UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1996
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: 0-25880
ILM II LEASE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia 04-3248639
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
265 Franklin Street, Boston, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (800) 225-1174
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
----
Shares on common stock outstanding as of November 30, 1996: 5,180,941. The
aggregate sales price of the shares sold was $500,000. This does not reflect
market value. There is no current market for these shares.
<PAGE>
ILM II LEASE CORPORATION
BALANCE SHEETS
November 30, 1996 and August 31, 1996 (Unaudited)
(In thousands)
ASSETS
November 30 August 31
----------- ----------
Cash and cash equivalents $ 1,534 $ 1,591
Accounts receivable 9 5
Prepaid expenses and other assets 94 118
------- -------
Total current assets 1,637 1,714
Furniture, fixtures and equipment 199 197
Less: accumulated depreciation (21) (14)
------- -------
178 183
Deferred tax asset, net 30 38
------- -------
$ 1,845 $ 1,935
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 391 $ 503
Real estate taxes payable - 203
Accounts payable - affiliates 334 327
Security deposits 11 12
-------- -------
Total current liabilities 736 1,045
Deferred rent payable 123 131
-------- -------
Total liabilities 859 1,176
Shareholders' equity 986 759
-------- -------
$ 1,845 $ 1,935
======== ========
See accompanying notes.
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF INCOME
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands, except per share data)
1996 1995
---- ----
Revenues:
Rental and other income $ 3,576 $ 3,165
Interest income 10 4
-------- --------
3,586 3,169
Expenses:
Master lease rent expense 1,001 1,001
Dietary salaries, wages and food
service expenses 659 547
Administrative salaries, wages
and expenses 252 238
Marketing salaries, wages and expenses 152 160
Utilities 266 245
Repairs and maintenance 126 127
Real estate taxes 125 123
Property management fees 192 175
Other property operating expenses 382 314
General and administrative 27 20
Advisory fees 18 16
Depreciation expense 7 -
-------- --------
3,207 2,966
-------- --------
Income before taxes 379 203
Income tax expense (benefit):
Current 145 123
Deferred 7 (42)
-------- --------
152 81
-------- --------
Net income $ 227 $ 122
======== ========
Earnings per share of common stock $0.04 $0.02
===== =====
The above earnings per share of common stock is based upon the 5,180,952 shares
outstanding for each period.
See accompanying notes.
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended November 30, 1996 and 1995 (Unaudited)
(In thousands)
Common Stock Additional
$.01 Par Value Paid-in Accumulated
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance at August 31, 1995 15 $ - $ 1 $ (1) $ -
Issuance of common stock 5,166 52 447 - 499
Net income - - - 122 122
----- ---- ----- ----- -----
Balance at November 30, 1995 5,181 $ 52 $ 448 $ 121 $ 621
===== ==== ====== ====== =====
Balance at August 31, 1996 5,181 $ 52 $ 448 $ 259 $ 759
Net income - - - 227 227
----- ---- ------ ------ -----
Balance at November 30, 1996 5,181 $ 52 $ 448 $ 486 $ 986
===== ==== ====== ====== =====
See accompanying notes.
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1996 and 1995 (Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
(In thousands)
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 227 $ 122
Adjustments to reconcile net income to
net cash (used in) provided by operating activities
Depreciation expense 7 -
Changes in assets and liabilities:
Accounts receivable (4) (87)
Prepaid expenses and other assets 24 (157)
Deferred tax asset, net 8 (42)
Accounts payable and accrued expenses (112) 325
Accounts payable - affiliates 7 16
Real estate taxes payable (203) 66
Security deposits (1) -
Deferred rent payable (8) 114
Income taxes payable - 123
-------- ------
Total adjustments (282) 358
-------- ------
Net cash (used in) provided by operating
activities (55) 480
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (2) -
-------- ------
Net cash used in investing activities (2) -
Cash flows from financing activities:
Proceeds from issuance of common stock - 499
-------- ------
Net cash provided by financing activities - 499
-------- ------
Net (decrease) increase in cash and cash equivalents (57) 979
Cash and cash equivalents, beginning of period 1,591 -
-------- ------
Cash and cash equivalents, end of period $ 1,534 $ 979
======= ======
Supplemental disclosure:
Cash paid during the period for income taxes $ - $ -
======= ======
See accompanying notes.
