-----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, AcHD5ptAIExUu5Eqz66Ae1Roh8y6nMLlB+wDXKJysrWiVua3NylRK5ttxxwAkAIz ou1jeZkevn/Q7ImjbqqxiA== 0000912057-01-541306.txt : 20020412 0000912057-01-541306.hdr.sgml : 20020412 ACCESSION NUMBER: 0000912057-01-541306 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILM II SENIOR LIVING INC /VA CENTRAL INDEX KEY: 0000861880 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 061293758 STATE OF INCORPORATION: VA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18942 FILM NUMBER: 1801843 BUSINESS ADDRESS: STREET 1: 8180 GREENSBORO DRIVE STREET 2: STE 850 CITY: MCLEAN STATE: VA ZIP: 22102 BUSINESS PHONE: 8883573550 MAIL ADDRESS: STREET 1: 1300 CONNECTICUT AVE NW STREET 2: STE 1000 CITY: WASHINGTON STATE: DC ZIP: 20036 FORMER COMPANY: FORMER CONFORMED NAME: ILM II SENIOR LIVING INC DATE OF NAME CHANGE: 19970905 FORMER COMPANY: FORMER CONFORMED NAME: PAINE WEBBER INDEPENDENT LIVING MORTGAGE INC II DATE OF NAME CHANGE: 19971103 FORMER COMPANY: FORMER CONFORMED NAME: PAINEWEBBER INDEPENDENT LIVING MORTGAGE INC II DATE OF NAME CHANGE: 19930511 10-K 1 a2064788z10-k.txt FORM 10-K =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) - ----------- OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED: AUGUST 31, 2001 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: 0-18942 ILM II SENIOR LIVING, INC. (Exact name of registrant as specified in its charter) VIRGINIA 06-1293758 - ----------------------- ---------------------- (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 TITLE OF EACH CLASS ON 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Indicate by check mark whether the registrant (1) has filed all reports 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 August 31, 2001: 5,181,236. The aggregate sales price of the shares sold was $51,812,356. This does not reflect market value. There is no current market for these shares. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS FORM 10-K REFERENCE - ------------------------------ ---------------------- Prospectus of registrant dated Parts II, Part IV August 8, 1990, as supplemented [33 Act filing #33-33857] Current Report on Form 8-K/A Part IV of registrant dated August 16, 2001 =============================================================================== ILM II SENIOR LIVING, INC. 2001 FORM 10-K TABLE OF CONTENTS
PART I PAGE - ------ ---- Item 1 Business......................................................................................I-1 Item 2 Properties....................................................................................I-6 Item 3 Legal Proceedings.............................................................................I-6 Item 4 Submission of Matters to a Vote of Security Holders...........................................I-7 PART II Item 5 Market for the Registrant's Shares and Related Stockholder Matters..........................................................................II-1 Item 6 Selected Financial Data......................................................................II-2 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................II-3 Item 8 Financial Statements and Supplementary Data..................................................II-7 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................................................................II-7 PART III Item 10 Directors and Executive Officers of the Registrant..........................................III-1 Item 11 Executive Compensation......................................................................III-2 Item 12 Security Ownership of Certain Beneficial Owners and Management..............................III-2 Item 13 Certain Relationships and Related Transactions..............................................III-2 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................IV-1 Signatures .............................................................................................IV-3 Index to Exhibits .............................................................................................IV-4 Financial Statements and Supplementary Data.............................................................F-1 to F-21
ILM II SENIOR LIVING, INC. PART I ITEM 1. BUSINESS ILM II Senior Living, Inc. (the "Company"), formerly PaineWebber Independent Living Mortgage Inc. II, was incorporated on February 5, 1990 under the laws of the State of Virginia as a Virginia finite-life corporation for the purpose of making construction and participating mortgage loans secured by rental housing complexes for independent senior citizens ("Senior Housing Facilities"). On September 12, 1990, the Company sold to the public in a registered initial offering pursuant to a Registration Statement filed on Form S-11 under the Securities Act of 1933 (Registration Statement No. 33-33857), 5,181,236 shares of common stock, $.01 par value. 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. As a REIT, the Company is allowed a deduction for the amount of dividends paid to shareholders of the Company ("Shareholders"), thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. In order to qualify as a REIT, the Company must distribute at least 90 % of its taxable income on an annual basis and meet certain other requirements. ILM II Holding, a direct-owned subsidiary of the Company, now holds title to the five Senior Housing Facilities, which comprise the balance of the investment properties on the accompanying consolidated statement of net assets in liquidation and balance sheet, subject to certain mortgage loans payable to the Company. Such mortgage loans and the related interest expense are eliminated in the consolidation of the financial statements of the Company. The capital stock of ILM 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. 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 non-voting, 8% cumulative preferred stock issued to the Company ("the Preferred Stock"). The number of authorized shares of preferred and common stock in ILM 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 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 II Holding is not expected to have sufficient cash flow in the foreseeable future to make the required dividend payments, it is anticipated that dividends will accrue and be paid at liquidation. The Company recorded the contribution of the Preferred Stock in ILM II Holding to the charitable organizations at the amount of the initial liquidation preference of $111,000. Such amount was included in general and administrative expenses in the consolidated statement of income for the year ended August 31, 1997. Cumulative dividends accrued as of August 31, 2001 and 2000, on the Preferred Stock in ILM II Holding totaled $40,000 and $32,000, respectively. I-1 ILM II SENIOR LIVING, INC. ITEM 1. BUSINESS (CONTINUED) The assumption of ownership of the Senior Housing Facilities through ILM II Holding, which was a so-called "C" corporation for tax purposes at the time of the 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 Senior Housing Facilities were held by a C corporation. 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 ten 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 will not be held for such additional period of time. Based on management's current estimate of the increase in the values of the Senior Housing Facilities 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 would result in a built-in gain tax of approximately $3.8 million. The sale of the Company's interest in Villa Santa Barbara resulted in the recognition of a built-in gain of approximately $600,000, which was offset by pre-conversion net operating losses. Based in part upon advice from the Company's outside tax accountants, commencing in 1996 the Company has acted as though it had made an election in its 1996 tax return to allow the Company to avoid a corporate level tax upon conversion of ILM II Holding from a "C" Corporation to a REIT. Because proof of a formal election had not then been obtained, in February 2001 the Company pursued administrative relief with the Internal Revenue Service to ensure the availability of the benefits of this election. On May 8, 2001, the Internal Revenue Service notified the Company that it granted the requested administrative relief in this matter and, accordingly, the built-in gain tax has been deferred. To avoid this built-in gain tax, the Directors had recommended to the Shareholders an amendment to the Articles of Incorporation to extend the Company's scheduled liquidation date. At the Annual Meeting of Shareholders on August 16, 2001, the proposal to extend the finite life corporate existence of the Company was not approved by Shareholders. Because the overall vote was insufficient to approve the extension, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its properties commencing not later than December 31, 2001. As a result of the adoption of the plan of liquidation, the built-in gain tax will be payable upon the disposition of the investment properties. Accordingly, the Company has accrued a liability of $3,705,250 on the accompanying consolidated statement of net assets in liquidation at August 31, 2001, for the built-in gain tax. I-2 ILM II SENIOR LIVING, INC. ITEM 1. BUSINESS (CONTINUED) TERMINATED AGREEMENT AND PLAN OF MERGER WITH CSLC On February 7, 1999, the Company entered into an agreement and plan of merger, which was subsequently amended, with CSLC, the corporate parent of Capital. At a special meeting of Shareholders on June 22, 2000, holders of more than two-thirds of the outstanding shares of the Company's common stock voted in favor of approval of the then proposed Agreement and Plan of Merger. In November 2000, the Company extended until March 31, 2001, the outside termination date of its pending merger agreement with CSLC and entered into with CSLC a technical amendment to the merger agreement providing, among other things, that subject to the ILM II Board's fiduciary duties to Shareholders, CSLC would have until March 31, 2001 to obtain definitive financing sufficient for CSLC to complete the transaction. In connection with the amendment, CSLC agreed, after March 31, 2001, to a termination of all of its rights of first and last offer it may have had with respect to the sale by the Company to a third party of its common stock, its ownership interest in ILM II Holding and/or the sale of the Company's senior living properties and assets, and to reduce the amount of certain termination fees payable by the Company to CSLC under certain limited circumstances. All other terms of the merger agreement remained in effect. In connection with the then proposed merger, the Company had agreed to cause ILM II Holding to cancel and terminate the Facilities Lease Agreement with Lease II on the date of consummation of the merger. In November 2000, the Company's Board of Directors voted to extend the Facilities Lease Agreement, which was scheduled to expire on December 31, 2000, through the earlier of the date on which the merger of the Company with CSLC was consummated or March 31, 2001, and on a month-to-month basis thereafter if the merger were not consummated by that time. On February 8, 2001, the Company received notice from CSLC terminating the merger agreement. CSLC stated in its termination letter that it terminated the merger agreement because of its concerns relating to the Company's claimed election in 1996 to defer built-in gain taxes upon conversion of ILM II Holding from a "C" Corporation to a REIT. As previously reported in the Company's public filings, the Company claimed this election based upon the advice of its outside tax accountants; has operated since 1996 under the belief that such election was validly perfected; and, in February 2001, pursued administrative relief with the Internal Revenue Service to ensure the availability of the Company's election to defer such corporate level built-in gain taxes. On May 8, 2001, the Internal Revenue Service notified the Company that it granted the requested administrative relief in this matter. SALE OF 75% CO-TENANCY INTEREST IN VILLA SANTA BARBARA On August 15, 2000, the Company caused ILM II Holding to sell its 75% co-tenancy interest in its senior living facility located in Santa Barbara, California ("Villa Santa Barbara"), to CSLC for $10,143,750. In consideration for the sale, the Company received $9,543,750 in cash and CSLC contributed $600,000 toward the Company's outstanding construction loan debt and assumed certain then current transaction expenses of the Company in connection with the previously announced proposed merger contemplated by the Amended and Restated Agreement and Plan of Merger dated October 19, 1999, as amended on April 18, 2000 (the "Merger Agreement"), by and among the Company, CSLC and CSLC's wholly-owned acquisition subsidiary. The remaining 25% co-tenancy interest in Villa Santa Barbara was formerly owned by ILM Holding, Inc. ("Holding I"), a subsidiary of ILM Senior Living, Inc. ("ILM I") and was transferred to CSLC at the time the merger between ILM I and CSLC was consummated. A gain on the sale of approximately $6,160,000 was recognized in the accompanying consolidated statement of income for the year ended August 31, 2000. I-3 ILM II SENIOR LIVING, INC. ITEM 1. BUSINESS (CONTINUED) At August 31, 2001, through its consolidated subsidiary, the Company owned five Senior Housing Facilities (six at August 31, 1999, as Villa Santa Barbara was sold on August 15, 2000). The Company's investments as of August 31, 2001, are described below:
