<PAGE>
==============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
OR
--- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____to____.
Commission File Number: 0-18249
-------
ILM 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 November 30, 1998: 5,181,236.
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Page 1 of 22
<PAGE>
ILM II SENIOR LIVING, INC
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
November 30, 1998 (Unaudited) and August 31, 1998........................................... 4
Consolidated Statements of Income
For the three month periods ended November 30, 1998 and 1997 (Unaudited).................... 5
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended November 30, 1998 and 1997 (Unaudited)........................... 6
Consolidated Statements of Cash Flows
For the three months ended November 30, 1998 and 1997 (Unaudited)........................... 7
Notes to Consolidated Financial Statements (Unaudited)....................................8-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....16-19
Part II. Other Information
Item 5. Other Information...........................................................................20
Item 6. Exhibits and Reports on Form 8-K............................................................20
Signatures....................................................................................................21
</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
November 30, 1998 (Unaudited) and August 31, 1998
(Dollars in thousands, except per share data)
ASSETS
------
<TABLE>
<CAPTION>
November 30, 1998 August 31, 1998
----------------- ---------------
<S> <C> <C>
Operating investment properties, at cost:
Land $ 5,523 $ 5,518
Building and improvements 27,910 27,726
Furniture, fixtures and equipment 3,815 3,815
-------- --------
37,248 37,059
Less: accumulated depreciation (7,882) (7,599)
-------- --------
29,366 29,460
Unamortized mortgage fees 1,425 1,425
Less: accumulated amortization (1,001) (966)
------- -----
424 459
Loan origination fees 104 72
Less: accumulated amortization (6) -
--- ----
98 72
Cash and cash equivalents 1,398 1,896
Accounts receivable - related party 433 273
Prepaid expenses and other assets 133 154
Deferred rent receivable 61 69
-------- --------
$ 31,913 $ 32,383
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses $ 137 $ 220
-------- --------
137 220
Preferred shareholders' minority
interest in subsidiary 127 125
-------- --------
Total liabilities 264 345
Shareholders' equity:
Common stock, $0.01 par value,
12,500,000 shares authorized
5,181,236 issued and outstanding 52 52
Additional paid-in capital 44,823 44,823
Accumulated deficit (13,226) (12,837)
-------- --------
Total shareholder's equity 31,649 32,038
-------- --------
$ 31,913 $ 32,383
======== ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three-month periods ended November 30, 1998 and 1997 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30
--------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Rental and other Income $1,311 $1,192
Interest Income 18 22
----- -----
1,329 1,158
EXPENSES:
Depreciation 283 283
Amortization 41 36
Professional fees 172 85
General and administrative 101 14
Directors' compensation 20 24
----- ----
617 442
NET INCOME $ 712 $ 772
====== ======
Basic earnings per share of common stock $ 0.14 $ 0.15
====== ======
Cash dividends paid per share of common stock $ 0.21 $ 0.16
====== ======
</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 three months ended November 30, 1998 and 1997 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock Additional
$.01 Par Value Paid-In Accumulated
--------------
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Shareholders' equity
at August 31, 1997 5,181 $52 $44,823 $(11,988) $ 32,887
Cash dividends paid - - - (842) (842)
Net income - - - 772 772
----- --- ------- --------- --------
Shareholders' equity
at November 30, 1997 5,181 $52 $44,823 $ (12,058) $ 32,817
Shareholders' equity
at August 31, 1998 5,181 $52 $44,823 $ (12,837) $ 32,038
Cash dividends paid - - - (1,101) (1,101)
Net income - - - 712 712
----- --- ------- ---------- --------
Shareholders' equity
at November 30, 1998 5,181 $52 $44,823 $ (13,226) $ 31,649
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM II SENIOR LIVING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1998 and 1997 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
November 30
------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 712 $ 772
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization expense 324 319
Charitable contribution of subsidiary's preferred stock
and accrued dividends of subsidiary 2 2
Changes in assets and liabilities:
Accounts receivable - related party (160) (1,200)
Deferred rent receivable 8 8
Prepaid expenses and other assets 21 (55)
Accounts payable and accrued expenses (83) 171
Other liabilities - 127
------- ------
Net cash provided by operating activities 824 144
------- ------
Cash flows used in investing activities:
Additions to operating investment properties (189) (172)
------- ------
Net cash used in investing activities (189) (172)
------- ------
Cash flows used in financing activities:
Loan origination fees (32) -
Cash dividends paid to shareholders (1,101) (842)
------- ------
Net cash used in investing
activities (1,133) (842)
------- ------
Net decrease in cash and cash equivalents ( 498) (870)
Cash and cash equivalents, beginning of period 1,896 2,361
------ ------
Cash and cash equivalents, end of period $ 1,398 $ 1,491
======= =======
</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 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 November 30, 1998 and August 31, 1998 and revenues and
expenses for the three-month periods ended November 30, 1998 and 1997. Actual
results could differ from the estimates and assumptions used. Operating
results for the three months ended November 30, 1998, are not necessarily
indicative of the results that may be expected for the year ended August 31,
1999.
