<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 FEBRUARY 28, 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)
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 February 28, 1999: 7,519,430.
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Page 1 of 22
<PAGE>
ILM I LEASE CORPORATION
INDEX
Part I. Financial Information PAGE
Item 1. Financial Statements
Balance Sheets
February 28, 1999 (Unaudited) and August 31, 1998...........4
Statements of Income
For the six months and three months ended
February 28, 1999 and 1998 (Unaudited)....................5
Statements of Changes in Shareholders' Equity
For the six months ended February 28, 1999
and 1998 (Unaudited)......................................6
Statements of Cash Flows
For the six months ended February 28, 1999
and 1998 (Unaudited)......................................7
Notes to Financial Statements (Unaudited)................8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................14-19
Part II. Other Information.................................................20
Item 6. Exhibits and Reports on Form 8-K...........................20
Signatures.................................................................21
-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
February 28, 1999 (Unaudited) and August 31, 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
February 28, 1999 August 31, 1998
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents $1,251 $1,897
Accounts receivable, net 81 56
Tax refund receivable 6 145
Prepaid expenses and other assets 89 127
---------- ---------
Total current assets 1,427 2,225
Furniture, fixtures and equipment 1,111 999
Less: accumulated depreciation (596) (390)
---------- ---------
515 609
Deferred tax asset, net 268 364
---------- ---------
$2,210 $3,198
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 859 $1,123
Termination fee payable -- 975
Real estate taxes payable 385 213
Accounts payable - related party 391 438
Security deposits 6 7
---------- ---------
Total current liabilities 1,641 2,756
Deferred rent payable 31 49
---------- ---------
Total liabilities 1,672 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) (162) (307)
---------- ---------
Total shareholders' equity 538 393
---------- ---------
$2,210 $3,198
---------- ---------
---------- ---------
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF INCOME
For the six months and three months ended February 28, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
February 28, February 28,
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Rental and other income $9,908 $9,545 $4,970 $4,795
Interest income 8 21 4 13
------ ------ ------ ------
9,916 9,566 4,974 4,808
EXPENSES
Master lease rent expense 3,728 3,583 1,870 1,810
Dietary and food service salaries,
wages and expenses 1,806 1,763 902 859
Administrative salaries, wages and expenses 670 641 345 321
Marketing salaries, wages and expenses 456 429 231 214
Utilities 413 398 207 201
Repairs and maintenance 351 310 178 155
Real estate taxes 413 470 203 208
Property management fees 537 484 277 241
Other property operating expenses 751 729 369 363
General and administrative 142 (58) 69 (119)
Directors compensation 27 37 14 20
Professional fees 175 479 60 352
Depreciation expense 206 51 109 26
------ ------ ------ ------
9,675 9,316 4,834 4,651
------ ------ ------ ------
Income before taxes 241 250 140 157
Income tax expense (benefit):
Current -- 73 -- 44
Deferred 96 27 54 19
------ ------ ------ ------
96 100 54 63
------ ------ ------ ------
NET INCOME $ 145 $ 150 $ 86 $ 94
------ ------ ------ ------
------ ------ ------ ------
Basic earnings per share of common stock $ 0.02 $ 0.02 $ 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.
-5-
<PAGE>
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the six months ended February 28, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock Retained
$.01 Par Value Additional Earnings
-------------- Paid-In (Accumulated
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 -- -- -- 150 150
--------- ------- ------- ------- -----
Balance at February 28, 1998 7,519,430 $ 75 $625 $ 224 $924
--------- ------- ------- ------- -----
--------- ------- ------- ------- -----
Balance at August 31, 1998 7,519,430 $ 75 $625 $(307) $393
Net income -- -- -- 145 145
--------- ------- ------- ------- -----
Balance at February 28, 1999 7,519,430 $ 75 $625 $(162) $538
--------- ------- ------- ------- -----
--------- ------- ------- ------- -----
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the six months ended February 28, 1999 and 1998 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
February 28,
-------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 145 $ 150
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Depreciation expense 206 51
Deferred tax expense (benefit), net 96 (219)
Changes in assets and liabilities:
Accounts receivable, net (25) (24)
Tax refund receivable 139 --
Prepaid expenses and other assets 38 433
Accounts payable and accrued expenses (264) (37)
Accounts payable - related party (47) 647
Termination fee payable (975) --
Real estate taxes payable 172 214
Deferred rent payable (18) (18)
Security deposits (1) 1
-------- --------
Net cash (used in) provided by
operating activities (534) 1,198
-------- --------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (112) (155)
-------- --------
Net cash used in investing activities (112) (155)
-------- --------
Net (decrease) increase in cash and cash equivalents (646) 1,043
Cash and cash equivalents, beginning of period 1,897 1,473
-------- --------
Cash and cash equivalents, end of period $1,251 $2,516
-------- --------
-------- --------
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 February 28, 1999, and revenues and expenses for
each of the six- and three-month periods ended February 28, 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 six- and three-month periods ended
February 28, 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 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.
-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. Consummation of the merger is presently
anticipated in October 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>
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.
-9-
<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 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 $564,000
and $288,000 for the six- and three-month periods ended February 28,
1999, respectively, compared to $418,000 and $218,000 for the six- and
three- month periods ended February 28, 1998, 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. 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. Consummation of the merger
is presently anticipated in October 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.
