<PAGE>
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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: 0-25878
-------
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.)
8180 GREENSBORO DRIVE, SUITE 850, MCLEAN, VA 22102
- -------------------------------------------- --------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 257-3550
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange 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: 7,519,430.
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Page 1 of 18
<PAGE>
ILM I LEASE CORPORATION
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Balance Sheets
November 30, 1998 (Unaudited) and
August 31, 1998...........................................3
Statements of Income
For the three-month periods ended November 30, 1998
and 1997 (Unaudited)......................................4
Statements of Changes in Shareholders' Equity
For the three months ended November 30, 1998
and 1997 (Unaudited).......................................5
Statements of Cash Flows
For the three months ended November 30, 1998
and 1997 (Unaudited).......................................6
Notes to Financial Statements (Unaudited).................7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...12-15
Part II. Other Information..................................................16
Item 6. Exhibits and Reports on Form 8-K............................16
Signatures..................................................................17
-2-
<PAGE>
ILM I LEASE CORPORATION
BALANCE SHEETS
November 30, 1998 (Unaudited) and August 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
November 30, 1998 August 31, 1998
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 881 $1,897
Accounts receivable - related party 165 --
Accounts receivable, net 88 56
Tax refund receivable 7 145
Prepaid expenses and other assets 126 127
----------- ---------
Total current assets 1,267 2,225
Furniture, fixtures and equipment 1,053 999
Less: accumulated depreciation (487) (390)
----------- ---------
566 609
Deferred tax asset 324 364
----------- ---------
$2,157 $3,198
----------- ---------
----------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 954 $1,123
Termination fee payable -- 975
Real estate taxes payable 229 213
Accounts payable - related party 471 438
Security deposits 8 7
----------- ---------
Total current liabilities 1,662 2,756
Deferred rent payable 40 49
----------- ---------
Total liabilities 1,702 2,805
Shareholders' equity:
Common stock, $0.01 par value,
20,000,000 shares
authorized 7,519,430
issued and outstanding 75 75
Additional paid-in capital 625 625
Retained earnings (deficit) (245) (307)
----------- ---------
Total shareholders' equity 455 393
----------- ---------
$2,157 $3,198
----------- ---------
----------- ---------
</TABLE>
See accompanying notes.
-3-
<PAGE>
ILM I LEASE CORPORATION
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 $4,938 $4,750
Interest income 5 8
------ ------
4,943 4,758
EXPENSES:
Facilities lease rent expense 1,858 1,782
Dietary and food service salaries,
wages and expenses 904 905
Administrative salaries, wages and expenses 326 319
Marketing salaries, wages and expenses 225 216
Utilities 206 197
Repairs and maintenance 174 155
Real estate taxes 209 201
Property management fees 260 242
Other property operating expenses 382 367
General and administrative 72 50
Directors compensation 13 18
Professional fees 115 127
Depreciation expense 97 26
------ ------
4,841 4,605
------ ------
Income before taxes 102 153
Income tax expense (benefit):
Current -- 50
Deferred 40 11
------ ------
40 61
------ ------
NET INCOME $ 62 $ 92
------ ------
------ ------
Basic earnings per share of common stock $ 0.01 $ 0.01
------ ------
------ ------
</TABLE>
The above earnings per share of common stock is based upon the 7,519,430 shares
outstanding for each period.
See accompanying notes.
-4-
<PAGE>
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three-month periods ended November 30, 1998 and 1997 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Additional Retained
-------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------ ------ ---------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1997 7,519,430 $75 $625 $ 74 $ 774
Net income -- -- -- -- --
-------- ------ ---------- --------- -----
Balance at November 30, 1997 7,519,430 $75 $625 $ 166 $ 866
-------- ------ ---------- --------- -----
-------- ------ ---------- --------- -----
Balance at August 31, 1998 7,519,430 $75 $625 $(307) $ 393
Net income -- -- -- 62 62
-------- ------ ---------- --------- -----
Balance at November 30, 1998 7,519,430 $75 $625 $(245) $ 455
-------- ------ ---------- --------- -----
-------- ------ ---------- --------- -----
</TABLE>
See accompanying notes.