The Company, formerly PaineWebber Independent 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.
The Company originally invested the net proceeds of the initial public
offering in six participating mortgage loans secured by senior housing
facilities located in five different states ("Senior Housing Facilities").
All of the loans made by the Company were originally to Angeles Housing
Concepts, Inc. ("AHC"), a company specializing in the development,
acquisition and operation of Senior Housing Facilities.
During the quarter ended February 28, 1993, Angeles announced that it was
experiencing liquidity problems that resulted in the inability to meet its
obligations. Subsequent to such announcements, AHC defaulted on the regularly
scheduled mortgage loan payments due to the Company on March 1, 1993.
Subsequent to March 1993, payments toward the debt service owed on the
Company's loans were limited to the net cash flow of the operating investment
properties. On May 3, 1993, Angeles filed for reorganization under a Chapter
11 Federal Bankruptcy petition filed in the state of California. AHC did not
file for reorganization. The Company retained special counsel and held
extensive discussions with AHC concerning the default status of its loans.
During the fourth quarter of fiscal 1993, a non-binding settlement agreement
between the Company, AHC and Angeles was reached whereby ownership of the
properties was transferred from AHC to the Company or its designated
affiliates. Under the terms of the settlement agreement, the Company released
AHC and Angeles from certain obligations under the loans. On April 27, 1994,
each of the properties owned by AHC and securing the loans was transferred
(collectively, "the Transfers") to newly-created special purpose corporations
affiliated with the Company (collectively, "the Property Companies"). The
Transfers had an effective date of April 1, 1994 and were made pursuant to
the settlement agreement entered into on February 17, 1994 ("the Settlement
Agreement") between the Company and AHC which had previously been approved by
the bankruptcy court handling the bankruptcy case of Angeles. All of the
capital stock of each Property Company was held by ILM II Holding, Inc. ("ILM
II Holding"), a Virginia corporation. In August 1995, each of the Property
Companies merged into ILM II Holding, which is majority owned by the Company.
As a result, ownership of the Senior Housing Facilities is now held by ILM II
Holding and the Property Companies no longer exist as separate legal entities.
-8-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
1. GENERAL (continued)
ILM II Holding holds title to the six Senior Housing Facilities, which
comprise the balance of operating investment properties on the accompanying
consolidated balance sheets, subject to certain mortgage loans payable to the
Company. Such mortgage loans and the related interest expense are eliminated
in consolidation. The capital stock of ILM II Holding was originally owned by
the Company and PaineWebber. ILM II Holding had issued 100 shares of Series A
Preferred Stock to the Company in return for a capital contribution in the
amount of $495,000 and had issued 10,000 shares of common stock to
PaineWebber in return for a capital contribution in the amount of $5,000 on
March 25, 1994. 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.
The accompanying consolidated financial statements include the operations
of ILM II Holding. 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 non-voting, 8% cumulative preferred stock issued
to the Company. The number of authorized shares of preferred and common stock
in ILM II Holding were also increased as part of the recapitalization.
Following the recapitalization, the Company made charitable gifts of one
share of the preferred stock in ILM II Holding to each of 111 charitable
organizations so that ILM II Holding would meet the stock ownership
requirements of a REIT as of January 30, 1997. The preferred stock has a
liquidation preference of $1,000 per share plus any accrued and unpaid
dividends. Dividends on the preferred stock 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 accrued as of November 30, 1998 on the preferred stock
in ILM II Holding totaled approximately $16,280.
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, 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. As
discussed further in Note 2, 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 and the Senior Housing Facilities were leased to
Lease II (see Note 2 for a description of the master lease agreement). Lease
II is a public company subject to the reporting obligations of the Securities
and Exchange Commission.
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 as Vice Chairman and Chief Executive Officer of
Capital Senior Living Corporation, an affiliate of Capital, since November
1996. As a result, through July 28, 1998, Capital was considered a related
party.
-9-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
1. GENERAL (continued)
At a meeting of the Company's Board of Directors on January 10, 1997,
PaineWebber recommended the immediate sale of the Senior Housing Facilities
held by the Company and an affiliated entity, ILM Senior Living, Inc. ("ILM
I"), by means of a controlled auction to be conducted by PaineWebber with
PaineWebber offering to purchase the properties for $127 million, thereby
guaranteeing the Shareholders a "floor" price. The Senior Housing Facilities
held by the Company would represent approximately $52 million of this amount.
