<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
-----------------
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____ to ____.
Commission File Number: 0-25880
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.)
1750 Tysons Boulevard, Suite 1200, Tysons Corner, VA 22102
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 257-3550
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------- -------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Shares Of Common Stock $.01 Par Value
-------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ____No _X__
Shares of common stock outstanding as of November 30, 1999: 5,180,952.
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Page 1 of 18
<PAGE>
ILM II LEASE CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Balance Sheets
November 30, 1999 (Unaudited) and August 31, 1999............................................4
Statements of Income
For the three months ended November 30, 1999 and 1998 (Unaudited)............................5
Statements of Changes in Shareholders' Equity
For the three months ended November 30, 1999 and 1998 (Unaudited)............................6
Statements of Cash Flows
For the three months ended November 30, 1999 and 1998 (Unaudited)............................7
Notes to Financial Statements (Unaudited).................................................8-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....12-15
Part II. Other Information...................................................................................16
Item 6. Exhibits and Reports on Form 8-K............................................................16
Signatures....................................................................................................17
</TABLE>
-2-
<PAGE>
ILM II LEASE CORPORATION
Part I. Financial Information
- ------------------------------
Item I. Financial Statements
(See next page)
-3-
<PAGE>
ILM II LEASE CORPORATION
BALANCE SHEETS
November 30, 1999 (Unaudited) and August 31, 1999
(Dollars in thousands, except per share data)
ASSETS
------
<TABLE>
<CAPTION>
November 30, 1999 August 31, 1999
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,718 $1,487
Accounts receivable, net 60 80
Accounts receivable - related party 30 50
Prepaid expenses and other assets 167 352
Tax refund receivable 21 21
--------- ---------
Total current assets 1,996 1,990
Furniture, fixtures and equipment 1,195 1,135
Less: accumulated depreciation (640) (518)
--------- ---------
555 617
Deposits 9 9
Deferred tax asset, net 154 154
--------- ---------
$2,714 $2,770
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses $ 647 $ 625
Income taxes payable 269 226
Real estate taxes payable 20 230
Accounts payable - related party 370 337
Security deposits 54 49
--------- ---------
Total current liabilities 1,360 1,467
Deferred rent payable 29 37
--------- ---------
Total liabilities 1,389 1,504
Contingencies
Shareholders' equity:
Common stock, $0.01 par value, 20,000,000 shares
authorized 5,180,952 issued and outstanding 52 52
Additional paid-in capital 448 448
Retained earnings 825 766
--------- ---------
Total shareholders' equity 1,325 1,266
--------- ---------
$2,714 $2,770
========= =========
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF INCOME
For the three months ended November 30, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30
-----------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Rental and other income $4,131 $4,037
Interest income 8 3
------- -------
4,139 4,040
------- -------
EXPENSES:
Facilities lease rent expense 1,352 1,311
Dietary salaries, wages and food service expenses 705 691
Administrative salaries, wages and expenses 316 282
Marketing salaries, wages and expenses 177 170
Utilities 262 274
Repairs and maintenance 163 129
Real estate taxes 130 134
Property management fees 253 224
Other property operating expenses 365 359
General and administrative expenses 82 64
Directors compensation 15 13
Professional fees 99 165
Depreciation expense 122 46
------- -------
4,041 3,862
------- -------
Income before taxes 98 178
Income tax expense:
Current 39 -
Deferred - 72
------- -------
39 72
------- -------
NET INCOME $ 59 $ 106
======= =======
Basic earnings per share of common stock $0.02 $0.02
======= =======
</TABLE>
The above earnings per share of common stock is based upon the 5,180,952 shares
outstanding for each period.
See accompanying notes.
