<PAGE>
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: AUGUST 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------ SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____ to _____.
Commission File Number: 0-25878
ILM I LEASE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
VIRGINIA 04-3248637
----------------------- ----------------
(State of organization) (I.R.S. Employer
Identification No.)
1750 Tysons Boulevard, Suite 1200, McLean, VA 22102
-------------------------------------------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 888-257-3550
--------------
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
SHARES OF COMMON STOCK $.01 PAR VALUE
-------------------------------------
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
Indicate by check mark whether the registrant (1) has filed all reports 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 X No __
Shares of common stock outstanding as of August 31, 2000: 7,519,430. The
aggregate sales price of the shares sold was $700,000. This does not reflect
market value. There is no current market for these shares.
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<S> <C>
DOCUMENTS FORM 10-K REFERENCE
-------------------------------------------------------------- -------------------
Registration Statement on Form 10 of registrant Part III, Part IV
dated July 20, 1995, as supplemented [33 Act filing #33-27653]
</TABLE>
Current Report on Form 8-K
of registrant dated June 7, 2000
===============================================================================
<PAGE>
ILM I LEASE CORPORATION
2000 FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1 Business.............................................................................I-1
Item 2 Properties...........................................................................I-5
Item 3 Legal Proceedings....................................................................I-5
Item 4 Submission of Matters to a Vote of Security Holders..................................I-6
PART II
Item 5 Market for the Registrant's Shares and Related
Stockholder Matters.................................................................II-1
Item 6 Selected Financial Data.............................................................II-2
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................................II-3
Item 8 Financial Statements and Supplementary Data.........................................II-7
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................II-7
PART III
Item 10 Directors and Executive Officers of the Registrant.................................III-1
Item 11 Executive Compensation.............................................................III-2
Item 12 Security Ownership of Certain Beneficial Owners and Management.....................III-3
Item 13 Certain Relationships and Related Transactions.....................................III-3
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................IV-1
Signatures.......................................................................................................IV-2
Index to Exhibits................................................................................................IV-3
Financial Statements and Supplementary Data....................................................................F1-F16
</TABLE>
<PAGE>
ILM I LEASE CORPORATION
PART I
ITEM 1. BUSINESS
ILM I Lease Corporation (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 senior citizens (the
"Senior Housing Facilities") under the terms of 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 was the operation of the Senior
Housing Facilities. On August 15, 2000, the Facilities Lease Agreement was
terminated, and the Company's sole business ceased.
ILM I contributed $700,000 to the Company in return for all of the issued
and outstanding shares of the Company's common stock. ILM I had originally made
mortgage loans secured by the Senior Housing Facilities to Angeles Housing
Concepts, Inc. ("AHC") 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 then majority-owned, indirect
subsidiaries of ILM I, subject to the mortgage loans. Subsequently, these
property-owning subsidiaries of ILM I were merged into ILM Holding. As part of
the fiscal 1994 settlement agreement with AHC (the "Settlement Agreement"), ILM
Holding retained AHC 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. As discussed further in Item 7, the
management agreement with AHC was terminated in July 1996. ILM I is a public
company subject to the reporting obligations of the Securities and Exchange
Commission.
ILM I had elected to qualify and be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986, as amended ("the Code"),
for each taxable year of operations. In order to maintain its status as a REIT,
75% of ILM I's annual gross income must be Qualified Rental Income as defined by
the Code. The rent paid by the residents of the Senior Housing Facilities likely
would not be deemed to be Qualified Rental Income because of the extent of
services provided to residents. Consequently, the operation of the Senior
Housing Facilities by ILM I or its subsidiaries over an extended period of time
could adversely affect ILM I's status as a REIT. Therefore, ILM I formed the
Company to operate the Senior Housing Facilities, and by means of a
distribution, transferred the ownership of the common stock of the Company to
the holders of ILM I common stock on September 1, 1995. Because the Company,
which is taxed as a so-called "C" corporation, is no longer a subsidiary of ILM
I, it can receive service-related income without endangering the REIT status of
ILM I.
On September 1, 1995, after ILM I received the required regulatory
approval, it distributed all of the outstanding shares of capital stock of the
Company to the holders of record of ILM I's common stock. One share of common
stock of the Company was issued for each full share of ILM I's common stock
held. No fractional shares were issued. Holders of ILM I's common stock were not
required to pay any cash or other consideration or to exchange their common
stock of ILM I for the common stock of the Company. Prior to the distribution of
the Company's stock, ILM I's shareholders received an information statement
fully describing the Company and the distribution of its capital stock.
ILM Holding (the "Lessor"), a then majority-owned subsidiary of ILM I,
leased the Senior Housing Facilities to the Company (the "Lessee"), pursuant to
a Facilities Lease Agreement. Such lease was extended on a month-to-month basis
on November 16, 1999 beyond its original expiration date of December 31, 1999.
The lease was accounted for as an operating lease in the Company's financial
statements through August 31, 2000. ILM I completed the merger with Capital
Senior Living Corporation ("CSLC") on August 15, 2000, and caused ILM Holding to
cancel and terminate the Facilities Lease Agreement effective August 15, 2000.
Since the Company does not have any current plans to operate or own any
other facilities or engage in any other business outside its previous
relationship with ILM I, on November 8, 2000, the Company's Board of Directors
voted to pursue a plan of liquidation. As a result, the Company changed its
basis of accounting as of August 31, 2000, from the going-concern basis to the
liquidation basis.
I-1
<PAGE>
ILM I LEASE CORPORATION
ITEM 1. BUSINESS (CONTINUED)
In July 1996, following the termination of the property management
agreement with AHC, and 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 through July 28, 1998.
Pursuant to the Facilities Lease Agreement, the Company paid annual base
rent for the use of the Senior Housing Facilities in the aggregate amount of
$6,364,800. The facilities lease was a "triple-net" lease whereby the Lessee
paid 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 the Lessor, was 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 paid variable rent, on a quarterly basis, for each Senior
Housing 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. For the fiscal years ended August 31, 2000 and 1999, variable rent
expense was $1,183,000 and $1,164,000, respectively.
I-2
<PAGE>
ILM I LEASE CORPORATION
ITEM 1. BUSINESS (CONTINUED)
Descriptions of the properties covered by the Facilities Lease Agreement
between the Company and ILM Holding prior to the Facilities Lease Agreement's
termination on August 15, 2000 are summarized as follows:
<TABLE>
<CAPTION>
Year Rentable Resident
Property Name and Location (1) Type of Property Facility Built Units (3) Capacities (3)
------------------------------ ---------------- -------------- ---------- --------------
<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 (2) Senior Housing Facility 1979 125 125
Santa Barbara, CA
</TABLE>
(1) See Notes to the Financial Statements filed with this Annual Report for a
description of the agreements through which the Company has leased these
facilities.
(2) Until August 15, 2000, the Company operated Villa Santa Barbara under a
co-tenancy arrangement with an affiliated company, ILM II Lease Corporation
("Lease II"). ILM II Senior Living, Inc. ("ILM II") sold its interest in
Villa Santa Barbara on August 15, 2000 to CSLC. Accordingly, ILM II's
interest in the Santa Barbara facility was transferred to CSLC on August
15, 2000.
(3) 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.
The Senior Housing Facilities were subject to competition from similar
properties in the vicinities in which they are located. The properties are
located in areas with significant senior citizen populations and, as a result
there are, and will likely continue to be, a variety of competing projects aimed
at attracting senior residents. Such projects will generally compete on the
basis of rental rates, services, amenities and location. The Company had no real
estate investments located outside the United States. The Company's sole
business was the operation of the Senior Housing Facilities. Therefore,
presentation of information about industry segments is not applicable.
