<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 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.)
1750 Tysons Boulevard, Suite 1200, Tysons Corner, VA 22102
- -------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 257-3550
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- ------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Shares Of Common Stock $.01 Par Value
-------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Shares of common stock outstanding as of November 30, 1999: 7,519,430.
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Page 1 of 18
<PAGE>
ILM I LEASE CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Balance Sheets
November 30, 1999 (Unaudited) and August 31, 1999............................................4
Statements of Operations
For the three months ended November 30, 1999 and 1998 (Unaudited)............................5
Statements of Changes in Shareholders' Equity
For the three months ended November 30, 1999 and 1998 (Unaudited)............................6
Statements of Cash Flows
For the three months ended November 30, 1999 and 1998 (Unaudited)............................7
Notes to Financial Statements (Unaudited).................................................8-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....12-15
Part II. Other Information...................................................................................16
Item 6. Exhibits and Reports on Form 8-K............................................................16
Signatures....................................................................................................17
</TABLE>
-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
November 30, 1999 (Unaudited) and August 31, 1999
(Dollars in thousands, except per share data)
ASSETS
------
<TABLE>
<CAPTION>
November 30, 1999 August 31, 1999
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents $1,407 $1,066
Accounts receivable, net 71 102
Tax refund receivable 1 1
Prepaid expenses and other assets 263 278
----------- ---------
Total current assets 1,742 1,447
Furniture, fixtures and equipment 1,359 1,299
Less: accumulated depreciation (1,202) (943)
----------- ---------
157 356
Deferred tax asset, net 92 92
----------- ---------
$1,991 $1,895
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses $ 999 $ 868
Real estate taxes payable 229 190
Accounts payable - related party 302 305
Security deposits 7 7
----------- ---------
Total current liabilities 1,537 1,370
Deferred rent payable 3 12
----------- ---------
Total liabilities 1,540 1,382
Contingencies
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
Accumulated deficit (249) (187)
----------- ---------
Total shareholders' equity 451 513
----------- ---------
$1,991 $1,895
=========== =========
</TABLE>
-4-
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF OPERATIONS
For the three months ended November 30, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30
-------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Rental and other income $5,004 $4,938
Interest income 3 5
-------- ----------
5,007 4,943
EXPENSES:
Facilities lease rent expense 1,884 1,858
Dietary and food service salaries, wages and expenses 923 904
Administrative salaries, wages and expenses 385 326
Marketing salaries, wages and expenses 228 225
Utilities 201 206
Repairs and maintenance 163 174
Real estate taxes 208 209
Property management fees 276 260
Other property operating expenses 381 382
General and administrative 88 72
Directors compensation 15 13
Professional fees 57 115
Depreciation expense 260 97
-------- ----------
5,069 4,841
-------- ----------
(Loss) income before taxes (62) 102
Income tax expense:
Current - -
Deferred - 40
-------- ----------
- 40
-------- ----------
NET (LOSS) INCOME $ (62) $ 62
========== ==========
Basic earnings per share of common stock $ (0.01) $ 0.01
========= ==========
</TABLE>
The above earnings per share of common stock is based upon the 7,519,430 shares
outstanding for each period.
See accompanying notes.
-5-
<PAGE>
ILM I LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended November 30, 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>
Balance at August 31, 1998 7,519,430 $ 75 $625 $ (307) $393
Net income - - - 120 120
--------- ---- ---- ------ ----
Balance at November 30, 1998 7,519,430 $ 75 $625 $ (245) $455
========= ==== ==== ====== ====
Balance at August 31, 1999 7,519,430 $ 75 $625 $ (187) $513
Net loss - - - (62) (62)
--------- ---- ---- ------ ----
Balance at November 30, 1999 7,519,430 $ 75 $625 $ (249) $451
========= ==== ==== ====== ====
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1999 and 1998 (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (62) $ 62
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation expense 259 97
Deferred tax expense (benefit), net - 40
Changes in assets and liabilities:
Accounts receivable - related party - (165)
Accounts receivable, net 31 (32)
Tax refund receivable 1 138
Prepaid expenses and other assets 15 1
Accounts payable and accrued expenses 131 (169)
Accounts payable - related party (3) 33
Termination fee payable - (975)
Real estate taxes payable 39 16
Deferred rent payable (9) (9)
Security deposits - 1
------- -------
Net cash provided by operating activities 401 962
------- -------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (60) (54)
------- -------
Net cash used in investing activities (60) (54)
------- -------
Net increase (decrease) in cash and cash equivalents 341 (1,016)
Cash and cash equivalents, beginning of period 1,066 1,897
------- -------
Cash and cash equivalents, end of period $1,407 $881
======= =======
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, 1999. 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
November 30, 1999, and revenues and expenses for each of three-month
periods ended November 30, 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 three-month period
ended November 30, 1999, are not necessarily indicative of the results to
be expected for the year ending August 31, 2000.