-5-
<PAGE>
ILM I LEASE CORPORATION
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 $ 62 $ 92
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation expense 97 26
Deferred tax expense 40 11
Changes in assets and liabilities:
Accounts receivable - related party (165) (477)
Accounts receivable (32) (27)
Tax refund receivable 138 --
Prepaid expenses and other assets 1 71
Accounts payable and accrued expenses (169) 127
Termination fee payable (975) --
Accounts payable - related party 33 1,806
Real estate taxes payable 16 15
Deferred rent payable (9) (9)
Security deposits 1 1
--------- --------
Net cash (used in) provided by
operating activities (962) 1,636
--------- --------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (54) (73)
--------- --------
Net cash used in investing activities (54) (73)
--------- --------
Net increase (decrease) in cash and cash equivalents (1,016) 1,563
Cash and cash equivalents, beginning of period 1,897 1,473
--------- --------
Cash and cash equivalents, end of period $ 881 $3,036
--------- --------
--------- --------
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for income taxes $ -- $ --
--------- --------
--------- --------
</TABLE>
See accompanying notes.
-6-
<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 ILM I Lease Corporation's ("the Company") Annual Report on
Form 10-K for the year ended August 31, 1998. In the opinion of management,
the accompanying interim 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 financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with U.S. generally accepted accounting
principles, which require 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. 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 three-month period ended
November 30, 1998, are not necessarily indicative of the results to be
expected for the full year.
The Company was incorporated on September 12, 1994 under the laws of
the State of Virginia by ILM Senior Living, Inc., a Virginia finite-life
corporation ("ILM I"), formerly PaineWebber Independent Mortgage Fund,
Inc., to operate eight rental housing projects that provide
independent-living and assisted-living services for independent senior
citizens ("the Senior Housing Facilities") under a facilities lease
agreement dated September 1, 1995 (the "Facilities Lease Agreement"),
between the Company, as lessee, and ILM Holding, Inc. ("ILM Holding"), as
lessor, and a direct subsidiary of the Company. The Company's sole business
is the operation of the Senior Housing Facilities. ILM I made mortgage
loans to Angeles Housing Concepts, Inc. ("AHC") secured by the Senior
Housing Facilities between June 1989 and July 1992. In March 1993, AHC
defaulted under the terms of such mortgage loans and in connection with the
settlement of such default, title to the Senior Housing Facilities was
transferred, effective April 1, 1994, to certain indirect subsidiaries of
ILM I, subject to the mortgage loans. Subsequently, these property owning
subsidiaries were merged into ILM Holding. As part of the fiscal 1994
settlement agreement with AHC, AHC was retained as the property manager for
all of the Senior Housing Facilities pursuant to the terms of a management
agreement, which was assigned to the Company as of September 1, 1995 and
subsequently terminated in July 1996. The Company is a public company
subject to the reporting obligations of the Securities and Exchange
Commission.
In July 1996, following termination of the property management
agreement with AHC, the Company entered into a property management
agreement (the "Management Agreement") with Capital Senior Management 2,
Inc. ("Capital") to handle the day-to-day operations of the Senior Housing
Facilities. Lawrence A. Cohen, who served through July 28, 1998 as a
Director of the Company and President, Chief Executive Officer and Director
of ILM I, 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, the Management Agreement with Capital was considered a
related party transaction (see Note 3) through July 28, 1998.
-7-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. THE FACILITIES LEASE AGREEMENT
ILM Holding (the "Lessor") leases the Senior Housing Facilities to the
Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such lease
is scheduled to expire on December 31, 1999, 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. The lease is accounted for as an operating lease in
the Company's financial statements.
