-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OnntP1COJuDxnLs+5DuYyTBZZyQOoV7SDXI2DbJsPFhhP64lCr6vBFm6zGf0OXH/ 7NJ688yzgQU7t9L7EHKsOw== 0000912057-00-018159.txt : 20000417 0000912057-00-018159.hdr.sgml : 20000417 ACCESSION NUMBER: 0000912057-00-018159 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000229 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILM I LEASE CORP CENTRAL INDEX KEY: 0000932091 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043248637 STATE OF INCORPORATION: VA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25878 FILM NUMBER: 601712 BUSINESS ADDRESS: STREET 1: 28 STATE STREET SUITE 1100 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 8882573550 MAIL ADDRESS: STREET 1: 1300 CONNECTICUT AVE NW STREET 2: STE 1000 CITY: WASHINGTON STATE: DC ZIP: 20036 10-Q 1 10-Q ================================================================================ 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 FEBRUARY 29, 2000 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____to____. Commission File Number: 0-25878 ILM I LEASE CORPORATION (Exact name of registrant as specified in its charter) VIRGINIA 04-3248637 (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 February 29, 2000: 7,519,430. ================================================================================ ILM I LEASE CORPORATION INDEX
PAGE Part I. Financial Information Item 1. Financial Statements Balance Sheets February 29, 2000 (Unaudited) and August 31, 1999............................................4 Statements of Operations For the six months and three months ended February 29, 2000 and February 28, 1999 (Unaudited)............................................................5 Statements of Changes in Shareholders' Equity For the six months ended February 29, 2000 and February 28, 1999 (Unaudited)................6 Statements of Cash Flows For the six months ended February 29, 2000 and February 28, 1999 (Unaudited)................7 Notes to Financial Statements (Unaudited).................................................8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....12-16 Part II. Other Information...................................................................................17 Item 6. Exhibits and Reports on Form 8-K............................................................17 Signatures....................................................................................................18
-2- ILM I LEASE CORPORATION PART I. FINANCIAL INFORMATION Item I. Financial Statements (see next page) -3- ILM I LEASE CORPORATION BALANCE SHEETS February 29, 2000 (Unaudited) and August 31, 1999 (Dollars in thousands, except per share data)
ASSETS FEBRUARY 29, 2000 AUGUST 31, 1999 ----------------- --------------- Cash and cash equivalents $1,235 $1,066 Accounts receivable, net 275 102 Tax refund receivable 1 1 Prepaid expenses and other assets 329 278 -------- ------- Total current assets 1,840 1,447 Furniture, fixtures and equipment 1,451 1,299 Less: accumulated depreciation (1,425) (943) -------- ------- 26 356 Deferred tax asset, net 92 92 -------- ------- $1,958 $1,895 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 1,055 $ 862 Real estate taxes payable 280 190 Accounts payable - related party 332 311 Security deposits 8 7 -------- ------- Total current liabilities 1,675 1,370 Deferred rent payable - 12 -------- ------- Total liabilities 1,675 1,382 Contingencies Shareholders' equity: Common stock, $0.01 par value, 20,000,000 shares authorized 7,519,430 issued and outstanding 75 75 Additional paid-in capital 625 625 Accumulated deficit (417) (187) -------- ------- Total shareholders' equity 283 513 -------- ------- $1,958 $1,895 ======== =======
See accompanying notes. -4- ILM I LEASE CORPORATION STATEMENTS OF OPERATIONS For the six and three months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands, except per share data)
Six Months Ended Three Months Ended February 29 February 28 February 29 February 28 2000 1999 2000 1999 ----------- ----------- ----------- ------------ REVENUES Rental and other income $10,037 $9,908 $5,033 $4,970 Interest income 7 8 3 4 ------- ------ ------ ------ 10,044 9,916 5,036 4,974 EXPENSES Master lease rent expense 3,786 3,728 1,901 1,870 Dietary and food service salaries, wages and expenses 1,869 1,806 945 902 Administrative salaries, wages and expenses 767 670 382 345 Marketing salaries, wages and expenses 482 456 253 231 Utilities 414 413 213 207 Repairs and maintenance 334 351 171 178 Real estate taxes 422 413 214 203 Property management fees 547 537 271 277 Other property operating expenses 760 751 379 369 General and administrative 186 142 99 69 Directors compensation 31 27 16 14 Professional fees 194 175 137 60 Depreciation expense 482 206 223 109 ------- ------ ------ ------ 10,274 9,675 5,204 4,834 ------- ------ ------ ------ Income (loss) before taxes (230) 241 (168) 140 Income tax expense (benefit): Current - - - - Deferred - 96 - 54 ------- ------ ------ ------ - 96 - 54 ------- ------ ------ ------ NET (LOSS) INCOME $ (230) $ 145 $ (168) $ 86 ======= ======= ====== ====== Basic (loss) earnings per share of common stock $( 0.03) $ 0.02 $(0.03) $0.01 ======= ======= ====== ======
The above (loss) earnings per share of common stock is based upon the 7,519,430 shares outstanding for each period. See accompanying notes. -5- ILM I LEASE CORPORATION STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For six months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands, except per share data)