I-3
<PAGE>
ILM I LEASE CORPORATION
ITEM 1. BUSINESS (CONTINUED)
The Company's use of the properties was limited to use as Senior Housing
Facilities. The Company had 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 were 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.
Through June 18, 1997 and subject to the supervision of the Company's
Board of Directors, assistance in managing the business of the Company was
provided by PaineWebber Lease Advisor, L.P. ("PaineWebber"). For discussion
purposes, PaineWebber will refer to PaineWebber Lease Advisor, L.P. and all
affiliates of PaineWebber that provided services to the Company in the past.
PaineWebber resigned from this position effective as of June 18, 1997, although
PaineWebber agreed to perform certain administrative services for the Company
and its affiliates through August 31, 1997. Through the date of its resignation,
PaineWebber performed the day-to-day operations of the Company and acted as the
investment advisor and consultant for the Company. PaineWebber provided cash
management, accounting, tax preparation, financial reporting, investor
communications and relations as well as asset management services to the
Company. These services are now being provided to the Company, subject to the
supervision of the Company's Board of Directors, by various companies, advisors
and consultants including Greenberg Traurig, Fleet Bank, Ernst & Young LLP and
MAVRICC Management Systems, Inc.
There are currently three Directors of the Company. The Directors are
subject to removal by the vote of the holders of a majority of the outstanding
shares of the Company's common stock.
The terms of transactions between the Company and PaineWebber and similar
disclosures with respect to relationships of other related parties which provide
services to the Company are set forth in Items 11 and 13 below to which
reference is hereby made for a description of such terms and transactions.
As discussed further in Item 7, on July 29, 1996, the Company terminated
the property management agreement with AHC and retained Capital to be the
property manager of the Senior Housing Facilities, and ILM I guaranteed the
payment of all fees due to Capital under the terms of the Management Agreement.
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
CSLC. As a result, through July 28, 1998, Capital was considered a related party
(see Item 13). For the years ended August 31, 2000 and 1999, Capital earned
property management fees from the Company of $955,000 and $1,008,000
respectively.
I-4
<PAGE>
ILM I LEASE CORPORATION
ITEM 2. PROPERTIES
Until August 15, 2000, the Company had leased the eight operating
properties referred to under Item 1 above, to which reference is made for the
description, name and location of such properties.
Average occupancy levels for each fiscal quarter during 2000, along
with an average for the year, are presented below for each property:
<TABLE>
<CAPTION>
Average Quarterly Occupancy
--------------------------------------------------------------------
Fiscal 2000
11/30/99 2/29/00 5/31/00 8/31/00 Average
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Independence Village
of Winston-Salem 92% 90% 87% 90% 90%
Independence Village
of East Lansing 80% 80% 87% 86% 83%
Independence Village of Raleigh 97% 97% 93% 89% 94%
Independence Village of Peoria 96% 99% 97% 96% 98%
Crown Pointe Apartments 95% 91% 88% 88% 91%
Sedgwick Plaza Apartments 80% 79% 79% 79% 79%
West Shores 96% 96% 96% 98% 97%
Villa Santa Barbara 98% 98% 97% 96% 97%
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
On July 29, 1996, the Company and ILM Holding (collectively for this Item
3, the "Companies") terminated a property management agreement with AHC covering
the eight Senior Housing Facilities leased by the Company from ILM Holding. The
management agreement with AHC was terminated for "cause" pursuant to 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 Companies 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 management agreement for cause, no
termination fee was paid to AHC. Subsequent to the termination of the management
agreement, AHC filed for protection under Chapter 11 of the U.S. Bankruptcy Code
in its domestic State of California. The filing was challenged by the Companies,
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 the
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 that the management agreement could have been terminated without
cause, and recovery of attorneys' fees and expenses.
I-5
<PAGE>
ILM I LEASE CORPORATION
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
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 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 A.
Cohen, who, through July 28, 1998 was a Director of the Company and President,
Chief Executive Officer and Director of ILM I, and others alleging that the
defendants intentionally interfered with AHC's property management agreement
(the "California litigation"). The complaint sought damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to Federal
District Court in the Central District of California. At a Board 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 $229,000 as of August 31, 2000. The Company's Board
also concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by Capital in
the California litigation. At August 31, 2000, the amount advanced to Capital by
the Company and Lease II for Capital's California litigation costs totaled
approximately $563,000.
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. 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
I-6
<PAGE>
ILM I LEASE CORPORATION
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES AND RELATED STOCKHOLDER MATTERS
Prior to September 1, 1995, the Company was a wholly-owned subsidiary of
ILM I. Pursuant to a reorganization and distribution agreement, ILM I
capitalized the Company with $700,000, an amount estimated to provide the
Company with necessary working capital. On September 1, 1995, Mavricc Management
Systems, Inc., as the distribution agent, caused to be issued on the stock
records of the Company the distributed common stock of the Company, in
uncertificated form, to the holders of record of ILM I common stock at the close
of business on July 14, 1995. One share of the Company's common stock was
distributed for each outstanding share of ILM I common stock. No certificates or
scrip representing fractional shares of the Company's common stock were issued
to holders of ILM I common stock as part of the distribution. In lieu of
receiving fractional shares, each holder of ILM I common stock who would
otherwise have been entitled to receive a fractional share of the Company's
common stock received a cash payment equivalent to $0.15 per share for such
fractional interest. At August 31, 2000, there were 4,952 record holders of the
Company's shares. The shares do not trade on an established exchange and the
only market that has developed is a secondary market; therefore, little resale
activity occurs. Although PaineWebber and others may endeavor to assist
Shareholders desiring to sell their shares by attempting to match requests to
sell shares with requests to purchase shares, such transfers are not expected to
be frequent.
The Company did not pay cash dividends in fiscal years 2000, 1999, and
1998. Because the Company is pursuing a plan of liquidation, it is not
anticipated that cash dividends will be paid in the future.
On August 15, 2000, ILM I completed the merger with CSLC and certain
affiliates of Capital, and caused ILM Holding to cancel and terminate the
Facilities Lease Agreement effective August 15, 2000. 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 previous relationship with ILM I, subsequent to
the fiscal year end, on November 8, 2000, the Company's Board of Directors voted
to pursue a plan of liquidation. As a result, the Company changed its basis of
accounting as of August 31, 2000, from the going-concern basis to the
liquidation basis. It is currently expected that the Company will have nominal
value after payment of its expenses.
II-1
<PAGE>
ILM I LEASE CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
ILM I LEASE CORPORATION
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For the year For the year For the year
ended ended ended
August 31, 2000 August 31, 1999 August 31, 1998
------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenues $19,294 $19,923 $19,294
(Loss) income before income taxes (539) 393 (435)
Income tax expense (benefit) 99 273 (54)
-------- -------- -------
Net (loss) income $ (634) $ 120 $ (381)
======== ======== =======
Net (loss) income per share of common stock $ (0.09) $ 0.01 $ (0.05)
======== ======== =======
Total assets $ 664 $ 1,895 $ 3,198
======== ======== =======
Shares outstanding 7,519,430 7,519,430 7,519,430
</TABLE>
The above selected financial data should be read in conjunction with the
financial statements and related notes appearing in item 14 of this annual
report.
