<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MAY 31, 1999
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.)
8180 Greensboro Drive, Suite 850, McLean, VA 22102
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 357-3550
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each Class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF COMMON STOCK $.01 PAR VALUE
-------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
----- -----
Shares of common stock outstanding as of May 31, 1999: 5,181,236.
<PAGE>
ILM II SENIOR LIVING, INC
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
May 31, 1999 (Unaudited) and August 31, 1998.................................................4
Consolidated Statements of Income
For the nine months and three months ended May 31, 1999 and 1998 (Unaudited).................5
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended May 31, 1999 and 1998 (Unaudited)..................................6
Consolidated Statements of Cash Flows
For the nine months ended May 31, 1999 and 1998 (Unaudited)..................................7
Notes to Consolidated Financial Statements (Unaudited)....................................8-14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....15-20
Part II. Other Information
Item 5. Other Information...........................................................................21
Item 6. Exhibits and Reports on Form 8-K............................................................21
Signatures....................................................................................................22
</TABLE>
-2-
<PAGE>
ILM II SENIOR LIVING, INC
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
(see next page)
-3-
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED BALANCE SHEETS
May 31, 1999 (Unaudited) and August 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS May 31, 1999 August 31, 1998
------------ ---------------
<S> <C> <C>
Operating investment properties, at cost:
Land .......................................................... $ 5,567 $ 5,518
Building and improvements ..................................... 27,910 27,726
Furniture, fixtures and equipment ............................. 3,815 3,815
-------- --------
37,292 37,059
Less: accumulated depreciation ............................... (8,448) (7,599)
-------- --------
28,844 29,460
Unamortized mortgage fees ........................................... 1,425 1,425
Less: accumulated amortization ..................................... (1,073) (966)
-------- --------
352 459
Loan origination fees ............................................... 143 72
Less: accumulated amortization ..................................... (31) --
-------- --------
112 72
Cash and cash equivalents ........................................... 651 1,896
Accounts receivable - related party ................................. 308 273
Prepaid expenses and other assets ................................... 185 154
Deferred rent receivable ............................................ 45 69
-------- --------
$ 30,497 $ 32,383
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses ............................... $ 288 $ 220
Preferred shareholders' minority
interest in subsidiary ........................................... 132 125
-------- --------
Total liabilities ............................................. 420 345
Contingencies
Shareholders' equity:
Common stock, $0.01 par value,
12,500,000 shares authorized
5,181,236 shares issued and outstanding ....................... 52 52
Additional paid-in capital ....................................... 44,823 44,823
Accumulated deficit .............................................. (14,798) (12,837)
-------- --------
Total shareholder's equity .................................... 30,077 32,038
-------- --------
$ 30,497 $ 32,383
-------- --------
-------- --------
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the nine-month and three-month periods ended
May 31, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
May 31, May 31,
------- -------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental income $3,946 $3,700 $1,302 $1,262
Interest income 39 57 8 13
-------- ------ ------ ------
3,985 3,757 1,310 1,275
EXPENSES
Depreciation expense 849 849 283 283
Amortization expense 138 107 48 36
General and administrative 255 88 78 31
Professional fees 1,335 337 573 147
Directors' compensation 66 86 19 28
-------- ------ ------ ------
2,643 1,467 1,001 525
-------- ------ ------ ------
Net Income $1,342 $2,290 $ 309 $ 750
-------- ------ ------ ------
-------- ------ ------ ------
Basic earnings per share of common stock $ 0.26 $ 0.44 $ 0.06 $ 0.14
-------- ------ ------ ------
-------- ------ ------ ------
Cash dividends paid per share of common stock $ 0.64 $ 0.54 $ 0.21 $ 0.19
-------- ------ ------ ------
-------- ------ ------ ------
</TABLE>
The above earnings and cash dividends paid per share of common stock are based
upon the 5,181,236 shares outstanding for each period.
See accompanying notes.
-5-
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended May 31, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Additional
-------------- Paid-In Accumulated
SHARES Amount Capital Deficit Total
--------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Shareholders' equity
at August 31, 1997 5,181,236 $52 $44,823 $(11,988) $ 32,887
Cash dividends paid - - - (2,785) (2,785)
Net income - - - 2,290 2,290
--------- --- ------- -------- -------
Shareholders' equity
at May 31, 1998 5,181,236 $ 52 $44,823 $(12,483) $ 32,392
--------- --- ------- -------- -------
--------- --- ------- -------- -------
Shareholders' equity
at August 31, 1998 5,181,236 $ 52 $44,823 $(12,837) $ 32,038
Cash dividends paid - - - (3,303) (3,303)
Net income - - - 1,342 1,342
--------- --- ------- -------- -------
Shareholders' equity
at May 31, 1999 5,181,236 $ 52 $44,823 $(14,798) $ 30,077
--------- --- ------- -------- -------
--------- --- ------- -------- -------
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1999 and 1998 Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,342 $2,290
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense 987 956
Accrued dividends on subsidiary's preferred
stock 7 6
Changes in assets and liabilities:
Accounts receivable -- related party (35) (1,105)
Prepaid expenses and other assets (31) (128)
Deferred rent receivable 24 24
Accounts payable and accrued expenses 68 (3)
Accounts payable -- related party - (98)
------ -------
Net cash provided by operating activities 2,362 1,942
Cash flows from investing activities:
Additions to operating investment properties (233) (385)
------ -------
Net cash used in investing activities (233) (385)
Cash flows from financing activities:
Loan origination fees paid (71) -
Cash dividends paid to shareholders (3,303) (2,785)
------ -------
Net cash used in financing activities (3,374) (2,785)
------ -------
Net decrease in cash and cash equivalents (1,245) (1,228)
Cash and cash equivalents, beginning of period 1,896 2,361
------ -------
Cash and cash equivalents, end of period $ 651 $1,133
------ -------
------ -------
</TABLE>
See accompanying notes.
