<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 MAY 31, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____to____.
Commission File Number: 0-25878
ILM I LEASE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
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
------------------------
</TABLE>
Securities registered pursuant to Section
12(b) of the Act:
<TABLE>
<CAPTION>
<S> <C>
Name of each exchange on
TITLE OF EACH CLASS which registered
- ------------------- -------------------------
None None
</TABLE>
Securities registered pursuant to Section
12(g) of the Act:
SHARES OF COMMON STOCK $.01 PAR VALUE
---------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
Shares of common stock outstanding as of May 31, 1999: 7,519,430.
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Page 1 of 19
<PAGE>
ILM I LEASE CORPORATION
INDEX
Part I. Financial Information PAGE
----
Item 1. Financial Statements
Balance Sheets
May 31, 1999 (Unaudited) and August 31, 1998................4
Statements of Income
For the nine months and three months ended
May 31, 1999 and 1998 (Unaudited)...........................5
Statements of Changes in Shareholders' Equity
For the nine months ended May 31, 1999 and 1998
(Unaudited).................................................6
Statements of Cash Flows
For the nine months ended May 31, 1999 and 1998
(Unaudited).................................................7
Notes to Financial Statements (Unaudited)................8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................13-17
Part II. Other Information..................................................18
Item 6. Exhibits and Reports on Form 8-K...........................18
Signatures...................................................................19
-2-
<PAGE>
ILM I LEASE CORPORATION
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
(see next page)
-3-
<PAGE>
ILM I LEASE CORPORATION
BALANCE SHEETS
May 31, 1999 (Unaudited) and August 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
MAY 31, 1999 AUGUST 31, 1998
------------ ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $1,257 $1,897
Accounts receivable, net 130 56
Tax refund receivable 1 145
Prepaid expenses and other assets 134 127
-------- ---------
Total current assets 1,522 2,225
Furniture, fixtures and equipment 1,197 999
Less: accumulated depreciation (710) (390)
--------- ---------
487 609
Deferred tax asset, net 244 364
-------- --------
$2,253 $3,198
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 901 $1,123
Termination fee payable - 975
Real estate taxes payable 356 213
Accounts payable - related party 397 438
Security deposits 6 7
-------- ----------
Total current liabilities 1,660 2,756
Deferred rent payable 22 49
-------- ---------
Total liabilities 1,682 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) (129) (307)
---------- ---------
Total shareholders' equity 571 393
-------- --------
$2,253 $3,198
-------- --------
-------- --------
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF INCOME
For the nine months and three months ended May 31, 1999 and 1998
(Unaudited) (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
May 31, May 31,
--------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental and other income $14,895 $14,375 $4,987 $4,830
Interest income 12 48 4 28
------- ------- ------- ------
14,907 14,423 4,991 4,858
EXPENSES
Master lease rent expense 5,605 5,397 1,877 1,814
Dietary and food service salaries, wages and expenses 2,743 2,657 937 895
Administrative salaries, wages and expenses 1,042 896 372 256
Marketing salaries, wages and expenses 682 636 225 206
Utilities 607 595 194 196
Repairs and maintenance 520 472 169 162
Real estate taxes 623 676 210 205
Property management fees 778 742 241 258
Other property operating expenses 1,131 1,102 380 374
General and administrative 228 39 87 98
Directors compensation 39 60 12 23
Professional fees 291 762 116 283
Depreciation expense 320 78 114 26
------- ------- ------- ------
14,609 14,112 4,934 4,796
------- ------- ------- ------
Income before taxes 298 311 57 62
Income tax expense (benefit):
Current - 33 - (40)
Deferred 120 92 24 65
------- ------- ------- ------
120 125 24 25
------- ------- ------- ------
NET INCOME $ 178 $ 186 $ 33 $ 37
------- ------- ------- ------
------- ------- ------- ------
Basic earnings per share of common stock $ 0.02 $0.02 $0.00 $ 0.00
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
The above earnings per share of common stock is based upon the 7,519,430 shares
outstanding for each period.
See accompanying notes.