-5-
<PAGE>
ILM II LEASE CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended November 30, 1999 and 1998 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL
-------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1998 5,180,952 $ 52 $448 $197 $ 697
Net Income - - - 569 569
--------- ---- ---- ---- ------
Balance at November 30, 1998 5,180,952 $ 52 $448 $303 $ 803
========= ==== ==== ==== ======
Balance at August 31, 1999 5,180,952 $ 52 $448 $766 $1,266
Net Income - - - 59 59
--------- ---- ---- ---- ------
Balance at November 30, 1999 5,180,952 $ 52 $448 $825 $1,325
========= ==== ==== ==== ======
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 1999 and 1998 (Unaudited)
(Dollars In thousands)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 59 $ 106
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 122 46
Deferred tax expense (benefit) - 72
Changes in assets and liabilities:
Accounts receivable, net 20 (84)
Accounts receivable - related party 20 -
Prepaid expenses and other assets 185 (23)
Tax refund receivable - 125
Accounts payable and accrued expenses 22 (88)
Accounts payable - related party 33 160
Termination fee payable - (650)
Real estate taxes payable (210) (206)
Income taxes payable 43 -
Deferred rent payable (8) (7)
Security deposits, net 5 4
------- -------
Net cash provided by operating activities 291 545
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (60) (71)
------- -------
Net cash used in investing activities (60) (71)
Net increase (decrease) in cash and cash equivalents 231 (616)
Cash and cash equivalents, beginning of period 1,487 1,497
------- -------
Cash and cash equivalents, end of period $ 1,718 $ 881
======= =======
Supplemental disclosure:
- ------------------------
Cash paid during the period for state income taxes $ 50 $ -
======= =======
</TABLE>
See accompanying notes.
-7-
<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 ILM II Lease Corporation's (the "Company") Annual Report on
Form 10-K for the year ended August 31, 1999. In the opinion of management,
the accompanying interim financial statements, which have not been audited,
reflect all adjustments necessary to present fairly the results for the
interim periods. All of the accounting adjustments reflected in the
accompanying interim financial statements are of a normal recurring nature.
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with U.S. generally accepted accounting
principles for interim financial information, which requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities as of
November 30, 1999, and revenues and expenses for each of the three-month
periods ended November 30, 1999 and 1998. Actual results may differ from
the estimates and assumptions used. Certain numbers in the prior period's
financial statements have been reclassified to conform to the current
period's presentation. The results of operations for the three-month period
ended November 30, 1999, are not necessarily indicative of the results to
be expected for the year ending August 31, 2000.
The Company was incorporated on September 12, 1994 under the laws of
the State of Virginia by ILM II Senior Living, Inc., a Virginia finite-life
corporation ("ILM II"), formerly PaineWebber Independent Living Mortgage
Inc. II, to operate six rental housing projects that provide
independent-living and assisted-living services for independent senior
citizens ("the Senior Housing Facilities") under a facilities lease
agreement dated September 1, 1995 (the "Facilities Lease Agreement"),
between the Company, as lessee, and ILM II Holding, Inc. ("ILM II
Holding"), as lessor, and a direct subsidiary of the ILM II. The Company's
sole business is the operation of the Senior Housing Facilities.
ILM II made mortgage loans to Angeles Housing Concepts, Inc. ("AHC")
secured by the Senior Housing Facilities between July 1990 and July 1992.
In March 1993, AHC defaulted under the terms of such mortgage loans and in
connection with the settlement of such default, title to the Senior Housing
Facilities was transferred, effective April 1, 1994, to certain indirect
subsidiaries of ILM II, subject to the mortgage loans. Subsequently, these
property-owning subsidiaries were merged into ILM II Holding. As part of
the fiscal 1994 settlement agreement with AHC, AHC was retained as the
property manager for all of the Senior Housing Facilities pursuant to the
terms of a management agreement, which was assigned to the Company as of
September 1, 1995 and subsequently terminated in July 1996. ILM II is a
public company subject to the reporting obligations of the Securities and
Exchange Commission.
In July 1996, following termination of the property management
agreement with AHC, the Company entered into a property management
agreement (the "Management Agreement") with Capital Senior Management 2,
Inc. ("Capital") to handle the day-to-day operations of the Senior Housing
Facilities. Lawrence A. Cohen, who served through July 28, 1998 as a
Director of the Company and President, Chief Executive Officer and Director
of ILM II, has also served in various management capacities at Capital
Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen
currently serves as Chief Executive Officer of Capital Senior Living
Corporation. As a result, the Management Agreement with Capital was
considered a related party transaction (see Note 3) through July 28, 1998.