Common Stock $.01 Par Value Additional Retained ---------------------- Paid-In Earnings Shares Amount Capital (Deficit) Total ------ ------ ---------- --------- ----- Balance at August 31, 1998 7,519,430 $ 75 $625 $(307) $ 393 Net income - - - 145 145 --------- ---- ---- ----- ------ Balance at February 28, 1999 7,519,430 $ 75 $625 $(162) $ 538 ========= ==== ==== ===== ===== Balance at August 31, 1999 7,519,430 $ 75 $625 $(187) $ 513 Net loss - - - (230) (230) --------- ---- ---- ----- ------ Balance at February 29, 2000 7,519,430 $ 75 $625 $(417) $ 283 ========= ==== ==== ===== =====
See accompanying notes. -6- ILM I LEASE CORPORATION STATEMENTS OF CASH FLOWS For the six months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands)
Six Months Ended February 29, February 28, 2000 1999 ---- ---- Cash flows from operating activities: Net (loss) income $ (230) $ 145 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation expense 482 206 Deferred tax expense (benefit), net - 96 Changes in assets and liabilities: Accounts receivable, net (173) (25) Tax refund receivable - 139 Prepaid expenses and other assets (51) 38 Accounts payable and accrued expenses 193 (264) Accounts payable - related party 21 (47) Termination fee payable - (975) Real estate taxes payable 90 172 Deferred rent payable (12) (18) Security deposits 1 (1) ------ ------ Net cash provided by (used in) operating activities 321 (534) ------ ------ Cash flows from investing activities: Additions to operating investment properties (152) (112) ------ ------ Net cash used in investing activities (152) (112) ------ Net increase (decrease) in cash and cash equivalents 169 (646) Cash and cash equivalents, beginning of period 1,066 1,897 ------ ------ Cash and cash equivalents, end of period $1,235 $1,251 ====== ====== SUPPLEMENTAL DISCLOSURE: Cash paid during the period for state income taxes $ 1 $ 4 ====== ======
See accompanying notes. -7- ILM I 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 I 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 February 29, 2000, and revenues and expenses for each of six- and three-month periods ended February 29, 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 six- and three-month periods ended February 29, 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 Senior Living, Inc., a Virginia finite-life corporation ("ILM I"), formerly PaineWebber Independent Living Mortgage Fund, Inc., to operate eight rental housing projects that provide independent-living and assisted-living services for 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 Holding, Inc. ("ILM Holding"), as lessor, and a direct subsidiary of ILM I. The Company's sole business is the operation of the Senior Housing Facilities. ILM I made mortgage loans to Angeles Housing Concepts, Inc. ("AHC") secured by the Senior Housing Facilities between June 1989 and July 1992. In March 1993, AHC defaulted under the terms of such mortgage loans and in connection with the settlement of such default, title to the Senior Housing Facilities was transferred, effective April 1, 1994, to certain indirect subsidiaries of ILM I, subject to the mortgage loans. Subsequently, these property-owning subsidiaries were merged into ILM Holding. As part of the fiscal 1994 settlement agreement with AHC, AHC was retained as the property manager for all of the Senior Housing Facilities pursuant to the terms of a management agreement, which was assigned to the Company as of September 1, 1995 and subsequently terminated in July 1996. ILM I 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 I, has also served in various management capacities at Capital Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of Capital Senior Living Corporation. As a result, the Management Agreement with Capital was considered a related party transaction (see Note 3) through July 28, 1998. AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION On February 7, 1999, ILM I 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. The agreement presently provides that it may be terminated if the merger is not consummated by September 30, 2000. In connection with the merger, ILM I has agreed to cause ILM Holding to cancel and terminate the Facilities Lease Agreement immediately prior to the effective time of the merger. -8- ILM I LEASE CORPORATION Notes to Financial Statements (Unaudited) (continued) 1. GENERAL (CONTINUED) As noted above, the Facilities Lease Agreement was extended on a month-to-month basis as of December 31, 1999, beyond its original expiration date of December 31, 1999. 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, it is currently expected that the Company would have minimal residual value after settlement of expenses and other costs. 2. THE FACILITIES LEASE AGREEMENT ILM Holding (the "Lessor") leases the Senior Housing Facilities to the Company (the "Lessee") pursuant to the Facilities Lease Agreement. Such lease was extended on a month-to-month basis as of December 31, 1999, beyond its original expiration date of December 31, 1999. Accordingly, it is terminable upon 30 days' notice to the Company. As noted above, ILM I 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 Holding to cancel and terminate the Facilities Lease Agreement immediately prior to the effective time of the merger. 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 Holding are summarized as follows:
