UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
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 : 0-25878
ILM I LEASE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 04-3248637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 225-1174
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
----
Shares on common stock outstanding as of November 30, 1996: 7,519,430. The
aggregate sales price of the shares sold was $700,000. This does not reflect
market value. There is no current market for these shares.
<PAGE>
ILM I LEASE CORPORATION
BALANCE SHEETS
November 30, 1996 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
November 30 August 31
----------- ---------
Cash and cash equivalents $ 2,126 $ 2,185
Accounts receivable 107 77
Prepaid expenses and other assets 120 267
-------- --------
Total current assets 2,353 2,529
Furniture, fixtures and equipment 269 261
Less: accumulated depreciation (28) (19)
-------- --------
241 242
Deferred tax asset, net 17 26
-------- --------
$ 2,611 $ 2,797
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 530 $ 863
Real estate taxes payable 264 300
Accounts payable - affiliates 451 445
Security deposits 5 5
-------- --------
Total current liabilities 1,250 1,613
Deferred rent payable 114 123
-------- --------
Total liabilities 1,364 1,736
Shareholders' equity 1,247 1,061
-------- --------
$ 2,611 $ 2,797
======== ========
See accompanying notes.
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF INCOME
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands, except per share amounts)
1996 1995
---- ----
Revenues:
Rental and other income $ 4,400 $ 4,229
Interest income 22 7
------- -------
4,422 4,236
Expenses:
Master lease rent expense 1,582 1,582
Dietary salaries, wages and food
service expenses 829 737
Administrative salaries, wages
and expenses 286 253
Marketing salaries, wages and expenses 207 224
Utilities 203 191
Repairs and maintenance 152 143
Real estate taxes 214 199
Property management fees 207 233
Other property operating expenses 370 321
General and administrative 31 30
Advisory fees 22 21
Depreciation expense 9 -
------- -------
4,112 3,934
------- -------
Income before taxes 310 302
Income tax expense (benefit):
Current 115 159
Deferred 9 (38)
------- --------
124 121
------- --------
Net income $ 186 $ 181
======= ========
Earnings per share of common stock $0.02 $0.02
===== =====
The above earnings per share of common stock is based upon the 7,519,430 shares
outstanding for each period.
See accompanying notes.
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands)
Common Stock Additional
$.01 Par Value Paid-in Accumulated
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance at August 31, 1995 15 $ - $ 1 $ (1) $ -
Issuance of common stock 7,504 75 624 - 699
Net income - - - 181 181
------ ---- ----- ------ ------
Balance at November 30, 1995 7,519 $ 75 $ 625 $ 180 $ 880
===== ===== ===== ====== ======
Balance at August 31, 1996 7,519 $ 75 $ 625 $ 361 $1,061
Net income - - - 186 186
----- ----- ----- ------ ------
Balance at November 30, 1996 7,519 $ 75 $ 625 $ 547 $1,247
====== ===== ===== ====== =======
See accompanying notes.
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 186 $ 181
Adjustments to reconcile net income to
net cash (used in) provided by operating activities
Depreciation expense 9 -
Changes in assets and liabilities:
Accounts receivable (30) (33)
Prepaid expenses and other assets 147 (165)
Deferred tax asset, net 9 (39)
Income taxes payable - 166
Accounts payable and accrued expenses (333) 578
Accounts payable - affiliates 6 21
Real estate taxes payable (36) -
Deferred rent payable (9) 110
------ ------
Total adjustments (237) 638
------ ------
Net cash (used in) provided by
operating activities (51) 819
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (8) -
------ ------
Net cash used in investing activities (8) -
Cash flows from financing activities:
Proceeds from issuance of common stock - 699
------ ------
Net cash provided by financing activities - 699
------ ------
Net (decrease) increase in cash and cash equivalents (59) 1,518
Cash and cash equivalents, beginning of period 2,185 -
------ ------
Cash and cash equivalents, end of period $2,126 $1,518
====== ======
Supplemental disclosure:
Cash paid during the period for income taxes $ - $ -
===== ======
See accompanying notes.