-8-
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. The Facilities Lease Agreement
------------------------------
ILM II Holding (the "Lessor") leases the Senior Housing Facilities to
the Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such
lease is scheduled to expire on December 31, 2000 (December 31, 1999 with
respect to the Santa Barbara Facility), unless terminated earlier at the
election of the Lessor in connection with the sale by the Lessor of the
Senior Housing Facilities to a non-affiliated third party, upon 30 days'
notice to the Company. As noted below in Recent Developments, ILM II has
entered into an agreement and plan of merger with Capital Senior Living
Corporation and certain affiliates of Capital, and has agreed to cause ILM
II Holding to cancel and terminate the Facilities Lease Agreement
immediately prior to the effective time of the merger. While there can be
no assurance, consummation of the merger is presently anticipated in the
second quarter of calendar year 2000. The lease is accounted for as an
operating lease in the Company's financial statements.
Descriptions of the properties covered by the Facilities Lease
Agreement between the Company and ILM II Holding are summarized as follows:
<TABLE>
<CAPTION>
Year Facility Rentable Resident
Name Location Built Units (2) Capacities (2)
---- -------- ----- --------- --------------
<S> <C> <C> <C> <C>
The Palms Fort Myers, FL 1988 205 255
Crown Villa Omaha, NE 1992 73 73
Overland Park Place Overland Park, KS 1984 141 153
Rio Las Palmas Stockton, CA 1988 164 190
The Villa at Riverwood St. Louis County, MO 1986 120 140
Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
</TABLE>
(1) The Company operates Villa Santa Barbara under a co-tenancy arrangement
with an affiliated company, ILM I Lease Corporation ("Lease I"). The
Company has entered into an agreement with Lease I regarding such joint
tenancy. Lease I was formed for similar purposes as the Company by an
affiliated company, ILM Senior Living, Inc. ("ILM I"), a subsidiary of
which owns 25% of the Villa Santa Barbara property. The portion of the
Senior Housing Facility leased by the Company represents 75% of the total
project. Villa Santa Barbara is 25% owned by ILM Holding Inc. and 75% by
ILM II Holding, Inc., a direct subsidiary of ILM II, as tenants in
common. Upon the sale of ILM I or ILM II, arrangements would be made to
transfer the Santa Barbara facility to the selling joint tenant (or one
of its subsidiaries). The property was extensively renovated in 1995.
(2) Rentable units represent the number of apartment units and is a measure
commonly used in the real estate industry. Resident capacity equals the
number of bedrooms contained within the apartment units and corresponds
to measures commonly used in the healthcare industry.
Pursuant to the Facilities Lease Agreement, the Company pays annual
base rent for the use of the Senior Housing Facilities in the aggregate
amount of $4,035,600. The facilities lease is a "triple-net" lease whereby
the Lessee pays all operating expenses, governmental taxes and
assessments, utility charges and insurance premiums, as well as the costs
of all required maintenance, personal property and non-structural repairs
in connection with the operation of the Senior Housing Facilities. ILM II
Holding, as Lessor, is responsible for all major capital improvements and
structural repairs to the Senior Housing Facilities. Also, any fixed
assets of the Company at a Senior Housing Facility would remain with the
Senior Housing Facility at the termination of the lease. The Company also
pays variable rent, on a quarterly basis, for each facility in an amount
equal to 40% of the excess of aggregate total revenues for the Senior
Housing Facilities, on an annualized basis, over $13,021,000. Variable
rental income was $350,000 and $310,000 for the three-month periods ended
November 30, 1999 and 1998, respectively.
-9-
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. The Facilities Lease Agreement (continued)
------------------------------------------
The Company's use of the properties is limited to use as Senior Housing
Facilities. The Company has responsibility to obtain and maintain all
licenses, certificates and consents needed to use and operate each Senior
Housing Facility, and to use and maintain each Senior Housing Facility in
compliance with all local board of health and other applicable governmental
and insurance regulations. The Senior Housing Facilities located in
California, Florida and Kansas are licensed by such states to provide
assisted living services. In addition, various health and safety
regulations and standards, which are enforced by state and local
authorities, apply to the operation of all the Senior Housing Facilities.
Violations of such health and safety standards could result in fines,
penalties, closure of a Senior Housing Facility, or other sanctions.
RECENT DEVELOPMENTS
-------------------
On February 7, 1999, ILM II entered into an agreement and plan of
merger, which was amended and restated on October 19, 1999, with Capital
Senior Living Corporation, the corporate parent of Capital, and certain
affiliates of Capital. While there can be no assurance, consummation of the
merger is presently anticipated in the second quarter of calendar year 2000.