-7-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
1. GENERAL
The accompanying consolidated financial statements, footnotes and
discussions should be read in conjunction with the consolidated financial
statements and footnotes contained in the ILM II Senior Living, Inc.'s
(the "Company") Annual Report on Form 10-K for the year ended
August 31, 1998. In the opinion of management, the accompanying interim
consolidated financial statements, which have not been audited, reflect
all adjustments necessary to present fairly the results for the interim
periods. All of the accounting adjustments reflected in the accompanying
interim consolidated financial statements are of a normal recurring nature.
The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting in accordance with U.S. generally accepted
accounting principles for interim financial information, which requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities as of May 31, 1999 and revenues and expenses for each of the
nine- and three-month periods ended May 31, 1999 and 1998. Actual results
could differ from the estimates and assumptions used. Certain numbers in
the prior period's financial statements have been reclassified to conform
to the current period's presentation. The results of operations for the
nine- and three-month periods ended May 31, 1999, are not necessarily
indicative of the results that may be expected for the year ended
August 31, 1999.
The Company was incorporated on February 5, 1990 under the laws of the
State of Virginia as a Virginia finite-life corporation, formerly
PaineWebber Independent Mortgage Inc. II. On September 12, 1990, the
Company sold to the public in a registered initial offering 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 elected to qualify and be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986, as amended, for
each taxable year of operations.
The Company originally invested the net proceeds of the initial public
offering in nine participating mortgage loans secured by senior housing
facilities located in five different states ("Senior Housing Facilities").
All of the loans made by the Company were originally to Angeles Housing
Concepts, Inc. ("AHC"), as mortgagor, a company specializing in the
development, acquisition and operation of Senior Housing Facilities and
guaranteed by AHC's corporate parent, Angeles Corporation ("Angeles").
ILM II Holding, Inc. ("ILM II Holding"), a majority-owned subsidiary of the
Company, now holds title to the six Senior Housing Facilities, which
comprise the balance of the operating investment properties on the
accompanying consolidated balance sheets, subject to certain mortgage
loans payable to the Company. Such mortgage loans and the related interest
expense are eliminated in the consolidation of the financial statements of
the Company.
The Company made charitable gifts of one share of the preferred stock in
ILM 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 of
ILM II Holding. Cumulative dividends accrued as of May 31, 1999 on the
preferred stock in ILM II Holding totaled approximately $20,720.
-8-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
1. GENERAL (CONTINUED)
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. The management
agreement with AHC was terminated in July 1996. Subsequent to the effective
date of the settlement agreement with AHC, in order to maximize the
potential returns to the Company's existing Shareholders while maintaining
the Company's qualification as a REIT under the Internal Revenue Code, the
Company formed a new corporation, ILM II Lease Corporation ("Lease II"),
for the purpose of operating the Senior Housing Facilities under the terms
of a facilities lease agreement (the "Facilities Lease Agreement"). All of
the shares of capital stock of Lease II were distributed to the holders of
record of the Company's common stock and the Senior Housing Facilities were
leased to Lease II (see Note 2 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. All responsibility
for the day-to-day management of the Senior Housing Facilities, including
administration of the property management agreement with AHC, was
transferred to Lease II. On July 29, 1996, the management agreement with
AHC was terminated and Lease II retained Capital Senior Management 2, Inc.
("Capital") to be the new property manager of its Senior Housing Facilities
pursuant to a management agreement (the "Management Agreement").
Lawrence A. Cohen, who, through July 28, 1998, served as President, Chief
Executive Officer and Director of the Company and a Director of Lease II,
has also served in various management capacities at Capital Senior Living
Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently
serves as Chief Executive Officer and Acting Chief Financial Officer of
Capital Senior Living Corporation. As a result, through July 28, 1998,
Capital was considered a related party.
-9-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT
At May 31, 1999, through its consolidated subsidiary, the Company owned six
Senior Housing Facilities. The name, location and size of the properties are
as set forth below:
<TABLE>
<CAPTION>
Year Facility Rentable Resident
Name Location Built Units Capacity
- ---- -------- ------------- -------- --------
<S> <C> <C> <C> <C>
The Palms Fort Myers, FL 1988 205 255
Crown Villa Omaha, NE 1992 73 73
Overland Park Place Overland Park, KS 1984 141 153
Rio Las Palmas Stockton, CA 1988 164 190
The Villa at Riverwood St. Louis County, MO 1986 120 140
Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
</TABLE>
(1) The acquisition of Villa Santa Barbara was financed jointly by the
Company and an affiliated entity, ILM I. All amounts generated from the
operations of Villa Santa Barbara are equitably apportioned between the
Company, together with its consolidated subsidiary, and ILM I, together
with its consolidated subsidiary, generally 75% and 25%, respectively.