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 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 was extended on a month-to-month basis as of December 31, 1999, beyond
its original expiration date of December 31, 1999. Accordingly, it is
terminable upon 30 day's 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 in
the second quarter of calendar year 2000. 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
Name Location Facility Units (2) Capacities (2)
---- -------- Built --------- --------------
-----
<S> <C> <C> <C> <C>
Independence Village of East Lansing East Lansing, MI 1989 161 162
Independence Village of Winston-Salem Winston-Salem, NC 1989 159 161
Independence Village of Raleigh Raleigh, NC 1991 164 205
Independence Village of Peoria Peoria, IL 1990 166 183
Crown Point Apartments Omaha, NE 1984 135 163
Sedgwick Plaza Apartments Wichita, KS 1984 150 170
West Shores Hot Springs, AR 1986 136 166
Villa Santa Barbara (1) Santa Barbara, CA 1979 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, 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 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.
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 rental
income was $302,000 and $276,000 for the three-month periods ended November
30, 1999 and 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, which was amended and restated on October 19, 1999, 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 in the second quarter of calendar year 2000.
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
was extended on a month-to-month basis as of December 31, 1999, beyond its
original expiration date of December 31, 1999. 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. As a result of the
proposed merger, Lease I would have little "going concern" value.
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, 1999, PaineWebber resigned effective as of June
18, 1997.
The Company 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 of Capital Senior Living
Corporation. The Management Agreement is co-terminous with the Facilities
Lease Agreement. Because the Facilities Lease Agreement was extended beyond
December 31, 1999 on a month-to-month basis, the scheduled expiration date
of the Management Agreement has been extended on a month-to-month basis as
well, but not beyond July 29, 2001. Under the terms of the Management
Agreement, Capital earns a base management fee equal to 4% of the gross
operating revenues of the Senior Housing Facilities, as defined. Capital
also earns an incentive management fee equal to 25% of the amount by which
the "net cash flow" of the Senior Housing Facilities, as defined, exceeds a
specified base amount. Each August 31, the base amount is increased based
on the percentage increase in the Consumer Price Index as well as 15% of
Senior Housing Facility expansion costs. ILM I has guaranteed the payment
of all fees due to Capital under the terms of the Management Agreement. For
the three-month periods ended November 30, 1999 and 1998, Capital earned
property management fees from the Company of $276,000 and $242,000,
respectively.
-10-
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
--------------------------------------
On September 18, 1997, the Company entered into an agreement with
Capital Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansions of several of the Senior
Housing Facilities. Capital Senior Development, Inc. would receive a fee
equal to 7% of the total development costs of these expansions if they are
pursued. ILM Holding would also reimburse the Company for all costs related
to these potential expansions including fees to Capital Senior Development,
Inc. For the three-month period ended November 30, 1999 and 1998, Capital
Senior Development, Inc. earned no fees from the company 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 three-month periods ended November 30, 1999 and 1998,
Greenberg Traurig earned fees from the Company of $14,000 and $64,000,
respectively.
Accounts payable - related party at November 30, 1999 includes $302,000
for variable rent payable to ILM Holding. Accounts payable - related party
at August 31, 1999 includes $305,000 for variable rent payable to ILM
Holding.
4. LEGAL PROCEEDINGS AND CONTINGENCIES
-----------------------------------
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
---------------------------
ILM I and the Company have 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.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts Payable and Accrued Expenses at November 30, 1999, includes
the following:
<TABLE>
<S> <C>
Accounts Payable and Accrued Expenses $ 844
Estimated Repair Costs at E. Lansing Facility 155
------
Total $ 999
</TABLE>
-11-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Facilities Lease Agreement is a "triple-net" lease whereby the Lessee
pays all operating expenses, governmental taxes and assessments, utility charges
and insurance premiums, as well as the costs of all required maintenance,
personal property and non-structural repairs in connection with the operation of
the Senior Housing Facilities. ILM Holding, as Lessor, is responsible for all
major capital improvements and structural repairs to the Senior Housing
Facilities. If the Company and ILM Holding decide that any of the Senior Housing
Facilities should be expanded, the Facilities Lease Agreement between the
Company and ILM Holding would be amended to include such expansion. Pursuant to
the Facilities Lease Agreement, the Company pays annual base rent for the use of
all the Senior Housing Facilities in the aggregate amount of $6,364,800. The
Company also pays variable rent, on a quarterly basis, for each Senior Housing
Facility in an amount equal to 40% of the excess, if any, of the aggregate total
revenues for the Senior Housing Facilities, on an annualized basis, over
$16,996,000. Variable rental income was $302,000 and $276,000 for the
three-month periods ended November 30, 1999 and 1998, respectively.