<PAGE>
ILM I LEASE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussions should be
read in conjunction with the financial statements and footnotes contained
in the Company's Annual Report for the year ended August 31, 1996. In the
opinion of management, the accompanying financial statements, which have
not been audited, reflect all adjustments necessary to present fairly the
results for the interim period. All of the accounting adjustments reflected
in the accompanying interim financial statements are of a normal recurring
nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles 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, 1996 and August 31,
1996 and revenues and expenses for each of the three month periods ended
November 30, 1996 and 1995. Actual results could differ from the estimates
and assumptions used.
2. The Master Lease Agreement
The Company was formed by PaineWebber Independent Living Mortgage Fund,
Inc. ("ILM") to operate eight rental housing projects for independent senior
citizens ("the Senior Housing Facilities") under a master lease arrangement.
ILM has elected to be taxed as a Real Estate Investment Trust ("REIT") under
the Internal Revenue Code of 1986, as amended ("the Code"), for each taxable
year of operations. In order to maintain its status as a REIT, 75% of ILM's
annual gross income must be Qualified Rental Income as defined by the Code.
The rent paid by the residents of the Facilities likely would not be deemed
to be Qualified Rental Income because of the extent of services provided to
residents. Consequently, the operation of the Facilities by ILM or its
subsidiaries over an extended period of time could adversely affect ILM's
status as a REIT. Therefore, ILM formed the Company to operate the Senior
Housing Facilities, and by means of a distribution, transferred the ownership
of the common stock of the Company to the holders of ILM common stock on
September 1, 1995. Because the Company, which is taxed as a regular C
corporation, is no longer a subsidiary of ILM, it can receive service-related
income without endangering the REIT status of ILM.
The Company's sole business is the operation of the Senior Housing
Facilities. The Company has initially leased the Senior Housing Facilities
from ILM Holding, Inc. ("ILM Holding"), a majority-owned and consolidated
subsidiary of ILM which currently holds title to the Facilities, pursuant to
a master lease which commenced on September 1, 1995 and expires on December
31, 1999. The Company has entered into a property management agreement with
Capital Senior Management 2, Inc. of Dallas, Texas ("Capital") to handle the
day-to-day operations of the Senior Housing Facilities. The management
contract with Capital was executed in July 1996. In November 1996, Lawrence
A. Cohen, a Director of the Company and President, Chief Executive Officer
and Director of ILM, also became Vice Chairman and Chief Financial Officer of
Capital Senior Living Corporation, an affiliate of Capital. As a result, the
management contract with Capital is considered a related party transaction
(see Note 3).
<PAGE>
Descriptions of the properties covered by the master lease between the
Company and ILM Holding are summarized as follows:
<TABLE>
Date of
Name Location Rentable Units Construction (1)
---- -------- -------------- ----------------
<S> <C> <C> <C>
Independence Village of East Lansing East Lansing, MI 159 May 1989
Independence Village of Winston-Salem Winston-Salem, NC 156 February 1989
Independence Village of Raleigh Raleigh, NC 163 March 1991
Independence Village of Peoria Peoria, IL 164 November 1990
Crown Pointe Apartments Omaha, NE 133 August 1985
Sedgwick Plaza Apartments Wichita, KS 150 May 1985
West Shores Hot Springs, AR 134 June 1987
Villa Santa Barbara (2) Santa Barbara, CA 123 June 1979
</TABLE>
(1) Date initial construction was completed.
(2)The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM II Lease Corporation. The Company has
entered into an agreement with ILM II Lease Corporation regarding such
joint tenancy. ILM II Lease Corporation was formed for similar purposes
as the Company by an affiliated REIT, PaineWebber Independent Living
Mortgage Inc. II, whose subsidiary owns a portion of the Villa Santa
Barbara property. The portion of the Facility leased by the Company
represents 25% of the total project.
