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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended 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
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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.)
28 State Street, Suite 1100, Boston, MA 02109
- ---------------------------------------- -------------------
(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 17
<PAGE>
ILM I LEASE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
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...12-14
Part II. Other Information....................................................................................15
Item 6. Exhibits and Reports on Form 8-K...........................................................15
Signatures.....................................................................................................16
</TABLE>
-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 -- -- -- 92 92
---------- --- ----- ----- -----
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>
Rentable Resident
Name Location Units Capacities
---- -------- ----- ----------
<S> <C> <C> <C>
Independence Village of East Lansing East Lansing, MI 161 162
Independence Village of Winston-Salem Winston-Salem, NC 159 161
Independence Village of Raleigh Raleigh, NC 164 205
Independence Village of Peoria Peoria, IL 165 181
Crown Point Apartments Omaha, NE 135 163
Sedgwick Plaza Apartments Wichita, KS 150 170
West Shores Hot Springs, AR 136 166
Villa Santa Barbara (1) Santa Barbara, CA 125 125
</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 REIT, 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. 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).
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
-8-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. The Facilities Lease Agreement (continued)
------------------------------------------
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 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.
-9-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. Related Party Transactions (continued)
--------------------------------------
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.
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
-10-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
4. Legal Proceedings and Contingencies (continued)
-----------------------------------------------
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. 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,
-12-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 Company relies upon PC-based systems and does not expect to incur
material costs to transition to Year 2000 compliant systems in its internal
operations. The Company does not expect this project to have a significant
effect on operations. The Company will continue to implement systems and all new
investments are expected to be with Year 2000 compliant software.
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 and depreciation expense
of $71,000, 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 as compared to the same
period in the prior year, as a result of a decrease in income before taxes of
$51,000.
Net Income
Primarily as a result of the factors noted above, net income decreased
$30,000 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.
-13-
<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," "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.
-14-
<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
-15-
<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: February 19, 1999
-----------------
-16-
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