The Facilities Lease Agreement was extended on a month-to-month basis as of
December 31, 1999, beyond its original expiration date of December 31, 1999. As
explained under "Recent Developments" below, 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. 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 the effective date of the merger. While there can be no
assurance, consummation of the merger is presently anticipated in the second
quarter of calendar year 2000.
RECENT DEVELOPMENTS
On February 7, 1999, ILM I entered into an agreement and plan of merger,
which was amended and restated on October 19, 1999, 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 in the second quarter of calendar year 2000. 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 was extended on a
month-to-month basis as of December 31, 1999, beyond its original expiration
date of December 31, 1999. 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. As a result of the proposed merger, Lease I would have little
"going concern" value.
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the eight properties in which the Company has invested
averaged 91% and 95% for the three-month periods ended November 30, 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.
-12-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At November 30, 1999, the Company had cash and cash equivalents of
$1,407,000 compared to $1,066,000 at August 31, 1999. Remaining amounts of cash
will be used for the Company's working capital requirements. As noted above,
under 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 1999, 1998 and 1997 or for the first
quarter of fiscal year 2000. The Company may or may not determine to pay cash
dividends in the future. 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 and only significant and material third-party contractor, 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, the Company believes that it has completed all software and hardware
upgrades. The Company presently believes that these modifications and
replacements of existing software and certain hardware will remediate the Year
2000 issue. The costs of Year 2000 remediation have not been 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.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue. However, 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
only significant and material third-party contractor, were to experience a Year
2000 problem, it is possible 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 a problem would
be temporary and easily remedied with simple accountings.
-13-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1999 VERSUS THREE MONTHS ENDED NOVEMBER 30, 1998
REVENUES
Total revenues were $5,007,000 for the three-month period ended November 30,
1999 compared to $4,943,000 for the same period of the prior year, representing
an increase of $64,000, or 1.3%. 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 $5,069,000 for the three-month period ended November
30, 1999, compared to $4,841,000 for the same period in the prior year,
representing an increase of $228,000, or 4.7%. This increase in expenses was
primarily due to increases in depreciation expense of $163,000 or 168.0%;
facilities lease rent expense of $26,000 or 1.4%; general and administrative
expenses of $16,000 or 22.2%; administrative salaries, wages, and expenses of
$59,000 or 18.1%; dietary and food service salaries of $19,000 or 2.1%, and
property management fees of $16,000 or 6.2% offset by a $58,000 or 50.4%
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, as such
assets are not subject to repurchase by ILM Holding. The increase in property
management fees is attributable to higher incentive management fees earned by
the property manager as a result of higher revenues at the Senior Housing
Facilities.
INCOME TAX EXPENSE
Income tax expense decreased $40,000 or 100% to $0 for the three-month
period ended November 30, 1999, compared to $40,000 for the same period in the
prior year, as a result of a decrease in income before taxes of $164,000 or
264.5% from $102,000 for the three-month period ended November 30, 1998,
compared to a loss of $62,000 for the same period in 1999. The Company provided
a valuation allowance for the tax benefit arising from the net loss for the
three-month period ended November 30, 1999, as the tax benefit is not expected
to be realized.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$124,000 or 200.0% from income of $62,000 for the three months ended November
30, 1998 compared to net loss of $62,000 for the three months ended November 30,
1999.
-14-
<PAGE>
ILM I LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE
STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD," "MAY," "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 THAT ACTUAL FUTURE
RESULTS MAY DIFFER.
-15-
<PAGE>
ILM I LEASE CORPORATION
PART II-OTHER INFORMATION
ITEM 1. THROUGH 5. NONE
- -------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits: 27. Financial Data Schedule
(b) Reports on Form 8-K: NONE
-16-
<PAGE>
ILM I LEASE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BY: ILM I LEASE CORPORATION
By: /s/ Jeffry R. Dwyer
-------------------------------
Jeffry R. Dwyer
President
Dated: January 15, 2000
-----------------------------
-17-
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<PERIOD-END> NOV-30-1999
<CASH> 1,407
<SECURITIES> 0
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<CURRENT-ASSETS> 1,742
<PP&E> 1,359
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0
0
<COMMON> 75
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<TOTAL-LIABILITY-AND-EQUITY> 1,991
<SALES> 0
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<CGS> 0
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<INCOME-TAX> 0
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