II-2
<PAGE>
ILM I LEASE CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company was formed in 1995 by ILM I, a publicly-held, non-traded
REIT, for the purpose of operating eight Senior Housing Facilities under the
terms of a Facilities Lease Agreement. ILM I contributed $700,000 in return for
all of the issued and outstanding shares of the Company's common stock. ILM I
had originally made mortgage loans secured by the Senior Housing Facilities to
AHC 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 majority-owned, indirect subsidiaries of ILM I, subject to
the mortgage loans. Subsequently, these property-owning subsidiaries of ILM I
were merged into ILM Holding, which was then also a majority-owned subsidiary of
ILM I. As part of the fiscal 1994 Settlement Agreement with AHC, ILM Holding
retained AHC 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. As discussed further below, the management
agreement with AHC was terminated in July 1996.
ILM I has elected to qualify and be taxed as a REIT under the Internal
Revenue Code of 1986, as amended ("the Code"), for each taxable year of
operations. In order to maintain its status as a REIT, 75% of ILM I's annual
gross income must be Qualified Rental Income as defined by the Code. The rent
paid by the residents of the Senior Housing Facilities likely would not be
deemed to be Qualified Rental Income because of the extent of services provided
to residents. Consequently, the operation of the Senior Housing Facilities by
ILM I or its subsidiaries over an extended period of time could adversely affect
ILM I's status as a REIT. Therefore, ILM I formed the Company to operate the
Senior Housing Facilities, and by means of a distribution, transferred the
ownership of the common stock of the Company to the holders of ILM I common
stock. Because the Company, which is taxed as a so-called "C" corporation, is no
longer a subsidiary of ILM I, it can receive service-related income without
endangering the REIT status of ILM I.
On September 1, 1995, after ILM I received the required regulatory
approval, it distributed all of the outstanding shares of capital stock of the
Company to the holders of record of ILM I's common stock. One share of common
stock of the Company was issued for each full share of ILM I's common stock
held. No fractional shares were issued. Holders of ILM I's common stock were not
required to pay any cash or other consideration or to exchange their common
stock of ILM I for the common stock of the Company. Prior to the distribution of
the Company's stock, ILM I's shareholders received an information statement
fully describing the Company and the distribution of its capital stock.
Pursuant to the Facilities Lease Agreement, the Company paid annual base
rent for the use of the Senior Housing Facilities in the aggregate amount of
$6,364,800. The facilities lease was a "triple-net" lease whereby the Company,
as Lessee, paid 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 the Lessor, was
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 paid variable rent, on a quarterly
basis, for each Senior Housing 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. For the fiscal years ended August 31, 2000 and 1999,
variable rent expense was $1,183,000 and $1,164,000, respectively.
As noted above, the Company's Facilities Lease Agreement was terminated
effective August 15, 2000 due to the merger of ILM I with CSLC. The Company also
terminated the Management Agreement effective August 15, 2000. 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 previous relationship
with ILM I, on November 8, 2000, the Company's
II-3
<PAGE>
ILM I LEASE CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Board of Directors voted to pursue a plan of liquidation. As a result, the
Company changed its basis of accounting as of August 31, 2000, from the
going-concern basis to the liquidation basis. It is currently expected that the
Company will have nominal value after payment of its expenses.
On July 29, 1996, the Company terminated the management agreement with
AHC covering eight Senior Housing Facilities leased by the Company (see "Item 3,
Legal Proceedings") and retained Capital to be the manager of the Senior Housing
Facilities. ILM I had guaranteed the payment of all fees due to Capital under
the terms of the Management Agreement. 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 CSLC, an affiliate of Capital, since 1996. Mr. Cohen currently serves as
Chief Executive Officer of CSLC. As a result, the Management Agreement with
Capital was considered a related party transaction through July 28, 1998. Under
the terms of the management agreement, Capital earned a base management fee
equal to 4% of the gross operating revenues of the Senior Housing Facilities, as
defined. Capital also earned an incentive management fee equal to 25% of the
amount by which net cash flow of the Senior Housing Facilities, as defined,
exceeded a specified base amount. Each August 31, beginning on August 31, 1997,
the base amount was increased based on the percentage increase in the consumer
price index as well as 15% of facility expansion costs.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence A.
Cohen, who, through July 28, 1998 was a Director of the Company and President,
Chief Executive Officer and Director of ILM I, and others alleging that the
defendants intentionally interfered with AHC's property management agreement
(the "California litigation"). The complaint sought damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to Federal
District Court in the Central District of California. At a Board 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 $229,000 as of August 31, 2000. The Company's Board
also concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by Capital in
the California litigation. At August 31, 2000, the amount advanced to Capital by
the Company and Lease II for Capital's California litigation costs totaled
approximately $563,000.
Occupancy levels for the eight properties which the Company leased from
ILM Holding through August 15, 2000 averaged 91% and 94% for the fiscal years
ended August 31, 2000 and 1999, respectively. The Senior Housing Facilities
generated sufficient net cash flow to cover the base rent payments of $6,364,800
per year since the inception of the Company's operations. As noted above, the
Facilities Lease Agreement also provided for the payment of variable rent
beginning in January 1997. The Senior Housing Facilities generated gross
revenues in excess of the specified threshold in the variable rent calculation.
Annualized operating income levels were sufficient to cover the Company's base
and variable rent obligations to ILM Holding. In fiscal years ended August 31,
2000 and 1999, the Company had variable rent expense of $1,183,000 and
$1,164,000, respectively.
At August 31, 2000, the Company had cash and cash equivalents of
$644,000 compared to $1,066,000 at August 31, 1999. The decrease of $422,000 is
primarily attributable to the payment of property-level liabilities as a result
of the termination of the Facilities Lease Agreement and investment in capital
improvements to a lesser degree, offset by other cash flows provided by
operating activities. Furthermore, the Company does not currently anticipate
engaging in any borrowing activities. The Company did not pay cash dividends in
fiscal years 2000, 1999 and 1998. Because the Company is pursuing a plan of
liquidation, it is not anticipated that cash dividends will be paid in the
future.
II-4
<PAGE>
ILM I LEASE CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
REVENUES. Total revenues were $19,294,000 for the year ended August 31,
2000 compared to $19,923,000 for the year ended August 31, 1999, representing a
decrease of $629,000 or 3.2%. Rental and other income from the Company's senior
housing operations decreased $632,000, or 3.2%, primarily as a result of a 50%
decrease in rental income in the final month of the fiscal year as the
properties were transferred to CSLC at completion of ILM I's merger on August
15, 2000. Interest income increased $3,000, or 18.8%, to $9,000 in fiscal year
2000, compared to $16,000 in fiscal year 1999, primarily due to an increase in
cash and cash equivalents experienced throughout most of fiscal year 2000.
EXPENSES. Total expenses were $19,833,000 in fiscal year 2000 compared to
$19,530,000 in fiscal year 1999 representing an increase in expenses of $303,000
or 1.6%. Although overall expenses remained comparable between periods,
depreciation expense increased $133,000, or 24.1%, due to recognition of changes
in remaining useful lives for certain assets purchased in 1999 and prior to
conform to the lease expiration date, as such assets are not subject to
repurchase by ILM Holding. Administrative salaries, wages and expenses increased
$121,000, or 8.5%, while general and administrative expenses increased $221,000,
or 99.6% due mainly to a $103,000 or 118.4% increase in Director's & Officer's
insurance and a $40,000 or 22.3% increase in insurance costs at the property
level as well as minor increases in other general and administrative costs as
well. Professional fees increased $109,000 or 39.9% due to increases in audit
and financial service fees associated with the lease termination and change to a
liquidation basis of accounting. These increases were offset by a $222,000 or
3.0% decrease in master lease rent expense due to termination of the Facilities
Lease Agreement on August 15, 2000 as well as minor decreases in certain other
expenses.
INCOME TAX EXPENSE. Income tax expense decreased $174,000 or 63.7%, from
benefit of $273,000 in fiscal 1999 to expense of $99,000 in fiscal 2000, after
giving effect to the additional $298,000 increase in the valuation allowance in
2000 on the Company's deferred tax asset.