Villa Santa Barbara is owned 75% by ILM II Holding and 25% by ILM I
Holding, Inc. Upon the sale of ILM I or the Company, arrangements would
be made to transfer the Santa Barbara facility to the non-selling joint
tenant (or one of its subsidiaries). The property was extensively renovated
in 1995.
Subsequent to the effective date of the Settlement Agreement with AHC, in
order to maximize the potential returns to the existing Shareholders while
maintaining the Company's qualification as a REIT under the Internal
Revenue Code, the Company formed a new corporation, Lease II, for the
purpose of operating the Senior Housing Facilities under the terms of a
Facilities Lease Agreement dated September 1, 1995 between the Company's
consolidated affiliate, ILM II Holding, as owner of the properties and
lessor (the "Lessor"), and Lease II as lessee (the "Lessee"). The
facilities lease is a "triple-net" lease whereby the Lessee pays all
operating expenses, governmental taxes and assessments, utility charges and
insurance premiums, as well as the costs of all required maintenance,
personal property and non-structural repairs in connection with the
operation of the Senior Housing Facilities. ILM II Holding, as Lessor, is
responsible for all major capital improvements and structural repairs to
the Senior Housing Facilities. During the term of the Facilities Lease
Agreement, which expires on December 31, 2000 (December 31, 1999 with
respect to the Santa Barbara facility), unless earlier terminated at the
election of the Lessor in connection with the sale by the Lessor of the
Senior Housing Facilities to a non-affiliated third party upon 30 days'
notice to the Company. Lease II pays annual base rent for the use of all
of the Facilities in the aggregate amount of $4,035,600 per year. Lease II
also pays variable rent, on a quarterly basis, for each Senior Housing
Facility in an amount equal to 40% of the excess of the aggregate total
revenues for the Senior Housing Facilities, on an annualized basis, over
$13,021,000. Variable rent was $943,000 and $301,000 for the nine-and
three-month periods ended May 31, 1999, respectively, compared to $697,000
and $261,000, for the nine- and three-month periods ended May 31, 1998,
respectively.
RECENT DEVELOPMENTS
On February 7, 1999, the Company entered into an agreement and plan of
merger with Capital Senior Living Corporation, the corporate parent of
Capital, and certain affiliates of Capital. While there can be no
assurance, consummation of the merger is presently anticipated by the end
of calendar year 1999. In connection with the merger, the Company has
agreed to cause ILM II Holding to cancel and terminate the Facilities
Lease Agreement with Lease II immediately prior to the effective time of
the merger. There can be no assurance as to whether the merger will be
consummated or, if consummated, as to the timing thereof. As noted above,
the Facilities Lease Agreement, which is scheduled to expire on
December 31, 2000, may be terminated earlier at the election of the Lessor
in connection with the sale by the Lessor of the Senior Housing Facilities
to a non-affiliated third party. As a result, Lease II would have little
"going concern" value. There can be no assurance as to whether the merger
will be consummated or, if consummated, as to the timing thereof. If the
merger is consummated, the stockholders of the Company will receive the
merger consideration of approximately $14.30 per share, which approximate
amount is based, in part, upon the per-share market price of Capital Senior
Living Corporation's common stock on February 5, 1999.
-10-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
3. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors, assistance
in managing the business of the Company was provided by PaineWebber. As
discussed in the Company's Annual Report on Form 10-K, PaineWebber resigned
effective as of June 18, 1997.
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 the Management Agreement which commenced on
July 29, 1996. Lawrence A. Cohen, who, through July 28, 1998, served as
President, Chief Executive Officer and Director of the Company and a
Director of Lease II, has also served in various management capacities at
Capital Senior Living Corporation, an affiliate of Capital, since 1996.
Mr. Cohen currently serves as Chief Executive Officer and Acting Chief
Financial Officer of Capital Senior Living Corporation. For the nine-
and three-month periods ended May 31, 1999, Capital earned property
management fees from the Company of $773,000 and $225,000, respectively,
compared to $684,000 and $240,000, for the nine- and three-month periods
ended May 31, 1998, respectively.
On September 18, 1997, Lease II entered into an agreement with Capital
Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansion of several of the Senior
Housing Facilities. Capital Senior Development, Inc. will receive a fee
equal to 7% of the total development costs of these expansions if they
are pursued. The Company will reimburse Lease II for all costs related
to these potential expansions including fees to Capital Senior
Development, Inc. For the nine- and three-month periods ended May 31, 1999,
Capital Senior Development, Inc. earned no fees from the Company compared
to $73,000 and $14,000, for the nine- and three-month periods ended
May 31, 1998, respectively, for managing pre-construction development
activities for potential expansions of the Senior Housing Facilities.
Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of
Greenberg Traurig, Counsel to the Company and its affiliates since 1997.
For the nine- and three-month periods ended May 31, 1999, Greenburg Traurig
earned fees from the Company of $795,000 and $487,000, respectively. For
the nine- and three-month periods ended May 31, 1998, Greenberg Traurig
earned fees from the Company of $197,000 and $43,000, respectively.
Accounts receivable -- related party at May 31, 1999 and August 31, 1998
includes variable rent due from Lease II. There were no accounts payable-
related party at either May 31, 1999 or August 31, 1998.
