARKET CONDITIONS. SUCH ASSUMPTIONS NECESSARILY ARE BASED ON FACTS AND CONDITIONS AS THEY EXIST AT THE TIME SUCH STATEMENTS ARE MADE, THE PREDICTION OR ASSESSMENT OF WHICH MAY BE DIFFICULT OR IMPOSSIBLE AND, IN ANY CASE, BEYOND THE COMPANY'S CONTROL. FURTHER, THE COMPANY'S BUSINESS IS SUBJECT TO A NUMBER OF RISKS THAT MAY AFFECT ANY SUCH FORWARD-LOOKING STATEMENTS AND ALSO COULD CAUSE ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS PARAGRAPH. MOREOVER, THE COMPANY DOES NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT ANY CHANGES IN GENERAL ECONOMIC, COMPETITIVE OR MARKET CONDITIONS AND DEVELOPMENTS BEYOND ITS CONTROL. READERS OF THIS QUARTERLY REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THAT ACTUAL FUTURE RESULTS MAY DIFFER. -19- ILM SENIOR LIVING, INC. PART II-OTHER INFORMATION ITEM 1 THROUGH 5. NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: NONE -20- ILM SENIOR LIVING, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BY: ILM SENIOR LIVING, INC. By: /s/ J. William Sharman, Jr. ------------------------------ J. William Sharman, Jr. President and Director Dated: April 14, 2000 ---------------- -21- EX-27 2 EX-27
5 6-MOS AUG-31-2000 FEB-29-2000 1,645 0 490 0 0 2,135 48,143 14,061 36,357 475 0 0 138 75 33,576 36,357 0 3,828 0 2,008 0 0 0 1,820 0 1,820 0 0 0 1,820 .24 .24
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