NET INCOME (LOSS). Primarily as a result of the factors discussed above,
net income decreased $754,000 or 628.4% from income of $120,000 in fiscal 1999
to net loss of $634,000 in fiscal 2000.
1999 COMPARED TO 1998
REVENUES. Total revenues were $19,923,000 for the year ended August 31,
1999 compared to $19,294,000 for the year ended August 31, 1998, representing an
increase of $629,000 or 3.3%. Rental and other income from the Company's senior
housing operations increased $675,000, or 3.5%, primarily as a result of
increases in rental rates at certain of the facilities located in strong
markets. Interest income decreased $46,000, or 74.2%, to $16,000 in fiscal year
1999, compared to $62,000 in fiscal year 1998, primarily due to a decrease in
cash and cash equivalents experienced throughout most of fiscal year 1999.
EXPENSES. Total expenses were $19,530,000 in fiscal year 1999 compared to
$19,729,000 in fiscal year 1998 representing a decrease in expenses of $199,000
or 1.0%. Although overall expenses remained comparable, depreciation expense
increased $256,000, or 86.2%, due to recognition of changes in remaining useful
lives for certain assets purchased in 1999 and prior to conform to the lease
expiration date, as such assets are not subject to repurchase by ILM Holding.
Administrative salaries, wages and expenses increased $202,000, or 16.6%, while
general and administrative expenses decreased $42,000, or 15.9%. These increases
were offset, in part, by a decrease of $375,000 or 100% in termination fee
expense and a decrease of $850,000, or 75.7% in professional fees as a result of
reduced legal fees subsequent to the AHC litigation settlement. The increases in
other operating costs cited above were the result of higher operating levels
associated with improved occupancies.
II-5
<PAGE>
ILM I LEASE CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX EXPENSE. Income tax expense increased $327,000 or 605.6%,
from a benefit of $54,000 in fiscal 1998 to expense of $273,000 in fiscal 1999,
after giving effect to the additional $115,000 increase in the valuation
allowance in 1999 on the Company's deferred tax asset. The effective income tax
rate was 69% in fiscal 1999 and 7% in fiscal 1998.
NET INCOME (LOSS). Primarily as a result of the factors discussed above,
net income increased $501,000 or 131.4% from a net loss of $381,000 in fiscal
1998 to net income of $120,000 in fiscal 1999.
INCOME TAX EXPENSE. Income tax benefit decreased from $192,000 in fiscal
1997 to a benefit of $54,000 in fiscal 1998, after giving effect to the $120,000
valuation allowance in 1998 on the Company's deferred tax asset. The effective
income tax rate was 7% in fiscal 1998 and 40% in fiscal 1997.
NET INCOME (LOSS). Primarily as a result of the factors discussed above,
net loss increased from a net loss of $287,000 in fiscal 1997 to a net loss of
$381,000 in fiscal 1998.
INFLATION
The Company completed its fifth full year of operations in fiscal year
2000. The effects of inflation and changes in prices on the Company's operating
results to date have not been significant.
II-6
<PAGE>
ILM I LEASE CORPORATION
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K ("ANNUAL
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 ANNUAL 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 ANNUAL 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are included under Item
14 of this annual report.
TEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-7
<PAGE>
ILM I LEASE CORPORATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There currently are three Directors of the Company. The Directors are
subject to removal by the vote of the holders of a majority of the outstanding
shares of the Company's common stock. The Directors are responsible for the
general policies of the Company, but they are not required to personally conduct
the business of the Company in their capacities as Directors.
(a) and (b) The names and ages of the Directors and Executive
Officers of the Company during fiscal 1999 are as follows:
<TABLE>
<CAPTION>
Dates
Name Office Age of Office
---- ------ --- ---------
<S> <C> <C> <C>
Jeffry R. Dwyer President, Secretary and Director 54 9/13/94*-present
Julien G. Redele Director 65 7/28/98-present
J. William Sharman, Jr. Director 60 9/18/97-present
</TABLE>
* The date of incorporation of the Company.
(c) There is no family relationship among any of the current
Directors or Officers. All of the current Directors and Officers of the
Company have been elected to serve until the Company's next annual
meeting.
(d) The business experience of each of the Directors and
Executive Officers of the Company is as follows:
JEFFRY R. DWYER is President, Secretary and Director of the Company.
Mr. Dwyer has served as President of the Company since March 9, 1999. Mr. Dwyer
has been a shareholder of Greenberg Traurig, which has provided legal services
to the Company and its affiliates since June 1997. From 1993 to 1997 Mr. Dwyer
was a partner with the law firm of Akin, Gump, Strauss, Hauer & Feld in the
District of Columbia. Prior to joining Akin, Gump, Strauss, Hauer & Feld, Mr.
Dwyer was a partner with the law firm of Morrison & Foerster from 1989 to 1993.
Mr. Dwyer also presently serves as Secretary and a Director of ILM II and also
serves as President, Secretary and Director of Lease II. Mr. Dwyer has written
several law review articles and a major treatise on real estate financing and
taught Real Estate Planning as an Adjunct Professor at the Georgetown University
Law Center. Mr. Dwyer graduated from Georgetown University and received his law
degree from the Georgetown University Law Center.
JULIEN G. REDELE is a Director and served as President of the Company
from July 28, 1998 through March 9, 1999. Mr. Redele' is one of the original
founders of SFRE, Inc., a Dutch owned real estate investment and development
firm which has served since 1963 as advisor to Dutch institutional, corporate
and individual investors active in the United States. Mr. Redele serves as a
Director of the Island Preservation Partnership. Mr. Redele attended
Westersingel Business School, Rotterdam, where he studied economics, law and
finance. Mr. Redele' also presently serves as Director of Lease II.
J. WILLIAM SHARMAN, JR. is a Director and served as President of the
Company from September 18, 1997 through July 28, 1998. Mr. Sharman also
presently serves as a Director of Lease II and as President and Director of ILM
II. Mr. Sharman is the Chairman of the Board and CEO of Lancaster Hotels and
Resorts, Inc., a hotel management company. Mr. Sharman served for ten years as
Chairman of the Board and President of the Lancaster Group, Inc., a real estate
development firm based in Houston, Texas, which is the predecessor of Lancaster
Hotel Management, L.C. and Bayou Equities, Inc. Mr. Sharman serves as a Director
of Small Luxury Hotels, Ltd. of the United Kingdom, an international hotel
marketing and reservations firm, and also serves on the Board of Trustees of St.
Edwards University in Austin, Texas. He has a Bachelor of Science degree from
the University of Notre Dame.
III-1
<PAGE>
ILM I LEASE CORPORATION
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
(e) Except for the Feldman litigation as discussed below, none
of the current Directors and Officers were involved in legal
proceedings which are material to an evaluation of his or her ability
or integrity as a Director or Officer. On May 8, 1998 Andrew A. Feldman
and Jeri Feldman, as Trustees for the Andrew A. & Jeri Feldman
Revocable Trust dated September 18, 1990 commenced a purported class
action on behalf of that trust and all other shareholders of ILM I and
ILM II (affiliates of the Company, as previously described) in the
Supreme Court of the State of New York, County of New York naming as
defendants ILM I, ILM II and Lawrence A. Cohen, Jeffry R. Dwyer, Julien
G. Redele, Carl J. Schramm and J. William Sharman, Jr. as the directors
of both corporations. The class action complaint alleged that the
directors engaged in wasteful and oppressive conduct and breached
fiduciary duties in preventing the sale or liquidation of the assets of
ILM I and ILM II, diverting certain of their assets. The complaint
sought compensatory damages in an unspecified amount, punitive damages,
the judicial dissolution of ILM I and ILM II, an order requiring the
directors to take all steps to maximize Shareholder value, including
either an auction or liquidation, and rescinding certain agreements,
and attorney's fees. On July 8, 1998, the defendants moved to dismiss
the complaint on all counts.