Terms of the Master Lease Agreement
-----------------------------------
During the term of the master lease, the Company is obligated to pay
annual base rent ("Base Rent") for the Facilities. For calendar year 1995,
the annual Base Rent was $5,886,000 (prorated according to the date of
commencement of the master lease), allocated as follows: $896,156 for the
Michigan Facility, $566,914 for the Winston-Salem, North Carolina Facility,
$1,017,659 for the Raleigh, North Carolina Facility, $892,600 for the
Illinois Facility, $893,918 for the Nebraska Facility, $855,702 for the
Kansas Facility, $623,984 for the Arkansas Facility, and $139,067 for the
California Facility. For calendar year 1996 and subsequent years, the annual
Base Rent will be $6,364,800, allocated as follows: $969,054 for the Michigan
Facility, $613,030 for the Winston-Salem, North Carolina Facility, $1,100,441
for the Raleigh, North Carolina Facility, $965,209 for the Illinois Facility,
$966,634 for the Nebraska Facility, $925,310 for the Kansas Facility,
$674,742 for the Arkansas Facility, and $150,380 for the California Facility.
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 ("Additional Rent"). ILM Holding, as the
Lessor, is responsible for major capital improvements and structural repairs
to the Senior Housing Facilities. In addition, beginning in January 1997 and
for the remainder of the lease term, the Company will also be obligated to
pay variable rent ("Variable Rent") for each Facility. Such Variable Rent
will be payable quarterly and will equal 40% of the excess, if any, of the
aggregate total revenues for the Facilities, on an annualized basis, over
$16,996,000.
<PAGE>
Under the master lease, the Company's use of the Facilities is limited to
use as a Senior Housing Facility unless the Lessor's consent to some other
use is obtained. The Company has responsibility to obtain and maintain all
licenses, certificates and consents needed to use and operate each Facility,
and to use and maintain each Facility in compliance with all local board of
health and other applicable governmental and insurance regulations. The
Facilities located in Arkansas, California and Kansas are licensed by such
states to provide assisted living services. Also, various health and safety
regulations and standards which are enforced by state and local authorities
apply to the operation of all of the Facilities. Violations of such health
and safety standards could result in fines, penalties, closure of a Facility
or other sanctions.
3. Related Party Transactions
The Advisor receives a base fee in an amount equal to 0.5% of the Gross
Operating Revenues of the Facilities operated by the Company as compensation
for its services. This fee amounted to $22,000 and $21,000 for the
three-month periods ended November 30, 1996 and 1995, respectively. In
addition, an affiliate of the Advisor is entitled to reimbursement for
expenses incurred in providing certain financial, accounting and investor
communication services to the Company. Included in general and administrative
expenses for the three months ended November 30, 1996 and 1995 is $19,000 and
$13,000, respectively, representing reimbursements to this affiliate of the
Advisor for providing such services to the Company.
The Company has retained Capital Senior Management 2, Inc. ("Capital") of
Dallas, Texas to be the property manager of the Senior Housing Facilities
pursuant to a Management Agreement which commenced on July 29, 1996. The
initial term of the Management Agreement expires on December 31, 1999, which
coincides with the expiration of the master lease agreement between the
Company and ILM Holding described in Note 2. Under the terms of the
Management Agreement, in the event that the master lease agreement is
extended beyond December 31, 1999, the Management Agreement will be extended
as well, but not beyond July 29, 2001. Effective in November 1996, Lawrence
A. Cohen, a Director of the Company and President, Chief Executive Officer
and Director of ILM, was also named Vice Chairman and Chief Financial Officer
of Capital Senior Living Corporation, an affiliate of Capital. Under the
terms of the Agreement, Capital will earn a Base Management Fee equal to 4%
of the Gross Operating Revenues of the Senior Housing Facilities, as defined.
Capital will also be eligible to earn an Incentive Management Fee equal to
25% of the amount by which the average monthly Net Cash Flow of the Senior
Housing Facilities, as defined, for the twelve month period ending on the
last day of each calendar month exceeds a specified Base Amount. Each August
31, beginning on August 31, 1997, the Base Amount will be increased based on
the percentage increase in the Consumer Price Index. ILM has guaranteed the
payment of all fees due to Capital under the terms of the Management
Agreement. Capital earned total management fees of $207,000 for the three
months ended November 30, 1996.
