<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MAY 31, 2000
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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
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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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (888) 257-3550
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
------------------- ----------------
<S> <C>
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 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 of common stock outstanding as of May 31, 2000: 5,180,952.
Current Report on Form 8-K
of Registrant Dated June 7, 2000
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Page 1 of 19
<PAGE>
ILM II LEASE CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information PAGE
<S> <C>
Item 1. Financial Statements
Balance Sheets
May 31, 2000 (Unaudited) and August 31, 1999.................................................4
Statements of Income
For the nine and three months ended May 31, 2000 and 1999 (Unaudited)........................5
Statements of Changes in Shareholders' Equity
For the nine months ended May 31, 2000 and 1999 (Unaudited)..................................6
Statements of Cash Flows
For the nine months ended May 31, 2000 and 1999 (Unaudited)..................................7
Notes to Financial Statements (Unaudited).................................................8-12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....13-17
Part II. Other Information....................................................................................18
Item 6. Exhibits and Reports on Form 8-K............................................................18
Signatures....................................................................................................19
</TABLE>
-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
May 31, 2000 (Unaudited) and August 31, 1999
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
MAY 31, 2000 AUGUST 31, 1999
------------ ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,863 $ 1,487
Accounts receivable, net 63 80
Accounts receivable - related party 30 50
Prepaid expenses and other assets 144 352
Tax refund receivable 21 21
------- -------
Total current assets 2,121 1,990
Furniture, fixtures and equipment 1,366 1,135
Less: accumulated depreciation (884) (518)
------- -------
482 617
Deposits 9 9
Deferred tax asset, net 54 154
------- -------
$ 2,666 $ 2,770
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 545 $ 621
Income taxes payable -- 226
Real estate taxes payable 184 230
Accounts payable - related party 398 341
Security deposits 62 49
------- -------
Total current liabilities 1,189 1,467
Deferred rent payable 14 37
------- -------
Total liabilities 1,203 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 963 766
------- -------
Total shareholders' equity 1,463 1,266
------- -------
$ 2,666 $ 2,770
======= =======
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF INCOME
For the nine and three months ended May 31, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
MAY 31 MAY 31
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Rental and other income $12,469 $12,130 $ 4,162 $ 4,008
Interest income 29 12 10 4
------- ------- ------- -------
12,498 12,142 4,172 4,012
EXPENSES
Master lease rent expense 4,084 3,947 1,364 1,302
Dietary and food service salaries, wages and expenses 2,102 2,050 706 685
Administrative salaries, wages and expenses 1,097 888 457 291
Marketing salaries, wages and expenses 542 513 188 191
Utilities 748 772 235 245
Repairs and maintenance 468 447 160 162
Real estate taxes 394 394 131 131
Property management fees 739 773 213 225
Other property operating expenses 1,101 1,074 373 366
General and administrative 292 187 106 82
Directors compensation 45 39 14 12
Professional fees 221 245 44 81
Depreciation expense 366 199 122 81
------- ------- ------- -------
12,199 11,528 4,113 3,854
------- ------- ------- -------
Income before taxes 299 614 59 158
Income tax expense (benefit):
Current 23 -- 17 --
Deferred 79 246 -- 63
------- ------- ------- -------
102 246 17 63
------- ------- ------- -------
NET INCOME $ 197 $ 368 $ 42 $ 95
======= ======= ======= =======
Basic earnings per share of common stock $ 0.04 $ 0.07 $ 0.01 $ 0.01
======= ======= ======= =======
</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 nine months ended May 31, 2000 and 1999 (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 -- -- -- 368 368
--------- --------- --------- --------- ---------
Balance at May 31, 1999 5,180,952 $ 52 $ 448 $ 565 $ 1,065
========= ========= ========= ========= =========
Balance at August 31, 1999 5,180,952 $ 52 $ 448 $ 766 $ 1,266
Net Income -- -- -- 197 197
--------- --------- --------- --------- ---------
Balance at May 31, 2000 5,180,952 $ 52 $ 448 $ 963 $ 1,463
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the nine months ended May 31, 2000 and 1999 (Unaudited)
(Dollars In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 197 $ 368
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation expense 366 199