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements
(Unaudited)
1. General
The accompanying financial statements, footnotes and discussions should be
read in conjunction with the financial statements and footnotes contained
in the Company's Annual Report for the year ended August 31, 1996. In the
opinion of management, the accompanying financial statements, which have
not been audited, reflect all adjustments necessary to present fairly the
results for the interim period. All of the accounting adjustments reflected
in the accompanying interim financial statements are of a normal recurring
nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with generally accepted accounting
principles which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of November 30, 1996 and August 31,
1996 and revenues and expenses for each of the three month periods ended
November 30, 1996 and 1995. Actual results could differ from the estimates
and assumptions used.
2. The Master Lease Agreement
The Company was formed by PaineWebber Independent Living Mortgage Inc. II
(ILM) to operate six rental housing projects for independent senior citizens
("the Senior Housing Facilities") under a master lease arrangement. ILM has
elected to 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's annual
gross income must be Qualified Rental Income as defined by the Code. The rent
paid by the residents of the 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 Facilities by ILM or its
subsidiaries over an extended period of time could adversely affect ILM's
status as a REIT. Therefore, ILM 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 common stock on
September 1, 1995. Because the Company, which is taxed as a regular C
corporation, is no longer a subsidiary of ILM, it can receive service-related
income without endangering the REIT status of ILM.
The Company's sole business is the operation of the Senior Housing
Facilities. The Company has initially leased the Senior Housing Facilities
from ILM II Holding, Inc. ("ILM Holding"), a majority-owned and consolidated
subsidiary of ILM which currently holds title to the Facilities, pursuant to
a master lease which commenced on September 1, 1995 and expires on December
31, 2000 (December 31, 1999 with respect to the Santa Barbara Facility). The
Company has entered into a property management agreement with Capital Senior
Management 2, Inc. of Dallas, Texas ("Capital") to handle the day-to-day
operations of the Senior Housing Facilities. The management contract with
Capital was executed in July 1996. In November 1996, Lawrence A. Cohen, a
Director of the Company and President, Chief Executive Officer and Director
of ILM, also became Vice Chairman and Chief Financial Officer of Capital
Senior Living Corporation, an affiliate of Capital. As a result, the
management contract with Capital is considered a related party transaction
(see Note 3).
<PAGE>
Descriptions of the properties covered by the master lease between the
Company and ILM Holding are summarized as follows:
<TABLE>
Date of
Name Location Rentable Units Construction (1)
<S> <C> <C> <C>
The Palms Fort Myers, FL 204 October 1988
Crown Villa Omaha, NE 73 January 1992
Overland Park Place Overland Park, KS 137 June 1984
Rio Las Palmas Stockton, CA 162 June 1988
The Villa at Riverwood St. Louis County, MO 119 June 1985
Villa Santa Barbara (2) Santa Barbara, CA 123 June 1979
</TABLE>
(1) Date initial construction was completed.
(2)The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM I Lease Corporation. The Company has
entered into an agreement with ILM I Lease Corporation regarding such
joint tenancy. ILM I Lease Corporation was formed for similar purposes
as the Company by an affiliated REIT, PaineWebber Independent Living
Mortgage Fund, Inc., whose subsidiary owns a portion of the Villa
Santa Barbara property. The portion of the Facility leased by the
Company represents 75% of the total project.
Terms of the Master Lease Agreement
-----------------------------------
During the term of the master lease, the Company is obligated to pay
annual base rent ("Base Rent") for the Facilities. For calendar year 1995,
the annual Base Rent was $3,548,700 (prorated according to the date of
commencement of the master lease), allocated as follows: $849,836 for the
Florida Facility, $541,010 for the Nebraska Facility, $720,252 for the Kansas
Facility, $591,429 for the Stockton, California Facility, $423,933 for the
Missouri Facility and $422,240 for the Santa Barbara, California Facility.
