-----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, Mj/yw84D3S112NNV5nGvhqIHNg26eczCE5oWhBGedK7f0SMmggQlHFbDilzpxxHJ PR9PpgllaD7HB7JT3Amrpg== 0000912057-00-018166.txt : 20000417 0000912057-00-018166.hdr.sgml : 20000417 ACCESSION NUMBER: 0000912057-00-018166 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 II LEASE CORP CENTRAL INDEX KEY: 0000932092 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043248639 STATE OF INCORPORATION: VA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25880 FILM NUMBER: 601740 BUSINESS ADDRESS: STREET 1: 28 STATE STREET SUITE 1100 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 8882573550 MAIL ADDRESS: STREET 1: 28 STATE STREET SUITE 1100 CITY: BOSTON STATE: MA ZIP: 02109 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: 0-25880 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 February 29, 2000: 5,180,952. =============================================================================== ILM II LEASE CORPORATION INDEX
Part I. Financial Information PAGE ---- Item 1. Financial Statements Balance Sheets February 29, 2000 (Unaudited) and August 31, 1999............................................4 Statements of Income For the six 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 II LEASE CORPORATION PART I. FINANCIAL INFORMATION Item I. Financial Statements (See next page) 3 ILM II 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 $ 1,790 $1,487 Accounts receivable, net 100 80 Accounts receivable - related party 30 50 Prepaid expenses and other assets 214 352 Tax refund receivable 21 21 --------- --------- Total current assets 2,155 1,990 Furniture, fixtures and equipment 1,253 1,135 Less: accumulated depreciation (762) (518) -------- -------- 491 617 Deposits 9 9 Deferred tax asset, net 52 154 -------- -------- $2,707 $2,770 ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 520 $ 621 Income taxes payable 229 226 Real estate taxes payable 53 230 Accounts payable - related party 404 341 Security deposits 58 49 --------- --------- Total current liabilities 1,264 1,467 Deferred rent payable 22 37 --------- --------- Total liabilities 1,286 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 920 766 -------- -------- Total shareholders' equity 1,420 1,266 ------- ---------- $2,707 $2,770 ====== ======
See accompanying notes. 4 ILM II LEASE CORPORATION STATEMENTS OF INCOME 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 $8,307 $8,122 $4,176 $4,085 Interest income 19 7 10 4 ------ ------ ------ ------ 8,326 8,129 4,186 4,089 EXPENSES Master lease rent expense 2,721 2,644 1,369 1,333 Dietary and food service salaries, wages and expenses 1,396 1,366 691 675 Administrative salaries, wages and expenses 640 597 324 315 Marketing salaries, wages and expenses 355 323 178 153 Utilities 512 527 251 254 Repairs and maintenance 308 286 145 156 Real estate taxes 263 262 133 128 Property management fees 526 547 272 323 Other property operating expenses 729 708 364 349 General and administrative 168 118 83 60 Directors compensation 31 27 16 13 Professional fees 177 151 80 (20) Depreciation expense 244 118 122 72 ------ ------ ------ ------ 8,070 7,674 4,028 3,811 ------ ------ ------ ------ Income before taxes 256 455 158 278 Income tax expense (benefit): Current - - - - Deferred 102 182 63 111 ------ ------ ------ ------ 102 182 63 111 ------ ------ ------ ------ NET INCOME $154 $273 $ 95 $ 167 ====== ====== ====== ====== Basic earnings per share of common stock $ 0.03 $ 0.05 $0.02 $ 0.03 ====== ====== ====== ======
The above earnings per share of common stock is based upon the 5,180,952 shares outstanding for each period. See accompanying notes. 5 ILM II LEASE CORPORATION STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the six months ended February 29, 2000 and February 28, 1999 (Unaudited) (Dollars in thousands, except per share data)
COMMON STOCK ADDITIONAL $.01 PAR VALUE PAID-IN RETAINED -------------- SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ------- -------- ----- Balance at August 31, 1998 5,180,952 $ 52 $448 $197 $ 697 Net Income - - - 273 273 -------- -------- ------- ----- ------- Balance at February 28, 1999 5,180,952 $ 52 $448 $470 $ 970 ========= ==== ==== ==== ======= Balance at August 31, 1999 5,180,952 $ 52 $448 $766 $ 1,266 Net Income - - - 154 154 --------- ------ ------- ---- ------- Balance at February 29, 2000 5,180,952 $ 52 $448 $920 $1,420 ========= ==== ==== ==== ======