Accounts payable - affiliates at November 30, 1996 and August 31, 1996
includes advances of $356,000 and $348,000, respectively, received from ILM
Holding, primarily for the purchase of personal property to operate the
Senior Housing Facilities. The remaining balance of accounts payable -
affiliates at November 30, 1996 consists of management fees payable to
Capital of $73,000 and advisory fees payable to the Advisor of $22,000. The
remaining balances of accounts payable - affiliates at August 31, 1996
consists of management fees of $76,000 payable to Capital and advisory fees
payable to the Advisor of $21,000.
<PAGE>
4. Contingencies
A management agreement between ILM Holding and Angeles Housing Concepts,
Inc. ("AHC") which covered the management of all eight Senior Housing
Facilities was assigned to the Company effective September 1, 1995. On July
29, 1996, the Company and ILM Holding ("the Companies") terminated the
property management agreement with AHC. The management agreement was
terminated for cause pursuant to the terms of the contract. 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 Company and ILM Holding allege, among
other things, 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 Holding. The Counterclaim alleges that the
management agreement was wrongfully terminated for cause and requests damages
which include the payment of a termination fee in the amount of $1,250,000,
payment of management fees pursuant to the contract from August 1, 1996
through October 15, 1996, and recovery of attorney's fees and expenses. ILM
has guaranteed the payment of the termination fee at issue in these
proceedings. The Companies intend to diligently prosecute the case and to
vigorously defend the counterclaims made by AHC. The eventual outcome of this
termination dispute cannot presently be determined. Accordingly, no provision
for any liability which might result from the outcome of this matter has been
recorded in the accompanying financial statements.
5. Federal Income Taxes
The Company is taxable as a regular C corporation and, therefore, its
income is subject to tax at the federal and state levels. The Company reports
on a calendar year for tax purposes. Income taxes at the appropriate
statutory rates have been provided for in the accompanying financial
statements.
Deferred income tax expense (benefit) reflects the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. The Company's deferred tax assets and liabilities as of November
30, 1996 and August 31, 1996 are comprised of the following amounts (in
thousands):
November 30 August 31
----------- ---------
Deferred tax asset - straight-line rent expense $ 45 $ 49
Deferred tax liability - tax over book amortization 28 23
------ ------
Net deferred tax asset $ 17 $ 26
====== ======
<PAGE>
The components of income tax expense (benefit) for the three months ended
November 30, 1996 and 1995 are as follows (in thousands):
1996 1995
---- ----
Current:
Federal $ 98 $ 135
State 17 24
----- ------
Total current 115 159
----- ------
Deferred:
Federal 7 (32)
State 2 (6)
----- ------
Total deferred 9 (38)
----- ------
$ 124 $ 121
===== ======
The reconciliation of income tax computed at U.S. federal statutory
rates to income tax expense is as follows (in thousands):
1996 1995
------------ -------------
Tax at U.S. statutory rates $ 105 34% $ 103 34%
State income taxes, net
of federal tax benefit 19 6% 18 6%
----- --- ------ ---
$ 124 40% $ 121 40%
===== === ====== ===
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
ILM I Lease Corporation (the "Company") was formed by PaineWebber
Independent Living Mortgage Fund, Inc. ("ILM"), a publicly-held, non-traded Real
Estate Investment Trust ("REIT"), for the purpose of operating eight Senior
Housing Facilities under the terms of a master lease agreement. ILM contributed
$700,000 in return for all of the issued and outstanding shares of the Company's
common stock. ILM has elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended ("the Code"), for each taxable year of operations. In
order to maintain its status as a REIT, 75% of ILM's annual gross income must be
Qualified Rental Income as defined by the Code. The rent paid by the residents
of the Facilities likely would not be deemed to be Qualified Rental Income
because of the extent of services provided to residents. Consequently, the
operation of the Facilities by ILM or its subsidiaries over an extended period
of time could adversely affect ILM's status as a REIT. Therefore, ILM formed the
Company to operate the Facilities, and by means of a distribution, transferred
the ownership of the common stock of the Company to the holders of ILM common
stock on September 1, 1995. Because the Company, which is taxed as a regular C
corporation, is no longer a subsidiary of ILM, it can receive service-related
income without endangering the REIT status of ILM.