PROPERTY NAME DATE OF YEAR RENTABLE RESIDENT AND LOCATION (1) TYPE OF PROPERTY INVESTMENT FACILITY BUILT UNITS (2) CAPACITIES (2) - ---------------- ---------------- ---------- -------------- --------- -------------- The Palms Fort Myers, FL Senior Housing Facility 7/18/90 1988 205 255 Crown Villa Omaha, NE Senior Housing Facility 4/25/91 1992 73 73 Overland Park Place Overland Park, KS Senior Housing Facility 4/9/92 1984 141 153 Rio Las Palmas Stockton, CA Senior Housing Facility 5/14/92 1988 164 190 The Villa at Riverwood St. Louis County, MO Senior Housing Facility 5/29/92 1986 120 140
(1) See Note 4 to the consolidated financial statements filed with this Annual Report for a description of the agreements through which the Company has acquired these real estate investments. (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. 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 Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. The Facilities Lease Agreement was originally scheduled to expire on December 31, 2000, 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 but in November 2000, was extended beyond its original expiration date on a month-to-month basis by vote of the Board of Directors. Lease II pays annual base rent for the use of all of the Facilities in the aggregate amount of $3,555,427 ($3,995,586 and $4,035,600 per year in 2000 and 1999, respectively). The reduction in base rent from the previous years was due to the sale of Villa Santa Barbara on August 15, 2000. 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 $11,634,000 ($13,021,000 through August 15, 2000, when Villa Santa Barbara was sold). For the years ended August 31, 2001, 2000 and 1999, variable rental income was $1,006,000, $1,437,000, and $1,261,000, respectively. The Senior Housing Facilities are subject to competition from similar properties in the vicinities in which they are located. The properties are located in areas with significant senior citizen populations and, as a result, there are, and will likely continue to be a variety of competing projects aimed at attracting senior residents. Such projects will generally compete on the basis of rental rates, services, amenities and location. The Company has no real estate investments located outside the United States. The Company is engaged solely in the business of real estate investment. Therefore, presentation of the information about industry segments is not applicable. I-4 ILM II SENIOR LIVING, INC. ITEM 1. BUSINESS (CONTINUED) Through June 18, 1997, and subject to the supervision of the Company's Board of Directors, assistance in the management of the business of the Company was provided by PaineWebber. PaineWebber resigned from this position effective as of June 18, 1997, although PaineWebber agreed to provide certain administrative services to the Company and its affiliates through August 31, 1997. Through the date of its resignation, PaineWebber performed the day-to-day operations of the Company and acted as the investment advisor and consultant for the Company. PaineWebber provided cash management, accounting, tax preparation, financial reporting, investor communications and relations as well as asset management services to the Company. These services are now being provided to the Company, subject to the supervision of the Company's Board of Directors, by various companies, advisors and consultants including Cohen & Steers, Greenberg Traurig, Fleet Bank, PricewaterhouseCoopers LLP and MAVRICC Management Systems, Inc. There are currently three Directors of the Company, none of whom are affiliates of PaineWebber, Cohen & Steers, Fleet Bank, PricewaterhouseCoopers LLP, MAVRICC Management Systems, or Capital. The Directors are subject to removal by the vote of the holders of a majority of the outstanding shares of Company common stock. PROPERTY MANAGEMENT Lease II 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 under the terms of the Management Agreement which commenced on July 29, 1996. For the years ended August 31, 2001, 2000, and 1999, Capital earned property management fees from Lease II of $656,000, $903,000 and $980,000, respectively. CORPORATE LIQUIDATION On July 6, 2001, in a proxy statement filed on Schedule 14A with the Securities and Exchange Commission, the Company's Board of Directors recommended to the Company's Shareholders that the Company's Articles of Incorporation be amended to extend the Company's finite-life existence from December 31, 2001 until December 31, 2008. On August 16, 2001, at the Annual Meeting of Shareholders, the proposal to extend the finite-life corporate existence of the Company was not approved by the Shareholders. The Company's Articles of Incorporation required holders of a majority of its outstanding shares to approve the proposal. Accordingly, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its Senior Housing Facilities commencing not later than December 31, 2001. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. Upon liquidation of the Senior Housing Facilities, net proceeds and remaining cash reserves, after paying all liquidation and dissolution expenses, will be distributed to the Company's Shareholders and the Company will be dissolved. Pursuant to its obligation to liquidate and distribute its assets on December 31, 2001 in accordance with its Articles of Incorporation, on November 20, 2001, the Company and ILM II Holding entered into a purchase and sale agreement with BRE/Independent Living, LLC, a Delaware limited liability company ("BRE"), pursuant to which the Company agreed to sell, and BRE agreed to purchase, all of the Company's right, title and interest in and to its Senior Housing Facilities and certain other related assets. In consideration for the sale of the Senior Housing Facilities, BRE agreed, subject to certain conditions and apportionments, to pay the Company a purchase price of $45.5 million, approximately $2.275 million of which will be paid as a refundable deposit, into escrow, on or before November 27, 2001 (the "Deposit"). I-5 ILM II SENIOR LIVING, INC. ITEM 1. BUSINESS (CONTINUED) Each of the parties' respective obligations under such agreement is subject to customary closing conditions and includes a broad "diligence out" for BRE through December 31, 2001, which may be extended until March 1, 2002, providing BRE with the right, in its sole discretion, to terminate the agreement and receive a refund of the Deposit if BRE is not satisfied with any aspect of the Senior Housing Facilities. In the event BRE fails to terminate the agreement on or before January 31, 2002 pursuant to the termination right mentioned above, unless BRE elects for the Deposit to become non-refundable, the Company will be permitted to enter into a back-up agreement with a third party for the sale of the Senior Housing Facilities, which third party agreement will become effective in the event BRE terminates the agreement. Further, under certain circumstances, BRE is entitled to terminate the agreement and receive up to $2.4 million from the Company as liquidated damages and in certain other circumstances, the Company would be entitled to terminate the agreement and retain the Deposit as liquidated damages. Prior to entering into such agreement and in view of the pending termination of the Company's finite life corporate existence, the Company thought it was prudent to conduct an auction of the Company and the Senior Housing Facilities and accordingly authorized management to work expeditiously with the Company's legal and financial advisors to identify prospective purchasers of the Company's capital stock or assets (by means of merger, strategic business combination, tender offer or sale of the Company's Senior Housing Facilities) and to elicit bona fide offers for transactions to be consummated on or prior to December 31, 2001 which would maximize current shareholder value. As part of a five-week auction process that ended on October 24, 2001, liquidation announcements for the Company were published in the WALL STREET JOURNAL and THE WASHINGTON POST. Through the process, 160 potential purchasers were identified, comprehensive due diligence packages were distributed, and 126 potential purchasers expressed interest in reviewing information relating to one or more of the Senior Housing Facilities. Of those potential purchasers, 17 provided formal indications of interest, including eight parties who were interested in acquiring only a single senior or assisted living facility. Initial indications of interest for the Senior Housing Facilities, in terms of purchase price, ranged from a low of $34.0 million to a high of $51.0 million, the highest indication having been withdrawn shortly after it was made. Based upon the non-withdrawn indications of interest received, the Company's Board of Directors, with the advice of its legal and financial advisors, concluded that the BRE indication of interest was the highest in terms of a proposed purchase price and was most likely to maximize current shareholder value. Accordingly, the Company immediately entered into negotiations with BRE which culminated in the execution of the agreement mentioned above. Upon consummation of the transactions contemplated by such agreement or otherwise upon sale of the Senior Housing Facilities to a third party, the Company intends to liquidate and distribute its assets in accordance with the Virginia Stock Corporation Act, which provides for the distribution of the Company's assets first to the Company's creditors for purposes of discharging all of the Company's liabilities, and then, to the extent assets are remaining, to the Company's shareholders in accordance with their respective rights and interests. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. I-6 ILM II SENIOR LIVING, INC. ITEM 2. PROPERTIES As of August 31, 2001, the Company has interests in the five operating properties referred to under Item 1 above (six operating properties in 1999, prior to the sale of Villa Santa Barbara on August 15, 2000), to which reference is made for the description, name and location of such properties. Average economic occupancy levels for each fiscal quarter during 2001, along with an average for the year are presented below for each property:
Average Quarterly Occupancy ---------------------------------------------------------------------- FISCAL 2001 11/30/00 2/29/01 5/31/01 8/31/01 AVERAGE -------- ------- ------- ------- ------- The Palms 89% 89% 89% 88% 89% Crown Villa 90% 90% 81% 83% 86% Overland Park Place 91% 89% 84% 88% 88% Rio Las Palmas 91% 92% 92% 93% 92% The Villa at Riverwood 81% 77% 76% 75% 77%
ITEM 3. LEGAL PROCEEDINGS 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 I in the Supreme Court of the State of New York, County of New York naming the Company, ILM I and their Directors as defendants. The class action complaint alleged various theories of redress and a broad range of damages. 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 I. As part of the settlement, CSLC increased its proposed merger consideration payable to the Company and ILM I shareholders and was also responsible for a total of approximately $1.1 million (approximately 40% of which is allocable to the Company) in plaintiffs' attorneys fees and expenses upon consummation of the proposed mergers. On August 15, 2000, the merger of ILM I with CSLC was consummated and on February 28, 2001, CSLC terminated the proposed merger with the Company. Because of these events and based upon the Stipulation of Settlement, if the Company was to consummate an extraordinary transaction with a third party, the Company would be responsible for the Company's share of the plaintiff's attorney's fees and expenses. Accordingly, an amount of $440,000 is included in accrued liquidation expense on the consolidated statement of net assets at August 31, 2001. I-7 ILM II SENIOR LIVING, INC. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On July 6, 2001, in a proxy statement filed on Schedule 14A with the Securities and Exchange Commission, the Company's Board of Directors recommended to the Company's Shareholders that the three Directors be reelected to hold office until the 2002 Annual Meeting, the appointment of PricewaterhouseCoopers LLP as independent auditors be ratified, and that the Company's Articles of Incorporation be amended to extend the Company's finite-life existence from December 31, 2001 until December 31, 2008. On August 16, 2001, at the Annual Meeting of Shareholders, Directors were reelected and the appointment of PricewaterhouseCoopers LLP was ratified but the proposal to extend the finite-life corporate existence of the Company was not approved by the Shareholders. The Company's Articles of Incorporation required holders of a majority of its outstanding shares to approve the proposal. Accordingly, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its Senior Housing Facilities commencing not later than December 31, 2001. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. Upon liquidation of the Senior Housing Facilities, net proceeds and remaining cash reserves, after paying all liquidation and dissolution expenses, will be distributed to the Company's Shareholders and the Company will be dissolved. I-8 ILM II SENIOR LIVING, INC. PART II ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED STOCKHOLDER MATTERS During the public offering period, which commenced August 8, 1990 and ended May 10, 1991, the selling price of the shares of common stock was $10 per share. At August 31, 2001 there were 2,842 record holders of the Company's shares. There is no public market for the resale of the shares, and it is not anticipated that a public market will develop. While shares of the Company were designed for long-term holding, they may possibly be traded through a secondary market resale. The shares do not trade on an established exchange and the only market that has developed is an informal secondary market; therefore little resale activity occurs. Although certain parties may endeavor to assist Shareholders desiring to sell their shares by attempting to match requests to sell shares with requests to purchase shares, such transfers are not expected to be frequent. In addition, the Company's Articles of Incorporation restrict ownership of more than 9.8% of the Company's outstanding shares by one investor. These restrictions are designed to ensure that the Company does not violate certain share accumulation restrictions imposed by the Internal Revenue Code on REITs. Through the dividend payment made on April 15, 2000, for the quarter ended February 29, 2000, the Company made quarterly distributions, payable within 45 days after the end of each fiscal quarter, to Shareholders of record on the record date for such quarter as determined by the Directors. On June 2, 2000, the Company suspended the payment of regular quarterly dividends pending the then expected merger of the Company with CSLC. On November 13, 2000, the Company's board of directors voted to (1) reinstate the payment of regular quarterly dividends to shareholders with the dividend for the quarter ending November 30, 2000; and (2) distribute to shareholders the net proceeds from the sale of the Company's 75% interest in Villa Santa Barbara. In December 2000, dividends of $1.89 per share were paid to Shareholders of record as of November 1, 2000, distributing net proceeds from the sale of the Company's investment in Villa Santa Barbara. On January 15, 2001, a dividend for the quarter ended November 30, 2000, was paid to Shareholders of record as of December 15, 2000. On April 16, 2001, a dividend for the quarter ended February 28, 2001, was paid to Shareholders of record as of March 30, 2001, and on July 16, 2001, a dividend for the quarter ended May 31, 2001, was paid to Shareholders of record as of June 30, 2001. The Company intends to make distributions to Shareholders in an amount equal to at least 90% of its taxable income in order to continue to qualify as a REIT. Reference is made to Item 6 below for the amount of cash dividends paid per share of common stock during fiscal year 2001. II-1 ILM II SENIOR LIVING, INC. ITEM 6. SELECTED FINANCIAL DATA ILM II SENIOR LIVING, INC. For the years ended August 31, 2001, 2000, 1999, 1998 and 1997 (Dollars in thousands, except per share data)
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Revenues $ 4,725 $ 5,458 $ 5,321 $ 5,065 $ 4,515 Operating income (loss) 577 2,549 1,697 2,907 2,184 Gain on sale of Villa Santa Barbara 6,160 - - - Unrealized gain on appreciation of fair value of properties 22,809 - - - - Liquidation expense (2,404) - - - - Built-in gain tax expense (3,705) - - - - Net income $ 17,277 $ 8,709 $ 1,697 $ 2,907 $ 2,184 ========== ======== ======== ======= ======== Earnings per share of common stock $ 3.34 $ 1.68 $ 0.32 $ 0.56 $ 0.42 ========== ======== ======== ======= ======== Cash dividends paid per share of common stock $ 2.38 $ 0.64 $ 0.85 $ 0.73 $ 0.61 ========== ========== ========= ======== ========
2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Total assets $ 47,056 $ 35,611 $ 31,376 $ 32,383 $ 33,355 ========== ========== ========== ========== ========== Shares outstanding 5,181,236 5,181,236 5,181,236 5,181,236 5,181,236
(1) As a result of certain restructuring plans which the Company began to implement during fiscal 1995 (see Item 7), the financial position and results of operations of the combined investment properties in which the Company has invested have been presented on a consolidated basis in the Company's financial statements beginning in fiscal 1997. Prior to fiscal 1997, the Company had accounted for its interests in such properties under the equity method as a result of the Company not holding majority voting control of ILM Holding. The above selected financial data should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements appearing in item 14(a) of this annual report. II-2 ILM II SENIOR LIVING, INC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES ILM II Holding has acquired the respective investment properties subject to, and assumed the obligations under, the mortgage loans payable to the Company, pursuant to the 1997 Settlement Agreement with AHC. The principal balance of 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 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. Since ILM II Holding is consolidated with the Company in the accompanying consolidated financial statements for fiscal years 2001, 2000 and 1999, the mortgage loans and related interest expense have been eliminated in consolidation. Because the ownership of the assets of ILM II Holding was expected to be transferred to the Company or its wholly-owned subsidiary, ILM II Holding was capitalized with funds to provide it with working capital only for a limited period of time. At the present time, ILM II Holding is not expected to have sufficient cash flow during fiscal year 2001 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 II 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 August 31, 2001. As a result, the Company is expected to recover the full amount that would be due under the loans upon the sale of the Senior Housing Facilities. During 1999, the Company obtained a construction loan facility with a major bank that provided the Company with up to $8.8 million to fund the capital costs of the potential expansion programs. The construction loan facility was collateralized by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such Senior Housing Facilities. The loan was scheduled to expire on December 31, 2000, with possible extensions through September 29, 2003. Principal was due at expiration. Interest was payable at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. Loan origination costs in connection with this loan facility were being amortized over the life of the loan. On June 7, 1999, the Company 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. On August 16, 2000, the Company repaid approximately $600,000 of principal on the construction loan facility and the lender sold the loan to CSLC. On November 28, 2000, the Company and CSLC agreed that the maturity date of the loan would be extended until the date on which the merger of the Company with CSLC was consummated or the date on which the merger agreement is terminated, whichever occurred first. On February 8, 2001, CSLC terminated the proposed merger with the Company, and on April 3, 2001, the remaining principal balance plus accrued interest was repaid in full. Amounts outstanding under the loan at August 31, 2001 and 2000, were $0 and $570,000, respectively. II-3 ILM II SENIOR LIVING, INC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On July 6, 2001, the proxy statement filed on Schedule 14A with the Securities and Exchange Commission, the Company's Board of Directors recommended to the Company's Shareholders that the Company's Articles of Incorporation be amended to extend the Company's finite-life existence from December 31, 2001 until December 31, 2008. On August 16, 2001, at the Annual Meeting of Shareholders, the proposal to extend the finite-life corporate existence of the Company was not approved by the Shareholders. The Company's Articles of Incorporation required holders of a majority of its outstanding shares to approve the proposal. Accordingly, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its properties commencing not later than December 31, 2001. At August 31, 2001, the Company had cash and cash equivalents of $1,298,000 compared to $11,258,000 at August 31, 2000. The decrease in cash of approximately $9,960,000 is due to proceeds received from the sale of the Company's interest in Villa Santa Barbara to CSLC on August 15, 2000 being distributed to Shareholders in the form of dividends and the final repayment of the construction loan facility during the year. Amounts remaining will be used for the working capital requirements of the Company, along with the possible investment in the properties owned by the Company's consolidated affiliate for certain capital improvements. The source of future liquidity and dividends to the 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 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 90% of its taxable income to its Shareholders in order to continue to qualify as a REIT under the Internal Revenue Code. It is expected that upon the sale of the properties and payment of final expenses the Company will make a final distribution to the Shareholders. MARKET RISK The Company believes its market risk is immaterial. II-4 ILM II SENIOR LIVING, INC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS 2001 COMPARED TO 2000 Net income increased $8,568,000, or 98.4%, to $17,277,000 for the fiscal year ended August 31, 2001, compared to $8,709,000 for the fiscal year ended August 31, 2000, due mainly to recognition of $22,809,000 in unrealized gain on appreciation of investment properties. The value of the investment properties recorded on the accompanying financial statements equals the expected gross proceeds from the expected sale of the Senior Housing Facilities. This increase was offset by decreased revenues resulting from the sale of the Company's interest in Villa Santa Barbara in fiscal year 2000 and other expense of $2,404,000, the estimated cost of liquidating the Company, and built-in gain tax expense of $3,705,000. Total revenue was $4,725,000 for fiscal year 2001, representing a decrease in revenue of $733,000, or 13.4%, compared to total revenue of $5,458,000 for fiscal year 2000. Rental and other income decreased $846,000, or 15.7%, to $4,555,000 from $5,401,000 last year, due to decreased rental income earned pursuant to the terms of the Facilities Lease Agreement. Interest income increased $113,000, or 198.2%, to $170,000 for the year ended August 31, 2001, compared to $57,000 for the same period last year, primarily due to an increase in cash and cash equivalents after the sale of the Company's interest in Villa Santa Barbara on August 15, 2000. Total expenses increased $1,239,000, or 42.6% to $4,148,000 for the fiscal year ended August 31, 2001, compared to $2,909,000 for the fiscal year ended August 31, 2000. This increase in expenses is primarily attributable to increased professional fees of $1,056,000, or 92.9% for legal fees associated with the terminated agreement and plan of merger; legal aspects of the Company's finite life issue; and the 2001 proxy solicitation. General and administrative expenses increased $168,000 to $462,000, or 56.8%, for the fiscal year ended August 31, 2001, compared to $294,000 for the same period last year, due to a variety of factors including an $88,000 or 47.9% increase in Director's & Officer's insurance; a $50,000 or 2347.2% increase in portfolio communications associated with the 2001 proxy solicitation and the terminated agreement and plan of merger; increased investor servicing costs of $53,000 or 429.5% due to the 2001 proxy solicitation and the terminated agreement and plan of merger, offset by minor increases and decreases in other general and administrative costs. 2000 COMPARED TO 1999 Net income increased $7,012,000, or 413.2%, to $8,709,000 for the fiscal year ended August 31, 2000, compared to $1,697,000 for the fiscal year ended August 31, 1999, due mainly to the $6,160,000 gain on sale resulting from the Sale of Villa Santa Barbara. Total revenue was $5,458,000 for fiscal year 2000, representing an increase in revenue of $137,000, or 2.6%, compared to total revenue of $5,321,000 for fiscal year 1999. Rental and other income increased $136,000, or 2.6%, to $5,401,000 from $5,265,000 last year, due to increased rental income earned pursuant to the terms of the Facilities Lease Agreement. Interest income increased $1,000, or 1.8%, to $57,000 for the year ended August 31, 2000, compared to $56,000 for the same period last year, primarily due to an increase in cash and cash equivalents after the sale of the Company's interest in Villa Santa Barbara on August 15, 2000. Total expenses decreased $715,000, or 19.7%, to $2,909,000 for the fiscal year ended August 31, 2000, compared to $3,624,000 for the fiscal year ended August 31, 1999. This decrease in expenses is primarily attributable to decreased professional fees of $641,000, or 36.1%. General and administrative expenses decreased $50,000 to $294,000, or 14.5%, for the fiscal year ended August 31, 2000, compared to $344,000 for the same period last year, due to a variety of factors including decreased printing costs of $68,000; decreased miscellaneous costs of $45,000 or 82.5% offset by a $47,000 or 34.75% increase in Director's & Officer's insurance and increased postage and mailing costs of $11,000 or 41.8% due to increased communication with Shareholders and regulatory authorities due to the proposed merger with CSLC. Depreciation expense decreased $45,000 or 3.6% due mainly to the Company's sale of its co-tenancy interest in Villa Santa Barbara on August 15, 2000. II-5 ILM II SENIOR LIVING, INC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PROPERTY MANAGEMENT Lease II has retained Capital to be the property manager of the Senior Housing Facilities and the Company has guaranteed payment of all fees due to Capital pursuant to the Management Agreement which commenced on July 29, 1996. Under the terms of the Management Agreement, Capital earns a base management fee equal to 4% of the gross operating revenues of the Senior Housing Facilities, as defined. Capital also earns an incentive management fee equal to 25% of the amount by which the net cash flow of the Senior Housing Facilities, as defined, exceeds a specified base amount. Each August 31, beginning on August 31, 1997, the base amount is increased based on the percentage increase in the Consumer Price Index as well as 15% of Senior Housing Facility expansion costs. The occupancy levels of the five Senior Housing Facilities in which the Company has invested (six Senior Housing Facilities prior to the sale of Villa Santa Barbara on August 15, 2000) averaged 86% and 91% for the fiscal years ended August 31, 2001 and 2000, respectively. 