On October 15, 1999, the parties entered into a revised
Stipulation of Settlement and filed it with the Court, which approved
the settlement, by order dated October 21, 1999. In issuing that order
the Court entered a final judgment dismissing the action and all
non-derivative claims of the settlement class against the defendants
with prejudice. This litigation was settled at no cost to ILM I and ILM
II. As part of the settlement, Capital Senior Living Corporation
increased its proposed merger consideration payable to the ILM I and
ILM II shareholders and is also responsible for a total of
approximately $1.1 million in plaintiffs' attorneys fees and expenses.
(f) Compliance With Exchange Act Filing Requirements: The
Securities Exchange Act of 1934 requires the Officers and Directors of
the Company, and persons who own more than ten percent of the Company's
outstanding common stock, to file certain reports of ownership and
changes in ownership with the Securities and Exchange Commission.
Officers, Directors and ten-percent beneficial holders are required by
SEC regulations to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms received by it,
the Company believes that, during the year ended August 31, 2000, there was
compliance with all filing requirements applicable to its Officers and Directors
and ten-percent beneficial holders.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Directors each receive annual compensation of $12,000
plus $500 for attending each Board of Directors meeting and reimbursement for
expenses incurred in attending meetings and as a result of other work performed
for the Company. Officers of the Company are not compensated. Jeffry R. Dwyer
receives compensation from and is a shareholder of Greenberg Traurig, which acts
as Counsel to the Company and its affiliates. The former officers of the Company
who were also officers of PaineWebber received compensation from PaineWebber
which indirectly related to services to the Company because the Company was
required to pay certain fees to PaineWebber as described in Item 13. When
PaineWebber resigned as advisor to the Company, the former officers resigned
effective the same date; therefore no services were provided by such persons
subsequent to June 18, 1997. Lawrence A. Cohen, who was a Director of the
Company until July 28, 1998, received compensation from and was an employee of
Capital Senior Living Corporation, an affiliate of Capital and a related party
through July 28, 1998.
III-2
<PAGE>
ILM I LEASE CORPORATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) As of the date hereof, no person of record owns or is
known by the Company to own beneficially more than five percent of the
outstanding shares of common stock of the Company.
(b) The Directors and Officers of the Company do not have any
direct or indirect ownership of shares of the Company's common stock as
of the date hereof.
(c) There exists no arrangement, known to the Company, the
operation of which may at a subsequent date result in a change in
control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company retained Capital to be the property manager of the Senior
Housing Facilities pursuant to a Management Agreement which commenced on July
29, 1996 and terminated on August 15, 2000. As discussed in Note 1, 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
CSLC. Under the Management Agreement, Capital generally was required to perform
all operational functions necessary to operate the Senior Housing Facilities
other than certain administrative functions. The functions performed by Capital
include periodic reporting to and coordination with the Company, leasing the
individual units in the Senior Housing Facilities, maintaining bank accounts,
maintaining books and records, advertising and marketing the Senior Housing
Facilities, hiring and supervising on-site personnel, and performing
maintenance. Under the terms of the Management Agreement, Capital earned a base
management fee equal to 4% of the gross operating revenues of the Senior Housing
Facilities, as defined. Capital also earned 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, beginning on August
31, 1997, the base amount was increased based on the percentage increase in the
Consumer Price Index as well as 15% of Facility expansion costs. ILM I
guaranteed the payment of all fees due to Capital under the terms of the
Management Agreement. For the years ended August 31, 2000 and 1999, Capital
earned property management fees from the Company of $955,000 and $1,008,000,
respectively. At August 31, 2000, the Company has accounts payable to CSLC of
$659,000.
On February 4, 1997, AHC filed a complaint in the Superior Court of the
State of California against Capital, the new property manager; Lawrence A.
Cohen, who, through July 28, 1998 was a Director of the Company and President,
Chief Executive Officer and Director of ILM I, and others alleging that the
defendants intentionally interfered with AHC's property management agreement
(the "California litigation"). The complaint sought damages of at least
$2,000,000. On March 4, 1997, the defendants removed the case to Federal
District Court in the Central District of California. At a Board 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 $229,000 as of August 31, 2000. The Company's Board
also concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by Capital in
the California litigation. At August 31, 2000, the amount advanced to Capital by
the Company and Lease II for Capital's California litigation costs totaled
approximately $563,000. No amounts were advanced in fiscal year 2000.
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 expansion of several of the Senior Housing
Facilities. Capital Senior Development, Inc. received a fee equal to 7% of the
total development costs of these expansions if they are pursued. ILM Holding
reimbursed the Company for all costs related to these potential expansions
including fees to Capital Senior Development, Inc. For the years ended August
31, 2000 and 1999, Capital Senior Development, Inc. earned fees from the Company
of $0 and $41,000, respectively, for managing pre-construction development
activities for potential expansions of the Senior Housing Facilities.
III-3
<PAGE>
ILM I LEASE CORPORATION
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
Jeffry R. Dwyer, President, Secretary and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the years ended August 31, 2000 and 1999, Greenberg Traurig
earned fees from the Company of $32,000 and $64,000, respectively.
III-4
<PAGE>
ILM I LEASE CORPORATION
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) and (2) FINANCIAL STATEMENTS AND SCHEDULES:
----------------------------------
The response to this portion of Item 14 is submitted
as a separate section of this report. See Index to
Financial Statements and Financial Statement
Schedules at page F-1.
(3) EXHIBITS:
--------
The exhibits listed on the accompanying index to
exhibits at page IV-3 are filed as part of this
Report.
(b) The Company filed a Current Report on Form 8-K dated June 7, 2000,
reporting the impending termination of the Facilities Lease
Agreement between the Company and ILM I and its effect on the
Company's value and continued existence.
See (a)(3) above.
(c) Financial Statement Schedules:
The response to this portion of Item 14 is submitted
as a separate section of this report. See Index to
Financial Statements and Financial Statement
Schedules at page F-1.
IV-1
<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.
ILM I LEASE CORPORATION
By: /s/ Jeffry R. Dwyer
------------------------------
Jeffry R. Dwyer
President
(Principal Accounting Officer)
Dated: December 13, 2000
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company in the
capacity and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Jeffry R. Dwyer Date: December 13, 2000
------------------------------------------- -----------------
Jeffry R. Dwyer
Director
By: /s/ Julien G. Redele Date: December 13, 2000
------------------------------------------- -----------------
Julien G. Redele
Director
By: /s/ J. William Sharman, Jr. Date: December 13, 2000
------------------------------------------ -----------------
J. William Sharman, Jr.
Director
</TABLE>
IV-2
<PAGE>
ILM I LEASE CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(3)
ILM I LEASE CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE NUMBER IN THE REPORT
EXHIBIT NO. DESCRIPTION OF DOCUMENT OR OTHER REFERENCE
------------------------- ----------------------------------------- -------------------------
<S> <C> <C>
(3) and (4) Registration Statement on Form 10 of Filed with the Commission pursuant
the Registrant dated July 20, 1995, as to Rule 424(c) and incorporated
supplemented. herein by reference.
(13) Annual Reports to Shareholders No Annual Report for the year ended
August 31, 2000 has been sent to
the Shareholders. An Annual Report
will be sent to the Shareholders
subsequent to this filing.