Year Rentable Resident Name Location Facility Units (2) Capacities (2) ---- -------- Built --------- -------------- ----- Independence Village of East Lansing East Lansing, MI 1989 161 162 Independence Village of Winston-Salem Winston-Salem, NC 1989 159 161 Independence Village of Raleigh Raleigh, NC 1991 164 205 Independence Village of Peoria Peoria, IL 1990 166 183 Crown Point Apartments Omaha, NE 1984 135 163 Sedgwick Plaza Apartments Wichita, KS 1984 150 170 West Shores Hot Springs, AR 1986 136 166 Villa Santa Barbara (1) Santa Barbara, CA 1979 125 125
(1) The Company operates Villa Santa Barbara under a co-tenancy arrangement with an affiliated company, ILM II Lease Corporation ("Lease II"). The Company has entered into an agreement with Lease II regarding such joint tenancy. Lease II was formed for similar purposes as the Company by an affiliated company, ILM II Senior Living, Inc. ("ILM II"), a subsidiary of which owns a portion of the Villa Santa Barbara property. The portion of the Senior Housing Facility leased by the Company represents 25% of the total project. Villa Santa Barbara is 25% owned by ILM Holding 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. -9- ILM I LEASE CORPORATION Notes to Financial Statements (Unaudited) (continued) 2. THE FACILITIES LEASE AGREEMENT (CONTINUED) 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 $6,364,800. 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 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 $16,996,000 Variable rent was $615,000 and $313,000 for the six-and three-month periods ended February 29, 2000, respectively, compared to $564,000 and $288,000 for the six- and three- month periods ended February 28, 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 Arkansas, California and Kansas are licensed by such states to provide assisted living services. In addition, various health and safety regulations and standards, which are enforced by state and local authorities, apply to the operation of all the Senior Housing Facilities. Violations of such health and safety standards could result in fines, penalties, closure of a Senior Housing Facility, or other sanctions. 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 I, has also served in various management capacities at Capital Senior Living Corporation, an affiliate of Capital, since 1996. Mr. Cohen currently serves as Chief Executive Officer of Capital Senior Living Corporation. The Management Agreement is co-terminous with the Facilities Lease Agreement. Because the Facilities Lease Agreement was extended beyond December 31, 1999 on a month-to-month basis, the scheduled expiration date of the Management Agreement has been extended on a month-to-month basis as well, but not beyond July 29, 2001. 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 I has guaranteed the payment of all fees due to Capital under the terms of the Management Agreement. For the six- and three-month periods ended February 29, 2000, Capital earned property management fees from the Company of $547,000 and $271,000, respectively, compared to $537,000 and $277,000 for the six- and three-month periods ended February 28, 1999, respectively. -10- ILM I 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 expansions if they are pursued. ILM Holding would also reimburse the Company for all costs related to these potential expansions including fees to Capital Senior Development, Inc For the six- and three-month periods ended February 29, 2000 and February 28, 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 six- and three-month periods ended February 29, 2000 Greenberg Traurig earned fees from the Company of $20,000 and $6,000, respectively. For the six- and three-month periods ended February 28, 1999, Greenberg Traurig earned fees from the Company of $21,000 and $19,000, respectively. Accounts payable - related party at February 29, 2000 includes $313,000 for variable rent payable to ILM Holding and $18,000 for accrued legal fees due to Greenberg Traurig, Counsel to the Company and its affiliates and a related party, as described above. Accounts payable - related party at August 31, 1999 includes $305,000 for variable rent payable to ILM Holding and $6,000 for accrued legal fees due to Greenberg Traurig, Counsel to the Company and its affiliates and a related party. 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 I and the Company have secured a construction loan facility with a major bank that will provide ILM I with up to $24.5 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 I over the life of the loan. On June 7, 1999, ILM I borrowed $2,093,000 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 $22.4 million unused and available. The Company is a co-borrower on the construction loan. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts Payable and Accrued Expenses at February 29, 2000, includes the following: Accounts Payable $ 722 Accrued Expenses 333 --------- Total $ 1,055 =========