4. LEGAL PROCEEDINGS AND CONTINGENCIES
TERMINATION OF MANAGEMENT CONTRACT WITH AHC
On July 29, 1996, Lease II and ILM II Holding ("the Companies") terminated
a property management agreement with AHC covering the six Senior Housing
Facilities leased by Lease II from ILM II Holding. The management agreement
was terminated for cause pursuant to Sections 1.05 (a) (i), (iii) and (iv)
of the agreement. Simultaneously with the termination of the management
agreement, the Companies, together with certain affiliated entities, filed
suit against AHC in the United States District Court for the Eastern
District of Virginia for breach of contract, breach of fiduciary duty and
fraud. The Companies alleged that AHC willfully performed actions
specifically in violation of the management agreement and that such actions
caused damages to the Companies.
Due to the termination of the agreement for cause, no termination fee was
paid to AHC. Subsequent to the termination of the management agreement, AHC
filed for protection under Chapter 11 of the U.S. Bankruptcy Code in its
domestic State of California. The filing was challenged by the Companies,
and the Bankruptcy Court dismissed AHC's case effective October 15, 1996.
In November 1996, AHC filed with the Virginia District Court an answer in
response to the litigation initiated by the Companies and a counterclaim
against ILM II Holding. The counterclaim alleged that the management
agreement was wrongfully terminated for cause and requested damages which
included the payment of a termination fee in the amount of $750,000,
payment of management fees pursuant to the contract from August 1, 1996
through October 15, 1996, which is the earliest
-11-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
date that the management agreement could have been terminated without
cause, and recovery of attorneys' fees and expenses.
The aggregate amount of damages against all parties as requested in AHC's
counterclaim exceeded $2,000,000. On June 13, 1997 and July 8, 1997, the
court issued orders to enter judgment against the Company and ILM I in the
amount of $1,000,000. The orders did not contain any findings of fact or
conclusions of law. On July 10, 1997, the Company, ILM I, Lease I and
Lease II filed a notice of appeal to the United States Court of Appeals
for the Fourth Circuit from the orders.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence
Cohen, who, through July 28, 1998, was President, Chief Executive Officer
and a Director of the Company; and others alleging that the defendants
intentionally interfered with AHC's property management agreement (the
"California litigation"). The complaint sought damages in the amount of at
least $2,000,000. On March 4, 1997, the defendants removed the case to
Federal District Court for the Central District of California. At a Board
meeting on February 26, 1997, the Company's Board of Directors concluded
that since all of Mr. Cohen's actions relating to the California litigation
were taken either on behalf of the Company under the direction of the Board
or as a PaineWebber employee, the Company or its affiliates should
indemnify Mr. Cohen with respect to any expenses arising from the
California litigation, subject to any insurance recoveries for those
expenses. Legal fees paid by Lease I and Lease II on behalf of Mr. Cohen
totaled $239,000 as of May 31, 1999. The Company's Board also concluded
that, subject to certain conditions, the Company or its affiliates should
advance up to $20,000 to pay reasonable legal fees and expenses incurred
by Capital in the California litigation. Subsequently, the Boards of
Directors of Lease I and Lease II voted to increase the maximum amount
of the advance to $100,000. By the end of November 1997, Capital had
incurred $100,000 of legal expenses in the California litigation. On
February 2, 1998, the amount to be advanced to Capital was increased to
include 75% of the California litigation legal fees and costs incurred
by Capital for December 1997 and January 1998, plus 75% of such legal fees
and costs incurred by Capital thereafter, not to exceed $500,000. At
May 31, 1999, the amount of legal fees either advanced to Capital or
accrued on the financial statements of Lease I and Lease II totaled
approximately $563,000.
On August 18, 1998, the Company and its affiliates along with Capital and
its affiliates entered into a settlement agreement with AHC. Lease I and
Lease II agreed to pay $1,625,000 and Capital and its affiliates agreed to
pay $625,000 to AHC in settlement of all claims, including those related
to the Virginia litigation and the California litigation. The Company and
its affiliates also entered into an agreement with Capital and its
affiliates to mutually release each other from all claims that any such
parties may have against each other, other than any claims under the
property management agreements. The Company's Board of Directors believed
that settling the AHC litigation was a prudent course of action because
the settlement amount represented a small percentage of the increases in
cash flow and value achieved for the Company and its affiliates over the
past two years.
On September 4, 1998, the full settlement amounts were paid to AHC and its
affiliates with Lease II paying $650,000 and Lease I paying $975,000.
OTHER LITIGATION
On May 8, 1998 Andrew A. Feldman and Jeri Feldman, as Trustees for the
Andrew A. & Jeri Feldman Revocable Trust dated September 18, 1990,
commenced a purported class action on behalf of that trust and all other
shareholders of the Company and ILM I in the Supreme Court of the State
of New York, County of New
-12-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
York, against the Company, ILM I and the Directors of both corporations.
The class action complaint alleges that the Directors engaged in wasteful
and oppressive conduct and breached fiduciary duties in preventing the sale
or liquidation of the assets of the Company and ILM I, diverting certain
of their assets and changing the nature of the Company and ILM I. The
complaint seeks damages in an unspecified amount, punitive damages, the
judicial dissolution of the Company and ILM I, an order requiring the
Directors to take all steps to maximize Shareholder value, including either
an auction or liquidation, and rescinding certain agreements and attorney's
fees. On July 8, 1998, the Company joined with all other defendants to
dismiss the complaint on all counts.