For calendar years 1996 through 1999, the annual Base Rent will be
$4,035,600, allocated as follows: $966,439 for the Florida Facility, $615,240
for the Nebraska Facility, $819,074 for the Kansas Facility, $672,576 for the
Stockton, California Facility, $482,098 for the Missouri Facility and
$480,173 for the Santa Barbara, California Facility. For calendar year 2000,
the annual Base Rent will be $3,555,427 (reflects rent reduction attributable
to termination of lease for Villa Santa Barbara on December 31, 1999). The
master lease is a "triple-net" lease whereby the Lessee pays all operating
expenses, governmental taxes and assessments, utility charges and insurance
premiums, as well as the costs of all required maintenance, personal property
and non-structural repairs in connection with the operation of the Senior
Housing Facilities ("Additional Rent"). ILM Holding, as the Lessor, is
responsible for major capital improvements and structural repairs to the
Senior Housing Facilities. In addition, beginning in January 1997 and for the
remainder of the lease term, the Company will also be obligated to pay
variable rent ("Variable Rent") for each Facility. Such Variable Rent will be
payable quarterly and will equal 40% of the excess, if any, of the aggregate
total revenues for the Facilities, on an annualized basis, over $13,021,000.
<PAGE>
Under the master lease, the Company's use of the Facilities is limited to
use as a Senior Housing Facility unless the Lessor's consent to some other
use is obtained. The Company has responsibility to obtain and maintain all
licenses, certificates and consents needed to use and operate each Facility,
and to use and maintain each Facility in compliance with all local board of
health and other applicable governmental and insurance regulations. The
Facilities located in California, Florida and Kansas are licensed by such
states to provide assisted living services. Also, various health and safety
regulations and standards which are enforced by state and local authorities
apply to the operation of all of the Facilities. Violations of such health
and safety standards could result in fines, penalties, closure of a Facility
or other sanctions.
3. Related Party Transactions
The Advisor receives a base fee in an amount equal to 0.5% of the Gross
Operating Revenues of the Facilities operated by the Company as compensation
for its services. This fee amounted to $18,000 and $16,000 for the
three-month periods ended November 30, 1996 and 1995, respectively. In
addition, an affiliate of the Advisor is entitled to reimbursement for
expenses incurred in providing certain financial, accounting and investor
communication services to the Company. Included in general and administrative
expenses for the three-month periods ended November 30, 1996 and 1996 is
$15,000 and $19,000, respectively, representing reimbursements to this
affiliate of the Advisor for providing such services to the Company.
The Company has retained Capital Senior Management 2, Inc. ("Capital") of
Dallas, Texas to be the property manager of the Senior Housing Facilities
pursuant to a Management Agreement which commenced on July 29, 1996. The
initial term of the Management Agreement expires on December 31, 2000, which
coincides with the expiration of the master lease agreement between the
Company and ILM Holding described in Note 2. Under the terms of the
Management Agreement, in the event that the master lease agreement is
extended beyond December 31, 2000, the Management Agreement will be extended
as well, but not beyond July 29, 2001. Effective in November 1996, Lawrence
A. Cohen, a Director of the Company and President, Chief Executive Officer
and Director of ILM, was also named Vice Chairman and Chief Financial Officer
of Capital Senior Living Corporation, an affiliate of Capital. Under the
terms of the Agreement, Capital will earn a Base Management Fee equal to 4%
of the Gross Operating Revenues of the Senior Housing Facilities, as defined.
Capital will also be eligible to earn an Incentive Management Fee equal to
25% of the amount by which the average monthly Net Cash Flow of the Senior
Housing Facilities, as defined, for the twelve month period ending on the
last day of each calendar month exceeds a specified Base Amount. Each August
31, beginning on August 31, 1997, the Base Amount will be increased based on
the percentage increase in the Consumer Price Index. ILM has guaranteed the
payment of all fees due to Capital under the terms of the Management
Agreement. Capital earned total management fees of $192,000 for the three
months ended November 30, 1996.