Descriptions of the properties covered by the Facilities Lease Agreement
between the Company and ILM Holding are summarized as follows:
<TABLE>
<CAPTION>
Year Rentable Resident
Property Name and Location Type of Property Facility Built Units (2) Capacities (2)
- --------------------------- ---------------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Independence Village of Winston-Salem Senior Housing Facility 1989 159 162
Winston-Salem, NC
Independence Village of East Lansing Senior Housing Facility 1989 161 162
East Lansing, MI
Independence Village of Raleigh Senior Housing Facility 1991 164 205
Raleigh, NC
Independence Village of Peoria Senior Housing Facility 1990 166 183
Peoria, IL
Crowne Point Apartments Senior Housing Facility 1984 135 163
Omaha, NE
Sedgwick Plaza Apartments Senior Housing Facility 1984 150 170
Wichita, KS
West Shores Senior Housing Facility 1986 136 166
Hot Springs, AR
Villa Santa Barbara (1) Senior Housing Facility 1979 125 125
Santa Barbara, CA
</TABLE>
(1) The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM II Lease Corporation ("Lease II"). The
Company has entered into an agreement with Lease II regarding such joint
tenancy. Lease II was formed for similar purposes as the Company by an
affiliated company, ILM II Senior Living, Inc. ("ILM II"), a subsidiary of
which owns a portion of the Villa Santa Barbara property. The portion of
the Senior Housing Facility leased by the Company represents 25% of the
total project. Villa Santa Barbara is 25% owned by ILM Holding and 75% by
ILM II Holding, Inc., a direct subsidiary of ILM II, as tenants in common.
Upon the sale of ILM I or ILM II, 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.
-8-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. THE FACILITIES LEASE AGREEMENT (CONTINUED)
Pursuant to the Facilities Lease Agreement, the Company pays annual
base rent for the use of the Senior Housing Facilities in the aggregate
amount of $6,364,800. The 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
Lessor, is responsible for all major capital improvements and structural
repairs to the Senior Housing Facilities. Also, any fixed asset of the
Company at a Senior Housing Facility would remain with the Senior Housing
Facility at the termination of the lease. The Company also pays variable
rent, on a quarterly basis, for each facility in an amount equal to 40% of
the excess of aggregate total revenues for the Senior Housing Facilities,
on an annualized basis, over $16,996,000. Variable rent amounted to
$276,000 and $200,000 for the three-month periods ended November 30, 1998
and 1997, respectively.
The Company's use of the properties is limited to use as Senior Housing
Facilities. The Company has responsibility to obtain and maintain all
licenses, certificates and consents needed to use and operate each Senior
Housing Facility, and to use and maintain each Senior Housing Facility in
compliance with all local board of health and other applicable governmental
and insurance regulations. The Senior Housing 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 the Senior Housing Facilities. Violations of such health
and safety standards could result in fines, penalties, closure of a Senior
Housing Facility, or other sanctions.
RECENT DEVELOPMENTS
On February 7, 1999, ILM I entered into an agreement and plan of merger
with Capital Senior Living Corporation, the corporate parent of Capital, and
certain affiliates of Capital. Consummation of the merger is presently
anticipated in October 1999. In connection with the merger, ILM I has agreed
to cause ILM I Holding to cancel and terminate the Facilities Lease
Agreement immediately prior to the effective time of the merger. Although
there can be no assurance as to whether the merger will be consummated or,
if consummated, as to the timing thereof, the Company's operations would not
be expected to continue beyond the effective time of the merger.
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.
The Company has retained Capital to be the property manager of the
Senior Housing Facilities pursuant to the Management Agreement which
commenced on July 29, 1996. Lawrence A. Cohen, who served through July 28,
1998 as a Director of the Company as well as President, Chief Executive
Officer and Director of ILM I, has also served as Vice Chairman and Chief
Financial Officer of Capital Senior Living Corporation, an affiliate of
Capital, since November 1996. The Management Agreement is co-terminous with
the Facilities Lease Agreement. If, for any reason, the Facilities Lease
Agreement is extended beyond December 31, 1999, the scheduled expiration
date of the Management Agreement would be extended as well, but not beyond
July 29, 2001. There is no present intention to extend the term of the
Facilities Lease Agreement or the term of the Management Agreement (see
"Recent Developments" in Note 2). Under the terms of the Management
Agreement, Capital earns a base management fee equal to 4% of the gross
operating revenues of the Senior Housing Facilities, as defined. Capital
also earns an incentive management fee equal to 25% of the amount by which
the "net cash flow" of the Senior Housing Facilities, as defined, exceeds a
specified base amount. Each August 31, the base amount is increased based
on the percentage increase in the Consumer Price Index as well as 15% of
Senior Housing Facility expansion costs. ILM I has guaranteed the payment
of all fees due to
-9-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Capital under the terms of the Management Agreement. For the three-month
periods ended November 30, 1998 and 1997, Capital earned property
management fees from the Company of $260,000 and $242,000, respectively.