Deferred tax expense (benefit) 100 245
Changes in assets and liabilities:
Accounts receivable, net 17 (73
Accounts receivable - related party 20 --
Prepaid expenses and other assets 208 (16)
Tax refund receivable -- 131
Accounts payable and accrued expenses (76) (47)
Accounts payable - related party 57 34
Termination fee payable -- (650)
Real estate taxes payable (46) (93)
Income taxes payable (226) --
Deferred rent payable (23) (22)
Security deposits, net 13 17
------- -------
Net cash provided by operating activities 607 (93)
Cash flows from investing activities:
Additions to furniture, fixtures and equipment (231) (227)
------- -------
Net cash used in investing activities (231) (227)
------- -------
Net increase (decrease) in cash and cash equivalents 376 (134)
Cash and cash equivalents, beginning of period 1,487 1,497
------- -------
Cash and cash equivalents, end of period $ 1,863 $ 1,363
======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid during the period for state and federal income taxes $ 278 $ 3
======= =======
</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
May 31, 2000, and revenues and expenses for each of the nine- and
three-month periods ended May 31, 2000 and 1999. 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 nine- and
three-month periods ended May 31, 2000, 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 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)
AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION
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 ("CSLC"), the corporate parent of Capital, and
certain affiliates of Capital. On April 18, 2000, ILM II entered into a
First Amendment to the Amended and Restated Agreement and Plan of Merger
dated October 19, 1999.
At a special meeting of Shareholders on June 22, 2000, holders of more
than two-thirds of the outstanding shares of ILM's common stock voted in
favor of approval of the proposed Amended and Restated Agreement and Plan
of Merger dated October 19, 1999, as amended on April 18, 2000. Subject to
the satisfaction of certain conditions, consummation of the merger is
expected to occur on or about July 31, 2000. The agreement presently
provides that it may be terminated if the merger is not consummated by
September 30, 2000.
The Facilities Lease Agreement by its terms is scheduled to expire on
December 31, 2000, and may be terminated earlier at the election of ILM II
Holding upon sale of ILM II Holding's senior living communities to a
non-affiliated third party.
In connection with the merger, on June 2, 2000, the Company received
notice from ILM II Holding indicating that the Facilities Lease Agreement
would terminate on the date of consummation of the pending merger of ILM II
and Capital. Subject to the satisfaction of certain conditions and the
receipt of requisite approvals, although there can be no assurance as to
whether the merger will be consummated or, if consummated, as to the timing
thereof, consummation of the merger is expected to occur on or about July
31, 2000.
If the merger is consummated, the Company's operations would not be
expected to continue beyond the termination of the Facilities Lease
Agreement. Additionally, upon such termination, it is currently expected
that the Company would have nominal value after payment of expenses and
other costs, and the Board accordingly would review the Company's status
and continued existence. The Company plans to adopt a liquidation basis of
accounting if the Facilities Lease Agreement is terminated. At present, it
is expected that liquidation would be completed by the end of Calendar Year
2000. If the merger is not consummated, it is anticipated that the
Facilities Lease Agreement will remain in full force and effect pursuant to
its terms.
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 but was extended on a month-to-month basis), 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 above, ILM II has entered into an
agreement and plan of merger, as amended, 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 on the date of consummation
of the pending merger. While there can be no assurance, consummation of the
merger is expected to occur on or about July 31, 2000. The lease is accounted
for as an operating lease in the Company's financial statements.
-9-
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited)
(continued)
2. THE FACILITIES LEASE AGREEMENT (CONTINUED)
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 rent was
$1,081,000 and $363,000 for the nine- and three-month periods ended May 31,
2000, respectively, compared to $943,000 and $301,000 for the nine- and three-
month periods ended May 31, 1999, respectively.
The Company's use of the properties is limited to use as Senior Housing
Facilities. The Company has responsibility to obtain and maintain all licenses,
certificates and consents needed to use and operate each Senior Housing
Facility, and to use and maintain each Senior Housing Facility in compliance
with all local board of health and other applicable governmental and insurance
regulations. The Senior Housing Facilities 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.
