<PAGE>
================================================================================
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, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____ to ____.
Commission File Number: 0-25880
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 X No
----- ------
Shares of common stock outstanding as of November 30, 2000: 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> <C> <C>
Item 1. Financial Statements
Balance Sheets
November 30, 2000 (Unaudited) and August 31, 2000............................................4
Statements of Income
For the three months ended November 30, 2000 and 1999 (Unaudited)............................5
Statements of Changes in Shareholders' Equity
For the three months ended November 30, 2000 and 1999 (Unaudited)............................6
Statements of Cash Flows
For the three months ended November 30, 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....13-16
Part II. Other Information...................................................................................17
Item 6. Exhibits and Reports on Form 8-K............................................................17
Signatures....................................................................................................18
</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, 2000 (Unaudited) and August 31, 2000
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS
------
November 30, 2000 August 31, 2000
----------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 1,417 $1,894
Accounts receivable, net 32 21
Accounts receivable - related party 40 40
Accounts receivable - Capital Senior Living Corporation 39 39
Prepaid expenses and other assets 150 58
State tax refund receivable 21 21
------- --------
Total current assets 1,699 2,073
Furniture, fixtures and equipment 1,733 1,604
Less: accumulated depreciation (1,651) (1,153)
------- --------
82 451
Deposits 9 9
Deferred tax asset, net - 12
------- --------
$1,790 $2,545
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses $ 497 $ 542
Federal income taxes payable 276 276
Real estate taxes payable 106 305
Accounts payable - related party 309 378
Security deposits 41 36
------- --------
Total current liabilities 1,229 1,537
Deferred rent payable - 6
------- --------
Total liabilities 1,229 1,543
Commitments and 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 61 502
------- --------
Total shareholders' equity 561 1,002
------- --------
$1,790 $2,545
======= ========
</TABLE>
See accompanying notes.
-4-
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF INCOME
For the three months ended November 30, 2000 and 1999 (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
November 30
-----------
2000 1999
---- ----
<S> <C> <C>
REVENUES:
Rental and other income $ 3,548 $4,131
Interest income
10 8
-------- --------
3,558 4,139
-------- --------
EXPENSES:
Facilities lease rent expense 1,139 1,352
Dietary salaries, wages and food service expenses 632 705
Administrative salaries, wages and expenses 271 316
Marketing salaries, wages and expenses 147 177
Utilities 187 262
Repairs and maintenance 134 163
Real estate taxes 118 130
Property management fees 208 253
Other property operating expenses 319 365
General and administrative expenses 176 82
Directors compensation 14 15
Professional fees 144 99
Depreciation expense 498 122
-------- --------
3,987 4,041
-------- --------
(Loss) income before taxes (429) 98
Income tax expense:
Current - 39
Deferred 12 -
-------- --------
12 39
-------- --------
NET (LOSS) INCOME $ (441) $ 59
======== ========
Basic (loss) earnings per share of common stock $ (0.09) $ 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, 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, 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
========= ==== ==== ==== ========
Balance at August 31, 2000 5,180,952 $ 52 $448 $502 $ 1,002
Net Loss - - - (441) (441)
--------- ---- ---- ---- --------
Balance at November 30, 2000 5,180,952 $ 52 $448 $ 61 $ 561
========= ==== ==== ===== ========
</TABLE>
See accompanying notes.
-6-
<PAGE>
ILM II LEASE CORPORATION
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 2000 and 1999 (Unaudited)
(Dollars In thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
November 30,
------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (441) $ 59
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation expense 498 122
Deferred tax expense 12 -
Changes in assets and liabilities:
Accounts receivable, net (11) 20
Accounts receivable - related party - 20
Accounts receivable - Capital Senior Living Corporation - -
Prepaid expenses and other assets (92) 185
Accounts payable and accrued expenses (46) 22
Accounts payable - related party (69) 33
Real estate taxes payable (199) (210)
Federal income taxes payable - 43
Deferred rent payable (6) (8)
Security deposits, net 5 5
--------- ------
Net cash (used by) provided by operating activities (348) 291
Cash flows from investing activity:
Additions to furniture, fixtures and equipment (129) (60)
--------- ------
Net cash used in investing activities (129) (60)
--------- ------
Net (decrease) increase in cash and cash equivalents (477) 231
Cash and cash equivalents, beginning of period 1,894 1,487
--------- ------
Cash and cash equivalents, end of period $ 1,417 $1,718
========= ======
Supplemental Disclosure:
------------------------
Cash paid during the period for state and federal 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, 2000. 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, 2000, and revenues and expenses for each of the three-month
periods ended November 30, 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 three-month
periods ended November 30, 2000, are not necessarily indicative of the
results to be expected for the year ending August 31, 2001.