In connection with the merger, ILM II has agreed to cause ILM II Holding to
cancel and terminate the Facilities Lease Agreement immediately prior to the
effective time of the merger. As noted above, the Facilities Lease
Agreement, which is scheduled to expire on December 31, 2000, may be
terminated earlier at the election of the Lessor in connection with the sale
by the Lessor of the Senior Housing Facilities to a non-affiliated third
party, upon 30 days' notice to the Company. Although there can be no
assurance as to whether the merger will be consummated or, if consummated,
as to the timing thereof, the Company's operations would not be expected to
continue beyond the effective time of the merger. As a result of the
proposed merger, Lease II would have little "going concern" value..
3. Related Party Transactions
--------------------------
Subject to the supervision of the Company's Board of Directors,
assistance in managing the business of the Company was provided by
PaineWebber. As previously discussed in the Company's Annual Report on Form
10-K for the year ended August 31, 1999, PaineWebber resigned effective as
of June 18, 1997.
The Company retained Capital to be the property manager of the Senior
Housing Facilities pursuant to the Management Agreement, which commenced on
July 29, 1996. Lawrence A. Cohen, who served through July 28, 1998 as a
Director of the Company and President, Chief Executive Officer and Director
of ILM II, has also served in various management capacities at Capital
Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen
currently serves as Chief Executive Officer of Capital Senior Living
Corporation. The Management Agreement is co-terminous with the Facilities
Lease Agreement. If, for any reason, the Facilities Lease Agreement is
extended beyond December 31, 2000, the scheduled expiration date of the
Management Agreement would be extended as well, but not beyond July 29,
2001. There is no present intention to extend the term of the Facilities
Lease Agreement or the term of the Management Agreement and it is likely
they will be terminated before the end of the term of the Facilities Lease
Agreement (see "Recent Developments" in Note 2). Under the terms of the
Management Agreement, Capital earns a base management fee equal to 4% of
the gross operating revenues of the Senior Housing Facilities, as defined.
Capital also earns an incentive management fee equal to 25% of the amount
by which the "net cash flow" of the Senior Housing Facilities, as defined,
exceeds a specified base amount. Each August 31, the base amount is
increased based on the percentage increase in the Consumer Price Index as
well as 15% of Senior Housing Facility expansion costs. ILM II has
guaranteed the payment of all fees due to Capital under the terms of the
Management Agreement. For the three-month periods ended November 30, 1999
and 1998, Capital earned property management fees from the Company of
$253,000 and $224,000, respectively.
-10-
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
3. Related Party Transactions (continued)
--------------------------------------
On September 18, 1997, the Company entered into an agreement with
Capital Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansions of several of the Senior
Housing Facilities. Capital Senior Development, Inc. would receive a fee
equal to 7% of the total development costs of these potential expansions if
they are pursued. ILM II Holding would also reimburse the Company for all
costs related to these potential expansions including fees to Capital
Senior Development, Inc. For the three-month periods ended November 30,
1999 and 1998, Capital Senior Development, Inc. earned no fees from the
Company for managing pre-construction development activities for potential
expansions of the Senior Housing Facilities.
Jeffry R. Dwyer, Secretary, President and Director of the Company, is a
shareholder of Greenberg Traurig, Counsel to the Company and its affiliates
since 1997. For the three-month periods ended November 30, 1999 and 1998,
Greenburg Traurig earned fees from the Company of $12,000 and $34,000,
respectively.
Accounts receivable - related party at November 30, 1999 and August 31,
1999 includes $30,349 expense reimbursement due from ILM II Holding for the
balance of the Ft. Myers roof replacement. Accounts payable related party
at November 30, 1999 and August 31, 1999 includes $350,000 and $337,000,
respectively, for variable rent due to ILM II Holding.
4. Legal Proceedings and Contingencies
-----------------------------------
The Company has pending claims incurred in the normal course of
business which, in the opinion of the Company's Board of Directors, will
not have a material effect on the financial statements of the Company.
5. Construction Loan Financing
---------------------------
ILM II and the Company have secured a construction loan facility with
a major bank that will provide ILM II with up to $8.8 million to fund the
capital costs of the potential expansion programs. The construction loan
facility is secured by a first mortgage of the Senior Housing Facilities
and collateral assignment of the Company's leases of such properties. The
loan has a three-year term with interest accruing at a rate equal to LIBOR
plus 1.10% or Prime plus 0.5%. The loan term can be extended for an
additional two years beyond its maturity date with monthly payments of
principal and interest on a 25-year amortization schedule. Loan origination
costs in connection with this loan facility are being amortized by ILM II
over the life of the loan.