-10-
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
3. RELATED PARTY TRANSACTIONS
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 "Agreement and Plan of Merger with Capital Senior Living
Corporation" in Note 1). In connection with the Agreement and Plan of
Merger discussed in Note 1, the Management Agreement with Capital will be
terminated upon consummation of the merger. 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 nine- and three-month periods ended May 31,
2000, Capital earned property management fees from the Company of $739,000
and $213,000, respectively, compared to $773,000 and $225,000 for the nine-
and three-month periods ended May 31, 1999, respectively.
On September 18, 1997, the Company entered into an agreement with
Capital Senior Development, Inc., an affiliate of Capital, to manage the
development process for the potential expansions of several of the Senior
Housing Facilities. Capital Senior Development, Inc. would receive a fee
equal to 7% of the total development costs of these 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 nine- and three-month periods ended May
31, 2000, and 1999, 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 nine- and three-month periods ended May 31, 2000,
Greenberg Traurig earned fees from the Company of $28,000 and $1,700,
respectively. For the nine- and three-month periods ended May 31, 1999,
Greenberg Traurig earned fees from the Company of $54,000 and $0,
respectively.
Accounts receivable - related party at May 31, 2000 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 May 31, 2000 includes $363,000 for variable rent due to ILM II Holding;
$16,000 in accrued legal fees due to Greenberg Traurig, Counsel to the
Company and a related party; and $19,000 in miscellaneous reimbursements
due to affiliates. At August 31, 1999 accounts payable - related party
include $337,000 for variable rent due to ILM II Holding and $4,000 in
accrued legal fees due to Greenberg Traurig, Counsel to the Company and a
related party.
-11-
<PAGE>
ILM II LEASE CORPORATION
Notes to Financial Statements (Unaudited) (continued)
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.
6. SUBSEQUENT EVENT
On June 2, 2000, ILM II caused Holding II to notify the Company that
the Facilities Lease Agreement would terminate on the date of consummation
of the pending merger of the Company with CSLC. Subject to the satisfaction
of certain conditions and the receipt of requisite approvals, consummation
of the merger is expected to occur on or about July 30, 2000. If the merger
is not consummated, it is anticipated that the Facilities Lease Agreement
will remain in full force and effect pursuant to its terms.
-12-
<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. The
Facilities Lease Agreement is scheduled to expire on December 31, 2000. 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 $1,081,000 and $363,000 for the nine-and-three
month periods ended May 31, 2000, respectively, compared to $943,000 and
$301,000 for the nine- and three-month periods ended May 31, 1999, respectively.
As explained 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 on the date of consummation 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 II, there
is no assurance that the Company's operations will continue beyond the effective
date of the merger. The agreement presently provides that it may be terminated
if the merger is not consummated by September 30, 2000.
AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION
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 ("CSLC"), the corporate parent of Capital, and certain affiliates of
Capital. On April 18, 2000, ILM II entered into a First Amendment to the Amended
and Restated Agreement and Plan of Merger dated October 19, 1999.
At a special meeting of Shareholders on June 22, 2000, holders of more than
two-thirds of the outstanding shares of ILM II's common stock voted in favor of
approval of the proposed Amended and Restated Agreement and Plan of Merger dated
October 19, 1999, as amended on April 18, 2000. Subject to the satisfaction of
certain conditions, consummation of the merger is expected to occur on or about
July 31, 2000. The agreement presently provides that it may be terminated if the
merger is not consummated by September 30, 2000.
The Facilities Lease Agreement by its terms is scheduled to expire on
December 31, 2000, and may be terminated earlier at the election of ILM II
Holding upon sale of ILM II Holding's senior living communities to a
non-affiliated third party.
In connection with the merger, on June 2, 2000, the Company received notice
from ILM II Holding indicating that the Facilities Lease Agreement would
terminate on the date of consummation of the pending merger of ILM II and
Capital. Subject to the satisfaction of certain conditions and the receipt of
requisite approvals, although there can be no assurance as to whether the merger
will be consummated or, if consummated, as to the timing thereof, consummation
of the merger is expected to occur on or about July 31, 2000.
If the merger is consummated, the Company's operations would not be
expected to continue beyond the termination of the Facilities Lease Agreement.
Additionally, upon such termination, it is currently expected that the Company
would have nominal value after payment of expenses and other costs, and the
Board accordingly would review the Company's status and continued existence. The
Company plans to adopt a liquidation basis of accounting if the Facilities Lease
Agreement is terminated. At present, it is expected that liquidation would be
completed by the end of Calendar Year 2000. If the merger is not consummated, it
is anticipated that the Facilities Lease Agreement will remain in full force and
effect pursuant to its terms.