-5-
<PAGE>
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the nine months ended May 31, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
$.01 PAR VALUE Additional 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 - - - 186 186
--------- ---- ---- ---- ---
Balance at May 31, 1998 7,519,430 $ 75 $625 $260 $960
--------- ---- ---- ---- ---
--------- ---- ---- ---- ---
Balance at August 31, 1998 7,519,430 $ 75 $625 $(307) $393
Net income - - - 178 178
--------- ---- ---- ---- ---
Balance at May 31, 1999 7,519,430 $ 75 $625 $(129) $571
--------- ---- ---- ---- ---
--------- ---- ---- ---- ---
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 1999 and 1998 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
MAY 31,
-------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 178 $ 186
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation expense 320 78
Deferred tax expense (benefit), net 120 (208)
Changes in assets and liabilities:
Accounts receivable - related party (74) (113)
Accounts receivable (17)
Tax refund receivable 144 -
Prepaid expenses and other assets (7) 427
Accounts payable and accrued expenses (222) (270)
Accounts payable - related party (41) 1,722
Termination fee payable (975) -
Real estate taxes payable 143 202
Deferred rent payable (27) (28)
Security deposits (1) 1
------ -----
Net cash (used in) provided by operating activities (442) 1,980
------ -----
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (198) (263)
------- -------
Net cash used in investing activities (198) (263)
------- -------
Net (decrease) increase in cash and cash equivalents (640) 1,717
Cash and cash equivalents, beginning of period 1,897 1,473
------ -------
Cash and cash equivalents, end of period $1,257 $3,190
------ -----
------ -----
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for state income taxes $ 4 $ -
------ -----
------ -----
</TABLE>
See accompanying notes.
-7-
<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 for interim financial information, which requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities as of
May 31, 1999, and revenues and expenses for each of the nine- and
three-month periods ended May 31, 1999 and 1998. Actual results may differ
from the estimates and assumptions used. Certain numbers in the prior
period's financial statements have been reclassified to conform to the
current period's presentation. The results of operations for the nine- and
three-month periods ended May 31, 1999, are not necessarily indicative of
the results to be expected for the year ended August 31, 1999.
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 Living 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 ILM I. 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. ILM I 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 in various management capacities at Capital
Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen
currently serves as Chief Executive Officer and Acting Chief Financial
Officer of Capital Senior Living Corporation. As a result, the Management
Agreement with Capital was considered a related party transaction (see Note
3) through July 28, 1998.
-8-
<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 terminated earlier
at the election of the Lessor in connection with the sale by the Lessor of
the Senior Housing Facilities to a non-affiliated third party, upon 30 days'
notice to the Company. As noted below in Recent Developments, ILM I has
entered into an agreement and plan of merger with Capital Senior Living
Corporation and certain affiliates of Capital, and has agreed to cause ILM
Holding to cancel and terminate the Facilities Lease Agreement immediately
prior to the effective time of the merger. While there can be no assurance,
consummation of the merger is presently anticipated by the end of calendar
year 1999. 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 166 183
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 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. 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.
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 facilities lease is a "triple-net" lease whereby
the Lessee pays all operating expenses, governmental taxes and assessments,
utility charges and insurance premiums, as well as the costs of all
required maintenance, personal property and non-structural repairs in
connection with the operation of the Senior Housing Facilities. ILM
Holding, as Lessor, is responsible for all major capital improvements and
structural repairs to the Senior Housing Facilities. Also, any fixed assets
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 was
$859,000 and $295,000 for the nine- and three-month periods ended May 31,
1999, respectively, compared to $651,000 and $232,000 for the nine- and
three- month periods ended May 31, 1998, respectively.
-9-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. THE FACILITIES LEASE AGREEMENT (CONTINUED)
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. In addition, 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. While there can be no assurance, consummation
of the merger is presently anticipated by the end of calendar year 1999. In
connection with the merger, ILM I has agreed to cause ILM Holding to cancel
and terminate the Facilities Lease Agreement immediately prior to the
effective time of the merger. As noted above, the Facilities Lease
Agreement, which is scheduled to expire on December 31, 1999, may be
terminated earlier at the election of the Lessor in connection with the sale
by the Lessor of the Senior Housing Facilities to a non-affiliated third
party, upon 30 days' notice to the Company. 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 discussed in the Company's Annual Report on Form 10-K for
the year ended August 31, 1998, 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 and President, Chief Executive Officer
and Director of ILM I, has also served in various management capacities at
Capital Senior Living Corporation, an affiliate of Capital, since 1996. Mr.