(27) Financial Data Schedule Filed as last page of EDGAR
submission following the Financial
Statements and Financial Statement
Schedule required by Item 14.
</TABLE>
IV-3
<PAGE>
ILM I LEASE CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2) AND 14(d)
ILM I LEASE CORPORATION
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
REFERENCE
<S> <C>
ILM I LEASE CORPORATION:
Report of Ernst & Young LLP, Independent Auditors F-2
Net Liabilities in Liquidation as of August 31, 2000 F-3
Balance Sheet as of August 31, 1999 F-4
Statements of Operations for the years ended August 31, 2000, 1999 and 1998 F-5
Statements of Changes in Shareholders' Equity for the years ended August 31, 2000, 1999
and 1998 F-6
Statements of Cash Flows for the years ended August 31, 2000, 1999 and 1998 F-7
Notes to Financial Statements F-8
</TABLE>
Financial statement schedules have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the financial statements, including the notes thereto.
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Shareholders of
ILM I Lease Corporation:
We have audited the accompanying statement of net liabilities in
liquidation of ILM I Lease Corporation as of August 31, 2000, the balance sheet
as of August 31, 1999, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended August
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As described in Note 1 to the financial statements, the Company has
changed its basis of accounting as of August 31, 2000, from the going-concern
basis to the liquidation basis.
In our opinion, based on our audits, the financial statements referred
to above present fairly, in all material respects, the financial position of ILM
I Lease Corporation at August 31, 1999, their net liabilities in liquidation at
August 31, 2000, and the results of its operations and its cash flows for each
of the three years in the period ended August 31, 2000, in conformity with
generally accepted accounting principles in the United States applied on the
basis described in the preceding paragraph.
ERNST & YOUNG LLP
Dallas, Texas
October 24, 2000
except for Note 1, as to which the date is
November 8, 2000
F-2
<PAGE>
ILM I LEASE CORPORATION
Statement of Net Liabilities in Liquidation
August 31, 2000
(LIQUIDATION BASIS)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
2000
---------
<S> <C>
Cash and cash equivalents $ 644
Prepaid expenses and other assets 12
-------
Total current assets 656
=======
Furniture, fixtures and equipment 1,629
Less: accumulated depreciation (1,629)
-------
-
Deferred tax asset, net 8
-------
$ 664
=======
LIABILITIES
Accounts payable and accrued expenses $ 118
Accounts payable - Capital Senior Living Corporation 659
Accounts payable - related party 8
-------
Total current liabilities 785
Commitments and contingencies
Net liabilities in liquidation $ (121)
=======
</TABLE>
See accompanying notes.
F-3
<PAGE>
ILM I LEASE CORPORATION
BALANCE SHEET
August 31, 1999
(GOING-CONCERN BASIS)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
1999
---------
<S> <C>
Cash and cash equivalents $ 1,066
Accounts receivable, net 102
Tax refunds receivable 1
Prepaid expenses and other assets 278
-------
Total current assets 1,447
Furniture, fixtures and equipment 1,299
Less: accumulated depreciation (943)
-------
356
Deferred tax asset, net 92
-------
$ 1,895
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 868
Real estate taxes payable 190
Accounts payable - related party 305
Security deposits 7
-------
Total current liabilities 1,370
Deferred rent payable 12
-------
Total liabilities 1,382
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 20,000,000 shares authorized,
7,519,430 shares issued and outstanding 75
Additional paid-in capital 625
Accumulated deficit (187)
-------
Total shareholders' equity 513
-------
$ 1,895
=======
</TABLE>
See accompanying notes.
F-4
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF OPERATIONS
For the years ended August 31, 2000, 1999 and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Rental and other income $19,275 $19,907 $19,232
Interest income 19 16 62
------- ------- -------
19,294 19,923 19,294
EXPENSES:
Facilities lease rent expense 7,270 7,492 7,222
Dietary and food service salaries, wages and expenses 3,599 3,664 3,566
Administrative salaries, wages and expenses 1,542 1,420 1,218
Marketing salaries, wages and expenses 942 931 856
Utilities 812 839 834
Repairs and maintenance 690 732 661
Real estate taxes 961 836 827
Property management fees 949 1,008 919
Other property operating expenses 1,489 1,507 1,486
General and administrative 447 222 264
Directors compensation 64 52 81
Professional fees 382 273 1,123
Termination fee expense - - 375
Depreciation expense 686 553 297
------- ------- -------
19,833 19,530 19,729
------- ------- -------
(Loss) income before income taxes (539) 393 (435)
Income tax expense (benefit):
Current 15 - -
Deferred 84 273 (54)
------- ------- -------
99 273 (54)
------- ------- -------
NET (LOSS) INCOME $ (634) $ 120 $ (381)
======= ======= =======
NET (LOSS) INCOME PER SHARE OF COMMON STOCK $ (0.09) $ 0.01 $ (0.05)
======= ======= =======
</TABLE>
The above net (loss) income per share of common stock is based upon the weighted
average number of shares outstanding for the years ended August 31, 2000, 1999
and 1998 of 7,519,430.
See accompanying notes.
F-5
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended August 31, 2000, 1999 and 1998
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Common Stock
$.01 Par Value Additional Retained
--------------------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------ ----------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1997 7,519,430 $ 75 $ 625 $ 74 $ 774
Net loss - - - (381) (381)
---------- --------- -------- -------- --------
- -
BALANCE AT AUGUST 31, 1998 7,519,430 75 625 (307) 393
Net income - - - 120 120
---------- --------- -------- -------- --------
BALANCE AT AUGUST 31, 1999 7,519,430 75 625 (187) 513
NET LOSS - - - (634) (634)
---------- --------- -------- -------- --------
BALANCE (NET LIABILITY)
AT AUGUST 31, 2000 7,519,430 $ 75 $ 625 $ (821) $ (121)
========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
ILM I LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended August 31, 2000, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (634) $ 120 $ (381)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation expense 686 553 297
Deferred tax benefit, net 84 272 (54)
Changes in assets and liabilities:
Accounts receivable - related party - - 93
Accounts receivable, net 102 (46) (56)
Tax refund receivable 1 144 (145)
Prepaid expenses and other assets 266 (151) 132
Accounts payable and accrued expenses (750) (255) 241
Accounts payable - related party (297) (133) 322
Accounts payable - Capital Senior Living Corporation 659 - -
Termination fee payable - (975) 375
Real estate taxes payable (190) (23) 43
Security deposits (7) - 2
Deferred rent payable (12) (37) (37)
--------- --------- --------
Net cash (used in) provided by operating activities (92) (531) 832
--------- --------- --------
Cash flows from investing activity:
Additions to furniture, fixtures and equipment (330) (300) (408)
--------- --------- --------
Net cash used in investing activity (330) (300) (408)
--------- --------- --------
Net (decrease) increase in cash and cash equivalents (422) (831) 424
Cash and cash equivalents, beginning of period 1,066 1,897 1,473
--------- --------- --------
Cash and cash equivalents, end of period
$ 644 $ 1,066 $ 1,897
========= ========== =======
SUPPLEMENTAL DISCLOSURE:
-----------------------
Cash paid during the period for state income taxes $ 14 $126 $ 201
========= ========== =======
</TABLE>
See accompanying notes.
F-7
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements
1. ORGANIZATION, RESTRUCTURING, AND NATURE OF OPERATIONS
ILM I Lease Corporation ("the Company") was organized as a corporation
on September 12, 1994 under the laws of the state of Virginia. Through
August 31, 1995, the Company had no significant operations. The Company was
formed by ILM Senior Living, Inc. ("ILM I"), formerly PaineWebber
Independent Mortgage Fund, Inc., to operate eight rental housing projects
that provide independent living and assisted living services for
independent senior citizens ("the Senior Housing Facilities") under a
Facilities Lease Agreement. ILM I initially 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 majority-owned, indirect subsidiaries of ILM I,
subject to the mortgage loans. Subsequently, the indirect subsidiaries of
ILM I were merged into ILM Holding, Inc. ("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. As discussed further in Note 6, the management agreement with AHC was
terminated in July 1996.