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 II Holding, excluding Villa Santa Barbara, are $3,555,427 beginning September 1, 2000, and will remain at that level for the remainder of the lease term, including any month-to-month extensions of the lease. 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. Accordingly, ILM II Holding received variable rent payments in fiscal 2001, 2000, and 1999 in the amounts of $1,006,000, $1,437,000, and $1,261,000, respectively. INFLATION The Company completed its ninth full year of operations in fiscal 2001. The effects of inflation and changes in prices on the Company's operating results to date have not been significant. Inflation in future periods is likely to cause increases in the Company's expenses, which may be partially offset by increases in revenue from the Company's investments in the Senior Housing Facilities. Under the terms of the facilities lease, as discussed further above, the Company, through its consolidated affiliate, ILM II Holding, earned additional rental income based on increases in the gross revenues of the related operating properties beginning in January 1997. Such gross revenues may tend to rise with inflation since the rental rates on the tenant leases, which are short-term in nature, can be adjusted to keep pace with inflation as market conditions allow. RECENT EVENTS Historically, real estate has been subject to a wide range of cyclical economic conditions which affect various real estate sectors and geographic regions with differing intensities and at different times. In 2001, many regions of the United States have experienced varying degrees of economic recession, and the tragic events of September 11, 2001, may have accelerated certain recessionary trends such as the cost of obtaining sufficient property and liability insurance coverage and short-term interest rates. The Company believes, however, that these tragic events should not have a material effect on the Company's portfolio, given the Company's property types and the geographic regions in which the Company is located. The Company does not anticipate any material effects in financial performance. II-6 ILM II SENIOR LIVING, INC. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FORWARD-LOOKING INFORMATION CERTAIN STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL 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 ANNUAL 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 ANNUAL REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THE COMPANY MAKES ABSOLUTELY NO PROMISES, GUARANTEES, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY THEREOF. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data are included under Item 14 of this annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On June 12, 2001, the Company engaged PricewaterhouseCoopers LLP as its independent auditors, replacing Ernst & Young LLP. II-7 ILM II SENIOR LIVING, INC. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT There are currently three Directors of the Company. The Directors are subject to removal by the vote of the holders of a majority of the outstanding shares. The directors are responsible for the general policies of the Company, but they are not required to personally conduct the business of the Company in their capacities as Directors. (a) and (b) The names and ages of the Directors and Executive Officers of the Company during fiscal 2001 are as follows: NAME OFFICE AGE DATES OF OFFICE - ---- ------ --- --------------- J. William Sharman, Jr. President and Director 61 6/9/90** - present Jeffry R. Dwyer Secretary and Director 55 6/9/90* - present Carl J. Schramm Director 55 12/5/96 - present * The date of incorporation of the Company. ** The date of incorporation of the Company as Director; July 28, 1998 as President. (c) There is no family relationship among any of the Directors or Officers. All of the Directors and Officers of the Company have been elected to serve until the Company's next annual meeting. (d) The business experience of each of the Directors and Executive Officers of the Company is as follows: J. WILLIAM SHARMAN, JR. has served as a Director of the Company since its inception in 1990 and was appointed President on July 28, 1998. Mr. Sharman is the Chairman of the Board and Chief Executive Officer of Lancaster Hotels and Resorts, Inc., a hotel management company. Mr. Sharman served for ten years 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 a Director of Small Luxury Hotels, Ltd. of the United Kingdom, an international hotel marketing and reservations firm, and also serves on the Board of Trustees of St. Edwards University in Austin, Texas. Mr. Sharman also presently serves as a Director of Lease I and Lease II. He has a Bachelor of Science degree from the University of Notre Dame. JEFFRY R. DWYER has served as Secretary and a Director of the Company since its inception in 1990. Mr. Dwyer has been a shareholder of the law firm of Greenberg Traurig since June 1997. In May 1997, Greenberg Traurig began acting as Counsel to the Company and its affiliates. From 1993 to 1997, Mr. Dwyer was a partner with the law firm of Akin, Gump, Strauss, Hauer & Feld in the District of Columbia. Prior to joining Akin, Gump, Strauss, Hauer & Feld, Mr. Dwyer was a partner with the law firm of Morrison & Foerster from 1989 to 1993. Mr. Dwyer also presently serves as President, Secretary and Director of 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 law degree from the Georgetown University Law Center. III-1 ILM II SENIOR LIVING, INC. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) CARL J. SCHRAMM was appointed to fill a newly created seat on the Company's Board of Directors as of December 5, 1996. Mr. Schramm is President of Greenspring Advisors, Inc., a consulting and investment advisory firm serving clients in the managed care, health insurance and health information industries. From 1993 to 1995, Mr. Schramm served as Executive Vice President of Fortis, Inc., a diversified insurance and financial services company. From 1987 through 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 J.D. from Georgetown University. (e) None of the current Directors and Officers were involved in legal proceedings which are material to an evaluation of his or her ability or integrity as a Director or Officer. (f) Compliance With Exchange Act Filing Requirements: The Securities Exchange Act of 1934 requires the officers and directors of the Company, and persons who own more than ten percent of the Company's outstanding common stock, to file certain reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and ten-percent beneficial holders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, the Company believes that, during the year ended August 31, 2001, there was compliance with all filing requirements applicable to its officers and directors and ten-percent beneficial holders. ITEM 11. EXECUTIVE COMPENSATION The Company's Directors each receive an annual fee of $12,000 (except for J. William Sharman, Jr., President and Director, who receives $27,000) plus $500 for attending each Board of Directors meeting and reimbursement for expenses incurred in attending meetings and as a result of other work performed for the Company. Officers of the Company are not compensated. Jeffry R. Dwyer is a shareholder of and receives compensation from Greenberg Traurig, which acts as Counsel to the Company and its affiliates. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (a) As of the date hereof, no person of record owns or is known by the Company to own beneficially more than five percent of the outstanding shares of common stock of the Company. (b) The Directors and Officers of the Company do not have any direct or indirect ownership of shares of the Company's common stock as of the date hereof. (c) There exists no arrangement, known to the Company, the operation of which may at a subsequent date result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2001 and 2000, Greenberg Traurig earned fees from the Company of $1,326,000 and $603,000, respectively. III-2 ILM II SENIOR LIVING, INC. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) and (2) Financial Statements and Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. (3) EXHIBITS: The exhibits listed on the accompanying index to exhibits at page IV-3 are filed as part of this Report. (b) The Company filed a Current Report on Form 8-K dated August 16, 2001, announcing that the proposal to extend the finite-life corporate existence of the Company was not approved by Shareholders at the August 16, 2001, Annual Meeting of Shareholders. Because the overall vote was insufficient to approve the extension, pursuant to the Company's Articles of Incorporation, the Company reported that it will liquidate its properties commencing not later than December 31, 2001. The Company filed a Current Report on Form 8-K dated June 8, 2001, announcing that the Company appointed PricewaterhouseCoopers LLP as the Company's new independent auditors, replacing Ernst & Young LLP as auditors effective June 12, 2001. The Company filed a Current Report on Form 8-K dated February 14, 2001, announcing that on February 8, 2001, the Company received a notice from CSLC terminating the Amended and Restated Agreement and Plan of Merger dated October 19, 1999, as amended, between the Company and CSLC. The Company filed a Current Report on Form 8-K dated November 28, 2000, announcing that the Company extended until March 31, 2000, the outside termination date of its previously announced pending merger agreement with CSLC because CSLC was unable to obtain sufficient financing to complete the merger by September 30, 2000. The Company further announced its intention to resume paying quarterly cash dividends to holders of its common stock beginning in January 2001 and to distribute proceeds from the sale of the Company's co-tenancy interest in Villa Santa Barbara on December 15, 2000. The Company amended and restated its Current Report on Form 8-K originally filed with the Securities and Exchange Commission on August 30, 2000, and dated August 15, 2000, to clarify the transaction costs assumed by CSLC in connection with the previously announced proposed merger between the Company and CSLC and to file pro forma financial statements showing the effect of the sale of the Company's 75% co-tenancy interest in Villa Santa Barbara. IV-1 ILM II SENIOR LIVING, INC. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (c) Exhibits: See (a) (3) above. (d) Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. See Index to Financial Statements and Financial Statement Schedules at page F-1. IV-2 ILM II SENIOR LIVING, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. ILM II SENIOR LIVING, INC. By: /S/ J. WILLIAM SHARMAN, JR. ---------------------------------------- J. William Sharman, Jr. President and Chief Executive Officer Dated: NOVEMBER 29, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacity and on the dates indicated. By: /S/ J. WILLIAM SHARMAN, JR. Date: NOVEMBER 29, 2001 ----------------------------------- ------------------- J. William Sharman, Jr. Director By: /S/ JEFFRY R. DWYER Date: NOVEMBER 28, 2001 ----------------------------------- ------------------- Jeffry R. Dwyer Director By: /S/ CARL J. SCHRAMM Date: NOVEMBER 29, 2001 ----------------------------------- ------------------- Carl J. Schramm Director IV-3 ILM II SENIOR LIVING, INC. ANNUAL REPORT ON FORM 10-K ITEM 14(a)(3) ILM II SENIOR LIVING, INC. INDEX TO EXHIBITS
PAGE NUMBER IN THE EXHIBIT NO. DESCRIPTION OF DOCUMENT REPORT OR OTHER REFERENCE (3) and (4) Prospectus of the Registrant dated August Filed with the Commission pursuant to 8, 1990, as supplemented, with particular Rule 424(c) and incorporated herein by reference to the Restated Certificate and reference. Agreement of Limited Partnership. (10) Material contracts previously filed as Filed with the Commission pursuant to exhibits to registration statements and Section 13 or 15(d) of the Securities amendments thereto of the registrant Exchange Act of 1934 and incorporated together with all such contracts filed as herein by reference. exhibits of previously filed Forms 8-K and Forms 10-K are hereby incorporated herein by reference. Contracts regarding retention by ILM II Filed as Exhibits 1 and 2 to the Current Lease Corporation of Capital Senior Report on Form 8-K dated July 18, 1996 Management 2, Inc., as property manager. and incorporated herein by reference. (13) Annual Reports to Stockholders No Annual Report for the year ended August 31, 2001 has been sent to the Stockholders. An Annual Report will be sent to the Stockholders subsequent to this filing.