After taxes and closing costs, net proceeds to the Company would equal
approximately $48 million or approximately $9.36 per share. PaineWebber also
stated that if it purchased the properties at the specified price and were
then able to resell the properties at a higher price, PaineWebber would pay
any "excess profits" to the Shareholders. To assist the Company in evaluating
PaineWebber's proposal, NatWest Securities, a disinterested, independent
investment banking firm with expertise in healthcare REIT's and
independent/assisted living financings was engaged by the Company and Lease
II, as well as by ILM I and its affiliates. Following a comprehensive
analysis, the independent investment banking firm recommended that
PaineWebber's proposal should be declined and that, instead, investigations
of expansion and restructuring alternatives should be pursued. After
analyzing PaineWebber's proposal and the recommendations and other
information provided by the independent investment banking firm, the Boards
of the Company and ILM I voted unanimously to decline PaineWebber's proposal
and to explore the alternatives recommended by the independent investment
banking firm. The Boards declined to seek an immediate sale of the properties
because in the Boards' view, the liquidation price would not reflect the
"going concern" values of the Company and ILM I and, therefore, would not
maximize Shareholder value. In addition, the Boards did not consider it
advisable to liquidate the Company and ILM I on the suggested terms several
years prior to their scheduled termination dates.
PaineWebber indicated to the Board in its January 10, 1997, proposal that
it would not wish to continue to serve as advisor to the Company and its
affiliates if the Company declined to accept PaineWebber's proposal. The
Company accepted the resignation of PaineWebber, effective as of June 18,
1997. PaineWebber agreed to continue to provide certain administrative
services to the Company and its affiliates through August 31, 1997, pursuant
to the terms of a transition services agreement entered into with the Company
and its affiliates. The Company and its affiliates also accepted, effective
as of June 18, 1997, the resignations of those Officers and Directors who
were employees of or otherwise affiliated with PaineWebber.
The Company and Lease II are continuing to review various strategic
alternatives to maximize shareholder value and liquidity and have engaged
professional financial and legal advisors to formulate and present plans and
proposals for consideration by the Board. Although no definitive plans,
arrangements or understandings have been agreed to at this time, the Company
is actively reviewing the feasibility of a variety of financial transactions
and proposals, including the reorganization of the ownership of the Senior
Housing Facilities, business combinations with third parties and the sale of
the Company by means of cash and/or stock-for-stock merger. There can be no
assurance that any definitive transaction will be formulated, agreed to or
consummated.
-10-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE
At May 31, 1998, through its consolidated affiliate, the Company owned six
Senior Housing Facilities. The name, location and size of the properties are as
set forth below:
<TABLE>
<CAPTION>
Year
Property Name Facility Rentable Resident
and Location Type of Property Built Units (2) Capacities (2)
- ------------ ---------------- ----- --------- ----------
<S> <C> <C> <C> <C>
The Palms
Fort Myers, FL Senior Housing Facility 1988 205 255
Crown Villa
Omaha, NE Senior Housing Facility 1992 73 73
Overland Park Place
Overland Park, KS Senior Housing Facility 1984 141 153
Rio Las Palmas
Stockton, CA Senior Housing Facility 1988 164 190
The Villa at Riverwood
St. Louis County, MO Senior Housing Facility 1986 120 140
Villa Santa Barbara (1)
Santa Barbara, CA Senior Housing Facility 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 Holding, Inc. as
tenants in common. 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.
(2) Rentable units represent the number of apartment units and is a measure
commonly used in the real estate industry. Resident capacity equals the
number of bedrooms contained within the apartment units and corresponds to
measures commonly used in the healthcare industry.