See accompanying notes. 6 ILM II 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 income $ 154 $ 273 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 244 118 Deferred tax expense (benefit) 102 182 Changes in assets and liabilities: Accounts receivable, net (20) (56) Accounts receivable - related party 20 - Prepaid expenses and other assets 138 2 Tax refund receivable - 131 Accounts payable and accrued expenses (101) (111) Accounts payable - related party 63 45 Termination fee payable - (650) Real estate taxes payable (177) (106) Income taxes payable 4 - Deferred rent payable (15) (14) Security deposits, net 9 11 --------- --------- Net cash provided by operating activities 421 (175) Cash flows from investing activities: Additions to furniture, fixtures and equipment (118) (157) --------- -------- Net cash used in investing activities (118) (157) Net increase (decrease) in cash and cash equivalents 303 (330) Cash and cash equivalents, beginning of period 1,487 1,497 ------- --------- Cash and cash equivalents, end of period $ 1,790 $ 1,167 ======= ======== SUPPLEMENTAL DISCLOSURE: - ------------------------ Cash paid during the period for state income taxes $ 1 $ 3 ========= =========
See accompanying notes. 7 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 February 29, 2000, and revenues and expenses for each of the six- and three-month periods ended February 29, 2000 and February 28, 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 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 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, 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 II has agreed to cause ILM II Holding to cancel and terminate the Facilities Lease Agreement immediately prior to the effective time of the merger. As noted above, the Facilities Lease Agreement, which is scheduled to expire on December 31, 2000, may be terminated earlier at the election of the Lessor in connection with the sale by the Lessor of the Senior Housing Facilities to a non-affiliated third party, upon 30 days' notice to the Company. Although there can be no assurance as to whether the merger will be consummated or, if consummated, as to the timing thereof, the Company's operations would not be expected to continue beyond the effective time of the merger. As a result of the proposed merger, 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 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 with Capital Senior Living Corporation and certain affiliates of Capital, and has agreed to cause ILM II Holding to cancel and terminate the Facilities Lease Agreement immediately prior to the effective time of the merger. While there can be no assurance, consummation of the merger is presently anticipated in the second or third quarter of calendar year 2000. The lease is accounted for as an operating lease in the Company's financial statements. Descriptions of the properties covered by the Facilities Lease Agreement between the Company and ILM II Holding are summarized as follows:
Year Facility Rentable Resident NAME LOCATION BUILT UNITS (2) CAPACITIES (2) ---- -------- ----- --------- -------------- 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
(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. 9 ILM II 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 $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 $718,000 and $368,000 for the six- and three-month periods ended February 29, 2000, respectively, compared to $642,000 and $332,000 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 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. 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). 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 six- and three-month periods ended February 29, 2000, Capital earned property management fees from the Company of $526,000 and $272,000, respectively, compared to $547,000 and $323,000 for the six- and three-month periods ended February 28, 1999, respectively. 10 ILM II LEASE CORPORATION Notes to Financial Statements (Unaudited) (continued) 3. RELATED PARTY TRANSACTIONS (CONTINUED) -------------------------------------- On September 18, 1997, the Company entered into an agreement with Capital Senior Development, Inc., an affiliate of Capital, to manage the development process for the potential expansions of several of the Senior Housing Facilities. Capital Senior Development, Inc. would receive a fee equal to 7% of the total development costs of these potential expansions if they are pursued. ILM II Holding would also reimburse the Company for all costs related to these potential expansions including fees to Capital Senior Development, Inc For the 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 $27,000 and $15,000, respectively. For the six- and three-month periods ended February 28, 1999, Greenberg Traurig earned fees from the Company of $22,000 and $20,000, respectively. Accounts receivable - related party at February 29, 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 February 29, 2000 includes $368,000 for variable rent due to ILM II Holding and $16,000 in accrued legal fees due to Greenberg Traurig, Counsel to the Company and a related party. 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. 