On September 18, 1997, the Company entered into an agreement with
Capital Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansions of several of the Senior
Housing Facilities. Capital Senior Development, Inc. would receive a fee
equal to 7% of the total development costs of these expansions if they are
pursued. ILM Holding would also reimburse the Company 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 the Company of $0 and $96,810,
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 three-month periods ended November 30, 1998 and 1997,
Greenberg Traurig earned fees from the Company of $64,161 and $34,000,
respectively.
Accounts receivable - related party at November 30, 1998 and August 31,
1998 includes $164,612 and $0, respectively, due from ILM I. Accounts
payable - related party at November 30, 1998 and August 31, 1998 includes
$276,000 and $243,000, respectively, for variable rent and expense
reimbursements payable to ILM Holding in the amount of $93,000 and to Lease
II in the amount of $102,000.
4. LEGAL PROCEEDINGS AND CONTINGENCIES
A property management agreement between ILM Holding and 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 alleged, 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 agreement, AHC filed
for protection under Chapter 11 of the U.S. Bankruptcy Code in its domestic
state of California. The Companies challenged the filing, 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 alleged that the management agreement
was wrongfully terminated for cause and requests damages, which included
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, which is the earliest date the management agreement could
have been terminated without cause, and recovery of attorney's 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 ILM I and ILM II in
the aggregate 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, ILM II, and Lease II filed a notice of appeal to the United
States Court of Appeals for the Fourth Circuit from the Orders.
-10-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
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 a Director of the Company and
President, Chief Executive Officer and Director of ILM I, 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 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 the Company and Lease II on behalf of Mr.
Cohen totaled $228,118 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 and its affiliates in the California
litigation. Subsequently, the Boards of Directors of the Company 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. By November 30, 1998, $317,000 of legal fees had been
either advanced or accrued in the Company's financial statements and
$293,553 of legal fees have been either advanced or accrued in Lease II's
financial statements for Capital's California litigation costs, 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. The
Company 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 the Company paying $975,000 and Lease II paying
$650,000 to AHC and its affiliates.
5. SUBSEQUENT EVENT
On February 11, 1999, the Company's Board of Directors elected Jeffry
R. Dwyer to the office of Chief Operating Officer.
-11-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Facilities Lease Agreement is a "triple-net" lease whereby the
Lessee pays all operating expenses, governmental taxes and assessments,
utility charges and insurance premiums, as well as the costs of all required
maintenance, personal property and non-structural repairs in connection with
the operation of the Senior Housing Facilities. ILM Holding, as Lessor, is
responsible for all major capital improvements and structural repairs to the
Senior Housing Facilities. If the Company and ILM Holding decide that any of
the Senior Housing Facilities should be expanded, the Facilities Lease
Agreement between the Company and ILM Holding would be amended to include
such expansion. Pursuant to the Facilities Lease Agreement, the Company pays
annual base rent for the use of all the Senior Housing Facilities in the
aggregate amount of $6,364,800. The Company 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 $16,996,000. For the
three-month periods ended November 30, 1998 and 1997, variable rent expense
was $276,000 and $200,000, respectively.
The Facilities Lease Agreement is scheduled to expire on December 31,
1999. Accordingly, since the Company does not have any current plans to
operate or own any other facilities or engage in any other business outside
of its relationship with ILM I, there is no assurance that the Company's
operations will continue beyond December 1999. Moreover, the Facilities
Lease Agreement is subject to termination at any time by ILM Holding upon 30
days' notice to the Company in connection with the sale to a non-affiliated
third party of the Senior Housing Facilities.
RECENT DEVELOPMENTS
On February 7, 1999, ILM I entered into an agreement and plan of merger
with Capital Senior Living Corporation, the corporate parent of Capital, and
certain affiliates of Capital. Consummation of the merger is presently
anticipated in October 1999. In connection with the merger, ILM I has agreed
to cause ILM I Holding to cancel and terminate the Facilities Lease
Agreement immediately prior to the effective time of the merger. Although
there can be no assurance as to whether the merger will be consummated or,
if consummated, as to the timing thereof, the Company's operations would not
be expected to continue beyond the effective time of the merger.