Accounts payable - affiliates at November 30, 1996 and August 31, 1996
includes advances of $227,000 and $225,000, respectively, received from ILM
Holding, primarily for the purchase of personal property to operate the
Senior Housing Facilities. The remaining balance of accounts payable -
affiliates at November 30, 1996 includes management fees payable to Capital
of $63,000 and advisory fees payable to the Advisor of $18,000. The remaining
balances of accounts payable - affiliates at August 31, 1996 includes
management fees of $60,000 payable to Capital and advisory fees payable to
the Advisor of $17,000.
<PAGE>
4. Contingencies
A management agreement between ILM Holding and Angeles Housing Concepts,
Inc. ("AHC") which covered the management of all six Senior Housing
Facilities was assigned to the Company effective September 1, 1995. On July
29, 1996, the Company and ILM Holding ("the Companies") terminated the
property management agreement with AHC. The management agreement was
terminated for cause pursuant to the terms of the contract. Simultaneously
with the termination of the management agreement, the Companies, together
with certain affiliated entities, filed suit against AHC in the United States
District Court for the Eastern District of Virginia for breach of contract,
breach of fiduciary duty and fraud. The Company and ILM Holding allege, among
other things, that AHC willfully performed actions specifically in violation
of the management agreement and that such actions caused damages to the
Companies. Due to the termination of the agreement for cause, no termination
fee was paid to AHC. Subsequent to the termination of the 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 alleges that the
management agreement was wrongfully terminated for cause and requests damages
which include the payment of a termination fee in the amount of $750,000,
payment of management fees pursuant to the contract from August 1, 1996
through October 15, 1996, and recovery of attorney's fees and expenses. ILM
has guaranteed the payment of the termination fee at issue in these
proceedings. The Companies intend to diligently prosecute the case and to
vigorously defend the counterclaims made by AHC. The eventual outcome of this
termination dispute cannot presently be determined. Accordingly, no provision
for any liability which might result from the outcome of this matter has been
recorded in the accompanying financial statements.
5. Federal Income Taxes
The Company is taxable as a regular 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 November 30, 1996 and
August 31, 1996 are comprised of the following amounts (in thousands):
November 30 August 31
----------- ---------
Deferred tax asset - straight-line
rent expense $ 49 $ 53
Deferred tax liability - tax over
book amortization 19 15
----- -----
Net deferred tax asset $ 30 $ 38
===== =====
<PAGE>
The components of income tax expense (benefit) for the three months ended
November 30, 1996 and 1995 are as follows (in thousands):
1996 1995
---- ----
Current:
Federal $ 123 $ 105
State 22 18
------ -----
Total current 145 123
------ -----
Deferred:
Federal 6 (36)
State 1 (6)
------ -----
Total deferred 7 (42)
------ -----
$ 152 $ 81
====== =====
The reconciliation of income tax computed at U.S. federal statutory
rates to income tax expense is as follows (in thousands):
1996 1995
----------- ----------
Tax at U.S. statutory rates $ 129 34% $ 69 34%
State income taxes, net
of federal tax benefit 23 6% 12 6%
------ ---- ---- ---
$ 152 40% $ 81 40%
====== === ==== ===
<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
ILM II Lease Corporation (the "Company") was formed by PaineWebber
Independent Living Mortgage Inc. II ("ILM"), a publicly-held, non-traded Real
Estate Investment Trust ("REIT"), for the purpose of operating six Senior
Housing Facilities under the terms of a master lease agreement. ILM contributed
$500,000 in return for all of the issued and outstanding shares of the Company's
common stock. ILM has elected to 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's annual gross income must be
Qualified Rental Income as defined by the Code. The rent paid by the residents
of the 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 Facilities by ILM or its subsidiaries over an extended period
of time could adversely affect ILM's status as a REIT. Therefore, ILM formed the
Company to operate the Facilities, and by means of a distribution, transferred
the ownership of the common stock of the Company to the holders of ILM common
stock on September 1, 1995. Because the Company, which is taxed as a regular C
corporation, is no longer a subsidiary of ILM, it can receive service-related
income without endangering the REIT status of ILM.