Cohen currently serves as Chief Executive Officer and Acting Chief
Financial Officer of Capital Senior Living Corporation. 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 and it is likely they will be terminated before
the end of the term of the Facilities Lease 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 nine- and three-month periods ended May 31, 1999, Capital earned
property management fees from the Company of $778,000 and $241,000,
respectively, compared to $742,000 and $258,000 for the nine- and
three-month periods ended May 31, 1998, 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
-10-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
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 nine- and three-month periods ended May 31, 1999, Capital
Senior Development, Inc. earned no fees from the Company compared to fees
of $212,000 and $83,000 earned for the nine-and three-month periods ended
May 31, 1998, respectively, for managing pre-construction development
activities for potential expansions of the Senior Housing Facilities.
Jeffry R. Dwyer, Secretary, President and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the nine- and three-month periods ended May 31, 1999,
Greenberg Traurig earned fees from the Company of $32,000 and $0,
respectively. For the nine- and three-month periods ended May 31, 1998,
Greenberg Traurig earned fees from the Company of $116,000 and $64,000,
respectively.
Accounts payable - related party at May 31, 1999 includes $295,000 for
variable rent and an expense reimbursement payable to Lease II in the
amount of $102,000. Accounts payable - related party at August 31, 1998
includes $243,000 for variable rent and $93,000 for expense reimbursements
payable to ILM Holding in and expense reimbursements payable of $102,000 to
Lease II.
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 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 requested 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 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 in the amount of at least $2,000,000. On March
4, 1997, the defendants removed
-11-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
the case to Federal District Court for 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 $239,000 as of May 31, 1999. The Company's Board also
concluded that, subject to certain conditions, the Company or its
affiliates should advance up to $20,000 to pay reasonable legal fees and
expenses incurred by Capital 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 May 31, 1999, $339,000 of legal fees had been either
advanced or accrued in the Company's financial statements and $226,000 of
legal fees have been either advanced or accrued in Lease II's financial
statements for Capital's California litigation costs.
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.
The Company has pending claims incurred in the normal course of
business which, in the opinion of the Company's Board of Directors, will
not have a material effect on the financial statements of the Company.
5. CONSTRUCTION LOAN FINANCING
The Company has secured a construction loan facility with a major bank
that will provide ILM I with up to $24.5 million to fund the capital costs
of the potential expansion programs. The construction loan facility is
secured by a first mortgage of the Senior Housing Facilities and collateral
assignment of the Company's leases of such properties. The loan has a
three-year term with interest accruing at a rate equal to LIBOR plus 1.10%
or Prime plus 0.5%. The loan term can be extended for an additional two
years beyond its maturity date with monthly payments of principal and
interest on a 25-year amortization schedule. Loan origination costs in
connection with this loan facility are being amortized by ILM I over the
life of the loan.
On June 7, 1999, ILM I borrowed $2,093,000 under the construction loan
facility to fund the pre-construction capital costs, incurred through April
1999, of the potential expansions of the Senior Housing Facilities, leaving
approximately $22.4 million unused and available. The Company is a
co-borrower on the construction loan.
-12-
<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. Variable rent was $859,000 and $295,000 for the nine-and
three-month periods ended May 31, 1999, respectively, compared to $651,000 and
$232,000 for the nine- and three-month periods ended May 31, 1998, 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. While there can be no assurance, consummation of the
merger is presently anticipated by the end of calendar year 1999. In connection
with the merger, ILM I has agreed to cause ILM Holding to cancel and terminate
the Facilities Lease Agreement immediately prior to the effective time of the
merger. As noted above, the Facilities Lease Agreement, which is scheduled to
expire on December 31, 1999, may be terminated earlier at the election of the
Lessor in connection with the sale by the Lessor of the Senior Housing
Facilities to a non-affiliated third party, upon 30 days' notice to the Company.