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 ("CSLC"), an affiliate of Capital, since 1996.
Mr. Cohen currently serves as Chief Executive Officer of CSLC. As a result,
the Management Agreement with Capital was considered a related party
transaction (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 with CSLC, the corporate parent of Capital, and certain affiliates
of CSLC. In connection with the merger, the Company has 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
CSLC. 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. 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.
On August 15, 2000, ILM II caused ILM II Holding to terminate the
Facilities Lease Agreement with respect to the company's 75% leasehold
interest in Villa Santa Barbara and sell the Senior Housing Facility to
CSLC.
The Facilities Lease Agreement was originally scheduled to
expire on December 31, 2000. On November 13, 2000, the Facilities Lease
Agreement was extended on a month-to-month basis beyond its original
expiration date. On November 28, 2000, the Facilities Lease Agreement was
extended through the earlier of the date on which the merger of ILM II with
CSLC is consummated or March 31, 2001, and on a month-to-month basis
thereafter if the merger is not consummated by that time.
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
was originally scheduled to expire on December 31, 2000. On August 15, 2000, ILM
II caused ILM II Holding to terminate the Facilities Lease Agreement with
respect to the Company's 75% leasehold interest in Villa Santa Barbara and sell
the Senior Housing Facility to CSLC. On November 13, 2000, the Facilities Lease
Agreement was extended on a month-to-month basis beyond its original expiration
date. On November 28, 2000, the Facilities Lease Agreement was extended through
the earlier of the date on which the merger of ILM II with CSLC is consummated
or March 31, 2001, and on a month-to-month basis thereafter if the merger is not
consummated by that time. 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
</TABLE>
(1) 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 paid annual base
rent for the use of the Senior Housing Facilities in the aggregate amount of
$3,995,586 per year ($4,035,600 in 1999). The reduction in base rent from the
previous year is due to the termination of the Facilities Lease Agreement with
respect to Villa Santa Barbara which was sold by ILM II to CSLC on August 15,
2000. Effective September 1, 2000, annual base rent was adjusted to $3,555,427
(excluding Villa Santa Barbara). 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 paid 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 through August 15, 2000, when Villa Santa Barbara was sold.
Effective September 1, 2000, variable rent is payable quarterly in an amount
equal to 40% of the excess of the aggregate total revenues over $11,634,000
(excluding Villa Santa Barbara). Variable rent expense was $256,000 and $350,000
for the three-month periods ended November 30, 2000 and 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 a 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 CSLC, an
affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief
Executive Officer of CSLC. The Management Agreement is co-terminous with
the Facilities Lease Agreement. On November 13, 2000, the Facilities Lease
Agreement was extended on a month-to-month basis beyond its original
expiration date. On November 28, 2000, the Facilities Lease Agreement was
extended through the earlier of the date on which the merger of ILM II with
CSLC is consummated or March 31, 2000, and on a month-to-month basis
thereafter if the merger is not consummated by that time. 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 three-month
periods ended November 30, 2000 and 1999, Capital earned property
management fees from the Company of $208,000 and $253,000, 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 three-month periods ended November 30,
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 three-month periods ended November 30, 2000 and 1999,
Greenberg Traurig earned fees from the Company of $30,000 and $12,000
respectively.
Accounts receivable - related party at November 30, 2000 and August 31,
2000 includes $40,000 in expense reimbursements due from ILM II Holding for
capital expenditures at the Senior Housing Facilities. Accounts receivable
- Capital Senior Living Corporation at November 30, 2000, includes amounts
due from Capital as part of the final settlement of property-level
receivables and payables at lease termination with respect to the Company's
75% interest in Villa Santa Barbara. Accounts payable - related party at
November 30, 2000, includes $256,000 for variable rent due to ILM II
Holding; $30,000 in accrued legal fees due to Greenberg Traurig, Counsel to
the Company and a related party; and $23,000 in miscellaneous
reimbursements due to affiliates. At August 31, 2000, accounts payable -
related party primarily includes $356,000 for variable rent due to ILM II
Holding.
-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 that
provides 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 Company is a co-borrower on
the construction loan. Amounts outstanding under the construction loan
facility were $570,000 at November 30, 2000.
-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 was scheduled to expire on December 31, 2000, but was
extended as discussed below under "Agreement and Plan of Merger with CSLC".
