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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended 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.)
28 State Street, Suite 1100, Boston, MA 02109
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 257-3550
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Shares Of Common Stock $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
Shares of common stock outstanding as of February 28, 1999: 7,519,430.
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Page 1 of 19
<PAGE>
ILM I LEASE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
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).................................................8-12
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
</TABLE>
1
<PAGE>
ILM I LEASE CORPORATION
Part I. Financial Information
Item I. Financial Statements
(see next page)
2
<PAGE>
ILM I LEASE CORPORATION
BALANCE SHEETS
February 28, 1999 (Unaudited) and August 31, 1998
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
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.
3
<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.
4
<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 Additional Retained
$.01 Par Value Paid-In Earnings
Shares Amount Capital (Accumulated Total
Deficit)
------ ------ ------- ------------ -----
<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.
5
<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.
6
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
1. General
The accompanying financial statements, footnotes and discussions should be
read in conjunction with the financial statements and footnotes contained in ILM
I Lease Corporation's (the "Company") Annual Report on Form 10-K for the year
ended August 31, 1998. In the opinion of management, the accompanying interim
financial statements, which have not been audited, reflect all adjustments
necessary to present fairly the results for the interim periods. All of the
accounting adjustments reflected in the accompanying interim financial
statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with U.S. generally accepted accounting
principles 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.
7
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. The Facilities Lease Agreement
ILM Holding (the "Lessor") leases the Senior Housing Facilities to the
Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such lease is
scheduled to expire on December 31, 1999, unless 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>
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).
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
8
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. The Facilities Lease Agreement (continued)
located in Arkansas, California and Kansas are licensed by such states to
provide assisted living services. 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.
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-
9
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. Related Party Transactions (continued)
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.
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
10
<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 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.
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.
11
<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.
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
12
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 Company relies upon PC-based computer systems and does not expect to
incur material costs to transition to Year 2000 compliant systems in its
internal operations. The Company does not expect this project to have a
significant effect on operations. The Company will continue to implement systems
and all new investments are expected to be with Year 2000 compliant software.
13
<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; general and
administrative expenses of $200,000; depreciation expense of $155,000; property
management fees of $53,000; and dietary and food service salaries of $43,000,
offset by a $304,000 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
$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 as compared to the same
period in the prior year, as a result of a decrease in income before taxes of
$9,000. 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.
Net Income
Primarily as a result of the factors noted above, net income decreased
$5,000 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; general and
administrative expenses of $188,000; depreciation expense of $83,000; property
management fees of $36,000; and dietary and food service salaries of $43,000,
offset by a $292,000 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
$188,000 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.
14
<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 overall by $9,000 as compared to the same
period in the prior year, as a result of a decrease in income before taxes of
$17,000.
Net Income
Primarily as a result of the factors noted above, net income decreased
$8,000 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.
15
<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.
16
<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
17
<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: April 14, 1999
18
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