The Company's sole business is the operation of the Senior Housing
Facilities. The Company has initially leased the Senior Housing Facilities from
ILM Holding, Inc. ("ILM Holding"), a majority-owned and consolidated subsidiary
of ILM which currently holds title to the Facilities, pursuant to a master lease
which commenced on September 1, 1995 and expires on December 31, 1999. 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 Holding, as the Lessor, is responsible for major capital
improvements and structural repairs to the Senior Housing Facilities. During the
initial term of the master lease, the Company is obligated to pay annual base
rent for the use of all of the Facilities in the aggregate amount of $5,886,000
for calendar year 1995 (prorated based on the lease commencement date) and
$6,364,800 for calendar year 1996 and each subsequent year. Beginning in January
1997 and for the remainder of the lease term, the Company will also be obligated
to pay variable rent for each Facility. Such variable rent will be payable
quarterly and will equal 40% of the excess, if any, of the aggregate total
revenues for the Facilities, on an annualized basis, over $16,996,000.
On July 29, 1996, the Company and ILM Holding ("the Companies")
terminated the property management agreement with AHC covering the eight Senior
Housing Facilities leased by the Company. The management agreement was
terminated for cause pursuant to the terms of the contract. 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 Company and ILM Holding allege, among
other things, 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 Holding. The
Counterclaim alleges that the management agreement was wrongfully terminated for
cause and requests damages which include the payment of a termination fee in the
amount of $1,250,000, payment of management fees pursuant to the contract from
August 1, 1996 through October 15, 1996, and recovery of attorney's fees and
expenses. ILM has guaranteed the payment of the termination fee at issue in
these proceedings. The Companies intend to diligently prosecute the case and to
vigorously defend the counterclaims made by AHC. The eventual outcome of this
termination dispute cannot presently be determined. Accordingly, no provision
for any liability which might result from the outcome of this matter has been
recorded in the accompanying financial statements.
<PAGE>
Subsequent to terminating the management agreement with AHC, the Company
retained Capital Senior Management 2, Inc. ("Capital") of Dallas, Texas to be
the new manager of the Senior Housing Facilities pursuant to a Management
Agreement which commenced on July 29, 1996. The initial term of the Management
Agreement expires on December 31, 1999, which coincides with the expiration of
the master lease agreement between the Company and ILM Holding described above.
Under the terms of the Management Agreement, in the event that the master lease
agreement is extended beyond December 31, 1999, the Management Agreement will be
extended as well, but not beyond July 29, 2001. Effective in November 1996,
Lawrence A. Cohen, a Director of the Company and President, Chief Executive
Officer and Director of ILM, was also named Vice Chairman and Chief Financial
Officer of Capital Senior Living Corporation, an affiliate of Capital. Under the
terms of the Agreement, Capital will earn a Base Management Fee equal to 4% of
the Gross Operating Revenues of the Senior Housing Facilities, as defined.
Capital will also be eligible to earn an Incentive Management Fee equal to 25%
of the amount by which the average monthly Net Cash Flow of the Senior Housing
Facilities, as defined, for the twelve month period ending on the last day of
each calendar month exceeds a specified Base Amount. Each August 31, beginning
on August 31, 1997, the Base Amount will be increased based on the percentage
increase in the Consumer Price Index. ILM has guaranteed the payment of all fees
due to Capital under the terms of the Management Agreement.