Pursuant to the Facilities Lease Agreement, the Company paid annual base rent
for use of all the Senior Housing Facilities in the aggregate amount of
$3,995,586 ($4,035,600 in 1999). The reduction in base rent from the previous
year is due to the termination of the Facilities Lease Agreement with respect to
Villa Santa Barbara which was sold by ILM II to CSLC on August 15, 2000.
Effective September 1, 2000, annual base rent is $3,555,427 (excluding Villa
Santa Barbara). The Company also paid 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 through August 15, 2000, when Villa Santa Barbara was
sold. Effective September 1, 2000, variable rent is payable quarterly in an
amount equal to 40% of the excess of the aggregate total revenues over
$11,634,000 (excluding Villa Santa Barbara). Variable rent was $256,000 and
$350,000 for the three-month periods ended November 30, 2000, respectively.
AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION
On February 7, 1999, ILM II entered into an agreement and plan of
merger with CSLC, the corporate parent of Capital, and certain affiliates of
CSLC. In connection with the merger, the Company has 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 CSLC. 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. 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.
On August 15, 2000, ILM II caused ILM II Holding to terminate the
Facilities Lease Agreement with respect to the company's 75% leasehold interest
in Villa Santa Barbara and sell the Senior Housing Facility to CSLC.
The Facilities Lease Agreement was originally scheduled to expire on
December 31, 2000. On November 13, 2000, the Facilities Lease Agreement was
extended on a month-to-month basis beyond its original expiration date. On
November 28, 2000, the Facilities Lease Agreement was extended through the
earlier of the date on which the merger of ILM II with CSLC is consummated or
March 31, 2001, and on a month-to-month basis thereafter if the merger is not
consummated by that time.
-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 five properties in which the Company has invested
(six properties in 1999 prior to the termination of the Facilities Lease
Agreement with respect to Villa Santa Barbara which was sold by ILM II to CSLC
on August 15, 2000) averaged 89% and 93% for the three-month periods ended
November 30, 2000 and 1999, respectively. Base rent payments of $3,555,427 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 November 30, 2000, the Company had cash and cash equivalents of
$1,417,000 compared to $1,894,000 at August 31, 2000. This decrease in cash of
$477,000 is, in part, attributable to decreased cash flows from the operations
of the senior housing facilities as Villa Santa Barbara was sold on August 15,
2000, as previously explained. 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 year 2000 or for the first quarter of fiscal
year 2001. 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 flow 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.
-14-
<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, 2000 VERSUS THREE MONTHS ENDED NOVEMBER 30, 1999
REVENUES
Total revenues were $3,558,000 for the three months ended November 30, 2000
compared to $4,139,000 for the same period of the prior year, representing a
decrease of $581,000 or 14.0%. This decrease is primarily the result of the sale
of Villa Santa Barbara offset by increased rental revenues at certain of the
Company's Senior Housing Facilities located in strong markets.
EXPENSES
Total expenses were $3,987,000 for the three months ended November 30,
2000 compared to $4,041,000 for the same period in the prior year, representing
a decrease of $54,000 or 1.3%. This decrease was primarily due to decreases in
facilities lease rent expense of $213,000 or 15.8%; dietary and food service
salaries, wages and expenses of $73,000 or 10.4%; administrative salaries and
expenses of $45,000 or 14.2%; utilities of $75,000 or 28.6%; repairs and
maintenance of $29,000 or 17.8%; and property management fees of $45,000 or
17.8%. These decreases in expenses were offset by increases in general and
administrative costs of $94,000 or 114.6%; professional fees of $45,000 or
45.5%; and depreciation expense of $376,000 or 308.2%. The decrease in
facilities lease rent expense is primarily the result of decreased base and
variable rent payments due under the Facilities Lease Agreement since the sale
of Villa Santa Barbara on August 15, 2000. The decrease in other expenses is
primarily the result of decreased cost of operations due to the sale of Villa
Santa Barbara. The increased cost of Director's & Officer's insurance premiums
has caused general and administrative costs to increase when compared to the
same period in the previous year. 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 $27,000 or 69.3% as compared to the
same period in the prior year, as a result of a decrease in income before taxes
of $527,000 or 122.8%, from income of $98,000 as of November 30, 1999 to a loss
of $441,000 as of November 30, 2000, coupled with utilization of the net
deferred tax asset of $12,000.
NET LOSS
Primarily as a result of the factors noted above, net income decreased
$500,000 or 847.5% from income of $59,000 for the three months ended November
30, 1999 to net loss of $441,000 for the three months ended November 30, 2000.
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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
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 27. Financial Data Schedule
(b) Reports on Form 8-K:
None.
-17-
<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, 2001
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