In an oral ruling from the bench on December 8, 1998, the Court granted the
Company's dismissal motion in part and gave the plaintiffs leave to amend
their complaint. In sum, the Court accepted the Company's position that all
claims relating to so-called "derivative" actions were filed improperly and
were dismissed. In addition, the Court dismissed common law claims for
punitive damages, but allowed plaintiffs 30 days to allege any claims,
which may have injured shareholders without injuring the Company as a
whole.
On January 22, 1999, the Feldman plaintiffs filed an amended complaint,
again purporting to commence a class action, and adding claims under
Section 10(b) and 20(a) of the Securities and Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder. Even before the Company and the Board
of Directors responded to that amended complaint, the Feldman plaintiffs
moved for leave to file a second amended complaint to add claims directed
at enjoining the announced potential merger with Capital Senior Living
Corporation and, alternatively, for compensatory and punitive damages.
At a hearing held on March 4, 1999 relating to the motion for leave to
file that second amended complaint and to expedite discovery, the Court
granted leave to amend and set a schedule for discovery leading to a trial
(if necessary) in Summer 1999. The plaintiffs have requested documents and
depositions of certain current and former Directors.
On March 9, 1999, the Feldman plaintiffs filed a second amended complaint
which included claims for injunctive relief and, in the alternative,
damages in an unspecified amount. In response to the Company's motion to
dismiss the second amended complaint filed by the plaintiffs, the court
hearing the motion issued an order dismissing the plaintiffs' federal
security claims. The plaintiffs have requested documents and depositions
of certain current and former directors. The Company and the Board of
Directors is continuing to contest the action vigorously.
5. CONSTRUCTION LOAN FINANCING
The Company has secured a construction loan facility with a major bank that
will provide the Company with up to $8.8 million to fund the capital costs
of the potential expansion programs. The construction loan facility is
secured by a first mortgage of the Senior Housing Facilities and collateral
assignment of the Company's leases of such properties. The loan has a
three-year term with interest accruing at a rate equal to LIBOR plus 1.10%
or Prime plus 0.5%. The loan term can be extended for an additional two
years beyond its maturity date with monthly payments of principal and
interest on a 25-year amortization schedule. Loan origination costs in
connection with this loan facility are being amortized over the life of
the loan.
On June 7, 1999, the Company borrowed $1,165,000 under the construction
loan facility to fund the pre-construction capital costs, incurred
through April 1999, of the potential expansions of the Senior Housing
Facilities, leaving approximately $7.6 million unused and available.
-13-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
6. SUBSEQUENT EVENT
On June 15, 1999, the Company's Board of Directors declared a quarterly
dividend for the three-month period ended May 31, 1999. On July 15, 1999,
a dividend of $0.2125 per share of common stock, totaling approximately
$1,101,000, was paid to Shareholders of record as of June 30, 1999.
-14-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company offered shares of its common stock to the public from September
12, 1990 to May 10, 1991 pursuant to a Registration Statement filed under the
Securities Act of 1933. Capital contributions of $51,812,356 were received by
the Company (including $200,000 contributed by PaineWebber) and, after deducting
selling expenses and offering costs and allowing for adequate cash reserves,
approximately $42.9 million was available to be invested in participating first
mortgage loans secured by Senior Housing Facilities. The Company originally
invested the net proceeds of the initial public offering in six participating
mortgage loans secured by Senior Housing Facilities located in five different
states. All of the loans made by the Company were originally with AHC. As
previously reported, AHC defaulted on the scheduled mortgage loan payments due
to the Company on March 1, 1993. Its parent company, Angeles, subsequently filed
for bankruptcy. In fiscal 1994, a Settlement Agreement was executed whereby
ownership of the properties was transferred from AHC to certain designated
affiliates of the Company which were majority owned by the Company.
Subsequently, these affiliates were merged into ILM II Holding, which is
majority owned by the Company. ILM II Holding holds title to the six Senior
Housing Facilities which comprise the balance of operating investment properties
in the accompanying consolidated balance sheets, subject to certain mortgage
loans payable to the Company. As part of the fiscal 1994 Settlement Agreement
with AHC, ILM II Holding retained AHC as the property manager for all of the
Senior Housing Facilities pursuant to the terms of the Agreement. As discussed
further below, the Agreement with AHC was terminated in July 1996.
Subsequent to the effective date of the Settlement Agreement with AHC, in
order to maximize the potential returns to the Company's existing Shareholders
while maintaining its qualification as a REIT under the Internal Revenue Code,
the Company formed a new corporation, Lease II, for the purpose of operating the
Senior Housing Facilities under the terms of a Facilities Lease Agreement. As of
August 31, 1995, Lease II, which is taxable as a so-called "C" corporation and
not as a REIT, was a wholly owned subsidiary of the Company. On September 1,
1995 the Company, after receiving the required regulatory approval, distributed
all of the shares of capital stock of Lease II to the holders of record of the
Company's common stock.