IV-4 ILM II SENIOR LIVING, INC. ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) AND (2) AND 14(d) ILM II SENIOR LIVING, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
REFERENCE ILM II SENIOR LIVING, INC.: Report of PricewaterhouseCoopers LLP, Independent Accountants F-2 Report of Ernst & Young LLP, Independent Auditors F-3 Consolidated Statement of Net Assets in Liquidation at August 31, 2001 F-4 Consolidated Balance Sheet at August 31, 2000 F-5 Consolidated Statements of Income for the years ended August 31, 2001, 2000 and 1999 F-6 Consolidated Statements of Changes in Shareholders' Equity for the years ended August 31, 2001, 2000 and 1999 F-7 Consolidated Statements of Cash Flows for the years ended August 31, 2001, 2000 and 1999 F-8 Notes to Consolidated Financial Statements F-9 SCHEDULE: Schedule III - Real Estate and Accumulated Depreciation F-20
Other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements, including the notes thereto. F-1 ILM II SENIOR LIVING, INC. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of ILM II Senior Living, Inc.: In our opinion, the accompanying consolidated statement of net assets in liquidation and the related consolidated statements of income, shareholders' equity and cash flows present fairly, in all material respects, the net assets in liquidation of ILM II Senior Living, Inc. and its subsidiary (the "Company") at August 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As described in Note 1 to the financial statements, the Company adopted a plan of liquidation on August 31, 2001, and as a result changed its basis of accounting as of August 31, 2001, and for periods subsequent to August 31, 2001, from the going concern basis to the liquidation basis of accounting. PricewaterhouseCoopers LLP Boston, Massachusetts November 26, 2001 F-2 ILM II SENIOR LIVING, INC. NOTE: TO BE UPDATED BY ERNST & YOUNG REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Shareholders of ILM II Senior Living, Inc. We have audited the accompanying consolidated balance sheet of ILM II Senior Living, Inc. and subsidiary, as of August 31, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended August 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2000, and the consolidated results of their operations and their cash flows for each of the two years in the period ended August 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Dallas, Texas October 24, 2000 except for Note 9, as to which the date is December 15, 2000 See accompanying notes. F-3 ILM II SENIOR LIVING, INC. CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION August 31, 2001 (LIQUIDATION BASIS) (Dollars in thousands, except per share data)
2001 -------- ASSETS Investment properties, at fair value 45,500 Cash and cash equivalents 1,298 Accounts receivable - related party 247 Prepaid expenses and other assets 11 -------- $ 47,056 ======== LIABILITIES Accounts payable and accrued expenses $ 129 Accounts payable - related party 966 Built-in gain taxes payable 3,705 Accrued liquidation expenses 2,404 Preferred shareholders' minority interest in consolidated subsidiary 152 -------- Total liabilities 7,356 -------- Net assets in liquidation $ 39,700 ========
See accompanying notes. F-4 ILM II SENIOR LIVING, INC. CONSOLIDATED BALANCE SHEET August 31, 2000 (GOING-CONCERN BASIS) (Dollars in thousands, except per share data)
ASSETS Investment properties, at cost: Land $ 4,522 Building and improvements 24,190 Furniture, fixtures and equipment 3,856 -------- 32,568 Less: accumulated depreciation (8,813) -------- 23,755 Mortgage placement fees 1,247 Less: accumulated amortization (1,106) -------- 141 Loan origination fees 144 Less: accumulated amortization (84) -------- 60 Cash and cash equivalents 11,258 Accounts receivable - related party 376 Prepaid expenses and other assets 15 Deferred rent receivable 6 -------- $ 35,611 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 121 Accounts payable - related party 40 Construction loan payable 570 Preferred shareholders' minority interest in consolidated subsidiary 143 --------- Total liabilities 874 Shareholders' equity: Common stock, $0.01 par value, 12,500,000 shares authorized, 5,181,236 shares issued and outstanding 52 Additional paid-in capital 44,823 Accumulated deficit (10,138) --------- Total shareholders' equity 34,737 --------- $ 35,611 =========
See accompanying notes. F-5 ILM II SENIOR LIVING, INC. CONSOLIDATED STATEMENTS OF INCOME (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000, and 1999 (Dollars in thousands, except per share data)
2001 2000 1999 -------- --------- --------- REVENUE: Rental and other $ 4,555 $ 5,401 $ 5,265 Interest 170 57 56 -------- --------- --------- 4,725 5,458 5,321 EXPENSES: Depreciation 1,191 1,190 1,235 Amortization 200 184 184 General and administrative 462 294 344 Professional fees 2,193 1,137 1,778 Director compensation 102 104 83 -------- --------- --------- 4,148 2,909 3,624 -------- --------- --------- OPERATING INCOME 577 2,549 1,697 Unrealized gain on appreciation of investment properties 22,809 - - Liquidation expense (2,404) - - Built-in gain tax (3,705) - - Gain on sale of Villa Santa Barbara - 6,160 - -------- --------- --------- NET INCOME $ 17,277 $ 8,709 $ 1,697 ======== ========= ========= Earnings per share of common stock $ 3.34 $ 1.68 $ 0.32 ======== ========= ========= Cash dividends paid per share of common stock $ 2.38 $ 0.64 $ 0.85 ======== ========= =========
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-6 ILM II SENIOR LIVING, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000 and 1999 (Dollars in thousands, except per share data)
COMMON STOCK $.01 PAR VALUE ADDITIONAL ------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL --------- --------- ---------- ----------- ------- BALANCE 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 --------- --------- ---------- ----------- ------- - BALANCE AT AUGUST 31, 1999 5,181,236 52 44,823 (15,544) 29,331 Cash dividends paid - - - (3,303) (3,303) Net income - - - 8,709 8,709 --------- --------- ---------- ---------- -------- BALANCE AT AUGUST 31, 2000 5,181,236 52 44,823 (10,138) 34,737 Cash dividends paid - - - (12,314) (12,314) Net income - - - 17,277 17,277 --------- --------- ---------- ---------- -------- BALANCE (NET ASSETS) AT AUGUST 31, 2001 5,181,236 $ 52 $ 44,823 $ (5,175) $ 39,700 ========= ========= ========== ========== ========
See accompanying notes. F-7 ILM II SENIOR LIVING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Liquidation as of August 31, 2001) For the years ended August 31, 2001, 2000, and 1999 (In thousands)
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 17,277 $ 8,709 $1,697 Adjustments to reconcile net income to net cash provided by operating activities: Gain on Sale of Villa Santa Barbara - (6,160) - Unrealized gain on appreciation of property (22,809) Depreciation and amortization 1,392 1,374 1,419 Charitable contribution of subsidiary's preferred stock and accrued dividends 9 9 9 Changes in assets and liabilities: Accounts receivable - related party 129 (39) (64) Prepaid expenses and other assets 4 53 86 Deferred rent receivable 6 31 32 Accounts payable - related party 926 (487) 478 Built-in gain tax payable 3,705 - - Accrued liquidation cost payable 2,404 - - Accounts payable and accrued expenses 8 (98) 48 ------- ------- ------- Net cash provided by operating activities 3,051 3,392 3,705 ------- ------- ------- Cash flows provided by (used in) investing activities: Proceeds from sale of Santa Barbara - 10,144 - Additions to investment properties (127) (288) (377) ------- ------- ------- Net cash provided by (used in) investing activities (127) 9,856 (377) ------- ------- ------- Cash flows used in financing activities: Loan origination fees paid - - (72) (Paydown of) proceeds from construction loan facility (570) (600) 1,165 Cash dividends paid to shareholders (12,314) (3,303) (4,404) ------- ------- ------- Net cash used in financing activities (12,884) (3,903) (3,311) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (9,960) 9,345 17 Cash and cash equivalents, beginning of year 11,258 1,913 1,896 ------- ------- ------- Cash and cash equivalents, end of year $ 1,298 $11,258 $ 1,913 ======= ======= ======= Cash paid for state income taxes $ 17 $ 17 $ 42 ======= ======= ======= Cash paid for interest $ 28 $ 60 $ 11 ======= ======= ======= Interest capitalized $ 28 $ 62 $ 17 ======= ======= =======
See accompanying notes. F-8 ILM II SENIOR LIVING, INC. Notes to Financial Statements 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION ILM II Senior Living, Inc. (the "Company), formerly PaineWebber Independent Living Mortgage, 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). ILM II Holding now holds title to the five remaining Senior Housing Facilities which comprise the balance of investment properties on the accompanying consolidated statement of net assets and balance sheet, subject to certain mortgage loans payable to the Company. Such mortgage loans and the related interest expense are eliminated in the consolidation of the financial statements of the Company. The capital stock of ILM 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 "Preferred Stock"). The number of authorized shares of preferred and common stock in ILM II Holding were also increased as part of the recapitalization. Following the recapitalization, the Company made charitable gifts of one share of the Preferred Stock in ILM II Holding to each of 111 charitable organizations so that ILM II Holding would meet the stock ownership requirements of a REIT as of January 30, 1997. The Preferred Stock has a liquidation preference of $1,000 per share plus any accrued and unpaid dividends. Dividends on the Preferred Stock will accrue at a rate of 8% per annum on the original $1,000 liquidation preference and will be cumulative from the date of issuance. Since ILM II Holding is not expected to have sufficient cash flow in the foreseeable future to make the required dividend payments, it is anticipated that dividends will accrue and be paid at liquidation. The Company recorded the contribution of the Preferred Stock in ILM II Holding to the charitable organizations at the amount of the initial liquidation preference of $111,000. Such amount was included in general and administrative expense on the income statement for the year ended August 31, 1997. Cumulative dividends accrued as of August 31, 2001 and 2000, on the preferred stock in ILM II Holding totaled approximately $40,000 and $32,000, respectively. F-9 ILM II SENIOR LIVING, INC. Notes to Financial Statements 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION 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 Facilities 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 