ILM I has elected to qualify and be taxed as a Real Estate Investment
Trust ("REIT") under the Internal Revenue Code of 1986, as amended ("the
Code"), for each taxable year of operations. In order to maintain its
status as a REIT, 75% of ILM I's annual gross income must be Qualified
Rental Income as defined by the Code. The rent paid by the residents of the
Senior Housing Facilities likely would not be deemed to be Qualified Rental
Income because of the extent of services provided to residents.
Consequently, the operation of the Senior Housing Facilities by ILM I or
its subsidiaries over an extended period of time could adversely affect ILM
I's status as a REIT. Therefore, ILM I formed the Company to operate the
Senior Housing Facilities, and by means of a distribution, transferred the
ownership of the common stock of the Company to the holders of ILM I common
stock on September 1, 1995 (see Note 4). Because the Company, which is
taxed as a so-called "C" corporation, is no longer a subsidiary of ILM I,
it can receive service-related income without endangering the REIT status
of ILM I.
The Company's sole business was the operations of the Senior Housing
Facilities. The Company leased the Senior Housing Facilities from ILM
Holding, a subsidiary of ILM I that held title to the Senior Housing
Facilities, pursuant to a Facilities Lease Agreement. The lease was
accounted for as an operating lease in the Company's financial statements
until August 15, 2000.
In July 1996, following the 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 ("CSLC"), an affiliate of Capital, since 1996.
Mr. Cohen currently serves as Chief Executive Officer of CSLC. As a result,
the Management Agreement with Capital was considered a related party
transaction through July 28, 1998 (see Note 3.).
On August 15, 2000, ILM I completed the merger with CSLC and caused
ILM Holding to cancel and terminate the Facilities Lease Agreement
effective August 15, 2000. The Company also terminated the Management
Agreement effective August 15, 2000. 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 previous relationship with ILM I, subsequent to
fiscal year end, on November 8, 2000, the Company's Board of Directors
voted to pursue a plan of liquidation. As a result, the Company changed its
basis of accounting as of August 31, 2000, from the going concern basis to
the liquidation basis. It is currently expected that the Company will have
nominal value after payment of its expenses. No specific charges were taken
as a result of the Company's changing its basis of accounting.
F-8
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
2. USE OF ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared on the
accrual basis of accounting in accordance with generally accepted
accounting principles which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of August 31, 2000 and
1999 and revenues and expenses for the years ended August 31, 2000, 1999
and 1998. Actual results could differ from the estimates and assumptions
used. Certain amounts reported in 1999 have been reclassified to conform to
the 2000 presentation.
Furniture, fixtures and equipment was carried at the lower of cost,
reduced by accumulated depreciation, or fair value in accordance with FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of." Depreciation expense was provided on
a straight-line basis using an estimated useful life of 3 to 5 years. In
1998, the Company changed the estimated useful lives of its assets due to
the lease termination date of December 31, 1999, as such assets are not
subject to repurchase by ILM Holding. For the fiscal year ended August 31,
1998, this increased depreciation expense by $136,000.
Units at the Senior Housing Facilities were generally rented for terms
of twelve months or less. The base rent charged varied depending on the
unit size, with added fees collected for more than one occupant per unit
and for assisted living services. Included in the amount of base rent
charged were certain meals, housekeeping, medical and social services
provided to the residents of each Senior Housing Facility.
The Company rented the Senior Housing Facilities from ILM Holding
pursuant to a multi-year operating lease. Rent expense was recognized on a
straight-line basis over the term of the lease agreement. Deferred rent
payable represents the difference between rent expense recognized on a
straight-line basis and cash paid for rent pursuant to the terms of the
lease agreement.
The Company's policy is to expense all advertising costs as incurred.
For the years ended August 31, 2000, 1999 and 1998, advertising expenses
were $942,000, $931,000 and $856,000, respectively.
The cash and cash equivalents, receivables, accounts payable and
accrued liabilities appearing on the accompanying balance sheets represent
financial instruments for purposes of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments."
The carrying amount of these assets and liabilities approximates their fair
value as of August 31, 2000 due to the short-term nature of these
instruments.
Income tax expense is provided for using the liability method as
prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The Company has provided a valuation
allowance to recognize the effect that the lease termination date has on
the estimated net realizable value of the deferred tax asset as explained
more fully in Note 7 to the accompanying financial statements. At August
31, 2000 and 1999, a valuation allowance for deferred taxes of $533,000 and
$235,000, respectively, is included in deferred taxes, net, on the
accompanying balance sheets.
For purposes of reporting cash flows, cash and cash equivalents
include all highly liquid investments with original maturities of 90 days
or less.
F-9
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS
The Company retained Capital to be the property manager of the Senior
Housing Facilities pursuant to a Management Agreement which commenced on
July 29, 1996 and terminated on August 15, 2000. As discussed in Note 1,
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 CSLC. Under the Management Agreement,
Capital generally was required to perform all operational functions
necessary to operate the Senior Housing Facilities other than certain
administrative functions. The functions performed by Capital include
periodic reporting to and coordination with the Company, leasing the
individual units in the Senior Housing Facilities, maintaining bank
accounts, maintaining books and records, advertising and marketing the
Senior Housing Facilities, hiring and supervising on-site personnel, and
performing maintenance. Under the terms of the Management Agreement,
Capital earned a base management fee equal to 4% of the gross operating
revenues of the Senior Housing Facilities, as defined. Capital also earned
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, beginning on August 31, 1997, the base amount
was increased based on the percentage increase in the Consumer Price Index
as well as 15% of Facility expansion costs. ILM I guaranteed the payment of
all fees due to the terms of the Management Agreement. For the years ended
August 31, 2000 and 1999, Capital earned property management fees from the
Company of $955,000 and $1,008,000, respectively.
On February 4, 1997, AHC filed a complaint in the Superior Court of
the State of California against Capital, the new property manager; Lawrence
A. Cohen, who, through July 28, 1998 was a Director of the Company and
President, Chief Executive Officer and Director of ILM I, and others
alleging that the defendants intentionally interfered with AHC's property
management agreement (the "California litigation"). The complaint sought
damages of at least $2,000,000. On March 4, 1997, the defendants removed
the case to Federal District Court in the Central District of California.
At a Board 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 $229,000 as of August 31, 2000. The Company's Board also
concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by
Capital in the California litigation. At August 31, 2000, the amount
advanced to Capital by the Company and Lease II for Capital's California
litigation costs totaled approximately $563,000. No amounts were advanced
during fiscal year 2000.
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 expansion of several of the Senior
Housing Facilities. Capital Senior Development, Inc. received a fee equal
to 7% of the total development costs of these expansions if they are
pursued. ILM Holding reimbursed the Company for all costs related to these
potential expansions including fees to Capital Senior Development, Inc. For
the years ended August 31, 2000 and 1999, Capital Senior Development, Inc.
earned fees from the Company of $0 and $41,000, respectively, for managing
pre-construction development activities for potential expansions of the
Senior Housing Facilities.
F-10
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Jeffry R. Dwyer, President, Secretary and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the years ended August 31, 2000 and 1999, Greenberg Traurig
earned fees from the Company of $32,000 and $64,000, respectively.