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 in which the Company has invested
averaged 94% and 93% for the nine- and three-month periods ended May 31, 1999,
respectively, compared to 95% and 96% for the nine- and three-month periods
ended May 31, 1998, respectively. 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 May 31, 1999, the Company had cash and cash equivalents of $1,257,000
compared to $1,897,000 at August 31, 1998. The decrease of $640,000 is primarily
attributable to the September 4, 1998 payment of the AHC litigation settlement
of $975,000 (see Note 4) offset by other cash flows provided by operating
activities. Remaining amounts of cash will be used for the Company's working
capital requirements. As noted above, under
-13-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
the terms of the Facilities Lease Agreement, 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 years 1998 and 1997 or for the first, second
and third quarter of fiscal 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, 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 May 31, 1999, the Company believes that
it substantially completed all software and hardware upgrades as of December 31,
1998. The Company presently 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 is easily
remedied with simple accountings.
-14-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 1999 VERSUS NINE MONTHS ENDED MAY 31, 1998
REVENUES
Total revenues were $14,907,000 for the nine-month period ended May 31, 1999
compared to $14,423,000 for the same period of the prior year, representing an
increase of $484,000, or 3.4%. This increase is primarily the result of
increased rental rates at certain of the Company's Senior Housing Facilities
located in strong markets.
EXPENSES
Total expenses were $14,609,000 for the nine-month period ended May 31,
1999, compared to $14,112,000 for the same period in the prior year,
representing an increase of $497,000, or 3.5%. This increase in expenses was
primarily due to increases in depreciation expense of $242,000; facilities lease
rent expense of $208,000; general and administrative expenses of $189,000;
administrative salaries and expenses of $146,000; and dietary and food service
salaries of $86,000, offset by a $471,000 decrease in professional fees as a
result of settling the AHC lawsuit as well as less significant 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 $189,000 increase in general and administrative
costs when compared to the prior year is due to changes in estimated liabilities
at August 31, 1997, that were reduced in 1998. 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 to $120,000 for the nine-month period ended May
31, 1999, compared to $125,000 for the same period in the prior year, as a
result of a decrease in income before taxes to $298,000 for the nine-month
period ended May 31, 1999, compared to $311,000 for the same period in 1998.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$8,000 to $178,000 for the nine months ended May 31, 1999 compared to net income
of $186,000 for the nine months ended May 31, 1998.
THREE MONTHS ENDED MAY 31, 1999 VERSUS THREE MONTHS ENDED MAY 31, 1998
REVENUES
Total revenues were $4,991,000 for the quarter ended May 31, 1999 compared
to $4,858,000 for the same period of the prior year, representing an increase of
$133,000, or 2.7%. This increase is primarily the result of increased rental
rates at certain of the Company's Senior Housing Facilities located in strong
markets.
EXPENSES
Total expenses were $4,934,000 for the quarter ended May 31, 1999 compared
to $4,796,000 for the same period in the prior year, representing an increase of
$134,000, or 2.9%. This increase in expenses was primarily due to increases in
facilities lease rent expense of $63,000; administrative salaries and expenses
of $116,000; depreciation expense of $88,000; and dietary and food service
salaries of $42,000, offset by a $167,000 decrease in professional fees as a
result of settling the AHC lawsuit; as well as less significant 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.
-15-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX EXPENSE
Income tax expense decreased to $24,000 for the three-month period ended May
31, 1999, compared to $25,000 for the same period in the prior year, as a result
of a decrease in income before taxes to $57,000 for the three-month period ended
May 31, 1999, compared to $62,000 for the same period in 1998.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$4,000 to $33,000 for the quarter ended May 31, 1999 from net income of $37,000
for the quarter ended May 31, 1998.
-16-
<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.
-17-
<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
-18-
<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
President
Dated: July 15, 1999
-19-
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<CURRENT-ASSETS> 1,522
<PP&E> 1,197
<DEPRECIATION> 710
<TOTAL-ASSETS> 2,253
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<COMMON> 75
<OTHER-SE> 496
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