On June 7, 1999 ILM II borrowed $1,165,000 under the construction
loan facility to fund the pre-construction capital costs, incurred through
April 1999, of the potential expansions of the Senior Housing Facilities,
leaving approximately $7.6 million unused and available. The Company is a
co-borrower on the construction loan.
-11-
<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Facilities Lease Agreement is a "triple-net" lease whereby the Lessee
pays all operating expenses, governmental taxes and assessments, utility charges
and insurance premiums, as well as the costs of all required maintenance,
personal property and non-structural repairs in connection with the operation of
the Senior Housing Facilities. ILM II Holding, as Lessor, is responsible for all
major capital improvements and structural repairs to the Senior Housing
Facilities. If the Company and ILM II Holding decide that any of the Senior
Housing Facilities should be expanded, the Facilities Lease Agreement between
the Company and ILM II Holding would be amended to include such expansion.
Pursuant to the Facilities Lease Agreement, the Company pays annual base rent
for use of all the Senior Housing Facilities in the aggregate amount of
$4,035,600. The Company also pays variable rent, on a quarterly basis, for each
Senior Housing Facility in an amount equal to 40% of the excess, if any, of the
aggregate total revenues for the Senior Housing Facilities, on an annualized
basis, over $13,021,000. Variable rent was $350,000 and $310,000 for the
three-month periods ended November 30, 1999 and 1998, respectively.
The Facilities Lease Agreement is scheduled to expire on December 31, 2000.
As explained under "Recent Developments" below, ILM II has entered into an
agreement and plan of merger with Capital Senior Living Corporation and certain
affiliates of Capital, and has agreed to cause ILM II Holding to cancel and
terminate the Facilities Lease Agreement immediately prior to the effective time
of the merger. Accordingly, since the Company does not have any current plans to
operate or own any other facilities or engage in any other business outside of
its relationship with ILM I, there is no assurance that the Company's operations
will continue beyond the effective date of the merger. While there can be no
assurance, consummation of the merger is presently anticipated in the second
quarter of calendar year 2000.
RECENT DEVELOPMENTS
On February 7, 1999, ILM II entered into an agreement and plan of merger,
which was amended and restated on October 19, 1999, with Capital Senior Living
Corporation, the corporate parent of Capital, and certain affiliates of Capital.
While there can be no assurance, consummation of the merger is presently
anticipated in the second quarter of calendar year 2000. In connection with the
merger, ILM II has agreed to cause ILM II Holding to cancel and terminate the
Facilities Lease Agreement immediately prior to the effective time of the
merger. As noted above, the Facilities Lease Agreement, which is scheduled to
expire on December 31, 2000, may be terminated earlier at the election of the
Lessor in connection with the sale by the Lessor of the Senior Housing
Facilities to a non-affiliated third party, upon 30 days' notice to the Company.
Although there can be no assurance as to whether the merger will be consummated
or, if consummated, as to the timing thereof, the Company's operations would not
be expected to continue beyond the effective time of the merger. As a result of
the proposed merger, Lease II would have little "going concern" value.
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the six properties in which the Company has invested
averaged 93% and 96% for the three-month periods ended November 30, 1999 and
1998, respectively. Base rent payments of $4,035,600 will remain in effect
throughout the remaining term of the lease. As noted above, the Facilities Lease
Agreement also provides for the payment of variable rent. The Senior Housing
Facilities are currently generating gross revenues, which are in excess of the
specified threshold in the variable rent calculation. Current annualized
operating income levels are sufficient to cover the Company's base and variable
rent obligations to ILM II Holding.