The Facilities Lease Agreement is between the Company's consolidated
affiliate, ILM II Holding, as owner of the Senior Housing Facilities and Lessor,
and Lease II as Lessee. The facilities lease is a "triple-net" lease whereby the
Lessee pays all operating expenses, governmental taxes and assessments, utility
charges and insurance premiums, as well as the costs of all required
maintenance, personal property and non-structural repairs in connection with the
operation of the Senior Housing Facilities. ILM II Holding, as the Lessor, is
responsible for all major capital improvements and structural repairs to the
Senior Housing Facilities. Pursuant to the Facilities Lease Agreement, which
expires on December 31, 2000 (December 31, 1999 with respect to the Santa
Barbara property), Lease II pays annual base rent for the use of all the Senior
Housing Facilities in the aggregate amount of $4,035,600. Lease II also pays
variable rent, on a quarterly basis, for each Senior Housing Facility in an
amount equal to 40% of the excess, if any, of the aggregate total revenues for
the Senior Housing Facilities, on an annualized basis, over $13,021,000.
Variable rental income for the nine- and three-month periods ended May 31, 1999
was $943,000 and $301,000, respectively, compared to $697,000 and $261,000, for
the nine- and three-month periods ended May 31, 1998, respectively.
The Company completed its restructuring plans by qualifying ILM II Holding
as a REIT for Federal tax purposes. In connection with these plans, on November
21, 1996, the Company requested that PaineWebber sell all of its stock in ILM II
Holding to the Company for a price equal to the fair market value of the 1%
economic interest in ILM II Holding represented by the common stock. On January
10, 1997, this transfer of the common stock of ILM II Holding was completed at
an agreed upon fair value of $40,000. With this transfer completed, effective
January 23, 1997, ILM Holding recapitalized its common stock and preferred stock
by replacing the outstanding shares with 50,000 shares of new common stock and
275 shares of non-voting, 8% cumulative preferred stock issued to the Company.
The number of authorized shares of preferred stock 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
-15-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
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. Cumulative dividends in
arrears as of May 31, 1999 on the Preferred Stock in ILM II Holding totaled
approximately $20,720.
The assumption of ownership of the properties 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 properties (the "built-in gain tax"). The amount of such tax would be
calculated based on the lesser of the total net gain realized from the sale
transaction or the portion of the net gain realized upon a final sale which is
attributable to the period during which the properties were held 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 is within three years, the
properties may not be held for an additional ten years. The Board of Directors
may defer the Company's scheduled liquidation date if in the opinion of a
majority of the Directors the disposition of the Company's assets at such time
would result in a material under-realization of the value of such assets;
provided, however, that no such deferral may extend beyond December 31, 2014
absent amendment of the Company's Articles of Incorporation. Based on
management's current estimate of the increase in values of the Senior Housing
Facilities which occurred between April 1994 and January 1996, as supported by
independent appraisals, ILM II Holding would incur a sizable tax if the
properties were sold. Based on this increase in values during the time ILM II
Holding was operated as a regular C corporation, a sale within ten years of the
date of the conversion of ILM II Holding to a REIT could result in a built-in
gain tax of as much as $2.3 million.
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 1999 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 estimated current values of the Senior
Housing Facilities are well in excess of the mortgage principal amounts plus
accrued interest at May 31, 1999. As a result, the Company is expected to
recover the full amount that would be due under the loans upon sale of the
Facilities.
RECENT DEVELOPMENTS
On February 7, 1999, the Company entered into an agreement and plan of
merger with Capital Senior Living Corporation, the corporate parent of Capital,
and certain affiliates of Capital. While there can be no assurance, consummation
of the merger is presently anticipated by the end of calendar year 1999. In
connection with the merger, the Company has agreed to cause ILM II Holding to
cancel and terminate the Facilities Lease Agreement with Lease II immediately
prior to the effective time of the merger. There can be no assurance as to
whether the merger will be consummated or, if consummated, as to the timing
thereof. As noted above, the Facilities Lease Agreement, which is scheduled to
expire on December 31, 2000, may be terminated earlier at the election of the
Lessor in connection with the sale by the Lessor of the Senior Housing
Facilities to a non-affiliated third party. As a result, Lease II would have
little "going concern" value. There can be no assurance as to whether the merger
will be consummated or, if consummated, as to the timing thereof. If the merger
is consummated, the stockholders of the Company will receive the merger
consideration of approximately $14.30 per share, which approximate amount is
based, in part, upon the per-share market price of Capital Senior Living
Corporation's common stock on February 5, 1999.
-16-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the six properties in which the Company has invested
averaged 94% and 92% for the nine- and three-month periods ended May 31, 1999,
respectively, compared to 94% and 95% for the nine- and three-month periods
ended May 31, 1998, respectively. 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 are $4,035,600 and will remain at that level for the remainder of the
lease term. In addition, the Senior Housing Facilities are currently generating
gross revenues which are in excess of the specified threshold in the variable
rent calculation, as discussed further above, which became effective in January
1997.
The City of Stockton has announced plans to build a railroad underpass on
the street located immediately adjacent to Rio Las Palmas in Stockton,
California. The City plans to use a portion of the Rio Las Palmas property for a
temporary bypass during the expected 18-month construction process. Although
this road construction would not directly affect facility operations, it would
eliminate several parking spaces and result in increased noise and traffic
during the construction period while the traffic is re-routed closer to the
facility. Negotiations with the City are currently underway to minimize any
disruption to the operations of Rio Las Palmas and to secure a settlement that
will pay for any damages.