4. LEGAL PROCEEDINGS AND CONTINGENCIES ----------------------------------- The Company has pending claims incurred in the normal course of business which, in the opinion of the Company's Board of Directors, will not have a material effect on the financial statements of the Company. 5. CONSTRUCTION LOAN FINANCING --------------------------- ILM II and the Company have secured a construction loan facility with a major bank that will provide ILM II with up to $8.8 million to fund the capital costs of the potential expansion programs. The construction loan facility is secured by a first mortgage of the Senior Housing Facilities and collateral assignment of the Company's leases of such properties. The loan has a three-year term with interest accruing at a rate equal to LIBOR plus 1.10% or Prime plus 0.5%. The loan term can be extended for an additional two years beyond its maturity date with monthly payments of principal and interest on a 25-year amortization schedule. Loan origination costs in connection with this loan facility are being amortized by ILM II over the life of the loan. On June 7, 1999 ILM II borrowed $1,165,000 under the construction loan facility to fund the pre-construction capital costs, incurred through April 1999, of the potential expansions of the Senior Housing Facilities, leaving approximately $7.6 million unused and available. The Company is a co-borrower on the construction loan. 11 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 $718,000 and $368,000 for the six-and-three month periods ended February 29, 2000, respectively, compared to $642,000 and $332,000 for the six- and three-month periods ended February 28, 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 immediately prior to the effective time of the merger. Accordingly, since the Company does not have any current plans to operate or own any other facilities or engage in any other business outside of its relationship with ILM I, there is no assurance that the Company's operations will continue beyond the effective date of the merger. 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, 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 II has agreed to cause ILM II Holding to cancel and terminate the Facilities Lease Agreement immediately prior to the effective time of the merger. As noted above, the Facilities Lease Agreement, which is scheduled to expire on December 31, 2000, may be terminated earlier at the election of the Lessor in connection with the sale by the Lessor of the Senior Housing Facilities to a non-affiliated third party, upon 30 days' notice to the Company. Although there can be no assurance as to whether the merger will be consummated or, if consummated, as to the timing thereof, the Company's operations would not be expected to continue beyond the effective time of the merger. As a result of the proposed merger, 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 six properties in which the Company has invested averaged 92% and 95% for the three-month periods ended February 29, 2000 and February 28, 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. 12 ILM II LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) At February 29, 2000, the Company had cash and cash equivalents of $1,790,000 compared to $1,487,000 at August 31, 1999. Remaining amounts of cash will be used for the Company's working capital requirements. As noted above, under the terms of the Facilities Lease Agreement, the Lessor is responsible for major capital improvements and structural repairs to the Senior Housing Facilities. Consequently, the Company does not have any material commitments for capital expenditures. Furthermore, the Company does not currently anticipate the need to engage in any borrowing activities. As a result, substantially all of the Company's cash flow will be generated from operating activities. The Company did not pay cash dividends in fiscal years 1999, 1998, and 1997 or for the first quarter of fiscal year 2000. The Company may or may not determine to pay cash dividends in the future. Payment of dividends, if any, will be at the discretion of the Company's Board of Directors and will depend upon such factors as the Company's financial condition, earnings, anticipated investments and other relevant factors. The source of future liquidity is expected to be from operating cash flows from the Senior Housing Facilities, net of the Facilities Lease Agreement payments to ILM II Holding, and interest income earned on invested cash reserves. Such sources of liquidity are expected to be adequate to meet the Company's operating requirements on both a short-term and long-term basis. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize the year 2000 as a date other than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Based on ongoing assessments, the Company, through Capital, its property manager and only significant and material third-party contractor, has developed a program to modify or replace portions of its software and certain hardware, which are generally PC-based systems, so that those systems will properly recognize and utilize dates beyond December 31, 1999. While there can be no assurance, the Company believes that it has completed all software and hardware upgrades. The Company presently believes that these modifications and replacements of existing software and certain hardware will remediate the Year 2000 issue. The costs of Year 2000 remediation have not been material based on the Company's operations. The Company has assessed its exposure to operating equipment, and such exposure is not significant due to the nature of the Company's business. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue. However, disruptions in the economy generally resulting from Year 2000 issues could also adversely affect the Company. Although the amount of potential liability and lost revenue cannot be reasonably estimated at this time, in a worst case situation, if Capital, the Company's only significant and material third-party contractor, were to experience a Year 2000 problem, it is possible that the Company would not receive rental income as it became due from Senior Living Facility residents. The Company in turn would fail to pay ILM Holding lease payments as they arise under the master lease, and ILM Holding in turn would fail to pay ILM I mortgage payments due it. However, the Company believes that given the nature of its business, such a problem would be temporary and easily remedied with simple accountings. 13 ILM II 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 $8,326,000 for the six months ended February 29, 2000 compared to $8,129,000 for the same period of the prior year, representing an increase of $197,000 or 2.4%. 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 $8,070,000 for the six months ended February 29, 2000 compared to $7,674,000 for the same period in the prior year, representing an increase of $396,000 or 5.2%. This increase was primarily due to increases in facilities lease rent expense of $77,000 or 2.9%, administrative salaries and expenses of $43,000 or 7.2%; repairs and maintenance of $22,000 or 7.7%; depreciation expense of $125,000 or 105.9%; general and administrative costs of $52,000 or 44.1%; and professional fees of $26,000 or 17.2%. 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 $80,000 or 44.0% as compared to the same period in the prior year, as a result of an decrease in income before taxes of $199,000 or 77.7%, from $455,000 in 1999 to $256,000 in 2000. NET INCOME Primarily as a result of the factors noted above, net income decreased $119,000 or 43.6% to $154,000 for the six months ended February 29, 2000 from net income of $273,000 for the six months ended February 28, 1999. THREE MONTHS ENDED FEBRUARY 29, 2000 VERSUS THREE MONTHS ENDED FEBRUARY 28, 1999 REVENUES Total revenues were $4,186,000 for the three months ended February 29, 2000 compared to $4,089,000 for the same period of the prior year, representing an increase of $97,000 or 2.4%. This increase is primarily the result of increased rental rates at certain of the Company's Senior Housing Facilities located in strong markets. EXPENSES Total expenses were $4,028,000 for the three months ended February 29, 2000 compared to $3,811,000 for the same period in the prior year, representing an increase of $217,000 or 5.7%. This increase was primarily due to increases in facilities lease rent expense of $36,000 or 2.7%; marketing, salaries, wages and expenses of $25,000 or 16.3%; general and administrative expenses of $23,000 or 38.3%; and depreciation expense of $50,000 or 69.4% offset by decreases in professional fees of $100,000 or 500%; and property management fees of $51,000 or 15.8% 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. 14 ILM II LEASE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS (CONTINUED) INCOME TAX EXPENSE Income tax expense decreased overall by $48,000 or 43.2% as compared to the same period in the prior year, as a result of a decrease in income before taxes of $120,000 or 43.2%, from $278,000 in 1999 to $158,000 in 2000. NET INCOME Primarily as a result of the factors noted above, net income decreased $72,000 or 43.1% to $95,000 for the three months ended February 29, 2000 from net income of $167,000 for the three months ended February 28, 1999. 15 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. 16 ILM II LEASE CORPORATION PART II-OTHER INFORMATION ITEM 1. THROUGH 5. NONE - ------------------ ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ---------------------------------------- (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: NONE 17 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: APRIL 14, 2000 --------------- 18 EX-27 2 EXHIBIT 27
5 6-MOS AUG-31-2000 FEB-29-2000 1,790 0 365 0 0 2,155 1,253 762 2,809 1,367 0 0 0 52 1,368 2,809 0 8,326 0 8,070 0 0 0 256 0 256 0 0 0 154 .03 .03
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