subsequently amended, with CSLC, the corporate parent of Capital. At a special meeting of Shareholders on June 22, 2000, holders of more than two-thirds of the outstanding shares of the Company's common stock voted in favor of approval of the then proposed Agreement and Plan of Merger. On August 15, 2000, the Company caused ILM II Holding to complete the sale of its 75% co-tenancy interest in its senior living facility located in Santa Barbara, California ("Villa Santa Barbara"), to CSLC for $10,143,750. In consideration for the sale, the Company received $9,543,750 in cash and CSLC contributed $600,000 toward the Company's outstanding construction loan debt and assumed certain then current transaction expenses of the Company in connection with the previously announced proposed merger. The remaining 25% co-tenancy interest in Villa Santa Barbara was formerly owned by ILM Holding, Inc. ("Holding I"), a subsidiary of ILM Senior Living, Inc. ("ILM I") and was transferred to CSLC at the time the merger between ILM I and CSLC was consummated. A gain on the sale of approximately $6,160,000 was recognized in the accompanying consolidated statement of income for the year ended August 31, 2000. In November 2000, the Facilities Lease Agreement, which was scheduled to expire on December 31, 2000, was extended through the earlier of the date on which the merger of the Company with CSLC was consum- mated or March 31, 2001, and on a month-to-month basis thereafter if the merger was not consummated by that time. Although there can be no assurance, the Facilities Lease Agreement is expected to continue on a month-to-month basis until the Senior Housing Facilities are sold. F-10 ILM II SENIOR LIVING, INC. Notes to Financial Statements 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION (CONTINUED) On February 8, 2001, the Company received notice from CSLC terminating the merger agreement. CSLC stated in its termination letter that it terminated the merger agreement because of its concerns relating to the Company's claimed election in 1996 to defer built-in gain taxes upon conversion of ILM II Holding from a "C" Corporation to a REIT. As previously reported in the Company's public filings, the Company claimed this election based upon the advice of its outside tax accountants; has operated since 1996 under the belief that such election was validly perfected; and, in February 2001, pursued administrative relief with the Internal Revenue Service to ensure the availability of the Company's election to defer such corporate level built-in gain taxes. On May 8, 2001, the Internal Revenue Service notified the Company that it granted the requested administrative relief in this matter. On July 6, 2001, in a proxy statement filed on Schedule 14A with the Securities and Exchange Commission, the Company's Board of Directors recommended to the Company's Shareholders that the Company's Articles of Incorporation be amended to extend the Company's finite-life existence from December 31, 2001 until December 31, 2008. On August 16, 2001, at the Annual Meeting of Shareholders, the proposal to extend the finite-life corporate existence of the Company was not approved by the Shareholders. The Company's Articles of Incorporation required holders of a majority of its outstanding shares to approve the proposal Accordingly, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its Senior Housing Facilities commencing not later than December 31, 2001. As a result, the Company changed its basis of accounting, as of August 31, 2001, from the going-concern basis to the liquidation basis. Upon liquidation of the Senior Housing Facilities, net proceeds and remaining cash reserves, after paying all liquidation and dissolution expenses, will be distributed to the Company's Shareholders and the Company will be dissolved. F-11 ILM II SENIOR LIVING, INC. Notes to Financial Statements 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION (CONTINUED) Pursuant to its obligation to liquidate and distribute its assets on December 31, 2001 in accordance with its Articles of Incorporation, on November 20, 2001, the Company and ILM II Holding entered into a purchase and sale agreement with BRE/Independent Living, LLC, a Delaware limited liability company ("BRE") pursuant to which the Company agreed to sell, and BRE agreed to purchase, all of the Company's right, title and interest in and to its Senior Housing Facilities and certain other related assets. In consideration for the sale of the Senior Housing Facilities, BRE agreed, subject to certain conditions and apportionments, to pay the Company a purchase price of $45.5 million, approximately $2.275 million of which will be paid as a refundable deposit, into escrow, on or before November 27, 2001 (the "Deposit"). Each of the parties' respective obligations under such agreement is subject to customary closing conditions and includes a broad "diligence out" for BRE through December 31, 2001, which may be extended until March 1, 2002, providing BRE with the right, in its sole discretion, to terminate the agreement and receive a refund of the Deposit if BRE is not satisfied with any aspect of the Senior Housing Facilities. In the event BRE fails to terminate the agreement on or before January 31, 2002 pursuant to the termination right mentioned above, unless BRE elects for the Deposit to become non-refundable, the Company will be permitted to enter into a back-up agreement with a third party for the sale of the Senior Housing Facilities, which third party agreement will become effective in the event BRE terminates the agreement. Further, under certain circumstances, BRE is entitled to terminate the agreement and receive up to $2.4 million from the Company as liquidated damages and in certain other circumstances, the Company would be entitled to terminate the agreement and retain the Deposit as liquidated damages. Prior to entering into such agreement and in view of the pending termination of the Company's finite life corporate existence, the Company thought it was prudent to conduct an auction of the Company and the Senior Housing Facilities and accordingly authorized management to work expeditiously with the Company's legal and financial advisors to identify prospective purchasers of the Company's capital stock or assets (by means of merger, strategic business combination, tender offer or sale of the Company's Senior Housing Facilities) and to elicit bona fide offers for transactions to be consummated on or prior to December 31, 2001 which would maximize current shareholder value. As part of a five-week auction process that ended on October 24, 2001, liquidation announcements for the Company were published in the WALL STREET JOURNAL and THE WASHINGTON POST. Through the process, 160 potential purchasers were identified, comprehensive due diligence packages were distributed, and 126 potential purchasers expressed interest in reviewing information relating to one or more of the Senior Housing Facilities. Of those potential purchasers, 17 provided formal indications of interest, including eight parties who were interested in acquiring only a single senior or assisted living facility. Initial indications of interest for the Senior Housing Facilities, in terms of purchase price, ranged from a low of $34.0 million to a high of $51.0 million, the highest indication having been withdrawn shortly after it was made. Based upon the non-withdrawn indications of interest received, the Company's Board of Directors, with the advice of its legal and financial advisors, concluded that the BRE indication of interest was the highest in terms of a proposed purchase price and was most likely to maximize current shareholder value. Accordingly, the Company immediately entered into negotiations with BRE which culminated in the execution of the agreement mentioned above. F-12 ILM II SENIOR LIVING, INC. Notes to Financial Statements 1. NATURE OF OPERATIONS AND PLAN OF LIQUIDATION (CONTINUED) Upon consummation of the transactions contemplated by such agreement or otherwise upon sale of the Senior Housing Facilities to a third party, the Company intends to liquidate and distribute its assets in accordance with the Virginia Stock Corporation Act, which provides for the distribution of the Company's assets first to the Company's creditors for purposes of discharging all of the Company's liabilities, and then, to the extent assets are remaining, to the Company's shareholders in accordance with their respective rights and interests. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's significant accounting policies are summarized as follows: A. BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES In connection with its adoption of a plan of liquidation as of August 31, 2001, the Company adopted the liquidation basis of accounting which, among other things, requires that assets and liabilities be stated at their estimated value and that estimated costs of liquidating the Company be provided to the extent that they are reasonably determinable. As of August 31, 2001, the Company adopted a plan of liquidation and, accordingly, adjusted the carrying value of investment properties to $45,500,000 and recorded accrued expenses of $2,404,000. These expenses include estimates of costs to be incurred in carrying out the dissolution and liquidation of the Company. These costs include estimates of legal fees ($500,000); the potential Feldman litigation settlement ($440,000); taxes ($400,000); commissions ($460,000); insurance ($290,000); and other ($314,000). The investment properties were valued based on a Purchase and Sale agreement executed by the Company with a third party on November 20, 2001. The proposed sale price is subject to change upon completion of the due diligence period and amounts ultimately realized may vary significantly. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. The actual liquidation costs could vary from the related provisions due to the uncertainty related to the length of time required to complete the liquidation and dissolution of the Company. The accrued expenses do not take into consideration possible litigation arising from the potential representations and warranties made as part of the sale of the Senior Housing Facilities. Such costs, if any, are unknown and are not estimable at this time. 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. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company make estimates affecting the reported amounts of assets and liabilities, and of revenues and expenses. Key estimates include the valuation of investment properties and the estimate of liquidation expenses. Actual results, therefore, could differ from these estimates. F-13 ILM II SENIOR LIVING, INC. Notes to Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B. 