The Company and ILM I have been pursuing the potential for future expansion
of several of the facilities which are located in areas that have particularly
strong markets for senior housing. Potential expansion candidates include the
facilities located in Omaha, Nebraska, and Fort Myers, Florida. As part of this
expansion program, approximately one acre of land located adjacent to the Omaha
facility was acquired in the first quarter of fiscal year 1998 for approximately
$135,000. The Fort Myers facility includes a vacant parcel of approximately one
and one-half acres which could accommodate an expansion of the existing facility
or the construction of a new free-standing facility. Preliminary feasibility
evaluations have been completed for all of these potential expansions and
pre-construction design and construction-cost evaluations are underway for
expansions of the facilities located in Omaha and Fort Myers. Additionally, in
December 1997, ILM II Holding purchased a one-half acre parcel of land adjacent
to the Stockton facility for approximately $136,000. Although no expansion of
this facility is being considered at this time, this additional land will
provide needed parking spaces and improved access to the existing facility as
well as future expansion potential.
The Company has secured a construction loan facility with a major bank that
will provide the Company with up to $8.8 million to fund the capital costs of
the potential expansion programs. The construction loan facility is secured by a
first mortgage of the Senior Housing Facilities and collateral assignment of the
Company's leases of such properties. The loan has a three-year term with
interest accruing at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. The
loan term can be extended for an additional two years beyond its maturity date
with monthly payments of principal and interest on a 25-year amortization
schedule. Loan origination costs in connection with this loan facility are being
amortized over the life of the loan.
On June 7, 1999, the Company borrowed $1,165,000 under the construction
loan facility to fund the pre-construction capital costs, incurred through April
1999, of the potential expansions of the Senior Housing Facilities, leaving
approximately $7.6 million unused and available.
At May 31, 1999, the Company had cash and cash equivalents of $651,000
compared to $1,896,000 at August 31, 1998. Such amounts will be used for the
working capital requirements of the Company, along with the possible investment
in the properties owned by ILM II Holding for certain capital improvements, and
for dividends to the Shareholders. Future capital improvements could be financed
from operations or through borrowings, depending on the magnitude of the
improvements, the availability of financing and the Company's incremental
borrowing rate. The source of future liquidity and dividends to the Shareholders
is expected to be through facilities lease payments
-17-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
from Lease II, interest income earned on invested cash reserves and
proceeds from the future sales of the underlying operating investment
properties. Such sources of liquidity are expected to be adequate to meet the
Company's operating requirements on both a short-term and long-term basis. The
Company generally will be obligated to distribute annually at least 95% of its
taxable income to its Shareholders in order to continue to qualify as a REIT
under the Internal Revenue Code.
While the Company has potential liabilities pending due to ongoing
litigation against the Company, the eventual outcome of this litigation cannot
presently be determined. The Company will vigorously defend against all claims
made against it and, at this time, it is not certain that the Company will have
ultimate responsibility for any such claims.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize the year 2000 as a date other than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
The Company has assessed its exposure to operating equipment, and such
exposure is not significant due to the nature of the Company's business.
The Company is not aware of any external agent with a Year 2000 issue that
would materially impact the Company's results of operations, liquidity or
capital resources. However, the Company has no means of determining whether or
ensuring those external agents will be Year 2000 ready. The inability of
external agents to complete their Year 2000 resolution process in a timely
fashion could impact the Company.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
substantially completed all necessary phases of its Year 2000 program. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could also adversely affect the Company. Although the amount of potential
liability and lost revenue cannot be reasonably estimated at this time, in a
worst case situation, if Capital, the Company's most significant third party
contractor, were to experience a year 2000 problem, it is likely that Lease II
would not receive rental income as it became due from Senior Living Facility
residents. Lease II in turn would fail to pay ILM II Holding lease payments as
they arise under the master lease, and ILM II Holding in turn would fail to pay
the Company mortgage payments due it. However, the Company believes that given
the nature of its business, such problem would be temporary and easily
remediable with a simple accounting.
MARKET RISK
The Company believes its market risk is immaterial.
-18-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MAY 31, 1999 VERSUS THE NINE MONTHS ENDED MAY 31, 1998
Net income decreased $948,000, or 41.4%, to $1,342,000 for the nine-month
period ended May 31, 1999 compared to $2,290,000 for the nine-month period ended
May 31, 1998. Total revenue was $3,985,000 representing an increase of $228,000,
or 6.1%, compared to $3,757,000 for the same period of the prior year. Rental
and other income increased $246,000, to $3,946,000 for the nine-month period
ended May 31, 1999, compared to $3,700,000 for the nine-month period ended May
31, 1998, due to increased rental income earned pursuant to the terms of the
Facilities Lease Agreement. Total expenses increased $1,176,000, or 80.2%, to
$2,643,000 for the nine-month period ended May 31, 1999, compared to $1,467,000
for the nine-month period ended May 31, 1998. This increase in expenses is
primarily attributable to increased professional fees due to increased legal,
financial and advisory professionals who were engaged to assist the Company with
the proposed agreement and plan of merger with Capital Senior Living
Corporation, as discussed in Note 2 to the financial statements, and increased
legal fees associated with the construction loan facility. The $167,000 increase
in general and administrative expenses to $255,000 for the nine-month period
ended May 31, 1999, compared to $88,000 for the same period last year, is due to
a variety of factors including increased Director and Officer insurance costs of
$84,000; increased printing costs of $37,000 for the annual and quarterly
reports which were completed earlier in the current year when compared to the
previous year; and minor increases and decreases in other general and
administrative costs. Directors' Compensation decreased $20,000, or 23.3%, due
to a decrease in the number of Board members.