-11- ILM I 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 Holding, as Lessor, is responsible for all major capital improvements and structural repairs to the Senior Housing Facilities. If the Company and ILM Holding decide that any of the Senior Housing Facilities should be expanded, the Facilities Lease Agreement between the Company and ILM Holding would be amended to include such expansion. The Facilities Lease Agreement, which expired on December 31, 1999, has been extended on a month-to-month basis. Pursuant to the Facilities Lease Agreement, the Company pays annual base rent for the use of all the Senior Housing Facilities in the aggregate amount of $6,364,800. 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 $16,996,000. Variable rent was $615,000 and $313,000 for the six- and three-month periods ended February 29, 2000, respectively, compared to $564,000 and $288,000 for the six- and three-month periods ended February 28, 1999, respectively. AGREEMENT AND PLAN OF MERGER WITH CAPITAL SENIOR LIVING CORPORATION On February 7, 1999, ILM I 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. The agreement presently provides that it may be terminated if the merger is not consummated by September 30, 2000. In connection with the merger, ILM I has agreed to cause ILM Holding to cancel and terminate the Facilities Lease Agreement immediately prior to the effective time of the merger. 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, it is currently expected that the Company would have minimal residual value after settlement of expenses and other costs. LIQUIDITY AND CAPITAL RESOURCES Occupancy levels for the eight properties in which the Company has invested averaged 90% and 95% for the three-month periods ended February 29, 2000 and February 28, 1999, respectively. Base rent payments of $6,364,800 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 Holding. -12- ILM I LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) At February 29, 2000, the Company had cash and cash equivalents of $1,235,000 compared to $1,066,000 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 and second 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 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- ILM I LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS SIX MONTHS ENDED FEBRUARY 29, 2000 VERSUS SIX MONTHS ENDED FEBRUARY 28, 1999 REVENUES Total revenues were $10,044,000 for the six-month period ended February 29, 2000 compared to $9,916,000 for the same period of the prior year, representing an increase of $128,000, or 1.3%. This increase is the result of increased rental rates at certain of the Company's Senior Housing Facilities located in strong markets. EXPENSES Total expenses were $10,274,000 for the six-month period ended February 29, 2000, compared to $9,675,000 for the same period in the prior year, representing an increase of $599,000, or 6.2%. This increase in expenses was primarily due to increases in Facilities Lease rent expense of $58,000 or 1.6%; general and administrative expenses of $44,000 or 31.0%; depreciation expense of $276,000 or 134.0%; administrative salaries, wages and expenses of $97,000 or 14.5%; professional fees of $19,000 or 10.9%; and dietary and food service salaries of $63,000 or 3.5% as well as minor increases and decreases in other accounts. 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. The increase in professional fees is due to the earlier payment of audit fees as the Annual Report to Shareholders was completed more timely in comparison to the prior year. INCOME TAX EXPENSE Income tax expense decreased overall by $96,000 or 100% as compared to the same period in the prior year, as a result of a loss before taxes of $230,000 representing a $471,000 or 204.8% decrease in income before taxes. NET INCOME Primarily as a result of the factors noted above, net income decreased $375,000 or 258.6%, from net income of $145,000 for the six months ended February 28, 1999 compared to net loss of $230,000 for the six months ended February 29, 2000. THREE MONTHS ENDED FEBRUARY 29, 2000 VERSUS THREE MONTHS ENDED FEBRUARY 28, 1999 REVENUES Total revenues were $5,036,000 for the quarter ended February 29, 2000 compared to $4,974,000 for the same period of the prior year, representing an increase of $62,000, or 1.2%. This increase is the result of increased rental rates at certain of the Company's Senior Housing Facilities located in strong markets. -14- ILM I LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS (CONTINUED) EXPENSES Total expenses were $5,204,000 for the quarter ended February 29, 2000 compared to $4,834,000 for the same period in the prior year, representing an increase of $370,000, or 7.7%. This increase in expenses was primarily due to increases in Facilities Lease rent expense of $31,000 or 1.7%; general and administrative expenses of $30,000 or 43.5%; depreciation expense of $77,000 or 128.3%; administrative salaries, wages and expenses of $37,000 or 10.7%; and dietary and food service salaries of $43,000 or 4.8%. 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 of December 31, 1999, as such assets are not subject to repurchase by ILM Holding. INCOME TAX EXPENSE Income tax expense decreased overall by $54,000 or 100.0% as compared to the same period in the prior year, as a result of a decrease in income before taxes of $308,000 or 220.0%. NET INCOME Primarily as a result of the factors noted above, net income decreased $254,000 or 295.3% from net income of $86,000 for the quarter ended February 28, 1999 to net loss of $168,000 for the quarter ended February 29, 2000. -15- ILM I LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. -16- ILM I 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 -17- ILM I LEASE CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BY: ILM I LEASE CORPORATION By: /s/ Jeffry R. Dwyer -------------------------------- Jeffry R. Dwyer President Dated: April 14, 2000 ----------------- -18- EX-27 2 EX-27
5 6-MOS AUG-31-2000 FEB-29-2000 1,235 0 605 0 0 1,840 1,451 1,425 1,958 1,675 0 0 0 75 208 1,958 0 10,044 0 10,274 0 0 0 (230) 0 0 0 0 0 (230) (.03) (.03)
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