The Company's sole business is the operation of the Senior Housing
Facilities. The Company has initially leased the Senior Housing Facilities from
ILM II Holding, Inc. ("ILM Holding"), a majority-owned and consolidated
subsidiary of ILM which currently holds title to the Facilities, pursuant to a
master lease which commenced on September 1, 1995 and expires on December 31,
2000 (December 31, 1999 with respect to the Santa Barbara Facility). The master
lease is a "triple-net" lease whereby the Lessee pays all operating expenses,
governmental taxes and assessments, utility charges and insurance premiums, as
well as the costs of all required maintenance, personal property and
non-structural repairs in connection with the operation of the Senior Housing
Facilities. ILM Holding, as the Lessor, is responsible for major capital
improvements and structural repairs to the Senior Housing Facilities. During the
initial term of the master lease, the Company is obligated to pay annual base
rent for the use of all of the Facilities in the aggregate amount of $3,548,700
for calendar year 1995 (prorated based on the commencement date of the lease),
$4,035,600 for calendar years 1996 through 1999 and $3,555,427 for calendar year
2000 (reflects rent reduction attributable to termination of lease for Villa
Santa Barbara on December 31, 1999). Beginning in January 1997 and for the
remainder of the lease term, the Company will also be obligated to pay variable
rent for each Facility. Such variable rent will be payable quarterly and will
equal 40% of the excess, if any, of the aggregate total revenues for the
Facilities, on an annualized basis, over $13,021,000.
On July 29, 1996, the Company and ILM Holding ("the Companies")
terminated the property management agreement with AHC covering the six Senior
Housing Facilities leased by the Company. The management agreement was
terminated for cause pursuant to the terms of the contract. Simultaneously with
the termination of the management agreement, the Companies, together with
certain affiliated entities, filed suit against AHC in the United States
District Court for the Eastern District of Virginia for breach of contract,
breach of fiduciary duty and fraud. The Company and ILM Holding allege, among
other things, that AHC willfully performed actions specifically in violation of
the management agreement and that such actions caused damages to the Companies.
Due to the termination of the agreement for cause, no termination fee was paid
to AHC. Subsequent to the termination of the 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 alleges that the management agreement was wrongfully terminated for
cause and requests damages which include the payment of a termination fee in the
amount of $750,000, payment of management fees pursuant to the contract from
August 1, 1996 through October 15, 1996, and recovery of attorney's fees and
expenses. ILM has guaranteed the payment of the termination fee at issue in
these proceedings. The Companies intend to diligently prosecute the case and to
vigorously defend the counterclaims made by AHC. The eventual outcome of this
termination dispute cannot presently be determined. Accordingly, no provision
for any liability which might result from the outcome of this matter has been
recorded in the accompanying financial statements.
Subsequent to terminating the management agreement with AHC, the Company
retained Capital Senior Management 2, Inc. ("Capital") of Dallas, Texas to be
the new manager of the Senior Housing Facilities pursuant to a Management
Agreement which commenced on July 29, 1996. The initial term of the Management
Agreement expires on December 31, 2000, which coincides with the expiration of
the master lease agreement between the Company and ILM Holding described above.
Under the terms of the Management Agreement, in the event that the master lease
agreement is extended beyond December 31, 2000, the Management Agreement will be
extended as well, but not beyond July 29, 2001. Effective in November 1996,
Lawrence A. Cohen, a Director of the Company and President, Chief Executive
Officer and Director of ILM, was also named Vice Chairman and Chief Financial
Officer of Capital Senior Living Corporation, an affiliate of Capital. Under the
terms of the Agreement, Capital will earn a Base Management Fee equal to 4% of
the Gross Operating Revenues of the Senior Housing Facilities, as defined.
Capital will also be eligible to earn an Incentive Management Fee equal to 25%
of the amount by which the average monthly Net Cash Flow of the Senior Housing
Facilities, as defined, for the twelve month period ending on the last day of
each calendar month exceeds a specified Base Amount. Each August 31, beginning
on August 31, 1997, the Base Amount will be increased based on the percentage
increase in the Consumer Price Index. ILM has guaranteed the payment of all fees
due to Capital under the terms of the Management Agreement.