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the eight properties which the Company leases from
ILM Holding averaged 95% and 96%, respectively, for the three-month periods
ended November 30, 1998 and 1997. Base rent payments of $6,364,800, will
remain in effect throughout the remaining term of the lease. As noted above,
the Facilities Lease Agreement also provides for the payment of variable
rent. The Senior Housing Facilities are currently generating gross revenues
which are in excess of the specified threshold in the variable rent
calculation. Current annualized operating income levels are sufficient to
cover the Company's base and variable rent obligations to ILM Holding.
At November 30, 1998, the Company had cash and cash equivalents of
$881,000 compared to $1,897,000 at August 31, 1998. The decrease of
$1,016,000 is primarily attributable to the September 4, 1998 payment of
the AHC litigation settlement of $975,000 (see Note 4). Remaining amounts
of cash will be used for the Company's working capital requirements. As
noted above, under the terms of the facilities 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 by operating activities. The Company did not pay cash
dividends in fiscal years 1998 and 1997. The Company intends to review this
policy during 1999.
-12-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 flows from the Senior Housing Facilities, net of the
Facilities Lease Agreement 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.
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.
Based on ongoing assessments, the Company, through Capital, its
property manager, has developed a program to modify or replace portions of
its software and certain hardware, which are generally PC-based systems, so
that those systems will properly recognize and utilize dates beyond
December 31, 1999. While there can be no assurance, as of November 30,
1998, the Company believes that it will substantially complete all software
and hardware upgrades as of December 31, 1998. The Company believes that
these modifications and replacements of existing software and certain
hardware will mitigate the Year 2000 issue. However, if such modifications
and replacements are not completed timely, the Year 2000 issue could have a
material impact on the operations of the Company. The costs of Year 2000
remediation are not expected to be material based on the Company's
operations.
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 the Company would not receive rental
income as it became due from Senior Living Facility residents. The Company
in turn would fail to pay ILM Holding lease payments as they arise under
the master lease, and ILM Holding in turn would fail to pay ILM I mortgage
payments due it. However, the Company believes that given the nature of its
business, such problem would be temporary and easily remedied with a simple
accounting.
-13-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1998 VERSUS THREE MONTHS ENDED
NOVEMBER 30, 1997
REVENUES
Total revenues were $4,943,000 for the quarter ended November 30, 1998
compared to $4,758,000 for the same period of the prior year, representing
an increase of $185,000 or 3.9%. This increase is the result of increased
rental rates at certain of the Company's Senior Housing Facilities located
in strong markets.
EXPENSES
Total expenses were $4,841,000 for the quarter ended November 30, 1998
compared to $4,605,000 for the same period in the prior year, representing
an increase of $236,000 or 5.1%. This increase was principally comprised of
increases in Facilities Lease rent expense of $76,000 or 4.3% and
depreciation expense of $71,000 of 273.l%, offset by minor increases and
decreases in certain other expenses. The increase in Facilities Lease rent
expense is the result of increased variable rent payments due under the
Facilities Lease Agreement. The increase in depreciation expense is due to
the change in the estimated useful lives of the Company's fixed assets as a
consequence of the expected lease termination date of December 31, 1999, as
such assets are not subject to repurchase by ILM Holding.
INCOME TAX EXPENSE
Income tax expense decreased overall by $21,000 or 34.4% when compared to
the same period in the prior year, as a result of a decrease in income
before taxes of $51,000 or 50%.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$30,000 or 32.6% to net income of $62,000 for the quarter ended November
30, 1998 from net income of $92,000 for the quarter ended November 30,
1997.
-14-
<PAGE>
ILM I LEASE CORPORATION
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.
-15-
<PAGE>
ILM I LEASE CORPORATION
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
-16-
<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 I LEASE CORPORATION
By: /s/ Jeffry R. Dwyer
---------------------------
Jeffry R. Dwyer
Chief Operating Officer
(Principal Accounting Officer)
Dated: November 12, 1999
-----------------
-17-
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<CASH> 881
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<RECEIVABLES> 386
<ALLOWANCES> 0
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<CURRENT-ASSETS> 1,267
<PP&E> 1,053
<DEPRECIATION> 477
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0
0
<COMMON> 75
<OTHER-SE> 380
<TOTAL-LIABILITY-AND-EQUITY> 2,157
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