<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 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 1 of 25
<PAGE>
ILM II SENIOR LIVING, INC
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information PAGE
<S> <C> <C>
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) ................................ 8-15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . 16-22
Part II. Other Information
Item 5. Other Information ...................................................................... 23
Item 6. Exhibits and Reports on Form 8-K ....................................................... 23
Signatures .............................................................................................. 24
</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)
ASSETS
<TABLE>
<CAPTION>
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>
-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 (2) Capacity (2)
- ---- -------- ----- --------- ------------
<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
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 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.
-10-
<PAGE>
ILM II SENIOR LIVING, INC.
Notes to Consolidated Financial Statements (Unaudited)
(continued)
OPERATING INVESTMENT PROPERTIES SUBJECT TO FACILITIES LEASE AGREEMENT
(CONTINUED)
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.
-11-
<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
-12-
<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
-13-
<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.
-14-
<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.
-15-
<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, 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.
-16-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
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 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.
-17-
<PAGE>
ILM II SENIOR LIVING, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
GENERAL (CONTINUED)
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.
-18-
<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
-19-
<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.
-20-
<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 or
6%, 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 or 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
or 34% 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.
-21-
<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.
-22-
<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
-23-
<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
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