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. C. INVESTMENT PROPERTIES In accordance with the adoption of the liquidation basis of accounting, the Company increased the fair value of its investment properties as of August 31, 2001, to a value of $45,500,000, to equal the expected gross proceeds from the expected sale of the Senior Housing Facilities. This increase in fair value is included on the accompanying consolidated statement of net assets in liquidation at August 31, 2001. The investment properties were valued based on a Purchase and Sale agreement executed by the Company with a third party on November 20, 2001. The proposed sale price is subject to change upon completion of the due diligence period and amounts ultimately realized may vary significantly. There can be no assurance as to whether the transactions contemplated by the agreement will be consummated or, if consummated, as to the exact timing thereof. Similarly, there can be no assurance as to the timing of a liquidation and distribution of the Company's assets or the amount of assets that will be distributed to the Company's shareholders, if any. Properties owned by the Company were initially recorded at the purchase price plus closing costs. Development costs and major renovations were capitalized as a component of costs, and routine maintenance and repairs were charged to expense as incurred. For the years ended August 31, 2000 and 1999, investment properties were carried at the lower of cost, reduced by accumulated depreciation. Depreciation expense was 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. Mortgage placement fees were incurred by the Company and these fees are included in the accompanying consolidated balance sheets for fiscal year 2000, reduced by Accumulated Amortization of mortgage placement fees. Loan origination fees relating to the construction loan facility (see Note 6) are included on the accompanying consolidated balance sheet. These fees were being amortized to expense on a straight-line basis over the term of the loan and were fully written off at August 31, 2001. Interest paid on the construction loan facility was capitalized until the loan was repaid. D. RENTAL REVENUE In fiscal years 2001, 2000 and 1999, rental revenues consist of payments due from Lease II under the terms of the Facilities Lease Agreement described in Note 5. Base rental income under the facilities 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, 2000 represents the difference between rental income on a straight-line basis and rental income received under the terms of the facilities lease. F-14 ILM II SENIOR LIVING, INC. Notes to Financial Statements 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) E. 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 90% 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 Senior Housing Facilities securing its mortgage loan investments. To retain REIT status, the Company must ensure that 75% of its annual gross income is received from qualified sources. Under the original investment structure, interest income from the Company's mortgage loans was a qualified source. The Senior Housing Facilities that are now owned by a subsidiary of the Company provide residents with more services, such as meals, activities, assisted living, etc., than are customary for ordinary residential apartment properties. As a result, a significant portion of the rents paid by the residents includes income for the increased level of services received by them. Consequently, the rents paid by the residents likely would not be qualified rents for REIT qualification purposes if received directly by the Company. Therefore, if the Company received such rents directly, it could lose REIT status and be taxed as a regular corporation. After extensive review, the Board of Directors determined that it would be in the best interests of the Shareholders for the Company to retain REIT status and facilities 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 Facilities Lease Agreement). The Company reports on a calendar year basis for income tax purposes. All distributions during calendar years 2000 and 1999 were ordinary taxable dividends, except that 14.01% of distributions for 1999 represented a return of capital. 3. BUILT-IN GAIN TAX The assumption of ownership of the Senior Housing Facilities through ILM II Holding, which was organized as a so-called "C" corporation for tax purposes, has resulted in a possible future tax liability which would be payable upon the ultimate sale of the Senior Living 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 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 ten 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 will not be held for such additional period of time. Based on management's current estimate of the increase in the values of the Senior Housing Facilities 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 would result in a built-in gain tax of approximately $3.8 million. The sale of the Company's interest in Villa Santa Barbara resulted in the recognition of a built-in gain of approximately $600,000, which was offset by pre-conversion net operating losses. Based in part upon advice from the Company's outside tax accountants, commencing in 1996 the Company has acted as though it had made an election in its 1996 tax return to allow the Company to avoid a corporate level tax upon conversion of ILM II Holding from a "C" Corporation to a REIT. Because proof of a formal election had not then been obtained, in February 2001 the Company pursued administrative relief with the Internal Revenue Service to ensure the availability of the benefits of this election. F-15 ILM II SENIOR LIVING, INC. Notes to Financial Statements 3. BUILT-IN GAIN TAX (CONTINUED) On May 8, 2001, the Internal Revenue Service notified the Company that it granted the requested administrative relief in this matter and, accordingly, the built-in gain tax has been deferred. To avoid this built-in gain tax, the Directors had recommended to the Shareholders an amendment to the Articles of Incorporation to extend the Company's scheduled liquidation date. At the Annual Meeting of Shareholders on August 16, 2001, the proposal to extend the finite life corporate existence of the Company was not approved by Shareholders. Because the overall vote was insufficient to approve the extension, pursuant to the Company's Articles of Incorporation, the Company has adopted a plan of liquidation and announced that it will liquidate its properties commencing not later than December 31, 2001. As a result of the adoption of the plan of liquidation, the built-in gain tax will be payable upon the disposition of the investment properties. Accordingly, the Company has accrued a liability of $3,705,250 on the accompanying consolidated statement of net assets in liquidation at August 31, 2001, for the built-in gain tax. 4. PROPERTY MANAGEMENT AGREEMENT Lease II has retained Capital to be the property manager of the Senior Housing Facilities and the Company has guaranteed the payment of all fees due to Capital pursuant to a Management Agreement which commenced on July 29, 1996. For the years ended August 31, 2001, 2000, and 1999, Capital earned property management fees from Lease II of $656,000, $903,000 and $980,000, respectively. 5. RELATED PARTY TRANSACTIONS Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of Greenberg Traurig, Counsel to the Company and its affiliates since 1997. For the years ended August 31, 2001 and 2000, Greenberg Traurig received fees from the Company of $1,326,000 and $603,000, respectively. ACCOUNTS RECEIVABLE - RELATED PARTY at August 31, 2001 and 2000 represents amounts due from an affiliated company, Lease II, for variable rent. ACCOUNTS PAYABLE - RELATED PARTY at August 31, 2001, represents unbilled legal fees due to to Greenberg Traurig, counsel to the Company and its affiliates and a related party. ACCOUNTS PAYABLE - RELATED PARTY at August 31, 2000, includes $40,000 of expense reimbursements payable to Lease II. F-16 ILM II SENIOR LIVING, INC. Notes to Financial Statements 6. INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE As of August 31, 2001 and 2000, the Company, through its consolidated subsidiary, owned five Senior Housing Facilities (six Senior Housing Facilities through August 15, 2000, when Villa Santa Barbara was sold) (see Note 1). 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:
YEAR RENTABLE RESIDENT FACILITY DATE OF NAME LOCATION UNITS (2) CAPACITIES(2) BUILT INVESTMENT (1) - ---- -------- --------- ------------- ----- -------------- The Palms Fort Myers, FL 205 255 1988 7/18/90 Crown Villa Omaha, NE 73 73 1992 4/25/91 Overland Park Place Overland Park, KS 141 153 1984 4/9/92 Rio Las Palmas Stockton, CA 164 190 1988 5/14/92 The Villa at Riverwood St. Louis County, MO 120 140 1986 5/29/92 Villa Santa Barbara (3) Santa Barbara, CA
(1) Represents the date of the Company's original mortgage loan to Angeles Housing Concepts, Inc. (see Note 1). (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. (3) The Company's investment in Villa Santa Barbara was sold on August 15, 2000. 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. Through December 31, 2000, the Lessor had 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 was originally scheduled to expire on December 31, 2000, 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, but in November 2000, was extended beyond its original expiration date on a month-to-month basis by vote of the Board of Directors. 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 Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. Lease II pays annual base rent for the use of all of the Facilities in the aggregate amount of $3,555,427 ($3,995,586 per year and $4,035,600 per year in 2000 and 1999, respectively). The reduction in base rent from the previous years is due the sale of Villa Santa Barbara on August 15, 2000.) 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 $11,634,000 ($13,021,000 through August 15, 2000, when Villa Santa Barbara was sold). For the years ended August 31, 2001, 2000, and 1999, variable rental income was $1,006,000, $1,437,000, and $1,261,000, respectively. F-17 ILM II SENIOR LIVING, INC. Notes to Financial Statements 6. INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE (CONTINUED) Condensed balance sheets as of August 31, 2001, 2000, and 1999, and condensed statements of operations for the years ended August 31, 2001, 2000, and 1999 of Lease II are as follows (in thousands):