-12-
<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At November 30, 1999, the Company had cash and cash equivalents of
$1,718,000 compared to $1,487,000 at August 31, 1999. Remaining amounts of cash
will be used for the Company's working capital requirements. As noted above,
under the terms of the Facilities Lease Agreement, the Lessor is responsible for
major capital improvements and structural repairs to the Senior Housing
Facilities. Consequently, the Company does not have any material commitments for
capital expenditures. Furthermore, the Company does not currently anticipate the
need to engage in any borrowing activities. As a result, substantially all of
the Company's cash flow will be generated from operating activities. The Company
did not pay cash dividends in fiscal years 1999, 1998, and 1997 or for the first
quarter of fiscal year 2000. The Company may or may not determine to pay cash
dividends in the future. Payment of dividends, if any, will be at the discretion
of the Company's Board of Directors and will depend upon such factors as the
Company's financial condition, earnings, anticipated investments and other
relevant factors. The source of future liquidity is expected to be from
operating cash flows from the Senior Housing Facilities, net of the Facilities
Lease Agreement payments to ILM II Holding, and interest income earned on
invested cash reserves. Such sources of liquidity are expected to be adequate to
meet the Company's operating requirements on both a short-term and long-term
basis.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize the year 2000 as a date other than the year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Based on ongoing assessments, the Company, through Capital, its property
manager and only significant and material third-party contractor, has developed
a program to modify or replace portions of its software and certain hardware,
which are generally PC-based systems, so that those systems will properly
recognize and utilize dates beyond December 31, 1999. While there can be no
assurance, the Company believes that it has completed all software and hardware
upgrades. The Company presently believes that these modifications and
replacements of existing software and certain hardware will remediate the Year
2000 issue. The costs of Year 2000 remediation have not been material based on
the Company's operations.
The Company has assessed its exposure to operating equipment, and such
exposure is not significant due to the nature of the Company's business.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue. However, disruptions in the economy generally
resulting from Year 2000 issues could also adversely affect the Company.
Although the amount of potential liability and lost revenue cannot be reasonably
estimated at this time, in a worst case situation, if Capital, the Company's
only significant and material third-party contractor, were to experience a Year
2000 problem, it is possible that the Company would not receive rental income as
it became due from Senior Living Facility residents. The Company in turn would
fail to pay ILM Holding lease payments as they arise under the master lease, and
ILM Holding in turn would fail to pay ILM I mortgage payments due it. However,
the Company believes that given the nature of its business, such a problem would
be temporary and easily remedied with simple accountings.
-13-
<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1999 VERSUS THREE MONTHS ENDED NOVEMBER 30, 1998
REVENUES
Total revenues were $4,139,000 for the three months ended November 30, 1999
compared to $4,040,000 for the same period of the prior year, representing an
increase of $99,000 or 2.5%. This increase is primarily the result of increased
rental rates at certain of the Company's Senior Housing Facilities located in
strong markets.
EXPENSES
Total expenses were $4,041,000 for the three months ended November 30,
1999 compared to $3,862,000 for the same period in the prior year, representing
an increase of $179,000 or 4.6%. This increase was primarily due to increases in
facilities lease rent expense of $41,000 or 3.1%, administrative salaries and
expenses of $34,000 or 12.1%; repairs and maintenance of $34,000 or 26.4%;
depreciation expense of $76,000 or 165.2%; general and administrative costs of
$18,000 or 28.1 %; and property management fees of $29,000 or 12.9%, offset by a
$66,000 or 40.0% decrease in professional fees as a result of settling the AHC
litigation as well as minor increases and decreases in certain other expenses.
The increase in facilities lease rent expense is the result of increased
variable rent payments due under the Facilities Lease Agreement. The increase in
depreciation expense is due to the change in the estimated useful lives of the
Company's fixed assets as a consequence of the scheduled lease termination date
of December 31, 2000, as such assets are not subject to repurchase by ILM II
Holding. The increase in property management fees is attributable to higher
incentive management fees earned by the property manager as a result of higher
revenues at the Senior Housing Facilities.
INCOME TAX EXPENSE
Income tax expense decreased overall by $33,000 or 45.8% as compared to the
same period in the prior year, as a result of an decrease in income before taxes
of $80,000 or 81.6%, from $178,000 in 1998 to $98,000 in 1999.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$47,000 or 44.3% to $59,000 for the three months ended November 30, 1999 from
net income of $106,000 for the three months ended November 30, 1998.