-10-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. RELATED PARTY TRANSACTIONS
Subject to the supervision of the Company's Board of Directors,
assistance in managing the business of the Company was provided by
PaineWebber. As discussed in the Company's Annual Report on Form 10-K
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 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 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
six- and three-month periods ended February 28, 1999, Capital earned
property management fees from the Company of $537,000 and $277,000,
respectively, compared to $484,000 and $241,000 for the six- and
three-month periods ended February 28, 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 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 six- and three-month
periods ended February 28, 1999, Capital Senior Development, Inc.
earned no fees from the Company compared to fees of $184,000 and
$87,000 earned for the six- and three-month periods ended February 28,
1998, respectively, for managing pre-construction development
activities for potential expansions of the Senior Housing Facilities.
Jeffry R. Dwyer, Secretary and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its
affiliates since 1997. For the six- and three-month periods ended
February 28, 1999, Greenberg Traurig earned fees from the Company of
$21,000 and $19,000, respectively. For the six- and three-month periods
ended February 28, 1998, Greenberg Traurig earned fees from the Company
of $99,077 and $66,511, respectively.
Accounts payable - related party at February 28, 1999 includes
$288,000 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 expense
reimbursements payable to ILM Holding in the amount of $93,000 and to
Lease II in the amount of $102,000.
-11-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
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 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 February 28, 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 February 28,
1999, $313,000 of legal fees had been either advanced or accrued in the
Company's financial statements and $209,000 of legal fees have been
either advanced or accrued in Lease II's financial statements for
Capital's California litigation costs.
-12-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
4. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
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. CONSTRUCTION LOAN FINANCING
The Company has finalized negotiations with a major bank to
provide a construction loan facility that will provide ILM I with up
to $24.5 million to fund the capital costs of these potential expansion
programs. The construction loan facility will be secured by a first
mortgage of ILM I's properties and collateral assignment of the
Company's leases of such properties. The loan will have a three-year
term with interest accruing at a rate equal to LIBOR plus 1.10% or
Prime plus 0.5%. The loan term could be extended for an additional two
years beyond its maturity date with monthly payments of principal and
interest on a 25-year amortization schedule.
6. SUBSEQUENT EVENT
On March 9, 1999, Jeffry R. Dwyer was elected President of the
Company and Lease II.
-13-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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. 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
$564,000 and $288,000 for the six- and three-month periods ended
February 28, 1999, respectively, compared to $418,000 and $218,000 for
the six- and three-month periods ended February 28, 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. Consummation of the merger
is presently anticipated in October 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.
-14-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the eight properties which the Company leases
from ILM Holding averaged 94% and 96% for the three months ended
February 28, 1999 and 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 February 28, 1999, the Company had cash and cash equivalents of
$1,251,000 compared to $1,897,000 at August 31, 1998. The decrease of
$646,000 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 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 from operating activities. The Company did
not pay cash dividends in fiscal years 1998 and 1997 or for the first
and second 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
February 28, 1999, the Company believes that it substantially completed
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.
-15-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 (CONTINUED)
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 a simple
accounting.
-16-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1999 VERSUS SIX MONTHS ENDED
FEBRUARY 28, 1998
REVENUES
Total revenues were $9,916,000 for the six-month period ended
February 28, 1999 compared to $9,566,000 for the same period of the
prior year, representing an increase of $350,000, or 3.7%. 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 $9,675,000 for the six-month period ended
February 28, 1999, compared to $9,316,000 for the same period in the
prior year, representing an increase of $359,000, or 3.9%. This
increase in expenses was primarily due to increases in Facilities Lease
rent expense of $145,000 or 4.0%; general and administrative expenses
of $200,000 or 344.8%; depreciation expense of $155,000 or 303.9%;
property management fees of $53,000 or 11%; and dietary and food
service salaries of $43,000 or 2.4%, offset by a $304,000 or 63.5%
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 $200,000 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 overall by $4,000 or 4% as compared
to the same period in the prior year, as a result of a decrease in
income before taxes of $9,000 or 3.7%.
NET INCOME
Primarily as a result of the factors noted above, net income
decreased $5,000 or 3.3%, to net income of $145,000 for the six months
ended February 28, 1999 compared to net income of $150,000 for the six
months ended February 28, 1998.
THREE MONTHS ENDED FEBRUARY 28, 1999 VERSUS THREE MONTHS
ENDED FEBRUARY 28, 1998
REVENUES
Total revenues were $4,974,000 for the quarter ended February 28,
1999 compared to $4,808,000 for the same period of the prior year,
representing an increase of $166,000, or 3.5%. 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 $4,834,000 for the quarter ended February 28,
1999 compared to $4,651,000 for the same period in the prior year,
representing an increase of $183,000, or 3.9%. This increase in
expenses was primarily due to increases in Facilities Lease rent
expense of $60,000 or 3.3%; general and administrative expenses of
$188,000 or 158%; depreciation expense of $83,000 or 319.2%; property
management fees of $36,000 or 14.9%; and dietary and food service
salaries of $43,000 or 5%, offset by a $292,000 or 83% 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
$188,000 increase in general and administrative costs when compared to
the prior year is due to changes in estimated
-17-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
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 overall by $9,000 or 14.3% as
compared to the same period in the prior year, as a result of a
decrease in income before taxes of $17,000 or 10.8%.
NET INCOME
Primarily as a result of the factors noted above, net income
decreased $8,000 or 8.5% to net income of $86,000 for the quarter ended
February 28, 1999 from net income of $94,000 for the quarter ended
February 28, 1998.
-18-
<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.
-19-
<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
-20-
<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: November 12, 1999
-------------------
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<COMMON> 75
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