The six properties which the Company leases from ILM Holding averaged 95%
occupancy for the quarter ended November 30, 1996. Current annualized operating
income levels are sufficient to cover the base master lease payments at their
current annual level of $4,035,600, which will remain in effect throughout the
remaining term of the lease. As noted above, the master lease also provides for
the payment of variable rent beginning in January 1997. The Senior Housing
Facilities are currently generating gross revenues which are in excess of the
specified threshold in the variable rent calculation, as discussed further
above. Accordingly, the Company expects that it will owe variable rent payments
to ILM Holding in fiscal 1997. Further improvements in operating income levels
are expected upon the successful implementation of several new programs by the
new property management company. At many properties, the management company is
exploring the potential to increase the number of rentable units by asking the
facility managers to move off site. The increased rental revenue is expected to
more than offset any additional costs of housing the managers and providing
24-hour coverage at the front desk. The live-in assistant manager positions at
several properties are also being eliminated, which will increase the number of
rentable units. In addition, the management company is in the process of
implementing new marketing plans at several of the properties. Management of the
Company and ILM are currently reviewing annual operating budgets and capital
expenditure plans with the new property management team, which include an
ongoing program to replace air-conditioning units at the Santa Barbara facility,
as well as planned roof repairs at Overland Park Place and The Palms.
At November 30, 1996, the Company had cash and cash equivalents of
$1,534,000. Such amounts will be used for the Company's working capital
requirements. As noted above, under the terms of the master lease, the Lessor is
responsible for major capital improvements and structural repairs to the Senior
Housing Facilities. Consequently, the Company does not have any material
commitments for capital expenditures. Furthermore, the Company does not
currently anticipate the need to engage in any borrowing activities. As a
result, substantially all of the Company's cash flow will be generated from
operating activities. The Company did not pay cash dividends in fiscal 1996. The
Company intends to review this policy during fiscal 1997, subsequent to the
commencement of the variable rent payments discussed further above, and may or
may not determine to pay cash dividends in the future. Payment of dividends, if
any, will be at the discretion of the Company's Board of Directors and will
depend upon such factors as the Company's financial condition, earnings,
anticipated investments and other relevant factors. The source of future
liquidity is expected to be from operating cash flow from the Senior Housing
Facilities, net of the master lease payments to ILM Holding, and interest income
earned on invested cash reserves. Such sources of liquidity are expected to be
adequate to meet the Company's operating requirements on both a short-term and
long-term basis.
<PAGE>
Results of Operations
Three Months Ended November 30, 1996
- ------------------------------------
The Company's net income increased by $105,000 for the three months ended
November 30, 1996 when compared to the same period in the prior year. The
increase in net income is primarily the result of an increase in rental income
from the Senior Housing Facilities of $411,000. The increase in rental income is
primarily due to an increase in the portfolio's average occupancy level from 88%
for the first quarter of fiscal 1996 to 95% for the current quarter. In
addition, interest income increased by $6,000 due to an increase in the average
balance of invested cash equivalents during the current quarter. The increases
in rental income and interest income were partially offset by an increase in
operating expenses of $241,000. The increase in operating expenses was mainly
due to an increase of $112,000 in dietary salaries, wages and food service
expenses primarily associated with the improvement in the portfolio occupancy
level discussed further above. Increases in other property operating expenses,
utilities and administrative salaries, wages and expenses of $68,000, $21,000
and $14,000, respectively, also contributed to the overall increase in operating
expenses. Income tax expense increased by $71,000 due to the increase in net
operating income.
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
The status of the litigation involving the Company, ILM II Holding, Inc.
and Angeles Housing Concepts, Inc. remains unchanged from what was reported
in the Company's Annual Report on Form 10-K for the year ended August 31,
1996.
Item 2. through 5. NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: NONE
(b) Reports on Form 8-K: NONE
<PAGE>
ILM II LEASE CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
By: ILM II LEASE CORPORATION
By: /s/ Timothy J. Medlock
----------------------
Timothy J. Medlock
Treasurer
Dated: January 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Partnership's audited financial statements for the three months ended November
30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 1,534
<SECURITIES> 0
<RECEIVABLES> 9
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,637
<PP&E> 199
<DEPRECIATION> 21
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0
0
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</TABLE>