-14-
<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q
("QUARTERLY REPORT") CONSTITUTE "FORWARD-LOOKING STATEMENTS" INTENDED TO QUALIFY
FOR THE SAFE HARBORS FROM LIABILITY ESTABLISHED BY SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE FORWARD-LOOKING
STATEMENTS GENERALLY CAN BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE
STATEMENT WILL INCLUDE WORDS SUCH AS "BELIEVES," "COULD," "MAY," "SHOULD,"
"ENABLE," "LIKELY," "PROSPECTS," "SEEK," "PREDICTS," "POSSIBLE," "FORECASTS,"
"PROJECTS," "ANTICIPATES," "EXPECTS" AND WORDS OF ANALOGOUS IMPORT AND
CORRELATIVE EXPRESSIONS THEREOF, AS WELL AS STATEMENTS PRECEDED OR OTHERWISE
QUALIFIED BY: "THERE CAN BE NO ASSURANCE" OR "NO ASSURANCE CAN BE GIVEN."
SIMILARLY, STATEMENTS THAT DESCRIBE THE COMPANY'S FUTURE PLANS, OBJECTIVES,
STRATEGIES OR GOALS ALSO ARE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS MAY
ADDRESS FUTURE EVENTS AND CONDITIONS CONCERNING, AMONG OTHER THINGS, THE
COMPANY'S CASH FLOWS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION; THE
CONSUMMATION OF ACQUISITION AND FINANCING TRANSACTIONS AND THE EFFECT THEREOF ON
THE COMPANY'S BUSINESS, ANTICIPATED CAPITAL EXPENDITURES, PROPOSED OPERATING
BUDGETS AND ACCOUNTING RESERVES; LITIGATION; PROPERTY EXPANSION AND DEVELOPMENT
PROGRAMS OR PLANS; REGULATORY MATTERS; AND THE COMPANY'S PLANS, GOALS,
STRATEGIES AND OBJECTIVES FOR FUTURE OPERATIONS AND PERFORMANCE. ANY SUCH
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED
IN SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO A NUMBER OF ASSUMPTIONS REGARDING, AMONG OTHER THINGS, GENERAL ECONOMIC,
COMPETITIVE AND MARKET CONDITIONS. SUCH ASSUMPTIONS NECESSARILY ARE BASED ON
FACTS AND CONDITIONS AS THEY EXIST AT THE TIME SUCH STATEMENTS ARE MADE, THE
PREDICTION OR ASSESSMENT OF WHICH MAY BE DIFFICULT OR IMPOSSIBLE AND, IN ANY
CASE, BEYOND THE COMPANY'S CONTROL. FURTHER, THE COMPANY'S BUSINESS IS SUBJECT
TO A NUMBER OF RISKS THAT MAY AFFECT ANY SUCH FORWARD-LOOKING STATEMENTS AND
ALSO COULD CAUSE ACTUAL RESULTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE
PROJECTED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS IN THIS PARAGRAPH. MOREOVER, THE COMPANY
DOES NOT INTEND TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS TO REFLECT
ANY CHANGES IN GENERAL ECONOMIC, COMPETITIVE OR MARKET CONDITIONS AND
DEVELOPMENTS BEYOND ITS CONTROL.
READERS OF THIS QUARTERLY REPORT ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON ANY OF THE FORWARD-LOOKING STATEMENTS SET FORTH HEREIN AND THAT ACTUAL FUTURE
RESULTS MAY DIFFER.
-15-
<PAGE>
ILM II LEASE CORPORATION
PART II-OTHER INFORMATION
ITEM 1. THROUGH 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27. Financial Data Schedule
(b) Reports on Form 8-K: NONE
-16-
<PAGE>
ILM 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/ Jeffry R. Dwyer
-------------------------------
Jeffry R. Dwyer
President
Dated: January 15, 2000
----------------------
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<PAGE>
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<FISCAL-YEAR-END> AUG-31-2000
<PERIOD-END> NOV-30-1999
<CASH> 1,718
<SECURITIES> 0
<RECEIVABLES> 278
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,996
<PP&E> 1,195
<DEPRECIATION> 640
<TOTAL-ASSETS> 2,714
<CURRENT-LIABILITIES> 1,360
<BONDS> 0
0
0
<COMMON> 52
<OTHER-SE> 1,273
<TOTAL-LIABILITY-AND-EQUITY> 2,714
<SALES> 0
<TOTAL-REVENUES> 4,139
<CGS> 0
<TOTAL-COSTS> 4,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 98
<INCOME-TAX> 0
<INCOME-CONTINUING> 39
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59
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