FOR THE THREE MONTHS ENDED MAY 31, 1999 VERSUS THE THREE MONTHS ENDED
MAY 31, 1998
Net income decreased $441,000, or 58.8%, to $309,000 for the third quarter
ended May 31, 1999 compared to $750,000 for the third quarter ended May 31,
1998. Total revenue was $1,310,000 representing an increase of $35,000, or 2.7%,
compared to the same period of the prior year. Rental and other income increased
$40,000, to $1,302,000 for the quarter ended May 31, 1999, compared to
$1,262,000 for the quarter ended May 31, 1998, due to increased rental income
earned pursuant to the terms of the Facilities Lease Agreement. Total expenses
increased $476,000, or 90.7%, to $1,001,000 for the three-month period ended May
31, 1999, compared to $525,000 for the three-month period ended May 31, 1998.
This increase in expenses is primarily attributable to increased legal and
professional fees associated with the Company's proposed agreement and plan of
merger with Capital Senior Living Corporation, as discussed in Note 2 to the
financial statements. The $47,000 increase in general and administrative
expenses to $78,000 for the quarter ended May 31, 1999, compared to $31,000 for
the same period last year, is due to a variety of factors including increased
Director and Officer insurance costs of $22,000; increased printing costs of
$7,000 shareholder reports which were completed earlier in the current year when
compared to the previous year; and minor increases and decreases in other
general and administrative costs. Directors' Compensation decreased $9,000, or
32.1%, due to a decrease in the number of Board members.
-19-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE
STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," " COULD," "MAY," "SHOULD,"
"ENABLE," "LIKELY," "PROSPECTS," "SEEK," "PREDICTS," "POSSIBLE," "FORECASTS,"
"PROJECTS," "ANTICIPATES," "EXPECTS" AND WORDS OF ANALOGOUS IMPORT AND
CORRELATIVE EXPRESSIONS THEREOF, AS WELL AS STATEMENTS PRECEDED OR OTHERWISE
QUALIFIED BY: "THERE CAN BE NO ASSURANCE" OR "NO ASSURANCE CAN BE GIVEN."
SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES,
STRATEGIES OR GOALS ALSO ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS MAY
ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING, AMONG OTHER THINGS, THE
COMPANY'S CASH FLOWS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION; THE
CONSUMMATION OF ACQUISITION AND FINANCING TRANSACTIONS AND THE EFFECT THEREOF ON
THE COMPANY'S BUSINESS, ANTICIPATED CAPITAL EXPENDITURES, PROPOSED OPERATING
BUDGETS AND ACCOUNTING RESERVES; LITIGATION; PROPERTY EXPANSION AND DEVELOPMENT
PROGRAMS OR PLANS; REGULATORY MATTERS; AND THE COMPANY'S PLANS, GOALS,
STRATEGIES AND OBJECTIVES FOR FUTURE OPERATIONS AND PERFORMANCE. ANY SUCH
FORWARD LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO A NUMBER OF ASSUMPTIONS REGARDING, AMONG OTHER THINGS, GENERAL
ECONOMIC, COMPETITIVE AND MARKET CONDITIONS. SUCH ASSUMPTIONS NECESSARILY ARE
BASED ON FACTS AND CONDITIONS AS THEY EXIST AT THE TIME SUCH STATEMENTS ARE
MADE, THE PREDICTION OR ASSESSMENT OF WHICH MAY BE DIFFICULT OR IMPOSSIBLE AND,
IN ANY CASE, BEYOND THE COMPANY'S CONTROL. FURTHER, THE COMPANY'S BUSINESS IS
SUBJECT TO A NUMBER OF RISKS THAT MAY AFFECT ANY SUCH FORWARD-LOOKING
STATEMENTS AND ALSO COULD CAUSE ACTUAL RESULTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THOSE PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS PARAGRAPH.
MOREOVER, THE COMPANY DOES NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING
STATEMENTS TO REFLECT ANY CHANGES IN GENERAL ECONOMIC, COMPETITIVE OR MARKET
CONDITIONS AND DEVELOPMENTS BEYOND ITS CONTROL.
READERS OF THIS QUARTERLY REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THE COMPANY MAKES
ABSOLUTELY NO PROMISES, GUARANTEES, REPRESENTATIONS OR WARRANTIES AS TO THE
ACCURACY THEREOF.
-20-
<PAGE>
ILM II SENIOR LIVING, INC.
PART II-OTHER INFORMATION
ITEM 1. THROUGH 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27. Financial Data Schedule
(b) Reports on Form 8-K: NONE
-21-
<PAGE>
ILM II SENIOR LIVING, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BY: ILM II SENIOR LIVING, INC.
By: /S/ J. WILLIAM SHARMAN, JR.
---------------------------
J. William Sharman, Jr.
President and Director
Dated: JULY 15, 1999
-22-
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