Subsequent to the effective date of the Settlement Agreement with AHC, in
order to maximize the potential returns to the existing shareholders while
maintaining the Company's qualification as a REIT under the Internal Revenue
Code, the Company formed a new corporation, Lease II, for the purpose of
operating the Senior Housing Facilities under the terms of a master lease
agreement. The master lease agreement, which commenced on September 1, 1995,
is between the Company's consolidated affiliate, ILM II Holding, as owner of
the properties and lessor, and Lease II as lessee. The master lease is a
"triple-net" lease whereby the lessee pays all operating expenses,
governmental taxes and assessments, utility charges and insurance premiums,
as well as the costs of all required maintenance, personal property and
non-structural repairs in connection with the operation of the Senior Housing
Facilities. ILM II Holding, as lessor, is responsible for all major capital
improvements and structural repairs to the Senior Housing Facilities. During
the term of the master lease, which expires on December 31, 2000 (December
31, 1999 with respect to the Santa Barbara facility), the lessor has the
right to terminate the master lease as to any property sold by the lessor as
of the date of such sale. During the initial term of the master lease, Lease
II
-11-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
2. OPERATING INVESTMENT PROPERTIES SUBJECT TO MASTER LEASE (continued)
is obligated to pay annual base rent for the use of all of the Senior Housing
Facilities in the aggregate amount of $4,035,600. Lease II is also obligated to
pay variable rent for each Senior Housing Facility. Such variable rent is
payable quarterly and is equal to 40% of the excess, if any, of the aggregate
total revenues for the Senior Housing Facilities, on an annualized basis, over
$13,021,000. Variable rental income for the three-month periods ended November
30, 1998 and 1997 was $310,000 and $191,000, respectively.
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 previously
discussed in Note 1, 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
under the terms of the Management Agreement which commenced on July 29, 1996.
Lawrence A. Cohen, who, through July 28, 1998, served as President, Chief
Executive Officer and Director of the Company and a Director of Lease II, has
also served as Vice Chairman and Chief Financial Officer of Capital Senior
Living Corporation, an affiliate of Capital, since November, 1996. As a result,
through July 28, 1998, Capital was considered a related party. For the
three-month period ended November 30, 1997, Capital earned property management
fees from Lease II of $205,000.
On September 18, 1997, Lease II entered into an agreement with Capital Senior
Development, Inc., an affiliate of Capital, to manage the development process
for the potential expansion of several of the Senior Housing Facilities. Capital
Senior Development, Inc. will receive a fee equal to 7% of the total development
costs of these expansions if they are pursued. The Company will reimburse Lease
II for all costs related to these potential expansions including fees to Capital
Senior Development, Inc. For the three-month periods ended November 30, 1998 and
1997, Capital Senior Development, Inc. earned fees from Lease II of $0 and
$40,000, respectively, for managing pre-construction development activities for
potential expansions of the Senior Housing Facilities.
Jeffry R. Dwyer, Secretary and Director of the Company, is a shareholder of
Greenberg Traurig, which began acting as Counsel to the Company and its
affiliates in late fiscal year 1997. For the three-month periods ended November
30, 1998 and 1997, Greenberg Traurig earned fees from the Company of $153,000
and $54,000, respectively.
Accounts receivable - related party at November 30, 1998 includes base and
variable rent due from Lease II in accordance with the terms of the master lease
agreement. Accounts receivable - related party at August 31, 1998 includes
variable rent due from Lease II. There were no accounts payable-related party at
either November 30, 1998 or August 31, 1998.
-12-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES
TERMINATION OF 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 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 date that the
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. The Company had guaranteed the payment
of the termination fee at issue in these proceedings to the extent that any
termination fee is deemed payable by the court and in the event that Lease II
failed to perform pursuant to its obligations under the management agreement. 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"). 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 of at least $2,000,000. On March 4,
1997, the defendants removed the case to Federal District Court in the Central
District of California. At a Board meeting on February 26, 1997, the Company's
Board of Directors concluded that since all of Mr. Cohen's actions relating to
the California litigation were taken either on behalf of the Company under the
direction of the Board or as a PaineWebber employee, the Company or its
affiliates should indemnify Mr. Cohen with respect to any expenses arising from
the California litigation, subject to any insurance recoveries for those
expenses. Legal fees paid by Lease I and Lease II on behalf of Mr. Cohen totaled
$228,000 as of November 30, 1998. 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
November 30, 1998, the amount of legal fees either advanced to Capital or
accrued on the financial statements of Lease I and Lease II totaled
approximately $611,000, although the final amount to be reimbursed to Capital
has not yet been determined.
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
-13-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (continued)
property management agreements. The Company and its 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
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. The
Company and ILM I believe that the action is without merit and are vigorously
contesting this action.
Subsequent to the end of the quarter, 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 allegedly injured shareholders without
injuring the Company as a whole. The Board doubts that such a cause of action
could be alleged and continues to believe that this lawsuit is meritless. The
Board has directed outside counsel to continue vigorously contesting the action.
5. CONSTRUCTION LOAN FINANCING
The Company has finalized negotiations with a major bank to provide a
construction loan facility that will provide the Company with up to $24.5
million to fund the capital costs of the potential expansion programs. The
construction loan facility will be secured by a first mortgage of the Company's
properties and collateral assignment of the Company's leases of such properties.
The loan will have a three-year term with interest accruing at a rate equal to
LIBOR plus 1.10% or Prime plus 0.5%. The loan term could be extended for an
additional two years beyond its maturity date with monthly payments of principal
and interest on a 25-year amortization schedule.