The eight properties which the Company leases from ILM Holding averaged
92% occupancy for the quarter ended November 30, 1996. Current annualized
operating income levels are sufficient to cover the base master lease payments
at their current annual level of $6,364,800, which will remain in effect
throughout the remaining term of the lease. As noted above, the master lease
also provides for the payment of variable rent beginning in January 1997. 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. Accordingly, the Company expects that it will owe variable rent
payments to ILM Holding in fiscal 1997. Further improvements in operating income
levels are expected upon the successful implementation of several new programs
by the new property management company. At many properties, the management
company is exploring the potential to increase the number of rentable units by
asking the facility managers to move off site. The increased rental revenue is
expected to more than offset any additional costs of housing the managers and
providing 24-hour coverage at the front desk. The live-in assistant manager
positions at several properties are also being eliminated, which will increase
the number of rentable units. In addition, the management company is in the
process of implementing new marketing plans at several of the properties.
Management of the Company and ILM are currently reviewing annual operating
budgets and capital expenditure plans with the new property management team,
which include an ongoing program to replace air-conditioning units at the Santa
Barbara facility and a potential program to upgrade the overall appearance of
the Sedgwick Plaza property.
As discussed in the Annual Report, the road adjacent to the Raleigh
facility is being improved, and the county Department of Transportation has
requested a temporary construction easement on the property. Although the
easement will not directly affect the operation of the facility, it will likely
result in the removal of several trees that currently provide a buffer between
the building and the road. Negotiations are currently underway to minimize the
removal of trees and to secure a settlement from the county that will pay for
installing a new landscape buffer upon the completion of the roadway
construction.
At November 30, 1996, the Company had cash and cash equivalents of
$2,126,000. Such amounts will be used for the Company's working capital
requirements. As noted above, under the terms of the master lease the Lessor is
responsible for major capital improvements and structural repairs to the Senior
Housing Facilities. Consequently, the Company does not have any material
commitments for capital expenditures. Furthermore, the Company does not
currently anticipate the need to engage in any borrowing activities. As a
result, substantially all of the Company's cash flow will be generated from
operating activities. The Company did not pay cash dividends in fiscal 1996. The
Company intends to review this policy during fiscal 1997, subsequent to the
commencement of the variable rent payments discussed further above, and may or
may not determine to pay cash dividends in the future. Payment of dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon such factors as the Company's financial condition, earnings,
anticipated investments and other relevant factors. The source of future
liquidity is expected to be from operating cash flow from the Senior Housing
Facilities, net of the master lease payments to ILM Holding, and interest income
earned on invested cash reserves. 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.
<PAGE>
Results of Operations
Three Months Ended November 30, 1996
- ------------------------------------
The Company's net income increased by $5,000 for the three months ended
November 30, 1996 when compared to the same period in the prior year. The
increase in net income is primarily the result of an increase in rental income
from the Senior Housing Facilities of $171,000. The increase in rental income is
primarily due to a slight increase in the portfolio's average occupancy level
from 91% for the first quarter of fiscal 1996 to 92% for the current quarter. In
addition, interest income increased by $15,000 due to an increase in the average
balance of invested cash equivalents during the current quarter. The increases
in rental income and interest income were offset by an increase in operating
expenses of $178,000. The increase in operating expenses was mainly due to an
increase of $92,000 in dietary salaries, wages and food service expenses
primarily associated with the improvement in the portfolio occupancy level
discussed further above. Increases in other property operating expenses and
administrative salaries, wages and expenses of $49,000 and $33,000,
respectively, also contributed to the overall increase in operating expenses.
Income tax expense increased by $3,000 due to the increase in net operating
income.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
The status of the litigation involving the Company, ILM Holding, Inc.
and Angeles Housing Concepts, Inc. remains unchanged from what was reported
in the Company's Annual Report on Form 10-K for the year ended August 31,
1996.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
<PAGE>
ILM I LEASE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
By: ILM LEASE CORPORATION
By: /s/ Timothy J. Medlock
----------------------
Timothy J. Medlock
Treasurer
Dated: January 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the three months ended November
30, 1996 and is qualified in its entirety by reference to such financial
statements.
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0
0
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