2001 2000 1999 ---- ---- ---- (in liquidation) ASSETS Current assets $ 1,521 $ 2,073 $ 1,990 Furniture, fixtures, and equipment, net - 451 617 Other assets 9 21 163 ------------ ----------- ---------- $ 1,530 $ 2,545 $ 2,770 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 1,445 $ 1,537 $ 1,467 Other liabilities - 6 37 Shareholders' equity 85 1,002 1,266 ----------- --------- --------- $ 1,530 $ 2,545 $ 2,770 ======== ======== ======== STATEMENT OF OPERATIONS Revenues $14,180 $16,605 $16,250 Operating expenses 15,041 16,394 15,339 Income tax expense (benefit) 56 475 342 ------------ ----------- ----------- Net (loss) income $ (917) $ (264) $ 569 ============ =========== ===========
7. LEGAL PROCEEDINGS 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 I in the Supreme Court of the State of New York, County of New York naming the Company, ILM I and their Directors as defendants. The class action complaint alleged various theories of redress and a broad range of damages. On October 15, 1999, the parties entered into a Stipulation of Settlement that was filed with the Court and approved 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 I. As part of the settlement, CSLC increased its proposed merger consideration payable to the Company and ILM I shareholders and was also responsible for a total of approximately $1.1 million (approximately 40% of which is allocable to the Company) in plaintiffs' attorneys fees and expenses upon consummation of the proposed merger. If the proposed merger was not consummated and if the Company and ILM I were to consummate an extraordinary transaction with a third party, then the Company and ILM I would be responsible for the plaintiffs' attorneys fees and expenses. On August 15, 2000, the merger of ILM I with CSLC was consummated and on February 28, 2001, CSLC terminated the proposed merger with the Company. Because of these events and based upon the Stipulation of Settlement, if the Company was to consummate an extraordinary transaction with a third party, the Company would be responsible for the Company's share of the plaintiff's attorney's fees and expenses. As a result of the adoption of a plan of liquidation, a liability of $440,000 for a potential Feldman litigation settlement is included in accrued liquidation expense on the consolidated statement of net assets in liquidation at August 31, 2001. F-18 ILM II SENIOR LIVING, INC. Notes to Financial Statements 8. CONSTRUCTION LOAN FINANCING During 1999 the Company obtained a construction loan facility with a major bank that provided the Company with up to $8.8 million to fund the capital costs of potential expansion programs. The construction loan facility was collateralized by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such properties. The loan was scheduled to expire on December 31, 2000, with possible extensions through September 29, 2003. Principal was due at expiration. Interest was payable monthly at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. On June 7, 1999, the Company 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. On August 16, 2000, the Company repaid approximately $600,000 of principal on the construction loan facility in connection with the sale of Villa Santa Barbara and the lender sold the remaining loan to CSLC. As part of this transaction, the Company agreed that the term of the loan would not be extended beyond December 31, 2000. On November 28, 2000, the Company and CSLC agreed that the maturity date of the loan would be extended until the date on which the merger of the Company with CSLC was consummated or the date on which the merger agreement was terminated, whichever occurred first. On February 28, 2001, CSLC terminated the proposed merger with the Company, and on April 3, 2001, the remaining principal balance plus accrued interest was repaid in full. Amounts outstanding under the loan at August 31, 2001 and 2000 were $0 and $570,000, respectively. Loan origination fees of $144,000 were paid in connection with this loan facility and were amortized over the life of the loan. On April 3, 2001, unamortized loan origination fees totaling $29,867 were amortized to expense with repayment of the loan. Capitalized interest at August 31, 2001 and 2000, was $107,059 and $79,310, respectively. There were no amounts outstanding under the loan at August 31, 2001. 9. DIVIDENDS On November 13, 2000, the Company's Board of Directors voted to reinstate the payment of regular quarterly dividends to shareholders with the dividend for the quarter ending November 30, 2000, which was paid on January 15, 2001. Payment of dividends had been suspended in June 2000 pending the then proposed merger. On November 13, 2000, the Company's board of directors also voted to distribute to shareholders the net proceeds of approximately $9.8 million or $1.89 per share from the sale of the Company's 75% interest in Villa Santa Barbara. On December 15, 2000, the Company's Board of Directors declared a quarterly dividend to distribute the net proceeds from the sale of the Company's investment in Villa Santa Barbara. A dividend of $1.89 per share of common stock, totaling approximately $9,792,000 was paid as of December 15, 2000, to Shareholders of record as of November 1, 2000. Also on December 15, 2000, the Company's Board of Directors declared a quarterly dividend for the quarter ended November 30, 2000, in the amount of $0.1622 per share of common stock. On January 15, 2001, the dividend totaling approximately $840,000 was paid to Shareholders of record at the close of business on December 15, 2000. On March 15, 2001, the Company's Board of Directors declared a quarterly dividend for the quarter ended February 28, 2001, in the amount of $0.1622 per share of common stock. On April 16, 2001, the dividend totaling approximately $840,000 was paid to Shareholders of record at the close of business on March 30, 2001. In June 2001, the Company's Board of Directors declared a quarterly dividend for the quarter ended May 31, 2001. On July 16, 2001, a dividend of $0.1622 per share of common stock, totaling approximately $840,000 was paid to Shareholders of record as of June 30, 2001. F-19 SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ILM II SENIOR LIVING, INC. CONSOLIDATED SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION August 31, 2001 (Amounts in thousands)
COSTS CAPITALIZED INITIAL COST TO (REMOVED GROSS AMOUNT AT WHICH CARRIED AT THE COMPANY (2) SUBSEQUENT TO) END OF YEAR ---------------------- ACQUISITION OF -------------------------------- BUILDINGS & BUILDINGS & BUILDINGS & DESCRIPTION ENCUMBRANCES(1) LAND IMPROVEMENT IMPROVEMENTS(3) LAND IMPROVEMENTS - ----------- --------------- ---- ----------- --------------- ---------- -------------- CONGREGATE CARE FACILITIES: FORT MYERS, $ 8,700 $ 1,075 $ 11,233 $ (3,268) $ 1,319 $ 7,877 FLORIDA OMAHA, NEBRASKA 4,950 400 5,043 (1,054) 580 3,886 OVERLAND PARK, KANSAS 7,850 672 6,787 22 656 6,679 STOCKTON, CALIFORNIA 5,700 1,507 5,628 (443) 1,670 5,224 ST. LOUIS COUNTY, 5,850 292 4,488 74 368 4,436 MISSOURI SANTA BARBARA, CALIFORNIA 5,094 1,160 4,322 (197) 0 0 -------- -------- -------- -------- -------- -------- SUB-TOTAL $ 38,144 $ 5,106 $ 37,501 $ (4,866) $ 4,593 $ 28,102 -------- -------- -------- -------- -------- -------- FAIR VALUE ADJ. -- -- -- -- -- -- -------- -------- -------- -------- -------- -------- TOTAL $ 38,144 $ 5,106 $ 37,501 $ (4,866) $ 4,593 $ 28,102 ======== ======== ======== ======== ======== ======== GROSS AMOUNT AT WHICH CARRIED AT END OF YEAR ----------------- DEPRECIABLE UNAMORTIZED ACCUMULATED ACCUMULATED DATE OF DATE LIFE DESCRIPTION MORTGAGE FEES(5) TOTAL DEPRECIATION(5) AMORTIZATION(5) CONSTRUCTION ACQUIRE OF ASSETS - ----------- ---------------- ----- --------------- --------------- ------------ -------- ----------- CONGREGATE CARE FACILITIES: FORT MYERS, $ 412 $ 9,608 $ (2,739) $ (454) 1988 7/18/90 5-40 YRS. FLORIDA OMAHA, NEBRASKA 183 4,649 (1,581) (176) 1992 4/25/91 5-40 YRS. OVERLAND PARK, KANSAS 251 7,586 (2,132) (240) 1984 4/9/92 5-40 YRS. STOCKTON, CALIFORNIA 240 7,134 (1,848) (226) 1988 5/14/92 5-40 YRS. ST. LOUIS COUNTY, 161 4,965 (1,704) (151) 1985 5/29/92 5-40 YRS. MISSOURI SANTA BARBARA, CALIFORNIA 0 0 0 0 1979 7/13/92 5-40 YRS. -------- -------- -------- -------- SUB-TOTAL $ 1,247 $ 33,942 $(10,004) $ (1,247) -------- -------- -------- -------- FAIR VALUE ADJ. -- 11,558 10,004 1,247 -------- -------- -------- -------- TOTAL $ 1,247 $ 45,500 $ 0 $ 0 ======== ======== ======== ========
(1) ENCUMBRANCES REPRESENT FIRST MORTGAGE LOANS BETWEEN ILM II HOLDING AS MORTGAGOR, AND THE COMPANY AS MORTGAGE. SUCH LOANS ARE ELIMINATED IN CONSOLIDATION IN THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS (SEE NOTE 4). (2) INITIAL COST TO THE COMPANY REPRESENTS THE AGGREGATE ADVANCES MADE BY THE COMPANY ON THE LOANS SECURED BY THE FACILITIES WHICH WERE MADE TO AHC PRIOR TO THE DEFAULT AND FORECLOSURE ACTIONS DESCRIBED IN NOTES 1 AND 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS. (3) COSTS REMOVED SUBSEQUENT TO ACQUISITION REFLECT THE GUARANTY PAYMENTS RECEIVED BY THE COMPANY FROM AHC UNDER THE TERMS OF THE EXCLUSIVITY AGREEMENT AS DISCUSSED FURTHER IN NOTES 1 AND 4 TO THE CONSOLIDATED FINANCIAL STATEMENTS AND COSTS INCURRED RELATING TO CAPITALIZED INTEREST. (4) THE AGGREGATE COST OF REAL ESTATE OWNED AT AUGUST 31, 2001 FOR FEDERAL INCOME TAX PURPOSES IS APPROXIMATELY $31,365,719 (5) THE 75% CO-TENANCY INTEREST IN VILLA SANTA BARBARA WAS SOLD TO CAPITAL SENIOR LIVING CORPORATION (CSLC) ON AUGUST 15, 2000. (6) CERTAIN NUMBERS HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR'S PRESENTATION. F-20 SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION ILM II SENIOR LIVING, INC. AND SUBSIDIARY SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION (continued) August 31, 2001 (Amounts in thousands)
2001 2000 1999 -------- -------- -------- (5) Reconciliation of real estate owned: Balance at beginning of period $ 33,815 $ 38,861 $ 38,484 Acquisitions and improvements - year ended 8/31/01 127 -- -- Sale of Villa Santa Barbara on August 15, 2000 -- (5,334) -- Acquisitions and improvements - year ended 8/31/00 -- 288 -- Acquisitions and improvements - year ended 8/31/99 -- -- 377 Fair value adjustment 11,558 -- -- -------- -------- -------- Balance at end of period $ 45,500 $ 33,815 $ 38,861 ======== ======== ======== (6) Reconciliation of accumulated depreciation and amortization: Balance at beginning of period $ 9,919 $ 9,942 $ 8,565 Depreciation and amortization expense - year ended 8/31/01 1,391 -- -- Sale of Villa Santa Barbara on August 15, 2000 (1,354) Depreciation and amortization expense - year ended 8/31/00 1,331 Depreciation and amortization expense - year ended 8/31/99 -- -- 1,377 Fair value adjustment - depreciation and amortization expense - year ended 8/31/01 (11,251) -------- -------- --------- Balance at end of period $ 0 $ 9,919 $ 9,942 ======== ======== ========
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