6. SUBSEQUENT EVENT
On December 15, 1998, the Company's Board of Directors declared a
quarterly dividend for the quarter ended November 30, 1998. On January 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 December 31, 1998.
-14-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
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 master lease
agreement. 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. Lease II is
a public company subject to the reporting obligations of the Securities and
Exchange Commission.
The master lease agreement, which commenced on September 1, 1995, 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 master lease
is a "triple-net" lease whereby the lessee pays all operating expenses,
governmental taxes and assessments, utility charges and insurance premiums, as
well as the costs of all required maintenance, personal property and
non-structural repairs in connection with the operation of the Senior Housing
Facilities. ILM II Holding, as the lessor, is responsible for all major capital
improvements and structural repairs to the Senior Housing Facilities. During the
initial term of the master lease, which expires on December 31, 2000 (December
31, 1999 with respect to the Santa Barbara property), Lease II is obligated to
pay annual base rent for the use of all the Senior Housing Facilities in the
aggregate amount of $4,035,600. Beginning in January 1997 and for the remainder
of the lease term, Lease II is also obligated to pay variable rent for each
Senior Housing Facility. Such variable rent is payable quarterly and equals 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 three-month periods ended November 30, 1998 and 1997 was $310,000 and
$191,000, respectively.
-15-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 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 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 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 November 30, 1998 on
the Preferred Stock in ILM II Holding totaled approximately $16,280.
The assumption of ownership of the properties through ILM II Holding,
which was organized as a regular 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. 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, 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. To avoid this built-in gain tax, the Directors are
prepared at the appropriate time to recommend to the Shareholders an amendment
to the Articles of Incorporation to extend the Company's scheduled liquidation
date.
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 master lease.
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, 1998. As a result, the Company is expected to recover the
full amount that would be due under the loans upon sale of the Facilities.
-16-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Occupancy levels for the six properties in which the Company has
invested averaged 95% and 93%, respectively, for the three-month periods ended
November 30, 1998 and 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's net operating cash flow is expected to be relatively
stable and predictable due to the master lease structure. 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 Company and Lease II 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; St. Louis County, Missouri;
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. In addition, an
agreement was obtained to purchase approximately six acres of land located
adjacent to the St. Louis County facility for approximately $900,000. In
December 1997, the Company decided not to pursue the St. Louis County expansion
and allowed the agreement to expire. 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 December1997, 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.
Once the pre-construction design process is complete and projected
expansion costs are determined, the Company will carefully evaluate the costs
and benefits before proceeding with the construction of any of these expansions.
Depending on the extent of any expansions deemed appropriate, such plans could
result in the need for substantial additional capital. The Company has finalized
negotiations with a major bank to provide a construction loan facility that will
would provide the Company with up to $8.8 million to fund the capital costs of
these potential expansion programs. The construction loan facility will be
secured by a first mortgage of the Company's properties and collateral
assignment of such properties. The loan will have a three-year term with
interest accruing at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. The
loan term could be extended for an additional two years beyond its maturity date
with monthly payments of principal and interest on a 25-year amortization
schedule.
At November 30, 1998, the Company had cash and cash equivalents of
$1,398,000. 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 master lease payments from Lease II, interest income earned on invested
cash reserves and proceeds from the future sales of the underlying operating
investment properties. Such sources of liquidity are expected to be adequate to
meet 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.
-17-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 VERSUS THE THREE MONTHS ENDED
NOVEMBER 30, 1997
Net income decreased $60,000 or 7.8% for the first quarter ended
November 30, 1998 compared to the first quarter ended November 30, 1997. Total
revenue was $1,329,000 representing an increase of $115,000, or 9.5%, compared
to the same period of the prior year. Rental and other income increased $119,000
or 10%, to $1,311,000 from $1,192,000, due to increased rental income earned
pursuant to the terms of the master lease agreement. Total expenses increased
$175,000 or 39.6%, from $442,000 for the three months ended November 30, 1997
compared to $617,000 for the three months ended November 30, 1998. This increase
in expenses is primarily attributable to a combined increase in professional
fees and general and administrative expense of $173,000 or 57% due to increases
in Director's and Officer's insurance premiums; increased legal fees associated
with the construction loan facility; and financial and advisory professionals
who were engaged to assist the Company.
-18-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO
QUALIFY FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF
THE SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE
FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE
CONTEXT OF THE STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD," "MAY
BE," "SHOULD," "ENABLE," "LIKELY TO," "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.
-19-
<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
-20-
<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: November 16, 1999
-----------------
-21-
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