Accounts payable - Capital Senior Living Corporation at August 31, 2000
includes approximately $140,000 payable to CSLC as part of the final
settlement of property-level payables and receivables at lease termination
as well as base rent of $265,000 and variable rent of $254,000 payable to
ILM Holding, Inc. (and its successors).
Accounts payable - related party at August 31, 2000 includes $8,000 in
unbilled legal fees payable to Greenberg Traurig, Counsel to the Company
and a related party. Accounts Payable - related party at August 31, 1999
includes variable rent payable to ILM Holding of $305,000.
4. CAPITAL STOCK
Prior to September 1, 1995, the Company was a wholly-owned subsidiary
of ILM I. Pursuant to a reorganization and distribution agreement, ILM I
capitalized the Company with $700,000, an amount estimated to provide the
Company with necessary working capital. On September 1, 1995, Mavricc
Management Systems, Inc., as the distribution agent, caused to be issued on
the stock records of the Company the distributed Common Stock of the
Company, in uncertificated form, to the holders of record of ILM I Common
Stock at the close of business on July 14, 1995. One share of the Company's
Common Stock was distributed for each outstanding share of ILM I Common
Stock. No certificates or scrip representing fractional shares of the
Company's Common Stock were issued to holders of ILM I Common Stock as part
of the distribution. In lieu of receiving fractional shares, each holder of
ILM I Common Stock who would otherwise have been entitled to receive a
fractional share of the Company's Common Stock received a cash payment
equivalent to $0.15 per share for such fractional interest.
F-11
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
5. THE FACILITIES LEASE AGREEMENT
ILM Holding (the "Lessor"), a then majority-owned subsidiary of ILM I,
leased the Senior Housing Facilities to the Company (the "Lessee"),
pursuant to a Facilities Lease Agreement. Such lease was extended on a
month-to-month basis on November 16, 1999 beyond its original expiration
date of December 31, 1999. On August 15, 2000, ILM I completed its merger
with CSLC and caused ILM Holding to cancel and terminate the Facilities
Lease Agreement effective August 15, 2000. The lease was 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 prior to the Facilities Lease
Agreement's termination on August 15, 2000, are summarized as follows:
<TABLE>
<CAPTION>
Year
Facility Rentable Resident
Name Location Built Units (2) Capacity (2)
---- -------- ----- --------- ------------
<S> <C> <C> <C> <C>
Independence Village of East Lansing, MI 1989 161 162
East Lansing
Independence Village of Winston-Salem, NC 1989 159 161
Winston-Salem
Independence Village of Raleigh, NC 1991 164 205
Raleigh
Independence Village of Peoria, IL 1990 165 181
Peoria
Crown Pointe 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) Until August 15, 2000, the Company operated Villa Santa Barbara under a
co-tenancy arrangement with an affiliated company, ILM II Lease
Corporation ("Lease II"). The Company had entered into an agreement
with Lease II regarding such joint tenancy. ILM II Senior Living, Inc.
("ILM II") sold its interest in Villa Santa Barbara on August 15, 2000
to CSLC. Accordingly, ILM II's interest in the Santa Barbara facility
was transferred to CSLC on August 15, 2000.
(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.
F-12
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
5. THE FACILITIES LEASE AGREEMENT (CONTINUED)
Pursuant to the Facilities Lease Agreement prior to its termination
on August 15, 2000, the Company paid annual base rent for the use of the
Senior Housing Facilities in the aggregate amount of $6,364,800. The
facilities lease was a "triple-net" lease whereby the Lessee paid 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 the Lessor, was
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 paid variable rent, on a
quarterly basis, for each Senior Housing 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. For the fiscal years
ended August 31, 2000 and 1999, variable rent expense was $1,183,000 and
$1,164,000, respectively.
The Company's use of the properties was limited to use as Senior
Housing Facilities. The Company had 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.
6. LEGAL PROCEEDINGS AND CONTINGENCIES
A 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, Lease I and ILM
Holding (collectively for this Item 3, the "Companies") terminated a
property management agreement with AHC covering the eight Senior Housing
Facilities leased by Lease I from ILM Holding. The management agreement
with AHC was terminated for "cause" pursuant to 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
Companies 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 management agreement for cause, no
termination fee was paid to AHC. Subsequent to the termination of the
management agreement, AHC filed for protection under Chapter 11 of the U.S.
Bankruptcy Code in its domestic State of California. The filing was
challenged by the Companies, 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 the 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
that the management agreement could have been terminated without cause, and
recovery of attorneys' fees and expenses.
F-13
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
6. LEGAL PROCEEDINGS AND CONTINGENCIES (CONTINUED)
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
amount of $1,000,000. The orders do 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 A.
Cohen, who, through July 28, 1998 was a Director of the Company and
President, Chief Executive Officer and Director of ILM I, and others
alleging that the defendants intentionally interfered with AHC's property
management agreement (the "California litigation"). The complaint sought
damages of at least $2,000,000. On March 4, 1997, the defendants removed
the case to Federal District Court in the Central District of California.
At a Board 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 $229,000 as of August 31, 2000. The Company's Board also
concluded that, subject to certain conditions, the Company or its
affiliates should pay reasonable legal fees and expenses incurred by
Capital in the California litigation. At August 31, 2000, the amount
advanced to Capital by the Company and Lease II for Capital's California
litigation costs totaled approximately $563,000. No amounts were advanced
during fiscal year 2000.
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. 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.
The Company has pending claims incurred in the normal course of
business which, in the opinion of the Company's management, will not have a
material effect on the financial statements of the Company.
F-14
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
7. FEDERAL INCOME TAXES
The Company is taxable as a so-called `C" corporation and, therefore,
its income is subject to tax at the federal and state levels. The Company
reports on a calendar year for tax purposes. Income taxes at the
appropriate statutory rates have been provided for in the accompanying
financial statements.
Deferred income tax benefit reflects the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The Company's deferred tax assets and liabilities as of August 31, 2000 and
1999, are comprised of the following amounts (in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Deferred tax asset - straight-line rent expense $ - $ 5
Deferred tax asset - book over tax depreciation 464 236
Deferred tax asset - book over tax amortization 8 23
Net operating loss carryforward 69 63
----- -----
Gross deferred tax asset (541) 327
Valuation allowance for deferred tax asset (533) (235)
----- -----
Net deferred tax asset $ 8 $ 92
===== ======
</TABLE>
The Company has provided a valuation allowance to consider the effects
that the lease termination has on historical taxable income and the fact
that cumulative tax over book depreciation and the net operating loss
carryforward will not be recoverable against future taxable income as the
lease is terminated. The net operating loss carryforward will expire in
2014.
The components of income tax expense (benefit) for fiscal 2000, 1999
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 15 - -
----- ----- ----
Total current 15 - -
----- ----- ----
Deferred:
Federal 84 238 (47)
State - 35 (7)
----- ----- ----
84 273 (54)
----- ----- ----
Total deferred $ 99 $ 273 $(54)
===== ===== ====
</TABLE>
F-15
<PAGE>
ILM I LEASE CORPORATION
Notes to Financial Statements (continued)
7. FEDERAL INCOME TAXES (CONTINUED)
The reconciliation of income tax computed for fiscal 2000, 1999 and
1998, at U.S. federal statutory rates to income tax expense (benefit) is as
follows (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
------------------ -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $ - 34% $ 134 34% $(148) (34%)
State income taxes, net
of federal tax benefit 15 6% 24 6% (26) (6)
Valuation allowance 84 29% 115 29% 120 33
------- ----- ------ ---- ----- ----
$ 99 (69%) $ 273 (69%) $ (54) (7%)
======= ===== ====== ==== ===== ====
</TABLE>
F-16