-13-
<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Occupancy levels for the six properties in which the Company has invested
averaged 91% and 92% for the three-month periods ended May 31, 2000 and 1999,
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.
At May 31, 2000, the Company had cash and cash equivalents of $1,863,000
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
three quarters 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.
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<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
NINE MONTHS ENDED MAY 31, 2000 VERSUS NINE MONTHS ENDED MAY 31, 1999
REVENUES
Total revenues were $12,498,000 for the nine months ended May 31, 2000
compared to $12,142,000 for the same period of the prior year, representing an
increase of $356,000 or 2.9%. 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 $12,199,000 for the nine months ended May 31, 2000
compared to $11,528,000 for the same period in the prior year, representing an
increase of $671,000 or 5.8%. This increase was primarily due to increases in
facilities lease rent expense of $137,000 or 3.5%; administrative salaries and
expenses of $209,000 or 23.5%; repairs and maintenance of $21,000 or 4.7%;
depreciation expense of $167,000 or 83.9%; general and administrative costs of
$105,000 or 56.1%; and marketing, salaries, wages and expenses of $29,000 or
5.7%. These increases in expenses were offset by decreases in property
management fees of $34,000 or 4.4%; professional fees of $24,000 or 9.8%; and
utilities of $24,000 or 3.1%. The increase in facilities lease rent expense is
the result of increased variable rent payments due under the Facilities Lease
Agreement. The increase in depreciation expense is due to the change in the
estimated useful lives of the Company's fixed assets as a consequence of the
expected lease termination date. Pursuant to the terms of the Facilities Lease
Agreement, such assets would revert to ILM Holding upon lease expiration or
termination.
INCOME TAX EXPENSE
Income tax expense decreased overall by $144,000 or 58.5% as compared to the
same period in the prior year, as a result of a decrease in income before taxes
of $315,000 or 48.7%, from $614,000 in 1999 to $299,000 in 2000.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$171,000 or 46.5% to $197,000 for the nine months ended May 31, 2000 from net
income of $368,000 for the nine months ended May 31, 1999.
THREE MONTHS ENDED MAY 31, 2000 VERSUS THREE MONTHS ENDED MAY 31, 1999
REVENUES
Total revenues were $4,172,000 for the three months ended May 31, 2000
compared to $4,012,000 for the same period of the prior year, representing an
increase of $160,000 or 4.0%. This increase is primarily the result of increased
rental rates at certain of the Company's Senior Housing Facilities located in
strong markets.
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<PAGE>
ILM II LEASE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (CONTINUED)
EXPENSES
Total expenses were $4,113,000 for the three months ended May 31, 2000
compared to $3,854,000 for the same period in the prior year, representing an
increase of $259,000 or 6.7%. This increase was primarily due to increases in
facilities lease rent expense of $62,000 or 4.8%; administrative salaries, wages
and expenses of $166,000 or 57.0%; general and administrative expenses of
$24,000 or 29.3%; and depreciation expense of $41,000 or 50.6%. These increases
were offset by decreases in professional fees of $37,000 or 45.7%; and property
management fees of $12,000 or 5.3% as well as minor increases and decreases in
other expenses. The increase in facilities lease rent expense is the result of
increased variable rent payments due under the Facilities Lease Agreement. The
increase in depreciation expense is due to the change in the estimated useful
lives of the Company's fixed assets as a consequence of the expected lease
termination date. Pursuant to the terms of the Facilities Lease Agreement, such
assets would revert to ILM Holding upon lease expiration or termination.
INCOME TAX EXPENSE
Income tax expense decreased overall by $46,000 or 73.0% as compared to the
same period in the prior year, as a result of a decrease in income before taxes
of $99,000 or 62.7%, from $158,000 in 1999 to $59,000 in 2000.
NET INCOME
Primarily as a result of the factors noted above, net income decreased
$53,000 or 55.8% to $42,000 for the three months ended May 31, 2000 from net
income of $95,000 for the three months ended May 31, 1999.
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<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.
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<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:
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 II and its effect on the Company's value
and continued existence.
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<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: July 14, 2000
----------------
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